The Economic and Monetary Affairs Committee of the European Parliament has approved gold to be used as collateral

If you listen closely you will be able to hear the crickets. Not a word about this story in the typical financial newspapers. I’ve unfortunately been listening to Bloomberg TV and CNBC all day and have yet to hear a discussion about this truly remarkable event. I have of course heard countless tales of impending doom for a non-existent bubble. And hours have been wasted on the ridiculous notion the Fed will stop the liquidity train come July first; a debate I fillet in the post titled, Debate of QE Termination a Head Fake; Expect Market Rallies Upon Completion of QE2

This momentous decision by the European parliamentary committee ushers in a new era of legitimacy for an investment that was often referred to as a “barbarous relic” only a few years ago. Lest we all forget Nouriel Roubini’s (Dr.Doom’s) rather recent Dec. 14 2009 piece,“Here’s Five Reasons The “Barbarous Relic” Gold is Going to Tank”. The price of Gold is only up over 35% since that reference; as The Heavy would say, “How you like me now” Nouriel?

The committee’s declaration may in retrospect set the stage for a dramatic revaluation of gold to rebalance (reliquefy) the debt laden treasuries of bankrupt western governments. A $10,000-$15,000/oz Gold price would probably do the trick and fix the U.S. treasury’s horrendous balance sheet.

Zero Hedge offers a different take on the matter:

Wonder why Europe is pressing so hard for Greece (and soon the other PIIGS) to collateralize its pre-petition loans on a Debtor in Possession basis? Here is your answer: “Yesterday’s unanimous agreement by the European Parliament’s Committee on Economic and Monetary Affairs (ECON) to allow central counterparties to accept gold as collateral, under the European Market Infrastructure Regulation (EMIR), is further recognition of gold’s growing relevance as a high quality liquid asset. This vote reinforces market demand for a greater choice of assets that can be used as collateral to meet margin liabilities.” Luckily for Greece, it has 111.5 tons of gold in storage (somewhere at the New York Fed most likely). Looking down the road, Portugal has 382.5 tons, Spain 281.6, and Italy leads the pack with 2,451.8 tons.

The press release from the World Gold Council reads:

Tags: barbarous relic, gold, nouriel roubine, PIIGS, precious metals, QE, QE2, World Gold Council, Zero Hedge

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“The USSR had two newspapers, Pravda and Izvestia.  In the Russian language, “pravda” means truth and “izvestia” means news.  The saying amongst the Russian people put the situation in a nutshell:  “There’s no Pravda in Izvestia and there’s no Izvestia in Pravda”.” – The Privateer

‘You heard it here first’ and ‘Mark my words’ are the hackneyed phrases that come to mind as I begin to type this missive. I will add the oft used ‘I’m going out on a limb’ as I write the following:

The stock markets and commodity markets will not collapse when QE2 ends in June.  In fact, said markets will most likely rally.

So, why am I willing to shimmy out onto a limb that looks ravaged by disease? Because I either enjoy the danger(possible) or in all humility I see something about the entire tree others are choosing to ignore.

One can no more accuse a tree of being deaf and dumb as one can complain about the dropping of leaves on the ground because that is its nature. The same can be said of our Fed chairman, Ben Bernanke, so we can’t blame him for dropping tons of paper on the markets. He is who he is, plain and simple. He wrote dissertations on the benefits of easy money and helicopter drops of cash. So to blame him for executing his plan is futile. And to assume that the end of QE2 in June will usher in a new austere Fed chairman is to believe the proverbial leopard can change.

In fact, the Chairsatan(thank Zero Hedge for that moniker) has already begun speaking of continued accommodation, “…during the Fed Chairman’s first post FOMC meeting press conference ever on April 27, Mr Bernanke did state that the Fed was not going “cold turkey”.  He assured us that the proceeds from “maturing assets” in the Fed’s $US 2.7 TRILLION balance sheet will continue to be deployed in the Treasury debt markets.”- The Privateer.

I propose we dispense with the ridiculous ‘debate’ currently raging within the financial media about what happens at the end of QE2 and when QE3 will begin. Moreover, I would submit to you that by continuing this worthless ‘debate’ we are allowing our collective selves to become susceptible to further Fed prestidigitation.

Here is the set up for Fed Three Card Monty come June: Easy monetary policy must continue, this is a certainty(if you wish to argue this inevitability as well as other obvious laws like gravity and the color blue as relates to the sky then please navigate away from this blog, do a little research and then feel free to rejoin us at the adult table). However, Bernanke understands that a continuous trail of QE3, QE4, etc. will have diminishing returns and will be too easy for traders to follow and fade. The key for the Chairsatan is to create an environment for continued asset appreciation(US$ devaluation) without the easily recognizable QE POMO programs. So while the financial media is looking left debating quantitative easing as we currently know it, the Fed is moving right creating new QE devices to prop up markets.

