Readers are reminded that this blog is not advisory. Comment and opinions on this site are for information and can  not be used as investment advice. 

IMF Managing Director Christine LaGarde on Europe’s Proposals for Greece:

Ms. LaGarde writes in her Press Report this morning:

 “…As soon as the prior actions agreed with the Greek authorities are implemented and adequate financial contribution from the private sector is secured, I intend to make a recommendation to our Executive Board regarding IMF financing to support a program.” 

In a January 23rd speech Ms LaGarde had already made her position clear. ‘We must all understand that this is a defining moment. It is not about saving any one country or region. It is about saving the world from a downward economic spiral.’ 

Why then such a carefully worded comment on saving Greece? The  Analysis on the challenges and prospects of the Greek bailout that influenced the Euro meeting yesterday revealed policy makers were blind to reality. The situation was  more critical than they had expected. The confidential report is lengthy and detailed. But the key conclusion is clear.  Greece’s problems can not be solved by austerity alone.

Without economic growth the problem will only get worse . Here is an edited extract from the introduction to the analysis:

  …The 2011 out turn was worse than expected, both in terms of growth and the fiscal deficit; the macroeconomic outlook has deteriorated significantly…The assessment shows that, in a baseline scenario, public debt will decline to around 129 percent of GDP by 2020, staying above the 120 percent of GDP level targeted by European leaders in October. …There are notable risks.

Given the high prospective level and share of senior debt, the prospects for Greece to be able to return to the market in the years following the end of the new program are uncertain and require more analysis. Prolonged financial support on appropriate terms by the official sector may be necessary. Moreover, there is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term… a scenario of particular concern involves internal devaluation through deeper recession…This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020. Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it.’

In a nutshell -  to achieve any stability Greece’s growth and stability will have to be funded.

Europe’s Plans for Promoting Growth:

Europe’s proposals on growth and employment were outlined  in a lengthy (30,000 word) 30th January 2012  Statement released by the Members of the European Council. The policy  statement ‘Towards Growth Friendly Consolidation and Job Friendly Growth includes proposed initiatives under three headings:

1: Stimulating Employment, Specially for Young People;

2: Completing the Single Market; and

3: Boosting the Financing of the Economy ; In Particular SME’s

For the programme to gain traction and support employment growth  the ECB will be supporting monetary reflation for several years not only in Greece but probably on a pan European bases

Indications are that  ECB President Mr. Draghi will be up to the challenge.

 Gold and Reflation:

Gold ’s unique stateless money franchise assures protection against the consequences of central bank debt monetisation and other money creation activities introduced to  support reflation.

Frank Holmes, US Globa Investors CEO

and Chief Investment Office is co-author

of The Goldwatcher.

US Global’s weekly research comments on gold are

an invaluable and free resource for investors.

The  insightful analysis on old in the Bullring’  that follows was published

was published in an Investor Alert from Frank Holmes published today:

After prices fell 10 percent in December, many investors wondered if the bull market in gold was running out of steam. That was before Federal Reserve Chairman Ben Bernanke swooped in with a “red cape” and fired the bulls back up. Since the Fed reassured the world that interest rates will remain at “exceptionally low levels” for another two years, gold has jumped more than three percent.

UBS described the situation simply, “if investors needed a (further) reason why they should be long gold now, they got it yesterday … a more accommodative policy is a very good foundation for gold to build on the next move higher.”

To gold bugs, two more years of near-zero, short-term interest rates means negative real interest rates are here to stay, and this has historically been a strong driver for higher gold prices.

Bernanke and the Fed aren’t the only central bankers in the fiscal and monetary bullring. Brazil has cut its benchmark interest rate a few times and China lowered its reserve rate for banks in December. According to ISI Group, 78 “easing moves” have been announced around the world in just the past five months as countries look to stimulate economic activity.

One of the main weapons central bankers have employed is money supply, which has created a ton of liquidity in the global system. Global money supply rose 8 percent year-over-year in December, or about $4 trillion, according to ISI. I mentioned a few weeks ago how China experienced a record increase in the three-month change in M-2 money supply following China’s reserve rate cut.

