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Dan Norcini: Gold Needs a Strong Close to End this Week

Gold Needs a Strong Close to End this Week

by Trader Dan

The following weekly chart provides a bit of longer term perspective as it shows the very solid level of buying support that has marked an accumulation phase by some very large players down below the $1585 – $1565 level. That buying has forged a bottom in this market while it slowly gathered steam for an upside breakout that forced the hands of the speculative shorts and enticed momentum based money flows back onto the long side of the market.

There are two main points to bring away from this chart. The first is that gold has managed to clear a downsloping trend line going back to the its all time peak (in non-inflation adjusted terms). It will tremendously aid the bullish cause should this market close above that line and especially above the $1665 level to end this week.

The second is to note how the market has been recently marching higher along the bottom tine of the pitchfork managing to close each week ABOVE this line since its spring low. This series of higher lows is indicative of a market that is seeing DEMAND arise at a progressively higher price level. That in itself is friendly.

If this market can clear psychological round number resistance at $1700, I expect it to make a fairly rapid run to the $1788 – $1800 level. The reason? Because the move will be starting from a relatively low level of speculative players on the long side in this market.

Remember Open interest has bled out of this market to the extent of over 400K contracts since its peak last year in August. That is an astonishing washout in a year’s time! Speculators took their money and headed elsewhere looking for gains. If this market looks as if it is going to begin another trending move to the upside, those funds that were leaving in droves, will be returning in droves to try to capture the move higher and capitalize.

Look at the following chart of the OUTRIGHT LONG positions (Not NET LONGS) of the big managed money/hedge fund community in gold. Since peaking close to 260K contracts near the all time high in gold last year, it has dropped over 50% to the present time. As stated many times over the past few months – the hedge fund community lost interest in gold as it was not trending. They went elsewhere looking for opportunities and found them to a great extent in the grains.

However, this camp LOVES trending markets with lots of momentum, which is why gold will move sharply higher if the algorithms remain solidly on the buy side. That will see the following chart detail a rather abrupt turn higher with the line rising instead of falling. So much of course depends on the actions of the Central Banks but the markets seem to be more and more convinced that the next “PROBLEM” it is going to have to deal with is becoming one of inflation and rising prices rather than deflation and falling prices, thanks mainly to the accomodative monetary policies that many are now expecting to be forthcoming from all corners of the globe.

The Modern Debt Jubilee

From Bill Buckler, author of The Privateer

The Modern Debt Jubilee

The modern “debt jubilee” is characterised as “quantitative easing for the public”. It has been boiled down to a procedure where the central bank does not create new money by buying the sovereign debt of the government. Instead, it takes an arbitrary number, writes a check for that number, and deposits it in the bank account of every individual in the nation. Debtors must use the newly-created money to pay down or pay off debt. Those who are not in debt can use it as a free windfall to spend or “invest” as they see fit. This, it is said, is the only way left to restart economic “growth” and finally get the spectre of unending financial crisis out of the headlines. It is the latest of a long string of “print to cover” remedies.

The major selling feature of this “method” is that it provides the only sure means out of what is called the global “deleveraging trap”. This is the trap which is said to have ensnared Japan more than two decades ago and which has now snapped shut on the whole world. And what is a “deleveraging trap”? It is simply the obligation assumed when one becomes a debtor. This is the necessity to repay the debt. There are only three ways in which a debt can be honestly repaid. It can be repaid with new wealth which the proceeds of the debt made it possible to create. It can be repaid by an excess of production over consumption on the part of the debtor. Or it can be repaid from already existing savings. If none of those methods are feasible, the debt cannot be repaid. It can be defaulted upon or the means of “payment” can be created out of thin air, but that does not “solve” the problem, it merely makes it worse.

The “deleveraging trap”, so called, is merely a rebellion against the fact that you can’t have your cake and eat it too. So is the genesis of the entire GFC. Debt can always be extinguished by means of an arbitrarily created means of payment. But calling that process QE or a Debt Jubilee doesn’t (or shouldn’t) mask its essence, which is simple and straightforward debt repudiation.

A “debt jubilee” is the latest attempt to make a silk purse out of a sow’s ear. It is the latest pretense that we CAN print our way to prosperity, but only if we do it in the “right” way.

Rickards “gets” Freegold

Taking Over From the US Dollar With Organic Finance

 

By Greg Canavan • August 16th, 2012 • Related Articles • Filed Under

Something’s brewing.

We don’t know what it is, but it feels ominous. It could just be bias playing with our mind. That is, we know the financial system is broken and that the market should collapse. We know you can’t solve a debt problem by increasing debt.