Stock Market Strategy: Bernanke QE Ends June Stocks Commodities Will Rally

I don’t profess to know what the new QE devices will look like. They could be new ways of increasing the velocity of money as opposed to the amount or we could see new enormous QE programs out of Japan that somehow miraculously find their way into our markets. A mysterious large buyer with an insatiable appetite for US treasuries could emerge from the Caribbean as seen before, ” Purchases of U.S. debt remained relatively healthy from November to December, with buyers such as Japan, the United Kingdom, Brazil and Caribbean banking centers stepping up acquisitions in the final month of 2009.” - WSJ

Whatever the case may be rest assured the Fed’s goal is to have asset prices levitate when QE ‘ends’. The deception will be complete in the weeks following the termination of QE2 when the WSJ et al headlines read, “QE Ends but Markets Continue Higher Lifting Confidence Fed Plan is Working”. I beseech you, don’t play the part of the Times Square Tourist or you to will eventually be separated from your money.

Tags: ben bernanke, Bernanke, Brazil, caribbean, commodities, debt, Japan, POMO, QE, QE2, QE3, stocks, Treasury, WSJ

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A paradigmatic shift in market behavior occurred after the collapse of 2008. The commonly accepted drivers of market direction, most especially economic cycles, no longer applies in this post apocalyptic financial farce. In fact, constant Fed / Government intervention and outright manipulation has produced a parallel universe where “good” economic news is bad for the markets and “bad” economic news is good for the markets.

Liquidity is the key factor an investor must follow. All else on the financial news wires serves only as a cloud to distort financial vision. The “bad” equals good paradigm in force today exists because “bad” leads the Fed to increase liquidity which inevitably finds its way into the commodity and equity markets. To argue this obvious logic, to pretend economic growth is or will be good for the markets evidences an astonishing lack of understanding. Trying to manage money today based on the understanding of past economic cycles is akin to using an abacus in a world run by supercomputers. By the time you are done sliding beads the equation has changed a infinite amount of times.

Speaking of the equation, the Yen carry trade is perhaps the most important and volatile component. A constant and wary eye must be kept on this liquidity spigot. Any and every world event that raises the fear gauge and upsets this apple cart leads to immediate suffering in the commodity and equity markets. Take a look at the chart below. Said chart is a three month graphical representation of the Yen carry trade in terms of the Australian $. You will see the dramatic unwind that occurred in March during the earthquake/Tsunami scare. Investors will remember the simultaneous swift selloffs in world markets….

…Yesterday, we experienced the same carry unwind leads to equity / commodity rout.  The 5 day AUD/JPY chart below illustrates the precipitous drop from Monday through Tuesday:

Zero Hedge explains….

All Carry Unwinding Fast – General Collateral Hits Unprecedented 1 Basis Point

While the sell off in stocks and commodities following Goldman’s latest two-ply hit job had left the FX carry alone, it appears that even the funding desks have given up and are now dumping the core carry pairs, sending the JPY once again back to the intervention border. As the chart shows all FX carry pairs just got trampled, which in the perverse vicious loop that the market has become courtesy of peak leverage, means further weakness across all assets is likely imminent.

…So, until further notice watch the events unfolding in Japan closely. Expect negative events to unsettle the carry trade and so rock the equity / commodity markets in the short term. However, remember that “bad” equals “good” in this crazy world. Remember, each world crisis will be met with an equal or greater force of liquidity from central banks. This paradigm means fiat currency will continue to deteriorate sending commodity / equity prices higher. These are the new rules of the match. Don’t complain about fairness or waste time trying to call the top. Instead, use the knowledge to profit and defend your portfolio accordingly

Tags: AUD/JPY, Australian, Fed, liquidity, yen, Yen carry trade

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Guest Post: M.S. Howells & Co. Jose Mazas – ‘The Art of Lying’

To be the top economist in the nation, you have to be a good manipulator. Greenspan let it slip once. He said, “‘I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant”.

One thing to keep a straight face on is exact knowledge of future economic prints as well as the potential political pressures that policy makers are under. In the age of Wikileaks these institutional biases should not be ignored. We would, therefore, like to debunk two widely held beliefs, in the spirit of Wikileaks, by showcasing the historical record.

The first myth is that policy makers are unaware of yet to be released economic data. While it seems reasonable that policy makers should have this data well ahead of their official release, we as market participants often choose to believe that no such thing occurs. It’s just too much of a conspiracy theory, but in this case there is clear evidence that it is a myth. Evidence: See page 149 of the FOMC transcript of the January 30-31 2001 FOMC meeting. It reads, “Indeed, the Chicago Purchasing Managers’ Survey results for January that will be released tomorrow show….”

Keep in mind that this is not a government sponsored survey, which should buttress our accusation that policy makers have perfect immediate foresight for important government operated surveys/samples. This is the prudent action to undertake- to peak at the numbers.