Together, negative real interest rates and growing global money supply power the Fear Trade for gold. The pressure these two factors put on paper currencies motivates investors from Baby Boomers to central bankers to hold gold as an alternate currency.

Adrian Ash from Bullionvault says global central banks are on a buying spree and they have been since the Fed cut interest rates by 25 basis points in 2007. Central bankers’ shift to buying gold was a significant sea change for the yellow metal.

You can see from the chart below that official gold reserves have historically been much higher, averaging around 35,000 tons. In the 1990s, central banks began selling, with reserves hitting a 30-year low right around the time the Fed began cutting rates. Adrian says that gold holdings are now at a six-year high with the current amount of gold reserves just less than 31,000 tons.

These are countries large and small. In December, Russia, which has been routinely adding to the country’s gold reserves since 2005, purchased nearly 10 tons; Kazakhstan purchased 3.1 tons and Mongolia bought 1.2 tons. UBS says “although reported volumes are not very large, it is still an extension of the official sector accumulation trend.”

 Not all central banks are recent buyers, though. The “debt-heavy West” has sold its gold holdings, while emerging markets increased their gold reserves 25 percent by weight since 2008, says Adrian.

Reserves as a percent of all the gold mined has also declined, with “a far greater tonnage of gold … finding its way into private ownership,” says Adrian. Since 1979, you can see the percentage of reserves to total gold has declined at a much faster pace as individuals increasingly perceived gold as a financial asset.

Adrian points to China’s Gold Accumulation Plan as a recent example of this trend. A joint effort between the Industrial & Commercial Bank of China (ICBC) and the World Gold Council (WGC), the program allows Chinese citizens to buy gold in small increments as a way to build up their gold holdings over time. The WGC reported in September that the program had established 2 million accounts during its first few months in operation and the amount is growing by the day.

These programs open the door for gold as an investment to a whole new class of people in China but that’s only a fraction of the tremendous demand for gold that we are seeing from China. In addition to the Fear Trade, gold is driven by the Love Trade, which is the strong cultural affinity the East, namely China and India, has to the precious metal.

In 2010, the Indian Sub Continent and East Asia made up nearly 60 percent of the world’s gold demand and 66 percent of the world’s gold jewelry demand, according to the WGC.

Indian jewelry demand has historically increased during the Shradh period of the Hindu calendar, but last year, high prices and a volatile rupee kept many Indian buyers on the sideline.

If you thought $1,900 was too much to pay for an ounce of gold, imagine how Indians felt when the rupee fell against the U.S. dollar, causing a gold price spike in rupees. Gold in Indian rupee terms rose more than 35 percent from July to November, roughly three times the magnitude of gold priced in U.S. dollars, yuan or yen. This currency swing significantly impacted Indian gold imports, which dropped 56 percent in the fourth quarter, according to data from the Bombay Bullion Association.

 “Indian buyers will be back” after they adjust to the higher prices, says Fred Hickey. In one of his latest editions of “The High-Tech Strategist,” he cites late 2007 as a recent example when the Indian gold market experienced a similar rough patch. That year, gold demand in India fell off a cliff after prices spiked more than $1,000 an ounce in one quarter, tarnishing the country’s love affair with gold for a “brief period.” Fred says their cultural affinity for gold as an important store of wealth and protection against inflation will drive Indian buyers back into the market.

The trend was already changing in 2012, as UBS reported that the first day of trading saw physical sales to India were twice what they usually are, according to Fred. Although this is a very short time frame, I believe the buying trend will continue in this gold-loving country.

In China, “just as in India, gold is seen as a store of wealth and a hedge against inflation,” says Fred. Demand has been growing, especially in the third quarter, when China’s gold purchases outpaced India. “Physical demand for gold from the Chinese has been voracious all year,” says Fred. As of the third quarter, China had already obtained 612 tons, eclipsing its total 2010 demand, according to the WGC.

Across the Chinese retail sector, gold, silver and jewelry demand was the strongest performing segment in 2011, says J.P.Morgan in its “Hands-On China Report.” Growth in this segment far outpaced clothing and footwear, household electrical appliances, and even food, beverage, tobacco and liquor, all of which experienced more modest growth.

