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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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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Precious Metals Outlook: Bloomberg TV Headline: Goodby Gold

Bloomberg TV ran the above story yesterday morning, interviews were conducted and a consensus was formed. Based on this simple indicator I would say that Gold Prices bottomed yesterday at around $1159.  We will call this indicator the ‘Fin. TV’ indicator. You may recall how unbelievably accurate the Fin. TV indicator was in early July when identifying the equity market low.  I explained this phenomenon in the post titled , Stock Market Strategy: The More Things Change the More They Stay the Same . The bottom line of the explanation reads: “Rosenthal Investing Axiom: When CNBC et all call for imminent market demise expect instantaneous market rally.”

So, by applying the Fin. TV rule to Gold prices we should not be surprised to see Gold trading at $1175 as I write this note. Yesterday’s cacophony of calamitous Gold comments leads to the current $15+ comeback; categorically classic!

Stock Market Strategy: Data and Comments Continue to Point Towards Q.E.2

This morning’s disappointing GDP news dovetails nicely with voting Fed member Bullard’s comments yesterday.  The Zero Hedge story, “GDP Misses Expectations, Comes At 2.4%, Plunges From Revised Q1 GDP Of 3.7%” Offers a good breakdown of the details. I would, however, caution readers who believe this news is negative for the equity markets. Please remember the all important equation: Liquidity Expands + Credit Markets Improve = Equity Market Rally . News such as disappointing GDP numbers leads Fed members to speak out openly about the need for more liquidity…            

Bullard comments on deflation: St. Louis Fed President Bullard issued a paper arguing that the Federal Open Market Committee’s extended period language may be increasing the probability of a Japanese-style deflationary outcome for the U.S. within the next several years. Bullard concludes that an appropriate quantitative easing policy offers the best hope for avoiding a low nominal interest rate, deflationary outcome. Bullard frames his discussion in the context of theoretical analysis by Benhabib et. al. 1 that emphasizes two possible long-run outcomes for the economy: one which is consistent with monetary policy as it has typically been implemented in the U.S. in recent years, and one which is consistent with the low nominal interest rate, deflationary regime observed in Japan during the same period… See report here

…And comments about more liquidity are being backed up by actual growth in worldwide liquidity as seen in the chart below. While this cycle persists expect higher equity prices at best and consolidation of gains at worst….

Tags: Fed, Fin. TV, GDP, gold, precious metals, Q.E.2, Rosenthal Investing Axiom, stock market strategy, Worldwide liquidity, Zero Hedge

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Guest Post by Don Coxe (courtesy of Zero Hedge)

Don Coxe Dissects Gold, As “The Oldest-Established Store Of Value Moves To Center Stage”

…We think that future historians may well report that the moment when gold once again became a store of value was when the dollar began soaring in response to the stench of seared Greece—and gold climbed right along with it. The asset classes that have been inversely correlated since Keynes’s time suddenly united….

… So why didn’t inflation come roaring back when Bernanke doubled the Monetary Base and M-2 was climbing at double-digit rates?

And why didn’t inflation come back when central banks across the OECD were growing their monetary bases and money supplies were climbing? And why did gold take off to record levels when money supply growth began to dwindle and actually turn negative?

… What we believe is unfolding is a rush into gold by individual investors who look at the astronomic growth in financial derivatives—particularly collateralized debt swaps—and government deficits at a time when the effects of demographic collapse are finally being understood. According to some guesstimates we have heard, the supply of outstanding financial derivatives may be in the $70 trillion range, dwarfing the combined value of money supplies and debts. The total value of gold is so minuscule in comparison to the supply of these software-spawned instruments that it cannot be any real help in stabilizing global finances—but it can be a haven for investors seeking to protect themselves against an implosion of majestic proportions.

… So…as a store of value for future generations,

If you can no longer believe in residential real estate,
and you can no longer believe in bank deposits,
and you can no longer believe in the dollar,
and you can no longer believe in the yen,
and you can no longer believe in the euro…
What can you believe in?
How about gold?

It’s so old, it’s new again.

… Among the arguments routinely adduced against it is that it pays no interest—but with interest rates in the zero range, the opportunity cost is minimal.

Read More…

Stock Market Strategy: Follow Up – Credit Check

Michael Johnson (a.k.a Credit Guru) weighs in on recent credit market performance and shifts his stance:

Last Wednesday we turned from tactically bearish to neutral. We went completely bullish Friday morning. The equity market’s ability to ignore the recent improvements in bank and non-financial CDS profiles appears to be faltering…. and this could lead to a sustained equity rally… …Credit market performance so far this morning indicates that the SPX should be trading in the +25pt range….that would match the note we sent out Friday morning

Bears About to be Gored

Summary:

We now believe investors should be Tactically Bullish as well as fundamentally bullish

Bears should be getting nervous…credit market is improving

GS Credit curve has steepened

New Issue Market reopened

Bank CDS Spreads tightening

Credit market volatility decreasing

How many times do you think credit will tighten before the equity markets jump on the bullish bandwagon? It’s probably sooner rather than later…

Gored… As our readers know, during the recent sell-off we have remained fundamentally positive while turning tactically bearish. We have written numerous pieces highlighting the differences between the feared “sovereign credit crisis that will never be” and the onset of the 2007-2009 credit crisis. The fear of Greece and of Euro viability concerns short-circuiting the global economic recovery is wishful thinking by the bears. This is like the bank nationalization argument….politicians will allow the Euro to fail because they know it will cause global havoc….politicians will nationalize the banks because they know it will cause global havoc…investing based on the hope that politicians will make stupid mistakes does not seem appropriate.

However, the ability of FINREG to destabilize the bank’s access to the credit markets is a truly scary, and much more likely to happen, in our opinion. The inversion of the GS credit curve and the widening of larger US bank credit spreads began a week before the overall equity and credit markets began to sell off. In our opinion, the weakness in the money center bank’s credit profiles made it a lot easier for sovereign risk concerns to find a willing audience.

The combination of the sovereign credit crisis headlines along with money center bank credit fears caused the correlation between banks CDS spreads and CDX IG Index spreads to increase. Credit market volatility materially increased and appeared to spill over into the equity markets. Many of the equity market’s worst sell-offs immediately followed large credit market sell-offs.

However, the reason we are becoming tactically bullish at this point is the reduced likelihood that FINREG will be passed with its most destructive portions. This opinion is working its way through many of the money center banks CDS credit curve profiles and credit spread volatility is decreasing. Additionally, continued improvements in nearly every consumer loan asset class will likely force even the most bearish bank analysts to reduce their loss estimates….

Conclusion:

Being fundamentally bullish and tactically bearish has been a relatively solid approach to the recent sell-off in our opinion. However, the recent decrease in credit market spread volatility and the stabilizing of money center bank CDS profiles makes it difficult to remain tactically bearish when we remain bullish fundamentally. We are now fundamentally and tactically bullish. The recent trend in which the equity markets ignore credit market strength is not likely to last.

Tags: CDS, Credit, credit market volatility, credit markets, euro, finreg., gold, GS, Michael Johnson, precious metals, stock market strategy, Zero Hedge

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March 10th, 2010

Tags: budget deficit, DXY, investment strategy, OIL, rosenberg, Treasury, vix, Zero Hedge

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Tags: 2nd stimulus, commercial real estate, Goldman trading scandal, HFT, joe saluzzi, News that Moves Markets, RCM Editorial, Sergey Aleynikov, Zero Hedge

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