The second myth we’d like to debunk is the denial of the political cycle. Michael Johnson has undertaken a series of analyses on the impact of the political cycle on the media sector. Rational Economists have been debating the existence of the political cycle, mostly because it is difficult to measure. Yet oftentimes just because you can’t measure something precisely in the economic/financial data does not necessitate its denial, that is why econometricians formulate hypotheses to test and the that is why we never accept the Null Hypothesis, but rather say “we don’t have enough evidence to reject it”.

So, let’s try a different approach to assess whether the Fed could at times be influenced by the political environment rather than the economic environment, thus making it its independence less than concrete. Let’s go to the tapes, the Nixon Tapes! President Nixon taped all conversations held in the Oval Office, some of them got him into trouble, but those that remain have proven their worth to presidential historians and political scientists. A brilliant article in The Journal of Economic Perspectives (Fall 2006) illustrates the very interesting behind the scenes look at how President Nixon, in a bid to try to maximize his likelihood of being re-elected, pressured then Fed Chairman Arthur Burns into easing monetary policy in spite of Burns’ belief that easing was not necessarily in the best interests of the then US economy. At one point in their private conversation, Nixon turns to Burns and says “I know there’s the myth of the autonomous Fed…” and then laughs. Burns did in fact lower interest rates after a temporary soft patch.

Unlike the Fed that tries to keep a secret, we have, in this current administration, observed instances where the unemployment report was alluded to, before its release. This has not happened this week, however, we have detected a slight change in the tone of certain Fed speakers from last week into this week; we have heard the tone softening. Boston Fed President Rosenberg said on Monday “We don’t want to take away the accommodation too quickly”. The same day, Mr. Lockhart said “I remain satisfied that the current stance of monetary policy is appropriately calibrated to the current and projected state of the economy”. Additionally Mr. Bullard turned less hawkish from the prior week and said on Tuesday, “…additional uncertainty has clouded exit outlook…”. He was referring to the recent geopolitical events, or was he referring to this week’s employment report?

Our own econometric models which incorporate forecast expectations and the biases therein suggest we are not going to get a blow out strong number on Friday. In fact, our models suggest that the pace of hiring, in terms of changes in Non-Farm Payrolls, is likely to slow from last month’s unrevised pace of 192k. We do see elevated chances of a print below 150k, but even at an elevated 43%, (vs baseline of 30%), it is still a wise bet to expect a fairly muted NFP that is slightly worse than last month’s reading. In terms of the Unemployment Rate, we see a likely reading of 8.9% or 9.0%, with lower readings being unlikelier from a statistical bias perspective.

In summary, do listen to the shifts in tone from Fed speakers and administration officials, because they may know something we don’t and which they may not want to tell you. If you believe you understand what you think I said, it may be that what you read is not what I meant.

Bret Rosenthal is a Principal of Rosenthal Capital Management

Tags: bullard, Fed, FOMC, greenspan, lockhart, M.S. Howells, NFP, Non-Farm Payrolls, rosenberg, unemployment

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Reducing the Noise: A look at the stories that really matter

Evidence of a Government Manipulated Credit Market: ZeroHedge writes:

“…over the past 30 years, the 1 Year inflation expectations has tracked the moves in the 2 Year bond very closely. Until today: the 1 year inflation expectations jumped from 3.4% to 4.6%, a 1.2% jump in one month, this is the single highest monthly jump in a decade since the 1.4% jump in December 2001, following the deflationary knee jerk reaction from the September 11 attacks. But what is most interesting… the spread between the 1 Year inflation expectation and the 2 year bond yield is now at a record wide. This means that either consumers and bonds are at record odds over how they view the inflationary environment in the future, or that there is no real bond market in the short end (all the way up to the 2 Year bond), which is dictated purely by the Fed, and its monetization activity.”

We have contended for some time now that the 2nd phase of the Precious Metals bull market will coincide with explosive earnings growth of the mining companies. This EPS growth will naturally attract capital flows from Wall St. , which is well versed in the dynamics of price relative to earnings. The story below suggests the drilling companies will be primary examples of ebullient earnings growth….

Reuters Summit-Tight mine labor, equipment to slow future plans

NEW YORK, March 25 (Reuters) – Top North American miners of gold, copper and iron ore all said this week that a sudden ramp-up of mining projects has begun to squeeze labor and equipment and before long will slow or delay projects.

Executives talking to Reuters at this year’s Mining and Steel Summit said, skilled labor, especially geologists and mining engineers, were hard to come by and lead times on heavy equipment has been stretched out for weeks or months.

While none said their current plans were being stalled by shortages–the largest miners have lengthy planning processes and lucrative compensation packages to keep top talent–but, the day was not long off when projects would feel the crunch.

“If you add up all of the projects people want to bring online, there are not enough qualified workers to make it happen,” said Laurie Brlas, chief financial officer for iron ore miner Cliffs Natural Resources , adding, “You are seeing that everywhere. We are definitely seeing it.”Metal prices have advanced to either record or long-term highs since the start of the year, impelling miners to restart idled mines, expand current projects or develop new ones.