 J.P.Morgan says the bulk of the increase came from lower-tier cities “where income levels are rising the fastest and improvements in retail infrastructure have allowed for rapid store expansion.”

Increasing incomes coupled with government policies that support growth have been the main drivers for rising gold prices. Take a look at the chart below, which shows the strong correlation between incomes in China and India and the gold price. As residents in these countries acquire higher incomes, they have historically purchased more gold, driving gold prices higher.

We anticipated that the Year of the Dragon would spur an increase in the buying of traditional gifts of gold dragon pendants and coins. Gold buying did hit new records, says Mineweb, with sales of precious metals jumping nearly 50 percent from the same time last year, according to the Beijing Municipal Commission of Commerce.

This should serve as a warning to all of gold’s naysayers. Gold bullfighters beware—you now have to fight the gold bull while fending off a golden Chinese dragon.

In US Global Investors weekly comments also include threats and opportunities for investors in gold:

Opportunities

• Don Coxe, in his latest edition of Basis Points, urges gold investors to invest in gold equities at the expense of bullion ETFs as the Fed continues its policy of nonstop money at zero rates.  Likewise, David Rosenberg, of Gluskin Sheff, notes the Fed policy of currency debasement means that, in his opinion, exposure to gold and gold mining stocks in a portfolio is an absolute necessity.
• In a recent issue of Market Musings & Data Deciphering, David Rosenberg highlighted the Fed policy of keeping interest rates low with the potential for more quantitative easing to come, coupled with the current back-door QE program in the eurozone as being very constructive for gold.
• Rosenberg suggested investors would be more highly rewarded if they bought gold mining stocks versus gold bullion.  He also noted that, historically, gold mining equities tend to dramatically outperform bullion in the later stage of a gold bull market.

Threats

• The Fed policy of extending low interest rates is making life much more difficult for insurance companies and pension funds that manage long-term liabilities and for retirees seeking income from their investments.  Corporations are keeping high cash balances, partly due to uncertainty over future tax policy. Perhaps some of the reserves will be needed to fund pension plan deficits, which rose more than 50 percent in 2011.
• Newmont Mining noted in its recent regulatory filing with the SEC that its Hope Bay project in the far north of Canada will be subject to impairment testing.  Back in 2007 when gold prices were trading around $800, Newmont paid $1.5 billion for a 55 million ton resource that is estimated to contain 10.1 million ounces of gold. This works out to a resource grade of 5.69 grams per ton of gold. Today gold has doubled in price, but apparently there is some concern that the $900 million in estimated capital requirements to build the project may escalate beyond where the project’s returns would not be robust enough to take the risks.
• Equity issuance has been heavy recently.  Detour Gold raised about $240 million in the prior week, while NovaGold raised as much as $333 million this week, diluting current shareholders by more than 10 percent.  While the NovaGold financing represents only a small fraction of the additional $6.7 billion it will need, financing of this magnitude cumulatively takes some of the momentum out of the market.

The LBMA have  now published the commentaries accompanying each forecast. To access the commentary roll your cursor over the  accompanying the foirecast headline.

Link to page with gold forecasts and commentaries

Link to page with silver forecasts and commentaries 

Further comment will be posted on this blog after the commentaries have been reviewed.

The Bailout Scenario:

This podcast,   featured prominently on the IMF homepage today,  records an interview with Avrind Subramanian, author of Eclipse: Living in the Shadow of China’s Economic Dominance . You will probably be as shocked by the content as I was. But it will be well worth 8 minutes of your time to listen to the podcast.

In Subramanian’s opinion within a decade the economic power of China will exceed that of the US. There will no longer be a G20, a G7 or even a G2.  Only a G1 and it will be China.

The podcast starts with a discussion on Subramanian’s scenario of a ‘broken and battered’ U.S. turning to the IMF for a bailout within a decade. How might the world’s superpower come to sink so low?

Factors draining the US economy:

Subramanian cites 3 chronic problems:

1: Debt burdens resulting in low growth;

2: Inability to come to terms with entitlement and fiscal realities; and

3: The American dream no longer working. Median incomes have stagnated over the last three decades for a wide cross section of society while those at the very top have garnered a disproportionate share of the pie.

