Monthly Archives: June 2015

23-Jun (Guardian) — Eurozone experts are meeting on Tuesday to hammer out a plan to keep Greece in the eurozone as emergency talks enter a critical 48 hours.

An intense day of back-to-back meetings between Greece and its creditors ended on Monday without a definitive deal, although senior eurozone leaders insisted they were closer to breaking five months of stalemate over the Greek bailout.

Jean-Claude Juncker, the president of the European commission, described an 11th-hour compromise proposal from the Greek government as a “major step” that would yield an agreement in the coming days.

“I am convinced that we will come up with a final agreement in the course of the week for the simple reason that we have to find an agreement this week,” he said.

…Greece and its creditors have just days to reach an agreement that will unlock bailout funds ahead of a crunch deadline on Tuesday 30 June when Greece is due to repay €1.6bn (£1.14bn) to the International Monetary Fund. Default could trigger a chaotic exit from the eurozone that both Greece and his creditors insist they are anxious to avoid.

[source]

China Update

Under the new London gold fix regime, there are now eleven participants.

“Volumes have also increased significantly, with average daily volumes for the morning and afternoon gold auctions more than doubling, compared with the five months prior to IBA’s administration.”

Link

MK note:  As I have noted in the past, including China in the fix, brings a new element to the table in that China is out front about its market position as a major buyer of the physical metal.  In March’s NEWS & VIEWS, I cover  how China’s participation in the global gold pricing system is likely to impact the market in the months and years to  come.  Bank of China is already a participant and China Construction Bank is slated to join soon.

From the March newsletter:

“I expect this synergy to carry over when later this year China inaugurates its own version of a gold fix in Shanghai and three Chinese state banks join the London Bullion Market Association’s new London fix later this month. I am not among the group that foresees a hot gold war between the Shanghai and London fixes, between China and the West. More I believe we will see a balancing of interests – a cold war of sorts between the physical metal-based Shanghai business and the paper-based London business. China would not be seeking admission to the international gold club in London if it did not intend to adhere to some common ground rules – if in fact a quid pro quo of some sort had not been agreed.

That is not to say though that the new gold market mechanisms will fall short of being transformative. To the contrary, I would counsel to expect major changes in 2015. At the top of the list I would put the likelihood of Shanghai forcing London to honor its pricing by delivering real metal into the China market. The three state banks China has stationed in the new London eleven-member fix regime will act as a conduit for those deliveries – a mission for the time being likely to keep the flow through the London-Zurich-Hong Kong-Shanghai pipeline moving at a steady pace. In the process, China might force a level of honest settlement too often avoided in the previous gold fix regime. More on that further on . . .”

[Note: The original announcements listed three China banks as participants, not two.]

The doubling of volumes is a surprising development and it has come quickly under the new regime.  It is difficult to know at this juncture how much of that volume is going to China in the form of physical metal, but those numbers will likely come out over time.  At some point, the pressure from China is likely to accrue as a positive in the pricing mechanism, as the sellers realize over time that real, not paper, metal is China’s final objective.  We will be watching these developments with a great deal of interest as we move out of the usual summer doldrums in the gold market and into the Fall rush season.

22-Jun (USAGOLD) — The European creditors embroiled in a last-ditch effort to come to terms with Greece face a dilemma: If they can’t prevent a default, their taxpayers stand to lose a lot of money.

Ever since the region’s sovereign-debt crisis first flared in 2010, European nations have been stepping in for Greece’s private creditors — largely German and French banks — by lending the country the money to pay them off. Thanks to this bailout, banks and investors have much less at stake than before…

On the flip side, European governments — and Germany in particular — have become the largest holders of Greece’s 313 billion euros in sovereign debt, through an alphabet soup of entities that are ultimately backed by taxpayers. Beyond that, as of April, the European Central Bank had lent the Bank of Greece about 115 billion euros to replace money being pulled out of the country — credit that can turn into losses for the ECB’s remaining shareholders if Greece leaves the euro.

[source]

PG View: So the private creditors have been made largely whole . . . leaving the taxpayers of Europe holding the bag.

20-Jun (Telegraph) — Ian Spreadbury, who invests more than £4bn of investors’ money across a handful of bond funds for Fidelity, including the flagship Moneybuilder Income fund, is concerned that a “systemic event” could rock markets, possibly similar in magnitude to the financial crisis of 2008, which began in Britain with a run on Northern Rock.

“Systemic risk is in the system and as an investor you have to be aware of that,” he told Telegraph Money.

The best strategy to deal with this, he said, was for investors to spread their money widely into different assets, including gold and silver, as well as cash in savings accounts. But he went further, suggesting it was wise to hold some “physical cash”, an unusual suggestion from a mainstream fund manager.

His concern is that global debt – particularly mortgage debt – has been pumped up to record levels, made possible by exceptionally low interest rates that could soon end, and he is unsure how well banks could cope with the shocks that may await.