At the Prospectors and Developers Conference in early March in Toronto, junior miners and developers also said tight labor was rapidly worsening, and likely to accelerate costs, squeeze margins, and threaten some projects.

Cliffs got a taste of the crunch when it began to develop a new body of chrome ore.

“We asked five engineering houses to bid on our project. Three of them said, We have no resources. We can’t,” she said.

Major Drilling , a mine driller specializing in difficult locations, was surprised by the rapid ramp-up of demand for its services so far this year, comparing it with the swift slowdown of late 2008. Though Barrick Gold Chief Executive Aaron Regent did not think the recent pick up in mining projects was en par with the breakneck pace of 2008’s boom, he said, “It’s obvious that things are heading up.”

Nevertheless, to keep skilled labor in places like Tanzania and South America the world’s largest gold miner was having to pay wage increases of 70 percent to reflect local inflation rates. Western Australia’s multitude of projects also commanded sizable pay hikes, though wage rates in the United States and Canada were fairly benign, he said. While Major Drilling has plenty of drill rigs, it does not have enough crews to operate them. With many miners ramping up at the same time, it has had to curry favor to keep talent. “Some guy wants a special truck. It costs $5,000 more and he doesn’t need it, but he wants it. So, he gets it. You are in a skills intensive industry,” said CEO Francis McGuire.

Goldcorp CEO Chuck Jeannes said his company was not seeing slowdowns, but for some equipment, he might have to wait 50 weeks instead of 35 or 40 weeks a year ago. “It means you place those orders earlier,” he said. As a supplier, Major Drilling must decide which assignments to take. Miners that understand the exigencies of the shortages and are willing to pay will likely win the service. On the other hand, he described one company that stuck to its rules requiring outside bidders for part of a project. “We’re saying, ‘What do you mean you have to go to bid? There are no drills out there. We’re here. We can start today. In that case, our price is going to go way up,” said McGuire. “Companies that do that are going to have a heck of a problem getting their projects done,” he added. Furthermore, he said, a number of critical supplies have been showing up later and later and quality has declined. For example, machines are working 24 hours and equipment gets  stressed, so engines regularly blow. “Something as simple as an engine for a pick-up truck. In September, you could buy that anywhere in the world, any time. Now, it’s a four-month wait no matter where you are,” he said. When Major Drilling found a country with eight of the engines, it bought them and shipped them around the world.

“That is symptomatic of the extremely rapid ramp-up. It’s a very difficult 3 to 6 months as the ramp-up goes forward.”

Disclosure: We own shares of Major Drilling (MDI)

Tags: bond market, Fed, Inflation, Major Drilling, MDI, monetization, precious metals, Zero Hedge

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The fall and financial destruction of 2008 launched a brand-new era for the credit markets. An era marked by government intervention and outright manipulation all committed in broad daylight under the protection of financial apocalyptic prophecies. Our self-styled financial superheroes (Treasury Secretary Geithner and Fed Chairman Ben “Helicopter” Bernanke), wield their collective financial imagination and money printing press like Thor’s hammer on any and all areas of the credit markets they deem worthy. Think of this behavior, if you will, as a massive financial game of ‘Whack a Mole’: When a certain sector of the credit markets pops its head out of its hole and refuses to behave, Batman and Robin fly in on a Mil V-12 and pummel accordingly. We can rail against this free market destroying and dangerous ethic, or we can take advantage of this obscene ritual and profit.

I, for one, choose profit over catharsis and along that vein offer you the following illustration of credit market evolution by our very own Credit Guru, MJ:

Near the height of the credit crisis Capital One announced that were buying back their ABS Auto bonds. They indicated that the returns available in the secondary market exceeded the returns they could earn by originating new car loans. They continued to buy back bonds in the secondary market until secondary market prices increased to the point that it became more profitable to originate new car loans rather than simply buy secondary market loans. Once the economics favored originating new car loans over buying older vintage ABS bonds….credit flowed back into the car financing business…… and car sales began to increase as pent up demand was unleashed.

The recovery in the Auto Finance market and its ability to attract investment dollars has caused Auto finance credit to materially loosen for even non-prime borrowers. The power of this trend manifested itself in GM’s decision to acquire AmeriCredit.

A similar trend materialized in the airplane leasing business. As the credit markets recovered, bonds issued by airplane leasing companies rebounded strongly. Intermediate ILFC bonds were trading in the mid-50s in February 2009 but are now trading strongly through par. Similar to the Auto Finance business, once pre-credit crisis airplane leasing bonds approached par airplane leasing companies were quick to tap the market for new financing. This new financing allowed them to order new planes and pay for planes already on order. As we have stated numerous times since the spring 2009, the reestablishment of an airplane leasing credit market has facilitated a pick-up in aircraft purchasing that we believed would benefit the entire manufacturing industry.

This same basic premise also seems to be working its way through other structured credit asset classes…although it is and has occurred at different paces. In our opinion, CMBS is in the middle of this same cycle. The rally in many pre-crisis CMBS deals and the issuing of new deals will continue to accelerate and deal spreads will tighten as investors use leverage to build their portfolio size. Current 8x-10x leverage will increase and capital raises will provide managers with a great deal of buying power. The expected increase in leverage availability and the high rates of return still available in this market will allow it to continue to attract investment. As demand for CMBS investments increase the market will once again begin to finance an increase in commercial building…..

The RMBS sector is following the CMBS sector’s lead. Although we believe that government driven uncertainty regarding GSE shrinkage and increase regulatory risk is slowing the RMBS sector’s recovery, we do not believe that there is anything in the market at this point that will actually reverse the RMBS Sector’s recovery. The aggressive leveraging of RMBS securities in Hedge Funds, REITS, and other investment vehicles is in the process of driving RMBS prices higher. We expect that the demand for RMBS paper is going to materially grow and outstrip the amount of secondary market bonds readily available as the year progresses. This is one of the reasons the FED is dumping their bonds. By the end of this year we expect a sizable increase in non-GSE related RMBS debt that will begin the process of materially loosening homebuyer credit. This would lead to an increase in residential construction work in 2012 as the loosening facilitates the release of pent up housing demand.

Tags: ABS bonds, auto finance, ben bernanke, cmbs, Credit Guru MJ, credit markets, Fed, Fed Chairman, Geithner, GSE, REIT, rmbs, Thor's Hammer, treasury secretary

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The Japanese tragedy continues to unfold and I, like the rest of you, watch on in horror. Meanwhile, the toxic sludge spewing from the traditional financial media outlets is at full throttle with spigots wide open.  Nothing like a good tragedy to create hysteria and boost ratings.

I’d like to take it down a notch and offer a reality check:

1) We don’t know what will unfold, hence a deep breath is required to make the correct financial decisions. Is it possible Japan will cease to exist as we know it? So many talking heads on TV breathlessly report this apocalyptic angle. I humbly suggest most of the supposed ‘experts’ are not experts in the field of nuclear fusion and are most certainly not experts regarding the fluid situation unfolding in Japan.

2) “But they are experts”, you want to say. After all, CNBC, etc., all laud their words and the string of letters after names (i.e. Ph.D., etc.) implies intelligence. Alas, perspicacity is not guaranteed with extra book learning. In fact, evidence suggests arrogance is the common illness acquired. I will remind you that so called ‘experts’ were trotted out during the Gulf oil spill last year and they were almost all invariably proven wrong.

3) Today, ‘experts’ say Japan sits on top of seven volcanoes and another like magnitude earthquake will surely swallow the country whole. Last May similar ‘experts’ assured us the blown drilling platform and pipe were just the beginning of a chain reaction that would create an enormous fissure in the Gulf of Mexico and subsequent tsunami. I’m still enjoying the beaches of Florida, what about you?

4) Today, ‘experts’ say cesium will undoubtedly billow out from the Fukushima site ruining arable land in Japan – and even in the U.S. if the winds are right. Can this tragedy happen? I assume so. I’m not taking the situation lightly but (and here is the key), I don’t know. What I do know is that so called ‘experts’ assured us that a methane bubble was going to explode in the Gulf of Mexico last year and rain down acid in the farm belt of this country. Reality: No acid, just quality rain that created bumper crops this past year.

5) Today, traditional media outlets as well as the blogosphere love to direct our attention to a view of an empty Tokyo street and a Geiger counter. We are implored to watch this scene closely for impending doom. Of course, last spring these same fear mongers beseeched us to watch endless hours of a subsea oil pipe spewing energy. I’m still trying to figure out how that energy footage was useful, so I can’t even begin to get to the Geiger counter, sorry.

Conclusion: Two months and five days after the BP oil explosion hit the news wire BP’s stock price bottomed at $26.83. One month later the stock price was up 45% and today the stock price sits about 65% off the low. I’m not suggesting the duration and returns will be the same in this case.  Certainly, events could unfold that will make this tragedy worse. In fact, one could argue this situation is already more dire and I would not disagree. The time for recovery could be longer. However, I am trying to add a little perspective. Financially remain calm and if the opportunity presents over the coming weeks, look to build a portfolio of companies that will benefit from the rebuild of Japan.

Precious Metals Outlook: Meanwhile, the precious metals (Gold and Silver) continue to offer the best harbor amidst the financial tempest.  Gold remains marginally higher in all currencies since the tragedy began last Friday. I would wager any decline in the metal price can be tied directly to the unwind of the Yen carry trade.

As the reader may recall, the Yen carry trade is a favorite of the leveraged fund manager. Said manager borrows Yen at extremely low interest rates and invests in other assets he feels will outperform the cost of the borrow. In a simple example, the manager invests borrowed Yen into Australian government bonds at an advantageous spread (let’s say he borrows at .25% and receives 5% clearing 4.75% on the investment if held for 12 months). He sells borrowed Yen, buys Aussi $s and buys Aussi bonds. The problem occurs when this overly crowded trade hits the speed bump of a rising Yen.  If the Yen rises in value too quickly this highly leveraged trade begins to lose money at an alarming rate as the cost to buy back the borrowed Yen exceeds the 4.75% annual spread.