With these drains on economic performance an event such as inflation or higher interest rates would trigger an unmanagable  financial crises and the need for an IMF bailout.

Factors powering China’s economy:

Subramanian cites abundant capital inflows driving growth,  abundant labour and enhanced productivity. These conditions are  supported by a political system that must deliver growth to remain in power.  China’s current system has a ‘phenomenal’ track record with ‘nothing like it in history.’

The IMF podcast  interview and other comments on Eclipse:

Subramanian is a senior fellow at The Peterson Institute for International Economics and Eclipse, published at the end of last year, has been widely reviewed. The December edition of an  IMF publication includes a review of the book by Pieter Bottelier with several critical challenges to Subramanian’s thesis and conclusions.

Responding to the IMF podcast:

You don’t need to be convinced by Subramanian’s analysis to see that the case for owning gold as insurance against unthinkable outcomes is compelling. After the dominos start falling  it will be too late to protect yourself.

NEW PEAK FOR GOLD ABOVE $2000 IN LBMA FORECASTS 

Headline data from the annual London Bullion Marketing Association’s annual forecasting program, supported by major bullion banks, dealers and other market participants were released today.  The bottom lines on the averaged forecasts for gold and silver are:

Gold Hi $2055 Low $1433 Average for 2012 $1766

Silver Hi $44.49 Low $ 24,96 Average for 2012 $ 33.98

Of the 26 contributors 23 forecast top prices for gold would exceed $2000.

The most accurate gold forecasts over the last two years came from from UBS analyst Edy Tulley, now the most bullish  for 2012 with this forecast:

Gold Hi $2500 Low $1400 Average for 2012 $2050

The Financial Times have reported Edel Tulley citing ’stress in the Sovereign debt markets, low interest rates, central bank gold buying and the lack of compelling alternatives’ as factors supporting gold.

We will  read between the lines and contribute further observations when the LBMA  publish each analyst’s supporting comments within the next few weeks  Ross Norman, a contributor with a formidably successful forecasting record,  has already published his forecast with supporting commentary. 

 Chart courtesy www.sharelynx.com 

Background to the gold price correction:

The recent gold price correction, though steeper than expected, hasn’t come as a surprise. The final paragraph of the 10th December Goldwatcher posting refers. There is also commentary in The Goldwatcher posting of September 13th 2001 Gold and Economic Uncertainty that followed the major fall in the gold price from all time peaks.

Gold closed last night at $1583 after hovering round $1550-  a touch below  the $1600 200 day moving average. The gold price now is $1570. At times today it has been both $20 higher and lower. A substantial fall below $1600 will be seen by market technicians as confirming the gold bull  market trend is vulnerable to correction.

It’s clear now the flow of funds is no longer moving  in the direction of gold to the extent it has been. The main reason is size matters and the gold market isn’t large and liquid enough to absorb multi billion dollar transactions without price distortion. Substantial pools of funds are flowing to US and German Government debt securities, the destinations seen as safest and most liquid. Another main reason for the gold price correction may be economic slowdowns in China, India and the other Asian economies that accounted for recent surges in demand.

The euro crisis hasn’t been solved yet:

Europe’s affairs may be on course to some stability following both the ‘agreement’ reached by Europe’s leaders, the funding for banks announced by ECB Chairman Mario Draghi,  funding being arranged in new European facilities and funding expected from the IMF. But, at this stage, nothing is solved. The issues ‘agreed’ to  are not complete agreements or even heads of agreement. They are only Memorandums of Intent.

And, more to the point, Europe has serious solvency issues.  Some debts will never be paid and many major banks are to all practical purposes insolvent. Today Fitch have again downgraded ratings on a futrther five major European banks.

This Bloomberg interview with Michael Platt, a hedge fund manager with a $30 billion portfolio, is explicit on weaknesses with Europe’s cohesion and bank insolvency risks. In the interview he makes these points:

The euro crisis is worse than the 2008 Lehman crisis; he is totally risk averse and  holds funds in 2 year U.S. treasuries and German Bunds;  a euro break up ill have drastic consequences but there is no willingness in Europe to share or transfer wealth in a sustainable way; the ECB has no mandate to bail out Europe; refinancing Government debt at 5% to 6% is unsustainable; Italy could blow out next year; austerity will worsen the deficits that must be eliminated; the investment opportunity is not now but post the blow up - as happened in 2009.