He pointed out that a saver was covered only up to £85,000 per bank under the Financial Services Compensation Scheme – which is effectively unfunded – and that the Government has said it will not rescue banks in future, hence his suggestion that some money should be held in physical cash.

He declined to predict the exact trigger but said it was more likely to happen in the next five years rather than 10. The current woes of Greece, which may crash out of the euro, already has many market watchers concerned.

[source]

PG View: Spreadbury adds his voice to a number of high profile investors that have recently been advocating for precious metals ownership.

22-Jun (Bloomberg) — Euro-area finance chiefs tempered optimism that a deal on Greece was in the offing, saying expectations of a breakthrough were inflated amid confusion over new proposals intended to unlock aid.

With markets surging on speculation an accord was near, ministers closed ranks to douse hopes of an imminent deal as they arrived for a meeting in Brussels on Monday. Dutch Finance Minister Jeroen Dijsselbloem said it was “impossible to have a final assessment” of the Greek proposals since they had arrived so late, while his Irish counterpart, Michael Noonan, said he expected ministers to have to meet again on Thursday.

“I think this day is going to be a non-entity,” Finnish Finance Minister Alexander Stubb told reporters waiting in the pouring rain. “This seems to be a little bit of a Monday where we have wasted a lot of air miles both on the finance ministers’ side and on the prime ministers’ side, because I don’t foresee a breakthrough today.”

[source]

22-Jun (BBC) — Greece faces a critical 24 hours as European leaders hold an emergency summit that could break the deadlock around the country’s debt crisis.

Greek PM Alexis Tsipras said he hoped Greece would “return to growth within the eurozone”.

But European ministers have said there is still no basis for making a decision for aid for Greece on Monday.

On Sunday, Mr Tsipras set out new proposals to try to prevent a default on a €1.6bn (£1.1bn) IMF loan.

But he has ruled out pension cuts, higher power rates, and an excessive budget surplus.

[source]

PG View: The latest in a long line of emergency meetings, with Tsipras still ruling out pension cuts.

Andrew Oxlade/The Telegraph/6-20-2015

“Ian Spreadbury, who invests more than £4bn of investors’ money across a handful of bond funds for Fidelity, including the flagship Moneybuilder Income fund, is concerned that a ‘systemic event’  could rock markets, possibly similar in magnitude to the financial crisis of 2008, which began in Britain with a run on Northern Rock.

‘Systemic risk is in the system and as an investor you have to be aware of that,’ he told Telegraph Money.

The best strategy to deal with this, he said, was for investors to spread their money widely into different assets, including gold and silver, as well as cash in savings accounts. But he went further, suggesting it was wise to hold some ‘physical cash’, an unusual suggestion from a mainstream fund manager.”

“I am knowledgeable concerning markets and believe Donald is completely correct to be concerned that we have ‘a big fat bubble coming up. We have artificially induced low interest rates.’ I personally believe we are sailing in dangerous unchartered waters. I can only hope we get to shore safely. Never in the history of the Federal Reserve have interest rates been artificially held down for so long at the extremely low rates existing today. I applaud Donald for speaking out on this issue – more people should.”

Link

Please see posted below (Fed cracking the whip will no longer work to keep the tiger sitting on its stool). The Fed is the chief architect and project manager of that “major bubble.”

19-Jun (Bloomberg) — Greece is unlikely to resort to selling gold because disposing of the hoard valued at about $4.3 billion would only postpone a default, Commerzbank AG said.

Bullion prices would probably fall if the nation were to sell metal on the open market, Commerzbank said in a report Friday. Using gold to raise funds may mean selling to another central bank or the International Monetary Fund, or lending out the metal, it said.

Greece is edging closer to an exit from the euro after talks this week to reach a deal over aid ended in frustration. For Greece to use gold to pay the IMF the 1.5 billion euros ($1.7 billion) it owes by the end of the month, it would mean selling about 40 percent of its gold reserves.

“Selling gold would deprive the country of its only really valuable reserves, which could be put to good use at a later date, perhaps to stabilize a new currency if Greece exits the euro,” Commerzbank analysts including Frankfurt-based Eugen Weinberg wrote in the report. “We think it very unlikely that Greece is willing to go down this path.”

The value of Greece’s gold reserves amount to about 1 percent of its government debt, Commerzbank said. The country owns 112.5 metric tons and is ranked the 30th-largest holder by country, according to the London-based World Gold Council. The metal makes up about 66 percent of its foreign reserves.

[source]

19-Jun (BusinessInsider) — After yet another failed summit, the blame and recriminations started as soon as Thursday’s Eurogroup meeting broke up. Greece is now just 11 days away from its next major debt repayment, which it almost certainly can’t make without a bailout deal.