The real world tsunami in Japan has created the financial tsunami described above. The leveraged carry trade manager has been forced to buy back Yen and unwind said trade due to the crisis. The Yen reached all time post WWII highs against the US$ yesterday. How long this unwind panic goes on is anyone’s guess, but this explains why on some days (like Tuesday) all asset prices go down together as margin requirements are being met and the carry is unwound.

For those of you needing encouragement to stay the course with your Gold and Silver holdings, Gary offers the following thoughts:

1) World gold production is approximately 2500 metric tons (mt)

2) 2010 production in China was 341 mt

3) Thus, world production excluding China equals about 2159 mt

4) Chinese central bank buys all internally produced gold; thus, imports are bought by Chinese citizens

5) 9.3% of estimated world production of 2159 mt in 2011 was imported for Chinese consumers through Feb or 55.8% annualized

6) World gold production was flat to down over last 3-4 years and not expected to grow in 2011

7) The Industrial and Commercial Bank of China Ltd. (ICBC) started physical-gold linked savings accounts in December. Account openings have surpassed 1 million, with already more than 12 tons of gold stored on behalf of investors. The ICBC has more than 20 million accounts. If the savings account program is introduced throughout China, Chinese demand could easily overwhelm world gold output.

Tags: Australian, Australian bonds, BP, carry trade, Cesium, chinese, CNBC, earthquake, Fukushima, gold, Gulf of Mexico, ICBC, Industrial and Commercial Bank of China, Japan, Methane, Oil Spill, precious metals, Precious Metals Outlook, silver, Tokyo, tsunami, Yen carry trade

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Reducing the Noise: A look at the stories that really matter

A quick perusal of the stories below should result in the immediate understanding of why equity markets are lower this week.  The fairly heady equity gains of Feb. have been mostly neutralized in two days. This should not be a surprise to anyone actually paying attention the the signs. From the geopolitical to the home grown to the simply technical, all signs in the last couple of weeks point to heightened risk and reduced potential for reward. I explained to a reader via private email recently, “When I consider an investment for my own personal assets and our funds(Fortune’s Favor I & Fortune’s Favor Precious Metals) which are one and the same, I always weigh the risk /reward scenario. If I don’t like the results of the test I don’t make the trade.” That quote just about sums up my thoughts for today.

Case Shiller Confirms Housing Double Dip Accelerated, 20-City Composite At Lowest Since June 2009

As of December, so almost three months ago, the housing double dip was getting increasingly worse. This was confirmed by the latest Case Shiller data, according to which the 10- and 20-City Composites posted annual rates of decline of 1.2% and 2.4%, respectively. The 20 City Composite printed at 142.16, the lowest since June 2009 when it was 141.75. Luckily, NAR’s now completely disgraced Larry Yun is nowhere to be found in this release, from which we quote: “Data through December 2010, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index declined by 3.9% during the fourth quarter of 2010. The National Index is down 4.1% versus the fourth quarter of 2009, which is the lowest annual growth rate since the third quarter of 2009, when prices were falling at an 8.6% annual rate. As of December 2010, 18 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down compared to December 2009.” Bottom line: the chart says it all.

Italy Exchange Halted for ‘Technical Issues’ After Plunge

Trading on the Italian exchange remained halted because of “technical issues” after the benchmark FTSE MIB Index fell the most in eight months yesterday on concern Libya’s unrest may affect Italian companies.

Borsa Italiana SpA, owned by London Stock Exchange Group Plc, said in a statement on its website that “restoring operations” are under way after stocks failed to open and the futures market was halted at 12:10 p.m. All markets are suspended, the Milan bourse said in a separate statement.

Korean Bank Run Spreading: Eighth Bank Closes Following “Massive Withdrawals”

The quietest bank run that has so far completely evaded mainstream attention, that of Korea, is spreading, and an eighth bank has now shuttered after “Domin Bank, a savings bank with a capital adequacy ratio below 5 percent, voluntarily decided yesterday to suspend its operations temporarily because of massive withdrawals.” As JoongAng reports: “The decision took both depositors and financial regulators by surprise since it was the first time that a local bank shut its doors on its own.” Apparently the courageous decision by the Financial Services Chairman Kim Seok-dong to deposit $17,864 in a troubled bank has not done much if anything to prevent the locals from realizing that their banking system is built on a house of cards.

ECB Emergency Overnight Borrowings Near Record For Third Day In A Row

As was reported on Saturday, the culprits for the surge in borrowing on the Marginal Lending Facility have been supposedly identified, with Ireland once again to blame. The flawed explanation provided was that insolvent Irish banks are paying an extra 75 bps in interest just so they have access to capital on a day’s notice (as opposed to a week) as they unwind their collateral. Needless to say, we are skeptical of that “explanation.” And judging by the fact that today total borrowing on the MLP, while still near record highs, dropped by €2 billion, without any news of collateral unwind to free up asset sales by either Anglo Irish Bank and the Irish Nationwide Building Society, puts the credibility of the FT source at question. What is without doubt, is that borrowings on the MLP will persist for a long time, as was insinuated in the original piece. After all the whole point was to make this latest outlier event “priced in.”

