The Goldwatcher

13th May 2012:

MY TEMPORARY WEB LINK FOLLOWING MALWARE WARNING 

I am informed by DreamHost this website has been cleansed of any malware. but Google still display a Malware warning and the warning won’t be removed until they have checked the website following their review schedule. It may be a week or two before they do and I urge you not to access content in this website at this stage

I  posted the following note on Twitter on 3rd May 2012

MALWARE WARNING : www.thegoldwatcher.com

My computer has been attacked by an internet scam posing as a Windows service using several names including Windows Advanced Service Center & Windows Firewall etc.

I never subscribed to any of these services but read their unsolicited message and clicked their price options.  Somehow from this they were able to disable my Symantec service and infect my computer. I gather this virus came on line in the last week and in this time frame I haven’t sent any information other than e-mails without attachments.

Microsoft have been more than helpful,  have cleansed my computer of all infections and restored the Symantec function

However Google have warned of Malware on The Goldwatcher Web site and I have asked HST Digital to take the website off line,  ensure there is no MAKLWARE on the site and restore the site on line when they are satisfied there is no risk.

If anyone wishes to contact me please send an e-mail to john@thegoldwatcher.com

Which way now?

Readers are reminded this web site is not advisory. Information presented is not investment advice and must not be used as investment advice.

Revised 2012 Gold Price Forecasts:

Two important organisations that forecast gold prices,  The CPM Group founded by its CEO Jeffrey Christian and The Goldfields Consultancy, GFMS, recently acquired by Thomson Reuters, publish annual surveys compiled after extensive top down and bottom up research.  Here are their revised headline forecasts for 2012:

 CPM Group : Jeffrey Christian : Source Hard Assets Investor

2012 Range $1400 - $1800

Thomson Reuters Goldfields: Source 11th April 2012 update

 2012 Range   $ 1,530 - $1920 – Average $1731

These comments summarise Jeffrey Christian’s views recorded in the interview:

# In current conditions buyers, particularly central banks, will become very price sensitive ; and

# following a  contrarian line, rising interest rates will be positive for gold prices.

In London last week Philip Klapwijk, GFMS global head of metals analytics, presented information on all aspects of the industry. His generally upbeat views were qualified by reservations  including:

#  A 3% expected rise in  gold supply tonnage expected in 2012 that will result in a surplus of supply over demand for the first time in several years; 

# Weakness in the jewellery market in India, traditionally the largest market for gold, as a result of both high prices and increased import duty;  and in my opinion NB

# He argues it’s on the cards that gold producers will be hedging against price falls in future, reversing the pattern of unwinding hedges that supported gold prices through the latter years of the bull market.

Klapwyk acknowledged …’it’s quite possible we’ll see a push…perhaps below $1,550 in the next month or two (but) the consultancy maintained a bullish outlook for the medium term, and we could see last September’s record high being taken out witha push on towards $2,000 definitely on the cards before the year is out, although a clear breach of that mark is arguably a more likely event for the first half of next  year.’

At the same time as Klapwijk was talking positively in London  in Johannesburg, his colleague Paul Walker, Global head of Precious Metals at Goldfields GFMS  set off alarm bells with this comment: You have to countenance that there’s a materially positive probability that the gold price, some time in the next few years, could fall catastrophically and stay low for a long, long time.”

Of course sometime in the next few years isn’t imminent -  but keep in mind that next year, next month, next week, tomorrow and even today are all ‘sometime in the next few years.’ And we don’t need a Quant with a Phd to fathom out for us that if, after an eleven year bull market  a sell off starts, it could end in a stampede. Any old Quant knows that.

Motivation, Strategy & Timing:

I have focused in The Goldwatcher book and this blog on the utility of gold as the world’s Stateless Money Franchise but, in this context,  your Motivation, Timing and Strategy must always make sense. In an Investor Chronicle Article I contributed I also addressed the danger of getting obsessed with gold Pages 12 & 13.

The Eurozone’s developing banking and sovereign debt crises have dominated recent postings for this blog and, in a report published today.  the word’s most successful money manager Ray Dalio is quoted saying Spain is worse off after the LTRO financings than it was before - a conclusion that mightily reinforces the case for owning gold as protection against major financial disruption. 

In the light of the warnings by GFMS of a severe gold price correction, Jeffrey Christian’s comment on price sensitivity and Dalio’s warnings on dire risks for Europe what’s the right strategy for gold to follow?  