“Capital controls imminent without breakthrough,” is how Barclays analysts headlined their morning email on the subject.

On June 30 Greece owes €1.5 billion ($1.70 billion, £1.08 billion) to the International Monetary Fund (IMF) that the government almost certainly doesn’t have.

It then owes another €3.5 billion (£2.51 billion, $3.97 billion) to the European Central Bank (ECB) on July 20.

[source]

19-Jun (Bloomberg) — Federal Reserve Chair Janet Yellen may be a “Decemberist” — investors’ nickname for those who want to wait to raise the benchmark lending rate until the end of the year.

The tally of Fed officials who want to hike this year rather than next year is still 15-2. Seven central bankers forecast one hike or none at all in 2015, new projections released Wednesday showed, up from three in March.

There are four remaining Federal Open Market Committee meetings this year. Two of them — one in September and the other in December — have press conferences, which is why economists are highlighting those dates as probable for a rate increase.

A close read of what Yellen emphasized yesterday suggests it would take sustained momentum to get the economy past the hurdles she still sees in its path.

[source]

PG View: I doubt that a Sep rate hike was ever really in the cards. Hints to the contrary (as with March and June before that) were simply contrived to keep the market off guard. That may ultimately prove to be the case with December as well.

by Michael J. Kosares

Yesterday’s Fed announcement is a distinct break with the past and a watershed moment for the markets psychologically.  The Fed will no longer be able to simply crack the rhetorical whip in order to keep the market tiger sitting on its stool. We will probably get a taste of what this all means in the near term, but, in my view, the Fed will find itself on the defensive with little left in the quiver, save the ultimate rate hike, to discourage speculative bubbles.  Since it will be hard-pressed to actually snap the whip on Wall Street’s nose (in the form of aggressive rate hikes), the door is open to all sorts of renewed reckless behavior – a hey day for speculators of every description until the bubble ultimately bursts.  The importance of a hedge in gold is now more important than ever.

In the June edition of NEWS & VIEWS, I wrote the following observation on current market behavior – a piece that might be particularly relevant in view of yesterday’s Fed announcement.

On lemming-like algos and distinguishing yourself from the crowd

Back in 2012, I wrote, “It used to be ‘Don’t fight the tape.’ Now it’s ‘Don’t fight the algorithm.’ Well, algos and the madness of machines have become even more entrenched and more influential since those days.

“Real money funds investment people just aren’t playing the gold market. Central banks, the whole lot of them aren’t trading the gold market the way they used to,” says David Govett, head trader at Marex Spectron in a Financial Times article. “It’s created thin nervous markets — the algos can jump in and push it around and make a mess of it.” Of course, Govett is talking about derivative trading, not the acquisition and/or sale of physical metal itself.

Eventually circumstances change. Assumptions are overturned. Algo’s are re-written and we suddenly find ourselves in an entirely different ball game. The algo driven bear can quickly become the algo driven bull. Best way to weather the madness of machines? Own the physical metal, sit back and wait for the lemming-like machine traders to see the light.

While thinking about the algo problem for the gold market, I recalled a story told by an old friend – an engineer who worked at a major engineering firm here in Denver. Our connection was a mutual interest in gold, but that’s another story.

The team had a tight project deadline when all of a sudden a power outage took out the lights, the computers – everything electronic. My engineering friend was old school – the kind of guy that wore a bow tie and kept his pens and a slide rule in the ever-present plastic holder residing in his shirt pocket (Some of you may remember the type).

The younger engineers stood around looking at each other – panic in their eyes. But my engineering friend, like all good engineers, had a back-up plan. He pulled out his slide rule, a number 2 mechanical pencil, found his yellow legal pad, sat by a window and completed the final project calculations without a hitch.

Don’t know why I like this story with reference to algo trading, but I do.

True story, by the way . . . . . .

Epilogue

Bernard Baruch, the famous early 20th century stock speculator, in explaining the behavior of markets:

“Have you ever seen in some wood, on a sunny quiet day, a cloud of flying midges — thousands of them — hovering, apparently motionless, in a sunbeam? …Yes? …Well, did you ever see the whole flight — each mite apparently preserving its distance from all others — suddenly move, say three feet, to one side or the other? Well, what made them do that? A breeze? I said a quiet day. But try to recall — did you ever see them move directly back again in the same unison? Well, what made them do that? Great human mass movements are slower of inception but much more effective.”

This is the same Bernard Baruch who just before the stock market crash of 1929 liquidated his stock holdings and put his money into bonds and cash, and then later, after the crash, dumped a good portion of his fortune into gold. When asked why he would do such a thing by the secretary of the Treasury, Baruch replied that he was “commencing to have doubts about the currency.”

While others banked on the 1920’s stock mania, Baruch’s intuition was telling him that there was something amiss. There are times when it pays to distinguish yourself from the crowd – the midge that flies in the other direction.

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