With NYSE Short Interest At The Lowest Level In Years Following A Record Short Collapse… Who Will Be The Bid?

One of the cute side-effects of the Fed’s third mandate has been the successful elimination of all market shorts. A quick update of the NYSE short interest indicates not only the deplorable presence of shorts in the market (those entities who provide a natural bid when the market is plunging), but that the bulk of the market meltup over the past several months has been due exclusively to shorts covering existing positions. Well, with short interest now at a multi-year low of 12.4 billion shares (lowest since 2007), compared to 14.5 billion just after the Flash Crash, a 13.6 billion average over the period, and the lowest amount since the Lehman failure, our only question is when the market plunges, like it is doing today, who will be the natural short covering bid when stocks are in freefall?

Tags: bank run, case-shiller, ECB, flash crash, FTSE, housing, Italy, Korean, NYSE

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Update: Three Phases of the Secular Bull Market in Gold – By Gary Rosenthal

In our first installment of the ‘Three Phases’ manifesto I wrote:

Phase II:

During phase II the rising pattern of gold will begin to accelerate .  However, the gold mining stocks will experience rising relative strength verses the metal as explosive quarterly earnings reports bring attention to the sector. Takeovers will begin to populate the landscape at substantial market premiums as the larger companies bid for the successful exploration companies that have toiled quietly for more than a decade. Sometime before the end of this phase the major Wall Street brokerage firms will scramble to rebuild a research presence and recommendation lists in an area they have long proselytized against. All of a sudden the smaller companies will successfully be able to come to market and new funds will flood into the exploration area. Very quickly a drilling equipment shortage will emerge and all participants in the industry will experience labor shortages.

The Dec. 13 post concluded with our opinion that phase II had commenced. On Feb. 3rd, less than two months later, the following high profile acquisition occurred offering conclusive evidence that our Dec. 13 proclamation seems wholly accurate:

Fronteer Gold to be acquired by Newmont by way of a Plan of Arrangement. Under the Plan of Arrangement, shareholders of Fronteer Gold will receive Cdn$14.00 in cash and one common share in a new company (”Pilot Gold”), which will own certain exploration assets of Fronteer Gold, for each common share of Fronteer Gold.  The cash consideration represents a premium of approximately 37% to the closing price of the common shares of Fronteer Gold on the TSX as of February 2, 2011 and equates to a value of approximately Cdn$2.3 billion for Fronteer Gold (excluding Pilot Gold).

Fronteer Gold owns a 100% interest in the development-stage Long Canyon project, which is located approximately one hundred miles from Newmont’s existing infrastructure in Nevada.  The proximity of Long Canyon to Newmont’s Nevada operations provides the potential for significant development and operating synergies.  Fronteer Gold also owns a 100% interest in the Northumberland project and a joint venture interest with Newmont in the Sandman project in Nevada, among other assets.  Fronteer Gold has total attributable Measured and Indicated gold resources of 4.2 million ounces and Inferred resources of 1.7 million ounces.

Thoughts on the ramifications of this deal:

NEM is paying $2.3 billion for total attributable Measured and Indicated gold resources of 4.2 million ounces and Inferred resources of 1.7 million ounces and a great deal of attractive long term developmental potential.

The lion’s share of the purchase price is for future potential because FRG has no proven/probable reserves which is what the industry usually pays for.

NEM is very knowledgeable of the area and willing to pay a handsome price for potential located adjacent to its Nevada mining operations.

Analysts are going to have a difficult time using the terms of this deal as a yardstick to measure the takeover value of other junior exploration companies because FRG is such a special situation for NEM.

Nevertheless, I am certain it won’t take long before some enterprising young analyst points out that the total market value of one of our positions in both Fortune’s Favor I(FFI) and Fortune’s Favor Precious Metals(FFPM) (with inferred gold resources of  3.5 million ounces in Nevada) is “only” $28 million. That’s about as far as the comparison goes but the shares could easily multiply several times due to speculative “gold fever” and still not equal 3.5% of what NEM paid for FRG.

A more meaningful comparison would be with another favorite position of the Fortune’s Favor Family of Funds. This Company has proven/probable gold reserves of 14 million oz with more than $500 million cash and cash equivalents on the balance sheet. Said company is still relatively early in the exploration of the ______ Lake region with the potential of proving up more than 20 million oz of gold. If NEM was willing to pay $2.3 billion for FRG with no proven/probable what is the upside potential for this company with proven/probable gold reserves of 14 million oz , $500 million cash on the balance sheet and a current market value of only $2.5 billion?