Goldwatcher co-author Frank Holmes has a Golden Rule. Moderation. And he has a warning:

‘Don’t try to get rich with gold because price action can be far more dramatic than blue chip stocks and many other asset classes. …Gold Specualtors - be they long or short -  thrive when fear or greed is in the air, which at the extreme tends to signal market highs and lows.’ (Pages 210/211)

Current commentary from Frank Holmes on gold is accessible on the website of US Global Investors. The Goldwatcher is available on Amazon.

#Readers are reminded that this web site is not advisory. Comments and opinions expressed are not intended as investment advice and can not be used as such.

 Technical  considerations:

Technical indicators for gold have turned negative. The trend seen in the gold price chart of higher highs and higher lows appears to have been broken. There is no question technical damage has been done to gold price expectations and, apart from the market reactions reflected in charts, technical indicators can become self fulfilling prophesies.

A Marketwatch comment yesterday noted gold analysts warning a close below $1625 would prompt a technical breakdown and only a close above $1664 would result in a bullish trend (&)sharp gains should be used as a selling opportunity.’

Technical indicators are certainly negative. But what about the fundamentals?

Global interest rates:

The most dangerous development for gold prices would be rising interest rates and the market return on the benchmark US Ten year Treasury has risen some basis points. However central bank set rates for the dollar, euro and yen remain  at historically near zero levels and no central bank is expected to increase rates in present conditions. Not only has Bernanke announced an intention of keeping interest rates at or near current levels till 2014 but he has  given unlimited dollar support  to  liquidity for Europe’s banks.

With Europe and Japan at risk of a recession and the US seeing only green shoots of recovery, key global interest rates are likely to remain low for the foreseeable future.

The ECB has pumped an unprecedented trillion euros into commercial banks at 1% and Japan is planning a multi billion yen reflation.

Are Greece and Europe’s problems history?

A disorderly financial collapse for Greece and a sudden breakdown of the Euro are off the agenda for now. But its not clear that Europe’s crisis is over. This comment from Willem Buiter warns of problems for Spain,  Greece and  Portugal.

We also have elections over the next few months  in Greece and France. The outcome of the elections may be disruptive.

Gold as a contrarian investment:

The approach taken in The Goldwatcher based on  Motivation, Timing and Strategy makes the case for gold as a contrarian investment. Gold’s utility as insurance against risks ranging from financial market upsets to unthinkable catastrophes are outlined in the  goldwatcher-introduction.pdf on page 8.

Monetary reflation doesn’t automatically equal hyperinflation or even inflation. But it always has consequences.

Apart from the effects of reflation the formidable risks we face now include war with Iran, resolving the debacle in Afghanistan, tensions in the Middle East, nuclear North Korea, Nuclear Pakistan and, of course, the global debt burden that can’t be paid.

For charts illustrating global reflation please link to 6th March posting Catching a Falling Piano

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Chart William D. Nordhaus/NY Review of Books

Responding To The Sceptics:

In the current issue of The New York Review of Books Nobel Laureate Economist Professor William D. Nordhaus responds to the contents of an article No Need to Panic About Global Warming written by sixteen well known scientists.  The article published in the Wall Street Journal in January raised the following key questions:

• Is the planet in fact warming?

• Are human influences an important contributor to warming?

• Is carbon dioxide a pollutant?

• Are we seeing a regime of fear for skeptical climate scientists?

To the primary question on whether the planet is in fact warming  Nordhaus responds: ‘The finding that global temperatures are rising over the last century-plus is one of the most robust findings of climate science and statistics.’  The above chart is testament to that conclusion.

The most worrying feature of the distortion of climate science:

Here the sceptic’s charge was that alarmism over climate change provides government funding for academic research, a reason for government bureaucracies to grow, excuses to raise taxes, taxpayer subsidies for business that know how to work the system and a lure for big donations to charitable foundations promising to save the planet.

Nordhaus finds: ‘ This argument is inaccurate as scientific history and unsupported by any evidence… the first precise calculations about the impact of increased CO2 concentrations on the earth’s surface temperature were made by Svante Arrhenius in 1896, more than five decades before the NSF was founded. The skeptics’ account also misunderstands the incentives in academic research.IPCC authors are not paid. Scientists who serve on panels of the National Academy of Science do so without monetary compensation for their time and are subject to close scrutiny for conflicts of interest. Academic advancement occurs primarily from publication of original research and contributions to the advancement of knowledge, not from supporting “popular” views. Indeed, academics have often been subject to harsh political attacks when their views clashed with current political or religious teachings.…The attacks on the science of global warming are reminiscent of the well-documented resistance by cigarette companies to scientific findings on the dangers of smoking. Beginning in 1953, the largest tobacco companies launched a public relations campaign to convince the public and the government that there was no sound scientific basis for the claim that cigarette smoking was dangerous..’ 

Nordhaus finds the big money in climate change ‘involves firms, industries and individuals who worry that their economic interests will be harmed by policies to slow climate change … One of the most worrying features of the distortion of climate science is that the stakes are huge… expenditures on energy goods and services are close to $1000 billion. Restrictions on CO2 emissions large enough to bend downward the temperature curve from its current trajectory to a maximum of 2 to 3 degrees Centigrade would have large economic effects on many businesses…Scientists, citizens and our leaders will need to be extremely vigilant to prevent pollution of the scientific process by the merchants of doubt.

 

 

Picture by David Roberts:  The Acropolis in the 19th Century

Greece’s economic plight in 1858 :

A recent Frankfurter Allgemeine Article reviews Greece’s economic distress in 1858 as described by the French writer Edmond About. Here are a few quotes:

‘Greece is the only known example of a country that has lived in bankruptcy since the day that it was born. If such a situation were to prevail in France or England for just one year, we would see terrible catastrophes. Greece has peaceably lived with bankruptcy for more than 20 years. All of the country’s budgets, from the very first to the one just out, have been in deficit. … The powers that protect Greece have been obliged to guarantee the solvency of the Greek state so that it can negotiate with external lenders. But the loans thereby obtained have been squandered by the government without any benefit to the country: and now that this money has been spent, the guarantors have no other option but to have the good grace to pay the interest, which Greece cannot reimburse.’

Greek debt  rescheduling or defaults since 1828 :

According to Rogoff and Reinhart’s analysis for fifty years, about 25% of the time since1828 when Greece gained independence, the country was in default following five episodes of debt  re-scheduling or default.

Prospects for Greece following current re-scheduling: 

With negative economic growth and a fiscal straight jacket the indications are Greece will not be able to secure economic recovery. I am m still crunching the numbers and will post on the subject within a few days.

 i Illustration of FT Swap Acceptance Thermometer 

RESULTS DUE TOMORROW:

Bondholders have until 8 p.m. GMT tonight to take part in the debt swap. The official results announcement will be made tomorrow at 6 a.m. GMT. I am not holding my breath. Questions will remain on what happened to the credit default insurance cover that should have accompanied the loans. But the deal will be forced through one way or another. ’Geek’  in the title above isn’t one of  my frequent typos. It’s intentional. Today’s deal is a Geek deal -  not Computer or even black box Geeks. This time it’s  the legal, financial, political and Greek Geeks that schemed and legislated the transformation of a blatant default into a voluntary swap. We can watch developments live on the FT if we are subscribers or on the Guardian for free.

We shouldn’t be surprised by the largest solar storm in half a decade marking the occasion. Europe boasts honouring the rule of law.  Homer would certainly have woven the solar event into the story of this  Greek tragedy.

Are Greece’s Private Creditors or the CDS insurers the lucky ones?

Nouriel Roubini writes in today’s FT  ‘a myth is developing that private creditors have accepted significant losses while the official sector gets off scot free. But the reality is that private creditors got a very sweet deal while most actual and future losses have been transferred to the official creditors.’ After reviewing financial interventions leading to present arrangements Roubini concludes ‘Taxpayers of Greece’s official creditors, not private Bondholders,  will end up paying for most of the losses deriving from Greece’s past, current and future insolvency.’ On the ‘known knowns’ it appears to me  the credit default insurers who won’t be paying up are the lucky ones. Will we will learn more about this in future?

  Don Pittis

THE G 20 - CATCHING A FALLING PIANO

CBS Commentator Don Pettis contributed an article titled G20 : Catching a Falling Piano noting :

‘The leaders of the world’s richest countries have gathered in Washington beneath the economic equivalent of a falling piano …the U.S. government announced that it has rung up its biggest government deficit ever. The latest increase takes America’s total national debt to something over $10 trillion US, a number so large it is hard for us to comprehend…The Don Petis  article dates back to November 2008.

The following Wikipedia chart illustrates the growth in US debt to the current circa $15,000,000,000,000  debt level . That’s 50% above the $10 trillion - the number already ‘so large it’s hard to comprehend.’  And, as Pittis notes,  ’The U.S. government’s total list of liabilities, including such things as unfunded pensions, is five or six times larger (than the $10 trillion owing in 2008). America’s up to the minute debt (excluding unfunded pensions etc) is accessible on the us debt clock .