Conclusions:

Though price volatility affects the suitability of any asset acquired as a safe haven the euro crisis, banking solvency, sovereign solvency and debt issues and the debt and political  issues in the United States still support the utility of gold as insurance against major disruptions.

Gold price valuation, motivation, timing,  strategies, and associated subjects are all  addressed in The Goldwatcher book.  This blog is not advisory.

 # Note : The ECB funding announced for regional banks  has led to commentary suggesting the proceeds will be the ‘big bazooka’  used to purchase sovereign securities . I see difficulties with these suggestions and, for this analysis, am treating the ECB funding only as necessary liquidity support for banks. May comment further when more information is available.

#Note added 16.11.11 : Link to article suggesting yield compression seen on European bond markets today result of the new ECB facility. No comment yet from the ECB 

#Note added 18th Januiary 2012:

City wins court order to evict Occupy London Protestors 

The St Pauls occupation & The Occupy Everywhere Mobocracy:

‘Jesus would spend Christmas with the St Paul’s Cathedral protesters‘  the Archbishop of Canterbury, Dr. Rowan Willims said (on December 5th,) declaring Christ would be there ’sharing the risks, not just taking sides.’ Their demonstration, he said,  expressed ‘ a widespread and deep exasperation with the financial establishment.’ So we can assume the Archbishop won’t be on board with initiatives to insulate The City aristocracy from effective regulation.

Are we heading for an aristocracy versus mobocracy confrontation in Britain?

There’s surprisingly little debate in the media defining the aspects of the proposed pan-European regulation that British financial services must be protected from. Surely it’s not the disgraceful and unforgivable  failure of regulation  now officially declared responsible for the multi billion collapse of RBS Bank, - since bailed out and owned by the British taxpayer. Or the greed, negligence and possibly criminal acts that led to the hundreds of billions and possibly even trillions of pounds lost over the last few years. Losses following irresponsible and probably fraudulent conduct within major financial institutions.

By and large the British public share the ‘widespread and deep exasperation with the financial establishment.’identified by the Archbishop, the members of Britain’s ‘occupy everything’ mobocracy and our partner nations in Europe. Yet financial services are a major, traditional, valuable and, by and large,  honourable contributor to our economy.

I suggest the best we can do now is get a spotlight on the actual aspects of our financial services the Prime Minister  insists must be protected. With this information we will be in a better position to understand the extreme opposing positions adopted by both Prime Minister Cameron and other colleagues in Europe

Support for The City is shared across the British political spectrum:

Yesterday’s debate in Parliament gave the impression all conservatives support exempting our financial services establishment,The City aristocracy,  from European regulation. There is also an impression  all labour party members are against the exemption. The reality is different.

I have attended several think tanks and other discussions on Europe where  non interference with The City of London has often been discussed. The most passionate and uncompromising support for exempting The City I ever  heard came from a well known labour member of The House of Lords.

# Note : This post was first published at 7.06 on December 13th . The original post has been deleted to correct the arrangement of illustrations. 

Note added 12th November 2011:

This post will be updated later today after Mr. Cameron accounts to UK Parliament.  The following links reference the issue:

# Tweet from  BBC Journalist Joe Lynham on Italian interest rates:

BBC_Joe_Lynam Joe Lynam BBC Biz 

 Italian bond yields have jumped 3.3% this morning. Is this a judgement on the Euro saving summit last Fri?

# From Spiegel article ‘Coalition of the unwilling’ on proposed Euro pact:

 ’It is completely unclear, however, whether this intergovernmental treaty is in accordance with EU law. Even Elmar Brok, a member of the European Parliament for Germany’s conservative Christian Democratic Union (CDU) and one of Merkel’s close associates, wrote a letter to the chancellor warning her against a treaty outside the framework of the Treaty of Lisbon. Such an agreement, Brok argued, would be “illegal.” 

‘The legal departments of the European Commission, European Central Bank (ECB) and the European Council, which represents the member states in Brussels, also internally voiced doubts over the construct. At a meeting of the so-called sherpas (the representatives of the participating governments tasked with making preparations for international meetings) on the eve of last week’s summit, a heated debate erupted between Merkel’s European adviser, Nikolaus Meyer-Landrut, and the head of the legal department at the European Council.’

…………………………………………………………………………………………………………………….

Back to the blog as posted on 12th November

The outcome of yesterday’s  Euro summit  that most affects British Goldwatchers is Prime Minister Cameron’s veto of the European Union’s proposed treaty change. While the subject is being reviewed for a blog posting links to commentary  of interest will be posted @TheGoldwatcher on Twitter

The good news: no Lehman moment for Europe yet

Fears of an imminent euro crisis have been doused. Decisions on a binding ‘fiscal compact’ taken at yesterday’s leaders  summit and,  substantial liquidity support for regional Banks announced by ECB President Mario Draghi on Friday,  will probably be sufficient to avert a ‘Lehman moment’ for Europe.  For now anyway.

Now the bad news: Blood, sweat and teargas.

The Eurogeddon issues most feared until yesterday relate to excessive sovereign and private debts, unfunded state social programmes, rising unemployment, demographic changes,  bank failures, contagion, recessions, contractions and depressions. Conditions all aggravated by excessive leverage, excess capacity and insufficient aggregate demand to support employment and economic growth.

Current remedies proposed include arranging a substantial pool of funding to insulate sovereign debt from market forces. At the same time new deficit limits, budgetary restrictions and disciplines are  being introduced aimed at achieving rapid and drastic debt reductions.

Economic growth has not been prioritised and, absent a growth plan, economic and social conditions in troubled euro states are likely to go from bad to worse. The paradox of thrift and vicious circles of declining employment and increased social funding compound the problems

Policies relying on austerity have been described as ‘blood sweat and Teargas.’ Unless policies for growth are also priotitised the danger of Mobocracy looms large.

Note on the gold price:

It’s likely gold has been supported to an extent by speculating on Eurogeddon.  As speculators run for the exits it won’t be surprising to see some correction in the gold price.  Others with different motivation and strategies may see buying opportunities. The case for owning gold as protection from the  range of risks menacing us remains compelling.

.

Today’s headline news  & commentary is directed at the ‘Europe’ summit meeting. It’s still in progress.  The outcomes are too critical and  complex for a blog posting now that adds anything to the commentary accessible in the Financial Press and other informed sources.

I will continue Tweeting @TheGoldwatcher referencing interesting commentary and other input that may be useful. A Goldwatcher posting will follow after the meeting ends and implications have been analysed.

NEW WORLD GOLD COUNCIL REPORT & ASSET ALLOCATION

Introduction to World Gold Council report published today:

‘During a period of extraordinarily serious economic uncertainty in the eurozone, continued concerns about economic growth in the US heading into an election year, and the possibility of an economic slowdown in China, we wanted to examine the relevance of gold as a strategic asset for euro-based investors to protect their portfolios and to mitigate the systemic risks being faced.

A new study from New Frontier Advisors (NFA) was commissioned by the World Gold Council to address these concerns.

The NFA’s respected optimiser is used to analyse the statistical significance of gold for adding diversification value to an investment portfolio from the currency base and perspective of a € based investor. It takes a conservative strategic return expectation that the long-term real return of gold is equal to zero.

The findings suggests that an optimal strategic allocation to gold for euro-based investors ranges from 2-3% for the most diversified and lowest risk portfolios, to between 4-9% for portfolios split 50/50 between equities and bonds and as high as 10%, for portfolios with the majority of assets in equities.

 The NFA study makes a valuable contribution towards the World Gold Council’s own body of investment research, adding further third-party evidence to the case for gold as a foundation asset which provides insurance against extreme events. We believe that the relevance of gold as a strategic asset is likely to continue to grow in a world characterised by sluggish economic performance, poor investment returns, currency wars and high individual and systemic risk. Gold has unique properties which can protect European investor’s portfolios against the systemic risks being faced.

Download the report on The World Gold Council website .

To access report you may have to register