So we wait for something to happen.

Markets have conveniently settled down over the latter part of the northern summer. The power-brokers and money-managers have gone to the beach. It’s all going to script.

It’s probably no coincidence that as soon as the politicians get out of everyone’s way calm returns to the market. There’s no one around to stuff things up!

But things are already stuffed up. It’s the rate of decay that’s important. The rate usually slows down in the northern summer (although it didn’t in 2011) and speeds up in the volatile September and October period. Things may have been eerily quiet recently, but remember, there are just two weeks left in August…

Jim Rickards, who presented at our Strategy Session on Tuesday, reckons the most likely outcome of all this is chaos. He wasn’t trying to be alarmist. He’s just saying that when a system of international finance comes to an end, it normally goes through a chaotic period before another system emerges.

What will that system be? Rickards puts a number of options forward. All involve something taking over from the US dollar as the world’s reserve currency. The problem with the US dollar is that it fulfils the dual role of domestic currency and international reserve asset. This gives rise to the ‘Triffen Dilemma’, named after the US economist Robert Triffen. The dilemma is that the objectives of managing a domestic currency run contrary to the objectives of an international reserve asset.

For example, the US runs a trade deficit. It has done for decades. US trade deficits supply global liquidity. Excess US dollars flow to Middle Eastern oil producers, Chinese widget manufacturers and Japanese car makers.

What do you think would happen if the US suddenly became competitive and financially prudent? What if it started producing trade surpluses? It would be disastrous for the global economy. Global liquidity would dry up…there would be a massive credit crunch.

So the system depends on US profligacy. The US may enjoy an ‘exorbitant privilege’ in the words of former French President Charles De Gaulle , but it’s one that has benefitted – and we use that term loosely – the world in terms of delivering debt-based economic growth.

But for how much longer? Triffen identified the problem way back in the 1960s. Since then nothing has changed. The dilemma is now so big that it can’t be undone or reversed. The dual role of the US dollar as national and international currency is no longer viable.

So what happens next? Well, we can guarantee that any change will not be smooth or voluntary. The maintenance of the ‘system’ has many powerful beneficiaries. Which is why they’ll hold on until the death before change forces itself upon us.

Rickards reckons the IMF (international Monetary Fund) could come in and produce SDRs, or special drawing rights. SDRs are effectively a unit of account defined by the value of a basket of currencies: the US dollar, the euro, the British pound, and the Japanese yen.

These SDR’s could replace the international reserve role of the US dollar and in part solve Triffen’s Dilemma. But is issuing a piece of paper, backed by other pieces of paper and managed by a bunch of policymakers, a better system than the one we’ve got? Are SDRs relevant if it’s the ‘old’ industrial, debt-soaked powers who ultimately stand behind them?

Probably not. But the elites who run the system are from the old, debt soaked industrial powers, and they’ll do anything to keep their hold on power. This is why having SDR’s as a reserve currency is probably more realistic than you may think.

Would it be easy for the IMF to introduce SDRs? After all, their use means all international trade would be denominated in the SDR unit of account. Somehow we think getting international agreement on this will be difficult. But in times of chaos, obtaining agreement on something for the benefit of the few is not so difficult. The fear of the unknown and even greater chaos weakens democracy. We’ve seen it happen in Europe.

The other option Rickards came up with was gold as the replacement for the US dollar. However, he says this has no official support. He reckons there is no central banker around who supports a return to gold…which is reason enough for the rest of us to support it.

But a new system doesn’t necessarily have to have official support. It can just evolve organically. If each participant in this economic system, large or small, realises that a portion of their wealth is best protected by the physical ownership of gold, then gold will automatically assume a major role to play in the new financial system.

Rickards gave a few examples of what the future price of gold might look like based on various monetary aggregates. Using US M2 money supply and the US gold stock of just over 8,000 tonnes gives a gold price of US$30,862 per ounce. Assuming 40% backing of the money supply gets you to a $12,347 per ounce price.

These are just estimates of course. But even Rickards’ lowest estimate, at 40% of M1 money supply, produces a gold price around US$2,600. That’s well above the current price of gold. But gold is a market currently dominated by paper based gold derivative trading. We’ve shown before how the volumes traded on the over-the-counter market in London dwarf the estimated available physical supply.

Clearly, gold trading works like fractional reserve bank lending. This goes unnoticed in a financial system functioning smoothly. But it starts to break down when trust in the system breaks down. That’s because gold has no counterparty risk. It can’t default and can’t go bankrupt. Gold becomes more valuable as the system deteriorates.

