Eurozone Inflation Expected To Hit a Record 3.4% in March

Monday, March 31, 2008

-- UPDATED --
Sharply higher inflation in Germany and rising food and energy prices may propel Eurozone inflation to a record 3.4% in March, narrowing the options of the European Central Bank (ECB) at its next interest rate setting meeting on April 10.
German statistics office Destatis reported last Friday that preliminary March inflation figures showed a rise from 2.8% to 3.1%, wrote the WSJ.
The ECB gets heat from monetary expansion too. On Monday it reported that money supply M3 growth came in at 11.3% in February, after 11.5% in January. The target rates for the ECB's monetary policy are 4.5% M3 growth and 2% inflation. The M3 target has never been reached since the foundation of the ECB.
Despite inflationary warning signs all over the ECB has opened the taps for ailing banks even wider. Today the ECB helped banks with another €15 billion overnight repo to smoothe end-of-month operations. This week will see another additional €25 billion six-month repo while all other longer term repos maturing in the next 3 months will be replaced with the same amounts.
More fresh money will be digitized soon, the ECB announced on Friday. According to a press release,
The Governing Council decided at its meeting on 27 March 2008 to conduct supplementary longer‑term refinancing operations (LTROs) with a maturity of six months. In addition, the Governing Council decided to conduct further supplementary LTROs with a three month maturity. The regular monthly LTROs remain unaffected.
These supplementary three-month and six-month LTROs are aimed at supporting the normalisation of the functioning of the euro money market.
The supplementary three-month and six-month operations will be carried out as follows:
They will all be carried out through a variable rate standard tender procedure with preset amounts. As a rule, they will mature on the second Thursday of the given month.
One supplementary six-month LTRO with a preset amount of €25 billion will be allotted on Wednesday, 2 April, settled on Thursday, 3 April, and will mature on Thursday, 9 October 2008. Another supplementary six-month LTRO, in the amount of €25 billion, will be allotted on Wednesday, 9 July, settled on Thursday, 10 July 2008, and will mature on Thursday, 8 January 2009.
Two new supplementary three-month LTROs, with preset amounts of €50 billion each, will replace the two currently outstanding supplementary three-month LTROs of €60 billion each. The first will be allotted on Wednesday, 21 May, settled on Thursday, 22 May, and will mature on Thursday, 14 August 2008. The second will be allotted on Wednesday, 11 June, settled on Thursday, 12 June, and will mature on Thursday, 11 September 2008.
While the ECB continues to aid banks with more or less unlimited lending, a rate cut on April 10 can be ruled out on the basis of the latest monetary and inflationary developments.
Germany, victim of hyperinflation in the 1920s, is especially worried about a further worsening of the trend that saw Eurozone inflation rise above the target rate of 2% last summer. According to the Financial Times German Bundesbank president Axel Weber expressed alarm about recent inflation trends and hinted interest rates increases could not be ruled out. He said in Luxembourg that the ECB would “act if necessary” to secure price stability.
UPDATE: Eurozone inflation came in at 3.5% for March, Eurostat reported.

CORRECTED - ECB Will Hold Rates Steady Despite Overshooting Policy Targets

Thursday, March 27, 2008

--- CORRECTION --- The next interest rate setting meeting of the ECB will take place on April 10. Today's regular meeting of the Governing Council and General Council does not set rates. I apologize. The rest of the post remains unchanged.