The US has already extended its authorised debt ceilings as illustrated below:

EUROPE’S REFLATION:

Reuters have today posted this chart on US, UK, Japan and Euro zone central bank balance sheets as a percentage of GDP. The Euro zone is now leading the pack:

  The Financial Times has reported Jens Weidmann,  head of Germany’s Bundesbank, challenging ECB President Mario Draghi’s operations. They reference an article in the  Frankfurter Allgemeine Zeitung  (# the web page has a translate button)  with  Weidemann’s warning that  ’highlights fears of potential costs for Germany arising from its role as Europe’s biggest creditor nation and may spark fresh doubts about the eurozone’s ability to deal with the long running banking and sovereign debt crisis.’

Mario Draghi’s recent multi billion euro LTRO  1% 3 year funding for  European banks  has saved the day for now. But The Bundesbank  opposes the ECB acting as a lender of last resort - officially or via the back door as Draghi has done illustrated in the following Eurosystem Balance Sheet chart:

Chart : Frankfurter Allgemeine Zeitun

AMERICAN REFLATION:

The following chart illustrates the extent to which the Federal Reserve has funded American reflation:

 Reviewing Fed Chairman Bernanke’s  testimony to Congress on 1st March the Wall Street Journal commented ‘As part of its efforts to keep interest rates low and spur economic growth, the Fed has more than doubled the size of its balance sheet since the financial crisis after embarking on two rounds of bond-buying and purchasing mortgage-backed securities in an effort to support the weak housing market. 

REFLATING JAPAN:

The report   dylan-grice-on-japan.pdf details and illustrates Japan’s debt explosion from 60% opf GDP  in 1992 to 180%  now. Another projection in the report based on Japan’s  current interest rate gap reflects 300% of GDP by 2018 -  an unsupportable ratio in any circumstances.

GOLD & EUROZONE INITIATIVES:

The reality on global solvency today is that with all money  created by debt the overall situation is being described as ‘insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks.’ What holds this fragile and dodgy collusion together?

 The answer can only be that sovereigns make the law and the law can do anything -  as we have seen again with  the Greek defaults to private creditors being declared non defaults.

Current indications are that Eurozone policy makers may  succeed in securing sufficient compliance from Greece’s private banking creditors to keep Greece afloat for a while. They are also likely to secure a balanced budget treaty limiting Euro zone countries to maximum budget  deficits of 0.5% of GDP. On first glance this may look like a solution. But,  if we look at these outcomes carefully two conclusions are almost inevitable:

 1: Eurozone countries will be in a fiscal straight jacket that forces them into a deflationary depression, social disorder, mobocracy and even chaos; and

2: After being in recession for five years Greece won’t survive the fiscal straight jacket for long.

Policy makers, aware of the dangers,  have recognised  the imperative of stimulating employment and restoring growth.  But, on the ‘known knowns’ this can’t be done without fiscal stimulus and monetary reflation. With fiscal stimulus off the agenda the dollar, the euro, the Yen and the £ are all vulnerable as fiduciary currencies linked to over indebted economies propped up by central bank funding at unrealistically low interest rates

Gold, by contrast  is stateless money. There is a compelling case for owning it as protection against the effects of global central bank reflation, financial repression, structural budget deficits, currency wars, potential capital controls and other restrictions that can be legislated to artificially prop up vulnerable currencies.

 Note:  Readers are reminded content on this site is not provided as investing advice and must not be treated as investing advice

Shortly after posting this blog Symantec reported a Trojan on my computer.

I have deleted this posting in case the source was a link.

Will repost tonight.

Risks Are Skewed To The Upside:

Erste Bank Austria’s report  titled    special-report-oil-nothing-to-spare-2012-1.pdf prepared by analyst Ronald Stoeferle was published today. The report suggests Brent Crude will average $123 between now and March 2013 with all time high prices in the first half of this year.

Reports from Stoeferle, a recent and prescient commentator on gold,  cover the full spectrum of considerations that affect his subject. In this report he addresses current supply & demand factors, Persian Gulf insecurity and  high liquidity with low interests rates as  factors all skewing risk dynamics to the upside. He also approaches the subject from the perspective of Austrian economics. Following this approach he attributes the crucial factor in rising prices ongoing increases in money supply derived from the expansion of credit via fractional reserve banking .

The economic consequences of high oil prices, technical analysis considerations affecting prices and alternatives to crude oil, including shale gas that may in the future affect demand for crude are among the factors reviewed in this 80 page report.

Ronald Stoeferle’s thorough and original approach goes far  beyond the Power Point formula that characterises most the material being published now. It’s well worth reading.

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.