And as the system deteriorates, gold flees, making fractional-based gold trading more and more difficult.

Our money is on an organic system of finance evolving out of the old, US dollar debt-based system. We’ll call it ‘organic finance’. It will involve gold priced at much higher levels than it is now. That’s because the gold price has nowhere near kept up with the explosion in global credit in the last 40 years.

And because authorities refuse to restructure or write-off bad debt monetising that debt slowly is the only alternative.

That in itself will cause a whole bunch of other problems. We’ll look at what they might be tomorrow.

Regards,

Greg Canavan
for The Daily Reckoning Australia

Gold Continues To Be Money: CME Europe Now Accepts Gold As Clearing Collateral

Over two years ago, the US Clearing house of the CME, the world’s largest derivatives marketplace, had no choice but to allow gold as collateral. Why: because as we showed some days ago, while in Europe bank deposits are expansive, in the US, financial system funding relies primarily on mythical assets as liabilities, i.e., those that exist primarily due to faith in the system, something which has been in short supply, as a result of which the $15 trillion (down from a peak of $23 trillion) shadow banking system long used to fund regular operations, has been imploding.

Couple that with a scarcity of other (re)pledgeable assets which in the US do not, unlike the UK, have an infinite rehypothecation chain, and one can see why back in October 2009 the CME had no choice but to accept gold as eligible collateral for clearing purposes.

As of minutes ago, the European arm of CME Clearing has folded too, and has released a press release stating that it to0 “has extended the range of eligible collateral types to include gold bullion.” Of course, this is the same gold bullion that Germany will be seeking to “repo” in exchange for sovereign bail outs as Europe’s periphery continues to run out of endogenous money and has to increasingly rely on the benevolence of the Bundesbank.

For now all we need to know is that another exchange just threw in the towel and admitted that contrary to Bernanke’s stern position, gold is, indeed money.

Full press release:

CME Clearing Europe, the London-based clearing house wholly-owned by CME Group, the world’s leading and most diverse derivatives marketplace, today announced it has extended the range of eligible collateral types to include gold bullion.

The extension offers additional flexibility at a time when high quality collateral is at a premium and the clearing of over-the-counter (OTC) derivatives is increasing. CME Clearing Europe has followed the lead of CME Clearing, which has accepted gold to cover margin requirements since October 2009.

Launched in May 2011, CME Clearing Europe currently clears OTC commodity derivatives and plans, subject to regulatory approval, to introduce OTC Interest Rate Swap clearing later this year.

CME Clearing Europe

CME Clearing Europe is an FSA regulated, multi-asset class clearing house based in London that offers more than 200 OTC products for clearing. Its clearing model ensures stability and increases transparency in the OTC markets that it clears. CME Clearing Europe has its own dedicated staff, and its governance arrangements, capital and default resources are separate from those of CME Clearing in the US. As part of CME Group it nonetheless has full access to the to the clearing and risk management expertise, systems and financial strength of CME Clearing. More information can be found at www.cmeclearingeurope.com

No Time to Lose

Financialization’s Self-Destruct Sequence

Submitted by Charles Hugh Smith from Of Two Minds

Financialization’s Self-Destruct Sequence

We are in the latter stages of financialization’s self-destruct sequence.

Like all systems that follow an S-curve of growth and decay, financialization cannot return to its growth phase. I addressed the impossibility of reflating asset and credit bubbles in Let’s Pretend Financialization Hasn’t Killed the Economy (March 8, 2012).

But there is another dynamic at play: a self-destruct sequence triggered by central bank and Central State efforts to reflate asset and credit/leverage bubbles. All central bank and State policies aimed at driving capital into risk assets boil down to reflating phantom assets purchased with debt by issuing more debt that is based on newly issued phantom assets.

Phantom assets purchased with debt cannot be reflated by issuing more debt that is based on newly issued phantom assets. Piling more debt/leverage on a sandpile of phantom assets (CDS, bonds that cannot possibly be paid back, empty condos in the middle of nowhere, etc.) only heightens the probability that the unstable pile will collapse.

The implicit Central Planning campaign to trigger “mild” inflation is part of the self-destruct sequence. Central planners metaphorically fight the last war, or at best the last two wars, and so they remain blind to any dynamics that did not exist in their case studies.

In the 1970s, central bank easing and Central State stimulus sparked a nasty bout of accelerating inflation. This reduced the weight of debt because wages inflated along with goods and services.

Now that labor is in surplus globally, wages are not keeping pace with inflation. This completely changes the dynamic of “mild” (3%) inflation: as the purchasing power of earned income declines, servicing debt becomes more burdensome. Inflation only renders debt less burdensome if wages rise at the same rate as the cost of goods and services.