I expect this type of “yardstick” analysis to rapidly emerge throughout Wall Street over the next few months. Furthermore, we look for more evidence of phase II in Feb/March as we expect signs of equipment strain(sharply rising rig utilization and daily rate increases) and explosive earnings guidance from the drilling companies. As the price of gold/silver march higher we expect additional deals to be announced and a gold/silver “recommendation frenzy” to engulf Wall Street.

Tags: drilling, Fortune's Favor Family of Funds, Fortune's Favor I, Fortune's Favor Precious Metals, FRG, Fronteer Gold, gold, NEM, Newmont, precious metals, silver, Three Phases

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The Three Phases of Every Secular Bull Market in Gold – By Gary Rosenthal

Phase I:

In the early years a rising gold price is greeted with suspicion, doubt and often complete disbelief. The market is dominated by speculators and traders seeking relatively quick short term profits. Although gold may double or even triple in price during this phase(which can last five or more years) the price is subject to periodic violent selloffs of 20%-30% as short term traders are easily routed by the bullion banks. During this period gold bullion dramatically outperforms gold mining stocks as the market is disciplined to distrust the rise and avoid buying assets in the ground.  Indeed, most investors completely avoid gold during this period.

How to recognize when phase I is coming to a close:

Throughout the first phase the periodic selloffs follow a specific pattern. During the early years the selloffs are frequent, deep and can last for months. The gold mining stocks often decline as much as 50%, underperforming the metal in both directions.  However as time goes on the frequency, intensity and duration of the selloffs moderate as physical bullion buyers gain in strength and gradually erode the capability of the bullion banks to raid and manipulate the paper gold futures market. The mining stocks continue to react but begin to close the gap of underperformance. Phase I will come to a close when paper gold futures sell off for a few days but the gold mining stocks give up little or no ground or even a few of the stronger issues appreciate. Of course, mass media and so called market pundits will continue to call the top in gold which will keep most investors on the sidelines.

Phase II:

During phase II the rising pattern of gold will begin to accelerate .  However, the gold mining stocks will experience rising relative strength verses the metal as explosive quarterly earnings reports bring attention to the sector. Takeovers will begin to populate the landscape at substantial market premiums as the larger companies bid for the successful exploration companies that have toiled quietly for more than a decade. Sometime before the end of this phase the major Wall Street brokerage firms will scramble to rebuild a research presence and recommendation lists in an area they have long proselytized against. All of a sudden the smaller companies will successfully be able to come to market and new funds will flood into the exploration area. Very quickly a drilling equipment shortage will emerge and all participants in the industry will experience labor shortages.

Phase III:

Now the fun begins. This is the shortest but most explosive phase of the secular bull market in gold. This is the phase when all the sleepy financial institutions and the public finally wake up. Almost every week a new precious metals mutual fund or exchange traded fund will be launched as money pours into the sector. This is the inflection point when the public clamors to get aboard in true “gold rush” fashion and Wall Street is more than happy to accommodate with a constant flow of recommendations. Prices will continue to climb considerably beyond all prior fundamental benchmarks. Abrupt corrections will still occur as the COMEX will progressively raise futures margin requirements and so called pundits repeatedly try to foolishly call the top. But no top will be reached until the final excessive quantitative easing of fiat currencies (printed by the U.S. Federal Reserve, the European Central Bank and the Japanese Central Bank) finds its way into the gold market.

At Rosenthal Capital Management we recognize that QE has become a permanent drug of western central banks and believe no cure will be forthcoming for this long term addiction.  Over the last five years we have developed a considerable global research expertise in precious metals which has been a core focus in Fortune’s Favor I(our flagship fund) and guided Fortune’s Favor Precious Metals to significant returns since inception in the fall of 2006. Our primary focus has been owning bullion but we have recently begun to shift to the mining stocks as we enter the second phase outlined above. In addition to a mixture of the senior and junior issues we have broadened our approach to encompass what we believe is a global collection of the potentially most successful smaller exploration entities. While these issues collectively may occupy the smallest portion of our funds together they have the potential to have the greatest impact on the portfolio. We believe phase III of the current bull market may be able to yield a speculative exploration crop superior to the 1975-80 list below:

Name                         1975                      1980

Lion Mines              $0.07/share       $380/share

Bankeno                    $1.25                    $430

Wharf Resources   $0.40                    $560

Steep Rock                $.93                      $440

Mineral Resources $.60                       $415

Azure Resources     $0.05                    $109

An investment in Lion Mines of $700(10,000 shares) in 1975 would have netted a total profit of around $3,799,300 if held for the 5 years.

Final Comments:

First, we have purposely left out any comments on silver. Suffice it to say that if you research the archives of the Rosenthal Capital Management blog you will discover we believe silver will outperform gold in the current environment and is a major focus of our investment activities. Finally, in case you missed it, we believe Phase I of the current secular bull market in gold ended last week!

Positions: Long Gold and Silver assets. Not long stocks mentioned

Tags: bullion banks, central banks, COMEX, gold, precious metals, silver

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