The next council meeting of the European Central Bank (ECB) on April 10 will most likely decide to keep the main refinancing rate steady at 4%. Taking it from ECB president Jean-Claude Trichet's hearing at the European Parliament on Wednesday, markets can expect another statement peppered with his favorite phrases on "vigilance," but not a rate cut as a sign the ECB is really serious in combatting inflation and excessive money supply growth.
Inflation has risen to a record annual rate of 3.3% in February, Eurostat reported earlier this month. The acceleration in consumer prices now exceeds the ECB's target of 2% by 65%.
Money supply M3 growth has at least stabilized, but at an annual rate of 11.5% still overshoots the ECB's target rate of 4.5% by 155%. MSM have ignored the explosive trend in money supply for years by now.
Trichet had reiterated on Wednesday that the ECB's sole function is to keep inflation at bay, indirectly ruling out bailouts of ailing Eurozone banks which he called financially stable but threatened from a shrinking of their revenue base.
Trichet also upheld his view that medium term inflationary pressures would subside by 2009. I wonder where he takes his optimism from when Eurozone producer prices accelerated to 4.9% (4.4%) p.a. in January. As this number was most heavily influenced by surging energy prices I cannot see any improvement in the light of triple digit crude oil prices.
The ECB certainly is in a tricky situation. The surging Euro may result in a further widening of the Eurozone trade deficit, which in January rose from €7.2 billion to €10.7 billion YOY. Including the non-Euro members the EU trade deficit almost doubled to €30.7 billion MOM in January.
A rise in Eurozone interest rates could lead to massive build-ups in the dollar-Euro carry trade where investors borrow in dollars and invest proceeds in higher yielding Euro debt paper. The ECB wants to avoid further speculative inflows that would put more upward pressure on the Euro, which will celebrate its 10th anniversary next year - if all goes well.
While the ECB will hold the official rate steady, banks are scrambling for refinancing. Wednesday's €50 billion repo saw the average rate shoot up to 4.53% from 4.4% a fortnight earlier.
As usual, many questions will remain open even after the press conference after the council meeting.
Participating journalists will probably remain ignorant about the highly worrying trend in M3 growth as they have done in the past 4 years.
The other open question concerns #9 on the asset side of the ECB's balance sheet, so called other assets. This position is a hide-all for the ECB and nobody has ever asked what kind of securities supposedly valued at €333 billion are in there. According to the ECB,
the position other assets is a collective item including, in particular, items in the course of settlement (settlement account balances, for example the float of cheques in collection), coins of euro area Member States and other financial assets (e.g. equity shares, participating interests, investment portfolios related to central banks' own funds, pension funds and severance schemes or securities held due to statutory requirements). This item also contains tangible and intangible fixed assets, revaluation differences on off-balance-sheet instruments as well as accruals and deferred expenditure.
IMHO this position can absorb any crap paper the ECB decides to buy for whatever reasons. Find the explanation of all positions here.
DB Research just issued a paper that has more interesting background on ECB policy and stresses the point that there will be no bailouts as the only mandate of the ECB is to fight inflation.
One Eurozone CB Appears To Have Massive Problems
As the ECB has now advised for the third week in a row that its weekly financial statement is inaccurate due to one Eurozone central bank having problems to deliver its data, I will wear my crash helmet 24/7. According to the ECB,
The exceptional circumstances in one Eurosystem central bank, which prevented that central bank from producing its balance sheet as at 7 March and 14 March 2008, have continued and have also prevented the production of a balance sheet as at 21 March 2008. Consequently this week’s Eurosystem consolidated financial statement reflects the latest available balance sheet information provided by the Eurosystem central bank in question, namely its financial statement as at 29 February 2008.
Will this become another example of denial of reality until it cannot be hidden anymore? Get prepared for the worst.

Asian Economies Will Provide Strong Support for Commodities

Reflecting on the growing chatter that a further downturn in the USA and Europe may be the death kiss for the current commodity rally and even turn it into a bear market, I think it is time to remind readers of the factually good outlook for the global economy as a whole. An expected deterioration of Western growth may cut a percentage point from GDP growth rates further East. But that's about it.
According to a Bloomberg report,
The International Monetary Fund forecasts that, despite the slower U.S. growth, the global economy will expand 4.1 percent this year, above the average 3.7 percent over the past quarter century. Emerging markets including China and India aren't only boosting world growth, they're also creating new customers for other Asian exporters.
Sethaput Suthiwart-narueput, a managing director of Thai Siam Commercial Bank Securities told the Bangkok Post on Wednesday that new demand from emerging markets far outstrips new demand from the West and Japan.
Over the past few years, China, India and the Middle East represented 47% of new global demand, while the USs, Europe and Japan comprised 14%.
Not that Japan would fall prey to the financial and economic woes in Europe and the USA. According to Bloomberg,
Exports, which contributed more than half of the economy's expansion last quarter, climbed 8.7 percent from a year earlier after increasing 7.6 percent in January, the Finance Ministry said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg News was for a 7.5 percent gain.
Exports in the region grew even stronger, the report said:
Export growth to Asia quickened to 13.9 percent in February from 8.l percent a month earlier, today's report showed. Shipments to China rose 14.9 percent, and sales to Europe gained 7.2 percent. Exports to the U.S., meanwhile, slid 6 percent from a year earlier, a sixth monthly decline.
The Western slowdown is also welcome in China as it helps cooling off the red-hot economy. Xinhuanet reported last Monday,
Declining export growth, notably affected by the U.S. credit crunch, is likely to drag China's GDP growth down to 10.5 percent this year, still above official target of 8 percent, a leading university research paper said on Monday.
China's booming exports are likely to see a sharp decline, which will tame the 11.4 percent GDP growth last year to a slower 10.5 percent in 2008, against the backdrop of the subprime mortgage crisis and calming global economy, according to the research paper released by the Economic Research Institute of Renmin University.
This still leaves China with 10% more demand in everything and so far there are no signs why the Chinese Wirtschaftswunder should abate in 2009.
India will experience roughly a percentage point less GDP growth too, reports The Hindu, citing a report from the Economist Intelligence Unit.
India's economic growth rate is expected to moderate to 7.8 per cent in 2008-09, mainly on account of a global slowdown, says the Economist Intelligence Unit (EIU), an arm of London-based magazine Economist.
The Indian economy, according to government estimates, is expected to grow at 8.7 per cent during 2007-08.
Despite moderation in growth, India would continue to remain the second-fastest growing economy in Asia, said senior economist and Asia Editor of the EIU Anjalika Bardalai.
The growth will mainly be driven by the services sector with IT and IT enables services (ITeS) playing a major role, she said, adding that "in the coming years, the sector will see a major growth".
As India lacks commodities and energy it can be safely expected that demand will grow accordingly.
Commodity based economies will be among the few winners in 2008. The Canadian Economic Press cites Interfax:
Russia raised its forecasts for economic growth over 2008 to 7.1% from 6.7%, Interfax news agency said on Tuesday citing government officials.
The Asian tigers will see slower growth too, but there is not much to worry about.
Thai economists see 4.5% GDP growth in 2008, off the original 6% target.
Vietnam took back its growth expectations half a percentage point to a range of 8% to 8.5%, reports the Guardian.
Malaysia sees a likewise reduction to GDP growth between 5% and 6%, stemming from the Western slowdown.
All countries listed acknowledge that inflation may dent these projections further. 
Key for me is neverthelesse the hugely growing domestic demand. Just think India, where Tata offers its Nano car for 100,000 or one lakh Rupees. As millions of it will be sold, I would not short metals and oil.
And there is still room to sell billions of air-conditioners, laundry machines, LCD flatscreens, PC's and whatever else you can think of that is a standard in the West but not the East.
Westerners in debt up to their eyeballs will be a less interesting market for Asian companies when they get run over by their domestic clientele that is eager to close the consumerism gap to the West. 
The East-West bifurcation in economic growth is further proof for my view that the center of economic power is acceleratingly shifting to Asia. Wasn't it Beijing where so many Western dignitaries went hat in hand since the beginning of the financial crisis last August?

China Banks Now Permitted To Trade Gold Futures

Tuesday, March 25, 2008

This could be the next boost for the gold market. According to the official Chinese news outlet xinhuanet.com,
Chinese commercial banks will be allowed to trade gold futures in the domestic market, according to a notice released on the regulator's official website here on Monday.
China gold futures trading was launched in January, but domestic banks were barred from trading by the China Banking Regulatory Commission.
According to the notice, domestic banks that meet certain requirements, such as having capital adequacy ratio of more than 8%, can apply for a trading permit.
"That's great news for the gold futures market, which is not operating that well," said Hu Yuyue, an expert with Beijing Technology and Business University.
"Commercial banks can provide more liquidity and stability to the market, after all, they hold huge capital," said Hu.
"Gold futures trading can also help domestic banks to improve competitiveness against overseas banks as financial derivatives are supposed to be the largest revenue sources for leading banks," he said.
Non-interest income usually accounts for at least 50 percent of bank revenues in developed countries and the proportion can reach 80 percent for some banks.
However, Chinese banks depend heavily on the margins between deposits and loans.
The Shanghai Stock Exchange started trading in gold futures on January 10 and the June contract debuted trading limit up, outpacing COMEX prices by as much as 10%.
It may be a very early call, but the sudden participation of banks from a country where gold is seen as the ultimate money due to its unlimited convertibility and its role as the only asset that is not somebody else's obligation, this appears to me as the biggest fundamental shift we have seen in the gold market in many years.
This new milestone can be classified as bullish. Once turnover builds up, we may see a convergence between the so-called global spot price and China prices, which are regularly higher.
Given that the Chinese appear to have a much better understanding of the role of gold as the ultimate money in comparison to the Bush administration participating banks could strengthen the lever that one day in the not too distant future will lead to a short squeeze of dimensions hitherto unseen.
After all, this is another step to global dominance by China that certainly does not come out of thin air but is part of a strategy to enter global capital markets step by step.
All calls for an end to the recent commodities rally, like the one from Citigroup yesterday, look more like desparate statements from late-comers to the biggest secular bull market in motion these days.
I've been hearing it a lot lately that investors are waiting for a pullback to enter precious metals, energy and commodity markets. Now may be the last time, as fundamentals definitely shift in favour of real assets, compared to the 100s of billions central banks have been printing lately.
Gas Rationed, Wheat Harvest May Drop by 50% - Commodity Bull Will Rage Ahead
Hopes for double digit crude prices are getting buried in China too. Chinadaily reports that gasoline rationing is currently spreading from the industrialized south to the northern parts of the country, blaming a part of the woes on hoarding by producers and dealers.
Shanghai is left with 10 days of diesel supplies, says the report:
Shanghai, the country's economic center, is now being affected, with rationing, long queues and power-off filling machines becoming common at filling stations.
The Shanghai Economic Commission said on its website that the city has enough diesel to last more than 10 days.
CNPC and Sinopec emphasized that China had enough oil to ensure a stable supply and the fuel-supply crises of the second half of last year would not re-emerge.
According to the National Development and Reform Commission (NDRC), China's top economy planner, refined oil output, mainly produced by the two oil giants, surged 10.5 percent in the first two months of this year. The stockpile rose 28 percent, compared with the beginning of this year.
China regulates gas prices. The National Development and Reform Commission (NDRC), China's top economy planner, raised the prices of gasoline, diesel oil and aviation kerosene by 500 yuan ($70.91) per tonne in November, almost a 10 percent rise, to narrow the gap between steep international crude prices and state-set domestic oil prices. Oil rose more than $20 a barrel since.
A much graver situation may develop in wheat. ResourceInvestor.com has a report that a disease will wipe out 10% to 20% of this year's Chinese harvest, while a more serious epidemic could actually halve wheat production.
An outbreak of sharp eyespot disease (SED), which affects cereals, is threatening 72.46 million mu (4.83 million hectares) of wheat in China's major producing regions, according to local agricultural authorities.
SED might erode the wheat output by 10% to 20%, while a more serious epidemic could cut output by as much as 50%, officials from the Henan Oil and Grain Product Quality Inspection Center told Interfax. "As it is still the early growth stage for wheat, the impact on output might be reduced, although wheat quality may be downgraded," an official from the center said.
A lot of fundamentals may keep all forecasts for lower commodity prices what they are: Wishful thinking.
Last reminder: A raging bull market like the one we see in all commodities wants to throw everybody out of the saddle. Be prepared for a rocky, but ultimately steep climb in the coming months that will see its usual seasonal weakness in the warmer months.
The OilDrum has a very informative and extensive analysis on the food outlook until the year 2050. Don't miss out on it as it will whetten your mouth for more agriproducts.