In a decade of “mild” inflation and stagnant wages, households will experience a very real-world 30+% decline in their income. Meanwhile, their debt payments remain unchanged.

“Mild” inflation in an era of stagnant earned income will crush households, forcing liquidation or renunciation of debt. What happens as debt service costs rise as a percentage of real net income? There is less cash for consumption, and so the consumer-dependent economy spirals down. Credit is poured into the banking sector, but little trickles down to high-debt, stagnant-income households. This is deleveraging writ large.

What happens when central bank financial repression–lowering the yield on cash to near-zero–causes pension plans to fail and savings to earn negative real returns? Households must save more income to compensate for the destruction of yield by Central Planners.

These mutually reinforcing dynamics feed the self-destruct sequence’s inevitability. Add up the self-destructive forces: declining purchasing power, negative real returns on savings, rising debt based on newly issued phantom assets, and promises unbacked by real assets or based on declining national surpluses.

As Central Planning reflation of phantom assets fails, the credibility of the Status Quo institutions that promised success will crumble. I have described the dynamics of Heightened Expectations and the Collapse of Credibility and discussed The Keys To Understanding the Collapse of the Status Quo: Credibility and Expectations.

In the euphoric blow-off top phase of financialization, expectations of security and wealth were raised by political Elites anxious to mask the systemic looting of national wealth by financial/political Elites. Promises were even easier to issue than paper money.

But issuing promises, credit and leverage did nothing to expand the national surplus or the resources that ultimately back the promises and credit.

We can characterize the sudden, explosive convergence of fantasy (phantom assets and promises) and reality as Snapback! (October 9, 2008). The entire project of Central Planning (central banks and States) is to “extend and pretend” the Status Quo in the hopes that the gargantuan divergence between fantasy and reality will magically close as the result of “aggregate demand” or a new business cycle, or some other version of renewed “animal spirits.”

But “animal spirits” require trust in the transparency and fairness of markets and Status Quo institutions. As markets are rigged and manipulated to manage perceptions and enable vast skimming operations to continue, the credibility of the markets, politicos, State oversight agencies and the financial sector is eroded.

As central bank/State reflation of phantom assets fail, the credibility of the entire political/financial Elite and the institutions they control will be irrevocably lost.

Financialization’s self-destruct sequence has been triggered, and there is nothing anyone can do to stop it. The workings of the machine are opaque, and the interactions complex. We cannot know when the sandpile will collapse, or what the proximate cause of the collapse will be, but we can know that the unstable pile will collapse under the weight of the system’s illusory assets, fraud, collusion, embezzlement, corruption and corrosive dependence on artifice and lies.

We also know that self-serving vested interests will continue their pillaging until the destruct sequence’s final implosion brings the entire rotten edifice down in heap of empty promises.

In a word: Snapback!

Zerohedge: Behold The Fed’s Takeover Of The Bond Market

Behold The Fed’s Takeover Of The Bond Market

Submitted by Tyler Durden on 08/16/2012 19:48 -0400

The must see time lapse video below courtesy of Stone McCarthy shows the distribution across the entire curve of the US marketable debt, as it was held by either the Fed, or the private sector over the past three unconventional monetary policy programs: starting in 2003 and concluding yesterday. In one short minute, this clip demonstrates very vividly how the Fed effectively took over the US bond market.

Some things to note:

• The reason why the Fed no longer holds any debt with a maturity under ~3 years is because of the “ZIRP through late-2014” language which means there is no point for the Fed to hold that debt. For all intents and purposes it is the equivalent of cash. Debt maturing between now and 2014 amounts to just under $5 trillion.  Which means the Fed only has about $5.5 trillion in marketable debt with a maturity over 3 years to work with, and already owns about a third of it. It also means that as all the Fed’s holdings in the under 3 year category are sold, Twist will have to be extended, and with it the ZIRP language to beyond 3 years – most likely 5 or so.
• What is very visible is how the Fed had no choice but to expand its SOMA limit holdings per CUSIP from 35% to 70%. Soon, once the Fed owns 70% of every longer-dated Cusip, it will have no choice but to again extend the maximum permitted holdings, this time to 100% as it gradually become the entire market.

If after watching this clip anyone still believes that the biggest bond market in the world resembles anything even close to fair and efficient or which would have clearing prices anywhere near to where they transact now, they may want to double down on the FaceBook IPO allocation now.

Initial marketable debt distribution by holders starting back in2003 when the first Fed monetary policy started:

And most recent.

Average: