On the Move

Tuesday, November 24, 2009

Blogging will stay on low flame as I am forced to move out of my residence where the chimney has collapsed. I hope to be back by the end of next week. As for markets, gold and silver speak a clear language that we are steering towards financial armageddon.
As I can move into my new home only in March, I'll spend the time until then in India to do a little on the ground research concerning water emergencies and the thousands of farmers suicides thanks to Monsanto seeds that have to be bought every faring season.
India has cybercafes long after the last road has come to an end. I will monitor markets from there.

GUEST POST: Silver Goes Institutional

Friday, November 20, 2009

It is a special delight to present the following guest post by Sean Rakhimov, editor of silverstrategies.com, who sees first notable moves from institutional investors into the silver sector.

The Institutionalized Silver Market
by Sean Rakhimov
  • Where were are
The new realities of the precious metal markets are inescapably obvious. In the classic - three legs up, two legs down - bull market pattern, we are undoubtedly in the second "institutional" or "big money" stage. For Elliott Wave fans this would be the 'C' wave, characterized as the longest with a potential break mid-way. Regardless of your interpretation, the evidence suggests that big money is moving into this space in earnest. One could argue that the breakdown in the second half of 2008 threw a monkey wrench into this theory. Indeed, it was a rather painful event for most investors, but in technical terms it did not look all that bad as evidenced here. If anything, it helped anchor the previous move from $253 to $1000. We're not chart experts and are only using this to establish a base for the points we really want to make.

If you're still questioning the main premise of this article, we'll briefly remind you that the likes of John Paulson, Paul Tudor Jones, David Einhorn and a host of lesser known money managers have recently joined the party as has been amply discussed by others. The purpose of this missive is to shed some light into what it might mean to you, the "average investor" and if there are angles to be exploited in that regard.

We also have to mention the blockbuster purchase of 200 metric tonnes of gold by India's Central Bank from the IMF. With that deal in the books there should be no doubt in anyone's mind that gold and silver are hitting the mainstream.
  • What does it mean?
Assuming that is the case, the logical question to ponder is: what does it mean? In other words: how will this fundamental factor impact the market, how will it manifest itself in the share price of mining companies, and how can you and I get in on the action? During this stage, we envision the emergence of two major developments that should be of interest you.

1) These early and prominent leaders into precious metals will be imitated and followed by their less bold or, if you prefer, more conservative peers. That goes for both fund managers and central banks. In that light, if there ever was a time to follow the trend/money, this would be it. We're in the early stages of acceptance of gold (to be followed by silver) by the establishment as a legitimate investment instrument. These are not yet panic days, but naming gold as an investment choice won't raise eye-brows at cocktail parties going forward. You might still get some show of bewilderment, though not far beyond this coming Christmas season. Better yet, it might buy you a few nods of approval on this stretch. Certainly, you won't be instantly discarded as a screw-loose maverick, as was the case only a couple of years ago.

Further into 2010 and beyond, it is likely to become fashionable and perhaps understood that anyone with any sense of the market "has to have SOME gold"; and if you don't, your fellow fund managers will send you condescending looks as if to say "Don't you know everyone is in on the gold game?".
But everyone won't be, it will take time for a lot of newly converted believers to move into gold space and, more importantly, there isn't enough capacity in the sector to accommodate any significant influx of money. The thing to note here is that many funds that never had any exposure to precious metals or commodities will enter this space for lack of better alternatives, at least with a portion of their portfolios.

2) Expect substantial growth in assets under management of the better established precious metal funds, due to inflow of new funds from various sources, including funds operating in other sectors. Another reason will be the rise in share prices of precious metal fund holdings, which will suddenly make them viable competitors for investment dollars with their peers. For instance, a Vanguard Gold Fund would evolve from an obscure specialty fund with comparatively measly assets under management into, at first, a solid and sizeable fund, and later, a top performer and flagship within the group.
This should happen across the board and around the globe. Since success breeds success, it should be followed by increased percentage allocation of investment portfolios to the best performing funds. Remember Fidelity's Magellan fund getting so big it had to close doors to new investors? We expect things to play out in that direction. Not right away, but somewhere on the horizon, in the mania stage.
  • What is a poor fund manager to do?
Imagine you are a fund manager in some non-hard asset sector: bonds, financials, healthcare, tech, etc. Through some soul-searching and head-scratching (and some kicking and screaming) you arrive at the idea that you have to move into hard assets. Trouble is, you have no clue where to begin and how to value resource stocks. Short of hiring a mining analyst, who will be hard to come by for a while, and seeking outside help, these are the main options we see available to ‘do it yourself’ money managers:

  1. The first thing you do is look at the ETFs and other similar vehicles that provide exposure to the sector without having to deal with the nitty-gritty picking stocks. But the space is crowded;
  2. Then you look at the indexes and drill down to the blue chips. That's nice, yet you soon discover that valuations are defying gravity;
  3. Next, you check the top holdings of the best precious metals you can find and move into them;
  4. Do your due diligence and try to make your own picks, but that is a whole lot of work.

This is where things get interesting, so let us set the stage. In the diagram below we tried to identify the dominant money flow trends and highlighted them in shades of green based on where each group of investors is likely to direct the majority of their investment capital (yes, every player in the space will be at once the recipient and allocator of capital). We intentionally downplayed the impact of retail investors at this time, as their day in the spotlight is yet to come during the final blow-off stage of this bull market.

  • How to play it
One of the biggest investment themes of the past decade has been the China play. Everyone knew there was an opportunity there, but finding a way to bet on it without excessive risk was difficult. Eventually it evolved into a "Buy what China buys" strategy. Taking a page from that book, we think a similar approach can be applied here: one should buy what the best investors are buying in the precious metals sector. When we say "best" we don't mean in absolute returns, but rather, those best equipped to identify the most attractive opportunities.

As you can see, we believe the main beneficiaries from money flow trends will be the mid-tier companies; those with established resources and production. This group should be the main focus of precious metal/resource funds and at the same time, become a takeover target for the majors. The acquisition of Canplats by Goldcorp, is a good example of what we're talking about.

The main criteria that may be helpful in spotting these companies are:
  1. Established resources in the ground. Some of the hard and fast numbers to help sort companies are 5+ million ounce gold or 100+ million ounce of silver deposits will be picked off first, however all ounces are not created equal and other considerations apply in the selection of potential takeover targets.
  2. Production profile. Ultimately, production is the goal for majors, so the closer the project is to production, the more attractive it becomes. We would be looking at companies producing 200,000+ oz of gold with 15+ year mine life.
  3. Market capitalization. Another filter investors can use when looking at these stocks is market capitalization. Mid-tier companies, depending on various factors and development stage, will usually sport market caps of $200-300 Million at the lower end for explorers, to $1-2 Billion at the higher end for producers. Certainly, these are not all-encompassing brackets, but by and large the companies discussed above will fair somewhere in that range.
Most likely, all three prerequisites listed above will be true for a good takeover candidate. There are many other considerations which may be important in each specific case – such as grade, project economics, infrastructure, access to water, power and workforce, geopolitical concerns in the country where the assets are, and so on. But we are trying to keep it simple.

We certainly don’t mean to imply that companies elsewhere in the spectrum will not perform well or should not be considered. On the contrary, rising tide will lift all boats without holes in them. Speaking of holes, this is an industry where one drill hole can change the fortunes of all but the largest companies on any given day. So, by all means, entertain all options. That said, this market has gone institutional and the trend is your friend.

Austrian Banks May Be Less Stable Than Their Figures Show

Monday, November 16, 2009

All cannot be well in the Austrian banking sector despite opposite announcements from the banks themselves. Although Raiffeisen Zentralbank (RZB), Unicredit subsidiary Bank Austria and Erste Group reported operating profits in Q3 2009 only last week (click links for quarterly reports in English,) latest events from the past weekend keep me suspicious that Austria's banks, endangered by their failing ventures in Central Eastern Europe, are far away from the financially stable positions they wish for themselves. 2 Austrian banks have already failed to pay interest on their capital injections from the Austrian government in July.

Banks Want to Keep Unlimited State Guarantees Until 2011
According to a (German) report on the website of Austrian TV broadcaster ORF banks now ask for an extension of the state's guarantee to cover all deposits at Austrian banks. This unlimited warranty was scheduled to expire by the end of 2009, only to be replaced by a warranty that will cover all bank deposits up to €100,000 per bank and account holder. According to a spokesman from the finance ministry the new scheme will cover 98% of all deposits in Austria.
Austria has long been known to be the country where foreigners can discreetly park their money. Austria strongly refuses any further loosening of its banking secrecy law, fearing that this may lead to a competitive disadvantage. Both Italian and Russian tourists can be seen frequently depositing money in their Austrian accounts or buying gold. One need not identify themselves when buying gold for up to €15,000 and bank clerks have a traditionally bad memory for faces here.
Austria has so far admitted that the banking crisis may cost taxpayers up to €100 billion. But a Bloomberg report based on internal EU figures arrived at a total cost of €165 billion or more than €20,000 for every Austrian inhabitant.
The ORF story names Bank Austria CEO Willibald Cernko as the cheerleader for a number of banks who would like to see the unlimited warranty run until 2011, indicating that the banking sector in Austria may only see the worst in the medium term future. Anecdotal evidence has it that banks have essentially stopped lending to the private sector and small companies and do not plan to come back to the credit business anytime soon.
In line with the recovery of the Vienna Stock Exchange the 2 listed banks Raiffeisen International (RI) and Erste Group have strongly recovered this year. Erste, which first fell some 90% from more than €60 to €6, recovered to €30 whereas RI, which once traded above €120, fell to less than €14 and has now recovered to €46.
Erste Group needs to hold its shares close to €33, the price at which they are booked into the assets of their largest shareholders.
Raiffeisen International may pose the same problem for its large shareholders as the sunken share price diminishes their ability to use the shares as collateral for other investments. RI is 70% owned by RZB.
Erste Group CEO Andreas Treichl announced a few days ago that the bank would issue new shares in order to raise €1.65 billion in equity and would focus the offer on retail investors. Industry insiders see this as a sign that Erste Group failed to convince institutional investor to buy the issue, not exactly an encouraging sign in these days.
Bank Austria is likely to face problems in connection with some feeder funds that filled the pockets of the so far biggest Ponzi schemer, Bernie Madoff. Media reports put the damage between €350 million and €4.5 billion. I am still in research mode on this as the range is a bit too wide for my taste. But there will probably fire where one sees only smoke so far.
DISCLOSURE: Not so mad as to own Austrian bank shares.

4 EU Countries Resist US Access on European Transaction Data

Thursday, November 12, 2009

The most highly indebted nation in the world, the USA, is running into a bulwark of resistence in its strive to record European bank transaction data, Austrian daily Kurier reported on Thursday.
According to the report the USA wants to access all money transfer data and snoop into European bank accounts, including data on domestic and international money transfers. The so called Swift agreement is now rebuked by 4 European countries. Unfortunately Kurier failed to list the other 3 countries who say that if any such kind of agreement becomes reality they want a complete reciprocity, i.e. giving European authorities the same right to check out all US based accounts.
The USA has illegally siphoned off data from Swift, Europe's biggest clearing house for money transfers since 9/11 and now hopes to retroactively legalize its illegal snooping on innocent European account holders.
A draft prepared by the EU commission and the current Swedish EU presidency says that the intrusion on banking privacy shall be limited to accounts that are associated with terrorist activity. It also says that data has to be deleted as soon as an account turns out to be not involved into terror activity. The draft includes a paragraph that requires US authorities to announce all their intended scrutinization to the authorities in the respective EU country.
It is highly questionable that the intended US move will help in reducing terorrism finance which is rather relying on inofficial channels to transfer money. After all the SEC has been unable to find out who bought put options on those US airlines that crashed in the World Trade Center towers. The USA also claims that it does not know who owns the gigantic dollar deposits in the Caribbean offshore tax havens. IMHO these are more pressing questions in order to come to a correct description of the 9/11 hoax.

Man Tries To Sell 1 Ounce Gold Coin for $50 - NO Takers

Wednesday, November 11, 2009

I am a bit busy this week, attending 2 conferences which I will cover later. One concerned "Covering the Crisis" and the other one is about "Ways to a new financial order" organized by the Vienna Institute for International Dialogue and Cooperation
In order to reassure you that we are not even in the early stage of the gold bull market, probably still years away before we will see a gold hype or bubble, I recommend to watch this 6-minute video by Resistance where a guy tries to sell a 1 ounce Canadian Maple Leaf gold coin, current value $1,117, for $ 50 - and finds NO takers.

Gold may see a correction, but this video makes me except a price above $2,000 within 18 months and those non-buyers will probably scramble in 2012 to buy such an ounce for more than $3,500 as their paper investments will have all turned further south by then. This crisis/recession is far from over and we will not see a bottom before 2011 that may be the last stage of a WL recovery.
It is interesting to watch gold zooming in parallel with the stock market these days, another paradigm shift that indicates gold will break out to new highs in all currencies soon. This will attract momentum traders into the gold play, pushing it the next 10%.
Yes, there will be sharp corrections, so buy on all dips that are certain to come. A bull always likes to travel with as little baggage as possible while scaring those sitting on its back. Stay in the saddle.

Money Creation Explained in 34 Seconds

Friday, November 06, 2009

Yeah folks, that's what central banks do.

Hat tip goes to Burning Our Money.

ECB Does Nothing, Indicates Monetary Tightening

Thursday, November 05, 2009

Leaving its key interest rate unchanged at 1% on Thursday, the European Central Bank (ECB) appears to remain in standby mode, keeping financial institutions flush with cheap liquidity. The only new twist in President Jean-Claude Trichet's repetitive flood of calming words came in the Q&A session as reported by the Wall Street Journal:
The European Central Bank will begin absorbing excess liquidity from its monetary stimulus programs in a "timely" fashion, ECB President Jean-Claude Trichet said Thursday.
"Not all liquidity measures will be needed to the same extent as in the past," Mr. Trichet told a news conference, without being more specific. "Enhanced credit support on which we embarked is not for eternity."
He added that: "We expect [past] policy action will progressively feed through to the economy."
The introductory statement offers no fresh insights save for the point that the ECB warned governments not to lower taxes before the overall picture has significantly improved. Well, we certainly need not fear lower taxes in the technically bankrupt Euro member countries.
From the statement:
...many euro area governments are faced with high and sharply rising fiscal imbalances. If not addressed by a clear and credible exit strategy, this could seriously risk undermining public confidence in the sustainability of public finances and the economic recovery.
The very large government borrowing requirements carry the risk of triggering rapid changes in market sentiment, leading to less favourable medium and long-term interest rates. This in turn would dampen private investment and thereby weaken the foundations for a return to sustained growth.
Moreover, high public deficits and debts may complicate the task of the single monetary policy to maintain price stability. The Governing Council therefore calls upon governments to communicate and implement in a timely fashion ambitious fiscal exit and consolidation strategies based on realistic growth assumptions, with a strong focus on expenditure reforms. Tax cuts should only be considered over the medium term, when countries have regained sufficient room for budgetary manoeuvre.
If there is one thing I do not fear, it is lower taxes.
The ECB may currently be in a worse position than the Federal Reserve. Although I doubt US growth figures the economic situation of most European countries is still in the process of declining to new lows.
Trichet will soon face a tricky question: How to rein monetary inflation while not killing any future green shoots with higher interest rates,
We are in a unique situation that is fundamentally different as both record recessions and interest rates are at historic lows. By doing nothing for an extended period the Eurozone members risk higher government interest rates once markets begin to question the sustainability of a recovery without jobs and without growth.
Indebted consumers are not able to assist in the recovery: Latest Eurostat figures show that retail sales (PDF) declined minus 0.7% in September MOM.

EU Commission Asks Those Banksters who Caused Crisis for Solutions, Critics Say

The EU Observer has come up with a very good question: Why are those who caused the financial crisis are now consulted by the EU Commission in order to come up with a solution?
I may add the question: Why are the bonus-greedy destroyers of global prosperity are still on their jobs at all? I expect a complete change of elites within the next 3 years as has always been the case after every financial crisis in history.
The report, prepared by 160 organisations accuses the undemocratic top echelon of the EU that they were only interested in stabilizing the banking industry and not in an improvement for the whole society.
From the report:
The vast majority of experts advising the European Commission on greater financial regulation are drawn from the same institutions that helped cause the crisis, claims a new report published on Thursday (5 November).

The document, A captive Commission - the role of the financial industry in shaping EU regulation, accuses the EU executive of listening almost exclusively to the finance industry both before and after the onset of the financial crisis over a year ago.

Its authors, the Alliance for Lobbying Transparency and Ethics Regulation (Alter-EU), a coalition of some 160 civil society groups, say the commission continues to draw insufficiently from the considerable expertise to be found in academia and civil society groups.

"The commission only seems to be interested in listening to the advice of the finance industry, rather than acting in the interests of society," said Paul de Clerck, a member of ALTER-EU's steering committee.

Mr de Clerck is also critical of the legislative proposals put forward by the commission in September and currently being analysed by the European Parliament's economic committee and member state governments.

"The commission tells us they are tightening the rules but in reality their proposals still leave many loopholes. If the commission wants to restore confidence in our financial systems, it must break free of this stranglehold of partial advice," he says.

De Larosiere Group

The draft legislation draws extensively on a February report by a high-level group set up by European Commission President Jose Manuel Barroso last October, whose board almost immediately received criticism over its make-up.

FIN-USE, a group of experts in consumer protection and small businesses that also advises the commission, wrote a letter to Mr Barroso describing the Larosiere group members as "all eminent, respected members of the financial establishment."

"However, that is the very point – they are members of the 'establishment' and none could be considered dedicated user representatives," reads the letter.
Mr Larosiere himself is an advisor to French bank BNP Paribas, while other board members also have close links to large financial institutions implicated in the crisis including Lehman Brothers (Rainer Masera), Goldman Sachs (Otmar Issing) and CitiGroup (Onno Ruding).

"A fifth, Callum McCarthy, was the head of the UK Financial Services Authority, which had been described as systematically failing during the crisis. Another member, Leszek Balcerowicz, is well-known for his opposition to regulation," says the report.

Unfair accusations?

In response, the Commission says it is unfair to concentrate solely on the financial sector, arguing that a look at a broad cross section of the EU's many expert groups reveals a balanced showing of representatives from NGOs, consumer groups, and civil society in general as well as industry officials.

Alter-EU contests the suggestion of overall balance.

"The commission hasn't provided us with any evidence that what they are saying is actually backed up by figures," Mr de Clerck told this website.

On the question of sourcing financial advice from those implicated in the crisis, the commission says many of its advisors were among those to first sound the alarm bell.

The EU executive adds that the complicated nature of financial regulation makes it imperative to seek advice from established financial figures.

"If you want financial advice you don't ask a baker," one official told EUobserver.

EU finance ministers will meet next Tuesday in Brussels to discuss the Commission's draft proposals that call for a European risk board and three supervisory authorities to be set up.

In a sign of the extensive dogfight still to come, the UK threatened this week to veto the planned overhaul of EU financial regulation if further safeguards against EU interference in national financial affairs are not added.

"There can be no interventions that have fiscal consequences for individual nations," Paul Myners, the UK City minister, told the country's treasury committee.
Alright, the fights between all and everybody are on. But who will provide real solutions?

FOMC Statement: Fed on Autopilot, Will Reduce Buying Agency Paper

Wednesday, November 04, 2009

The Federal Reserve is set to continue its ZIRP (zero interest rate policy) until spring 2010. According to the statement released after the latest 2-day meeting of the Federal Open Market Committee (FOMC) the Fed kept its key interest rate unchanged at the level of 0% to 0.25%. While the Fed sees the economy picking up I stay with my opinion that US GDP is actually still contracting were it not for the unlimited spending on killing devices.

Ben Still Doesn't Get It
As all FOMC members voted for the continuation of doing nothing despite gold showing clearly that inflation will set in next year one can expect that inflation will surge next year to levels not seen since the 1970/80s.
Contradicting itself in one sentence I advise investors to be extremely cautious as the Fed is way too optimistic in seeing a recovery:
Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.
The cryptic FOMC statement sees at least that we certainly cannot talk about a Goldilocks economy anymore:
Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
Acknowledging declining consumer demand the Fed expects inflation to remain subdued:
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
I am not sure that the gradual tightening of the Fed's purchase programs will achieve the wished result of higher ABS prices. According to the statement the Fed will slow its purchases:
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.
Sorry, this statement is of little help for investors that want to find out whether the Fed will remain on its course of monetizing the debt or whether it may think about a real solution to fantasy security prices they pay because nobody else wants to buy these toxic assets.
Gold's surge today is a clear reminder that investors worldwide are wary about the future of the value of Federal Reserve Notes (FRN) and its potential purchasing power in the future.
Although this blog refrains to give actual investment advice I feel on the safe side to recommend precious metals again.

Worldwide Income Tax Survey

This is a most useful piece of information for all restless Internationalistas who are looking for a tax friendly residence. KPMG has done a global survey on income taxes.
As everybody's tax situation is different I recommend to download the whole PDF document and take your own conclusions.
Lastly a historic reminder: All revolutions were borne from 2 reasons: Either too high taxes or too expensive food.

IMF Sells 200 Tons of Gold to India for $6.7 Billion

Tuesday, November 03, 2009

The gold bull market becomes more interesting with every day. Based on disastrous economic fundamentals it now seems to be able to withstand hits of any size.
In a surprising move the IMF announced on Tuesday (CET) that it had sold 200 metric tons of gold to India in the last two weeks, valuing the sale at $6.7 billion or 4.2 billion Special Drawing Rights (SDR). The Reserve Bank of India had last released gold holdings of 357.8 metric tons as of March 2009. This purchase increases India's official gold reserves by more than 55% to 557.8 tons.
According to the release India bought the hoard between October 19 and 30 at daily market prices. The sale was executed directly after gold's new record of $1,072 per ounce on October 14, according to Bloomberg figures.

GRAPH: Who will win the bet? Checking the chart India bought the 200 tons between $1,030 and $1,066. India may see itself as a huge winner in the short, medium and long term, having upped its gold hoard by 55% to 557.8 tons according to figures from the Reserve Bank of India's (RBI) annual report 2008/2009 (PDF).
With this sale the IMF has sold half of the intended sales volume of 403 tons, announced jointly with the latest Central Bank Gold Sales Agreement in August.
It will be now most interesting to see who will grab the other 203 tons. Both Russia and China had announced in March that they will put a higher emphasis on gold reserves as a share of total forex reserves. Both countries have satisfied their demand from domestic production so far. China has become the biggest gold producer in the world, mining more than 300 tons of gold annually, outpacing energy-strapped South Africa.
The IMF's press release gives no room for speculation. IMF boss Dominique Strauss-Kahn stated,
“This transaction is an important step toward achieving the objectives of the IMF’s limited gold sales program, which are to help put the Fund’s finances on a sound long-term footing and enable us to step up much-needed concessional lending to the poorest countries."
The IMF is eager not to unsettle gold markets and will probably sell the remainder directly to central banks, it said further.
As previously announced (see Press Release No. 09/310), in accordance with the guiding principle of avoiding disruption of the gold market, the IMF’s Executive Board adopted modalities for the gold sales consistent with guidelines it had earlier established. In particular, the Fund is standing ready for an initial period to sell gold directly to central banks and other official holders that may be interested in such sales. Thereafter, on-market sales of any amounts remaining from the 403.3 tons would be conducted in a phased manner over time, following the approach adopted successfully by central banks participating in the Central Bank Gold Agreement.

Find some useful links on gold and the IMF here:
A primer: Gold Sales—FAQs
Factsheet: Gold in the IMF
Press Release on Gold Sales

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