More Details (and Questions) on Fedization

I don't know if there is a textbook on how to create fiat money but the latest statement by the Federal Reserve New York is at least a good attempt. I allow myself to fill in some of the gaps, trying to explain what really happens and who will make the most money. If your guess is the Fed, you have just won a free subscription to this blog.
In an effort to explain the Fedization of Bear Stearns the Fed NY put out another release in order to clarify such details as the actual cost of financing to JP Morgan after earlier agency reports had said the $29 billion entry on the asset side of the Fed's ledger was done at the discount rate.
From the Fed NY press release:
The Federal Reserve Bank of New York has agreed to lend $29 billion in connection with the acquisition of Bear Stearns by JPMorgan Chase & Co.
With a few strokes at the computer the Fed will create $29 billion out of thin air and wire it to JPM.
The loan will be against a portfolio of $30 billion in assets of Bear Stearns, based on the value of the portfolio as marked to market by Bear Stearns on March 14, 2008.
The Fed NY refuses to answer the most interesting question: What is in that portfolio and what is its value today?
JPMC has agreed to provide $1 billion in funding in the form of a note that will be subordinated to the Federal Reserve note. The JPMC note will be the first to absorb losses, if any, on the liquidation of the portfolio of assets.
Am I correct with the interpretation that JPM's risk is now limited to $1 billion and the Fed will eat the rest of these "if any" losses that may/will arise in the liquidation of these assets?
The FRBNY loan and the JPMC subordinated note will be made to a Delaware limited liability company (“LLC”) established for the purpose of holding the Bear Stearns assets. Using a single entity (the LLC) will ease administration of the portfolio and will remove constraints on the money manager that might arise from retaining the assets on the books of Bear Stearns.
The biggest constraint could be the ability to find a market price that will not kill the entire structure of this bailout.
The loan from the FRBNY and the subordinated note from JPMC will each be for a term of 10 years, renewable by the FRBNY.
As long as the music plays the Fed will collect interest on $29 billion it created with its electronic printing press. What a handsome return for a couple of man-hours at the computer. To quote Fed chairman Ben Bernanke from his infamous speech given in November 2002, "the US government has a technology, called a printing press - or, today, its electronic equivalent - that allows it to produce as many US dollars as it wishes at essentially no cost."
The rate due on the loan from the FRBNY is the primary credit rate, which currently is 3.25 percent and fluctuates with the discount rate. The rate on the subordinated note from JPMC is the primary credit rate plus 475 basis points (currently, a total of 8 percent).
Money For Nothing - But No Mention Of The Chicks
This fiat money game sure is fun for the Fed.
3.25% p.a. on $29 billion is a cool $942.5 million. Multiply by 10 years and add the $29 billion principal and you arrive at a hot $38.425 billion, provided it all works out as planned. On top of that come another $800 million interest and $1 billion in principal from the JPM note.
In this case Fedization is such a good business that the Fed is very likely to take more ailing gamblers onto its breast. I mean, $40.225 billion for basically no costs, who could withstand?
To muffle my Fed-rage I can easily resort to the dire outlook that maybe this rescue works for a while; but there are certainly a few more technically bankrupt financial entities out there.
Blackrock Financial Management Inc has been retained by the FRBNY to manage and liquidate the assets.
Another hand pilfering the corpse of Bear Stearns.
The Federal Reserve loan is being provided under the authority granted by section 13(3) of the Federal Reserve Act. The Board authorized the FRBNY to enter into this loan and made the findings required by section 13(3) at a meeting on Sunday, March 16, 2008.
I remember having seen some questions as to the legality of this Fedization earlier this day.
Repayment of the loans will begin on the second anniversary of the loan, unless the Reserve Bank determines to begin payments earlier. Payments from the liquidation of the assets in the LLC will be made in the following order (each category must be fully paid before proceeding to the next lower category):
  1. to pay the necessary operating expenses of the LLC incurred in managing and liquidating the assets as of the repayment date;
  2. to repay the entire $29 billion principal due to the FRBNY;
  3. to pay all interest due to the FRBNY on its loan;
  4. to repay the entire $1 billion subordinated note due to JPMC;
  5. to pay all interest due to JPMC on its subordinated note;
  6. to pay any other non-operating expenses of the LLC, if any.
Any remaining funds resulting from the liquidation of the assets will be paid to the FRBNY.

Doesn't sound as if the Fed would expect the $29 billion portfolio to rise by just one dollar.
Is the Fed already preparing for a bailout/takeover of General Motors? First payment after 2 years sounds like a car dealer desperate to move his declining inventory. But in the case of the Fed the inventory consists mostly of Federal Reserve Notes, wrongly called US dollars. I take this as another sign that their product is going out of fashion much faster than most people think.

Fedization

Ladies and gentleman, welcome to a new economic term. As the privately owned Federal Reserve New York starts out on a banking shopping spree, the new twist in the latest systemic crisis of the financial sector shall be called Fedization in contrast to the old-fashioned nationalization that stood at the end of past banking crises.
The Federal Reserve has now entered the casino in a sacrilegous way, by taking (in)direct stakes. Forget level playing fields, some investment banks will be more equal than others, withstanding all contrasting official statements to come.
What's next on the shopping list? General Motors, Starbucks coffeee served by the Fed or more funny paper for a share in Fannie Mae and Freddie Mac?
On Monday the Fed NY announced that it would form a limited liability corporation that will provide another $29 billion in financing for JP Morgan's purchase of Bear Stearns. This LLC will receive $30 billion in assets from JPM as collateral for its loan, financed at the discount rate of 2.5%.
The statement says,
At the closing of the merger, the Federal Reserve Bank of New York ("New York Fed") will provide term financing to facilitate JPMorgan Chase & Co.'s acquisition of The Bear Stearns Companies Inc. This action is being taken by the Federal Reserve, with the support of the Treasury Department, to bolster market liquidity and promote orderly market functioning.
The New York Fed will take, through a limited liability company formed for this purpose, control of a portfolio of assets valued at $30 billion as of March 14, 2008. The assets will be pledged as security for $29 billion in term financing from the New York Fed at its primary credit rate.
JPMorgan Chase will bear the first $1 billion of any losses associated with the portfolio and any realized gains will accrue to the New York Fed. BlackRock Financial Management, Inc. will manage the portfolio under guidelines established by the New York Fed designed to minimize disruption to financial markets and maximize recovery value.

This stinks as does the rest of this multi-billion deal where I am still looking for the actual cash involved. So far I can only see several layers of debt. Why is this portfolio valued at prices of April 14? What happened to realtime data? How much is this portfolio worth today?
According to the WSJ, taking it from the NYT, JPM will now exchange 0.21753 shares for every Bear share, effectively quintupling the original offer of 0.05473 shares. No cash here.
The offer was also sweetened with an issue of 95 million new Bear shares JPM will buy until April 8, giving it a 39.5% stake in outstanding shares. No mentioning of cash here either.
The WSJ has the full text of the "merger" agreement here. According to it JPM will enact an exception of the NYSE's Shareholder Approval Policy which provides an exception in cases where the delay involved in securing shareholder approval for the issuance would seriously jeopardize the financial viability of the listed company.
While this may be good news to Bear debt holders this action by the Fed NY raises the question whether Fedization will be a new precursor in the century-old banking cycle that provides dividends for shareholders in good times and a nationalization of losses at the end of ever monetary expansion process.
The Fed as a step-in to keep the mountains of pretensions markets are helped with since August 2007.
Pretensions such as: The Fed pretends the collateral has a value and markets pretend the freshly digitized billions of credit are money.
I also fail to understand what it means that the Fed will absorb the first billion of losses on the collateralized portfolio. Is this an effort to build trust that the Fed actually sees value in this portfolio?
Anyhow, I am confident that the new twist in cleaning up the mess will not be sen the last time now that the Fed NY has opened the floodgates, with the official encouragement of the US Treasury. There are many more investment banks under the waterline that cannot be nationalized as the state certainly has no function in taking part what is effectively institutionalized gambling.
But the question of moral hazard has probably never been of higher importance than nowadays as Nanny Benny works overtime to help bankers stay in their mansions.
Fedization is here to stay - and may probably grow much larger before this year is over.

It Certainly Looks Like a Silver Shortage

Friday, March 21, 2008

Worried by the steep correction in silver? Don't worry, just reduce your leverage. Silver has always corrected by roughly a third after its sharp ascents in the past 5 years. This is due to the extreme tightness of this market where a billion of whatever fiat currency still can do a lot of damage. At one point the short sellers will be run over by the very real freight train of exploding physical demand that has led to what looks like a worldwide shortage in bullion.


GRAPH: Silver always corrected by a third in the runups of the past 5 years. I would not rule out a similar development this time before silver will attack the $30 mark on its way to the old high at $50. Chart courtesy of Kitco.com

The US Mint has been out of the gold sale business for almost half a year now, filling orders on very few days since September. Currently only the new 2008 gold proof Eagles are on offer. All uncirculated bullion coins are not available. Platinum coins have not been available in a while too.
Now the physical delivery problems spread to silver as well. The US Mint says it will ship silver eagles again after April 9. But taking it from past experience, this schedule may be delayed again.
Jason Hommel, probably the most outspoken silver bull for a lot of reasons -but not all - I agree with, has compiled a story of real life experiences when trying to buy silver bullion.
From his report:
Three more major silver dealers are reported to be out of silver today: The U.S. Mint, Kitco, and Monex. This, on top of the major dealers yesterday, Amark, Perth Mint, CNI Numismatics, and APMEX, all reported sold out. Further, nearly all of Canada is reported to be out of silver, from Vancouver to Toronto.

Hommel concludes that the latest correction is a matter of price fixing.
This is unprecedented, and is a perfect case of market manipulation in the paper market at COMEX and other futures exchanges to see silver prices continue to drop down to below $17/oz. today. Paper promises can be created endlessly, but real silver cannot.
This is NOT a case of the dealers getting spooked, and selling out to the refiners just in time, at peak prices. This is a case of the public buying up the stock at coin shops across the world ever since gold hit $1000/oz.. That event finally sparked a little of the public's buying of silver and gold. Thus, the typical coin shop flow of silver to the refiners just stopped in the last few weeks, and especially the last two days.
This is NOT a case of the public creating a top with 'everyone' in silver, because nobody's in silver yet. In 2006, only $1 billion was spent on investment silver, which is 0.007% of the $13.5 trillion of money in the banks. As I have long reported, the silver market is so small, there is no room for new investor demand, not even 0.1% of money could be spent on silver, because that would be $13 billion, which would push silver prices to $200/oz., and we are seeing only the tiniest beginnings of that.
$13 billion would be almost enough to buy all the silver produced by the mines in one year, which would leave nothing for industry. It would essentially double demand, but supply would remain the same.
Furthermore, this is not a top because the public continues to get to the coin shops, and is now getting on waiting lists for silver. The public is not yet in, so how can the price drop?
This is a case of price fixing and manipulation, like communism. Sausage is reported to cost 1 ruble per link (editor: corrected), but there is no sausage. Silver price is quoted, but there is little to no silver.
Shortages are evidence of price fixing. Price fixing results in shortages. They are price fixing silver at a below market price over on the paper exchanges in New York and around the world.

Also check out the highly interesting comments on his story.
This blog reported last September that silver and gold bullion trade 10% to 15% higher in China.
To add my 2 cents on silver shortages I can fill in a little from the German speaking parts of Europe. ebay has offered the most liquid market for silver here, whose investment appeal is greatly diminished by 19% (Germany) and 20% (Austria) VAT and high mark ups of 16% for kilo bars from professional dealers.
1 kilo, worth €€354 at a "global" spot price of $17, would sell for €€481 including all punitive taxes, not considering shipping.
Nevertheless the 3 highest bids on ebay are €€516, €€491 and €€490 for a 1 kilo bar at the time of writing.
I also note that all multi-kilo offers from professional sellers have entirely disappeared for several weeks/months and that there are many new offering hands in this market which I consider the true silver market as these are actual exchanges of fiat money against bullion.
At the same time the new 1 oz silver Philharmonic has seen huge demand in Austria, despite even higher markups.
I also remember very well that prices on ebay stayed up when silver traded to $15 in early 2006 and then crashed to $10 in a similarly brutal move as we have experienced it this week. This correction was not entirely reflected in ebay prices then.
And here some more facts about delays in silver shipments:
Kitco states on its website,
IMPORTANT:Due to the volatility of the market, we are experiencing a significant increase in the volume of shipments going out. Although Kitco and our depositories are working hard to stay on top of this, you may experience a delay in your order being processed by our vault, and sent out to you. We apologize for any inconvenience this may cause, and appreciate your patience and understanding.

If you are impatient for more silver bullion, Apmex cannot help you either, reports Boom2Bust.com:
Due to the OVERWHELMING demand for precious metals, our online ordering system has been unable to keep up with our customers’ needs. We have had to disable the APMEX ordering system to allow us ample time to upgrade our site to accommodate the increased demand. We apologize for this temporary problem. In the mean time, we will be accepting telephone orders for the following items only as we have them available:
• 1 ounce Gold American Eagles
• 1 ounce Gold Canadian Maple Leafs
• 1 Ounce Gold Krugerrands
• 100 oz Silver Bars
• Misc Generic .999 Fine Silver
• 90% Coin Silver
During this time, we will have a minimum order of $5,000. We regret we have had to make this drastic change to our ordering process and rest assured, we are working expeditiously to correct the problem.

I conclude to buy more silver. Having to overcome a premium of 36% in Austria, I am anyway in for the very long term. The inflation-adjusted record high for silver now stands at more than $135 per ounce. Meet you there.

This PM Slump Is Only a Healthy and Overdue Correction

Enjoying 2 weeks in Paris I should concern myself with the truly beautiful issues in the world as there are the unmatched elegance of Parisian women crowding chic cafes, seafood platters that want you to forget the over-fished oceans, wine whose quality has profited from global warming and a general attitude that money is only a medium of exchange for the extravagant delicacies on every corner of a world where inflation seems to be only a technical term but not an existence threatening economic reality.
Well, one ride with the Metro shows that those who were priced out of the rental/property market on the shores of the river Seine have again descended to the netherworld as did their ancestors 3 centuries ago when they populated the catacombs, miles of tunnels stemming from Roman times and giving shelter to 1000s of poverty stricken people for many decades.
So much about past volatility in property markets of which Paris was the most sought after in continental Europe.
Looking at current residential property offers Paris has long surpassed the €10,000 mark per square meter (roughly 11 square feet) with prime locations topping out some 50% higher.
Some emergency sales by foreigners, who drove up prices in order to get a glimpse of the Louvre, may soon prove that such levels are difficult to sustain as soon as easy credit wanes.
But I am straying from my original topic, the global meltdown of precious metals prices.
Don't worry as this is only a healthy and overdue correction in a strong bull market.
Lacking answers for the suddenness and the strength of the downmove that knocked gold down 11% from $1,025 to $909 at the time of writing (silver dropped 20% from $21.20 to $16.85) within 4 days I hope the following questions may represent a guideline that may help you not to throw away all nerves and - mon dieu - your gold and silver investments.
Here come the questions. Find the answers yourself as it is always best to invest along proprietary knowledge and not the advice of others (when did your broker recommend precious metals investments the last time?)
  • Why should Federal Reserve Notes reverse their slide since 2001 when the Fed uses every opportunity to crank up the electronic printing press?
  • Both the Fed and the ECB have been lamenting a worrisome inflation outlook for some time now. Have they enacted a single (tightening) step since? (I am talking action, not empty words.)
  • Can you see any structural improvement in the triple US deficits?
  • Do you think commodity prices in general will descend again in a world where some 3 billion Asians will have evolved from paupers to car-buying consumers soon?
  • Did you come across any news that South Africa has yet found a way to solve its energy crisis that severely cut PM output?
  • Do you have a clear picture on the physical PM demand in the Eastern hemisphere?
  • How many of the last 100 persons you spoke to have actually invested in gold/silver yet?
  • Do you think the banking crisis is over or will we see more failures?
  • Oil hit $100 before correcting to $88 earlier this year and nobody forecasted the end of the 7-year uptrend. Why are MSM so quick to call the death of the PM bull market, now in its 8th year too?
  • Relating to gold's 11% drop this week: Did capital markets stabilize by 11% in the last 4 days?
  • Can you name another asset class that is a store of value in itself and not somebody else's obligation.
  • Did gold ever lose its value in the last 3,000 years?
  • Global gold production may actually fall this year below 2,500 tons while demand hovers around 5,000 tons. Is this good or bad for prices?
  • Short positions in COMEX gold and silver have kept rising through the latest record advances. Who are those "investors" that can afford to short such markets without running into serious margin calls?
  • Assuming you hold bullion: Have you sold any of it or are you keeping it in the vaults despite the recent hammering?
  • Assuming you do not hold bullion: At what price will you allocate 3% to 10% of your assets into PM's?
  • When do you think that other investors will raise their asset allocations in favor of PM's?
  • Have you discovered another inflation-proof asset recently?
I am confident readers can add many more self-answering questions. I am looking forward to your additions (and whacky answers) in comments.
Enjoy the holidays. It may be the time when the PM bull resurrects itself for the coming weeks. I uphold my view that we will see gold climbing above $1,100 in this spring cycle.

Fuelling Inflation, FOMC Drops Fed Funds By 75 Basis Points

Wednesday, March 19, 2008

It appears the Federal Reserve will hold on to its ill-gotten strategy of sacrificing the value of Federal Reserve Notes in order to avoid a recession. At least there were two votes against today's rate cut by the Federal Open Market Committee which slashed the Fed Funds rate 75 basis points to 2.25%, bringing it back to a level last seen from December 2004 to February 2005. This was also the last time that a Fed move stabilized FRN's temporarily for several months as inflation was much less a concern then.
Taking it from the FOMC statement the Fed is willing to risk it all as long as it keeps economic growth rates above zero.
Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

I highly doubt that more easy credit will solve anything as it is the root of the current problems. All those easy trillions printed by the Fed are nothing else than more layers of paper where frail counterparties promise to pay later.
Never mind the latest correction in commodity prices as neither your gas bill nor your grocery receipts will shower permanently lower figures - ever again. It evades my logical thinking as to how the Fed thinks all that easy money it will continue to flood markets with will not immediately sap through into commodities prices as we have seen it happening in the last 3 years.
Even the FOMC's own inflation expectations make all alarm bells ring.
Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

I translate this Fedspeak into, "prices will rise further but hopefully the slow US economy will dampen resource demand for a while." So what? More than 6 billion people elsewhere will be happy to gobble up resources as they have been doing for a while now. People will not eat less - unless food prices do really skyrocket - and lacking other transport will not consume less fuel.
Altogether there is no reason to change my strategy.
Banks go bust, central banks lend whatever markets wish for and there is absolutely no chance for a balanced budget in the US. Weaker FRN's may offer a glimmer of hope as it will make US exports cheaper, possibly creating mild economic growth.
As all structural problems only appear to get worse with every day - try to find a paper that does not write on emergency measures in the financial sector on a daily basis - gold below $1,000 looks like the steal of the day to me. Using the markets' irrationality in the face of more inflation to come and buying gold at the current level of $985 at the time of writing this may present a golden opportunity.
I'll eat my hat if gold does not trade above $1,100 before the end of the spring upmove.

Central Banks in Full Assault on the World's Forests

Wednesday, March 12, 2008

In another probably vain effort to stabilize markets reeling from too much leverage six central banks have committed themselves to printing more or less unlimited money in the foreseeable future. The Federal Reserve's announcement to now also accept MBS from private investors as collateral with a volume of up to 200 billion Federal Reserve Notes (FRN's) dwarfs the liquidity measures of the ECB, the Bank of England, the Bank of Japan, the Swiss National Bank, the Swedish Rijksbank and the Bank of Canada. 
Their statements collectively said that they would provide basically as much freshly digitized money as commercial banks would require in order to try to iron out the mess they created in the first place with their lowered credit standards.
Markets are brimming with rumours that the Fed may again cut the Fed Funds rate before the regular meeting on March 18.

OilGoldMar2008

GRAPH: The gold-oil-ratio shows that gold is again fairly cheap in comparison to crude oil. Chart courtesy of stockcharts.com.

Bundesbank president Axel Weber said on German Bloomberg TV that inflation risks would not allow a rate cut, sending FRN's to a new low of 1.55 for one Euro. IMHO these liquidity actions are just another inflationary nail in the coffing that has always gobbled up all unbacked fiat currencies in history. Who will ever take the political responsibility for the coming inflationary death of the Euro and the Fed currency?
While gold and silver took another breather on Tuesday after the recent run-up, oil markets immediately identified the new Tsunami of monetary inflation correctly and propelled crude to the new record close of $108.75/bbl.
Gold corrected to $965 but again held the support, possibly already creating the launch pad for the next take off. Gold is again way too cheap.
This constellation looks like a good opportunity to switch from oil into gold as both instruments are now bought for their inflation-proof qualities.
Investors who act accordingly may be in for another strong upleg in gold.
As all other commodities are rallying it will be only a matter of time before gold pierces the $1,000 mark - and may zoom to more than $1150 by late April/May. Gold has held steady close to its record high of $992, never giving up more than 3% of its gains. Silver's moves may be even more brutal as there is definitely more demand than supply and a very tight market in general. A low gearing should see investors through the current correction without giving up the next surprise move on the upside. It will come like the amen in a prayer. Foolish central banks will guarantee it.

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