Month: February 2014

Submitted by Eric Sprott of Sprott Asset Management

Don’t Miss this Golden Opportunity

Gold declined from $1,900 in September 2011 to $1,188 on December, 19, 2013. Silver declined from $48.50 to $18.50 over approximately the same time frame. Precious metal equities declined by approximately 70% over this period.¹ This move down played out exactly as was scripted. However, let us review the causes of this decline. We start out with the most important words ever written by a regulator: BaFin, the German equivalent of the SEC, said that precious metals prices were manipulated worse than LIBOR.² What are we to read into this, particularly the word “worse”? Obviously, worse than LIBOR could not mean that more money was fraudulently earned since the LIBOR markets are many orders of magnitude larger than the precious metals markets. Then it must mean that the egregiousness of the pricing dysfunction was materially larger in precious metals.

The chronology goes as follows:

• November 27, 2013, BaFin announces an inquiry into precious metals manipulation on the London Bullion Market Association (LBMA).³
• Mid-December 2013, BaFin is reported to have seized documents from Deutsche Bank (DB).⁴
• January 17, 2014, BaFin announces that the manipulation is “worse” than LIBOR.¹ On the same day, DB also announces its withdrawal from the LBMA gold and silver price fixings.⁵

Let’s imagine how this played out. Our guess is that BaFin, having reviewed DB’s trading practices, reported their findings to DB’s senior management. They are horrified at the findings (cough, cough) and decide a retreat from LBMA is required. This seems logical to us.

Let’s now discuss why bank traders get involved in price manipulation. In the most simple of all analyses, they don’t do it for the bank, but they do it to fraudulently receive higher bonuses. Otherwise, why take such personal risk? If we assume that manipulation of precious metal prices was the reality, as a bonus seeking trader, when do you want the price to be the most favorable? The answer is simple: by year-end and mid-year periods, when bonuses are calculated.

Figure 1: Gold Price Bottoms at Mid-Year and Year-End

Source: Bloomberg, Sprott Asset Management LP

If we look at what happened in 2013, the two lowest gold prices were on June 27^th and December 19^th (Figure 1).

Perfect! And perfectly obvious…

Now let’s deal with some reality in the real physical gold market in 2013. As we discussed in 2013, the supply/demand data suggests to us that physical demand was overwhelmingly greater than mine supply (Figure 2. See Markets at a Glance January 2014, October 2013, July 2013, May 2013 and February 2013 for more information on the shortage of physical gold).

Figure 2: World Gold Supply and Demand 2013, in Tonnes⁶

It is obvious to us that precious metals markets were manipulated in 2013. It is also obvious that demand far exceeded annual mine supply. Now let’s analyze what should happen, going forward, with these revelations. If gold prices are back on their long-term trend, ex-manipulation, a linear progression of the gold chart from 2000 to 2014 would suggest a price of $2,100 now (62% higher than the current $1,300 level) and $2,400 by year-end (Figure 3).

Figure 3: Gold Price is far from its Long-Term Linear Trend

Source: Bloomberg and Sprott Estimates

Figure 4 shows estimates of cash flow per share (CFPS) for different sized gold miners under gold prices at both $1,300 and a $2,000 per ounce. As you will note, the potential returns vary from 180% for the lumbering seniors to 420% for some of the smaller producers.

Figure 4: Upside Scenarios For Different Types of Gold Miners

Assumed Cash Flow multiple: 10. All Figures in US dollars. Estimates are for FY2014.
Source: Sprott Estimates and RBC Capital Markets. For illustrative purposes only. Eric Sprott and/or Sprott Asset Management Funds beneficially (directly or indirectly) may own in excess of 1% of one or more classes of the issued and outstanding securities of the above issuer). 

Are these gains likely to materialize? So far in 2014, the senior miners are up 27%¹, while the junior miners are up 42%⁷. Not a bad year. But, we are only seven weeks into the year.

Gold and silver have broken their downtrends and have surpassed their 200 day moving averages. The golden cross (i.e. the fifty day rising through the 200 day) still awaits, but it is most likely to happen within weeks.

When was the last time that an obvious reversal of an anomalous, yet explicable market dysfunction allowed you to imagine that you could expect multi-hundred per cent returns over a short time period?

Again, don’t miss this Golden Opportunity!

 

1	NYSE Arca Gold Miners Index.
2	http://ift.tt/1eNUcRO
3	http://ift.tt/1eCQV3Y
4	http://ift.tt/1hnngkB
5	http://ift.tt/1eCQV43
6	GFMS data comes from the WGC’s “Gold Demand Trends” publications for 2013 Q1, Q2, Q3 & Q4. Chinese mine supply comes from the China Gold Association for 2013. Russian mine supply comes from the Union of Gold Producers and is up to 2013 Q4. Chinese data is taken from the Hong Kong Census and Statistics Department and covers the period Jan.-Dec. 2013. Changes in Central Bank gold reserves are taken from the IMF’s International Financial Statistics, as published on the World Gold Council’s website for 2013 Q1, Q2, Q3 & Q4 and include all international organizations as well as all central banks. Net imports for Thailand, Turkey and India come from the UN Comtrade database and include gold coins, scrap, powder, jewellery and other items made of gold. The data is for 2013. ETFs data comes from GFMS as well.
7	MV Junior Gold Miners Index.

via Zero Hedge http://ift.tt/1bQb0sL Tyler Durden

Submitted by Mike Krieger of Libertyblitzkrieg

Yes, The Government is Spying on You Through Your Webcam – Another “Conspiracy Theory” Proven True

I still remember how many years ago in response to becoming aware of the possibility that my computer webcam could be accessed remotely I decided to put a piece of duct tape over the camera. I also remember the look on some of my friends’ faces upon seeing this and asking me why. They thought I was nuts. It wasn’t even a conversation I was comfortable having since the idea that the government or NSA could or would peep on innocent Americans through their webcams was beyond preposterous for the vast majority of people

This topic is exactly new, and I addressed it last April in my piece: A Look into the Malware the FBI Uses to Spy Through Webcams.

Now, thanks for Edward Snowden, we know more. Much, much more.

From the Guardian:

Beyond webcams and consoles, GCHQ and the NSA looked at building more detailed and accurate facial recognition tools, such as iris recognition cameras – “think Tom Cruise in Minority Report”, one presentation noted.

Don’t forget: Your Government Loves You. Particularly your nude webcam pics.

Full article here.

via Zero Hedge http://ift.tt/1krr04p Tyler Durden

Submitted by Chris Martenson of PeakProsperity.com

The Stock Market’s Shaky Foundation

According to the stock markets in the US and in Europe, the world’s economy is not just in good shape, but is in the best shape it’s ever been. 

The S&P 500 hit an intraday new record high of 1,858.71 on Feb 24, 2014, and is now 18.6% above the peak it hit in 2007, a moment everybody now recognizes was heavily overvalued.

An almost 19% gain above the prior all time high is an enormous and unusual event. Surely, you are thinking, there must be an equally compelling story and loads of fundamental data to support such a bull market?

Well, there really isn’t. 

Not a lot has changed between the prior 2007 peak and today. From a fundamental standpoint, not much at all. Per capita income is only up 8.1% between now and then, and yet the equity markets are rallying like the biggest income boom in all of history has occurred. 

Worse, the per capita income data is obscuring the fact that what little income gains have been recorded went almost entirely to the top ten percent of the population. So there’s no broad prospering middle class to drive an economic expansion of the sort that stocks seem to be pricing in.

Of course, the main narrative right now has nothing to do with anything fundamental. Rather, it centers on the idea that as long as the central banks of the west and Japan continue to print, everything financial will just continue to go up in price while — somehow — price inflation will remain tame.

Our view here at Peak Prosperity is that this narrative is wrong in every respect; except, perhaps, for those using a highly compressed speculation timeline that ignores both fundamentals and history.

In the immediate term, stock prices gyrate based on various assumptions that are often completely disconnected from reality.

But over the medium and longer terms, fundamentals drive prices; as it is ultimately corporate income and ultimately dividends that determine the value we ascribe to equities, and it’s the prospect of future earnings growth that drive the price multiple.

We’ll show in a moment just how far equity prices have diverged from the fundamentals.

But First, The Big Picture

Over the long haul, which we think needs to be kept front and center at all times, equities are nothing more than a means of sharing the wealth that companies create, which itself is a product of the extraction and processing of real things from the real world. 

Everything we think we know about the ‘fair value’ of equities was developed over a period of time when the future could always be counted upon to expand exponentially. 

You know, sayings like “Over the long haul equities return 10%”.

Such a statement can only be true in an exponentially-expanding world where exponentially more things are being extracted from the real world as time goes on.  In a world where there is only so much ‘stuff,’ it’s not possible for said ‘stuff’ to always be present in expansive and expanding quantities.

[Wonk note:  Equities could also advance via productivity gains, assuming more utility was derived from the same amount of resources. Perhaps we might assume a world where productivity climbs by 10% per annum to deliver our desired equity gains – but that’s never happened, and certainly will never happen for very long because it implies a 100% improvement every 7 years.]

A huge enabler of the economic expansion of the past century has been oil. Without a doubt, petroleum is the master resource for a global economy. And it is no longer cheap.  The reason why it is no longer cheap, and never will be again, is a larger story than we have time for here, but recent data should suffice to show that global oil has averaged more than $100 per barrel for more than three years. That’s 4x higher than the 1987-2004 average of $23 per barrel:

(Source)

To me, the anemic economic growth in the OECD countries, with their horrible job creation statistics and generally tepid recoveries (at best), is the very predictable result of what you get when oil becomes expensive.

If you hold the view, as we do at PeakProsperity.com, that the future economy cannot possibly grow at the same rates as it did in the past (and that likely someday all growth will cease), then equities are in for a serious correction at some point.

Perhaps that day is still far in the future. But there must always be an eventual reckoning between the number of claims on the world’s wealth world and the actual wealth itself.

Further increasing the risk for equities is the fact that, as claims on wealth, they are the least senior of the lot.  The holders of bonds and preferred shares come first.  So when we wander over to that other, and much larger, corner of the financial universe where debt resides and note that all forms of debt, but especially corporate debt, have continued to grow exponentially both before and after the great 2008 credit crisis, we see that equities are whistling past this part of the story too.

Of course, a huge proportion of all the new corporate debt taken on since that little hiccup in 2009 has been used to buy back shares and thereby goose (through accounting, not by value creation) the earnings per share numbers so widely reported by the financial press. 

Eventually, though, all that corporate debt will have to be paid back, and that activity will drain future cash flows and earnings. Again, steadily rising – nay, exponentially rising – levels of corporate debt are a massive collective bet that the future will be exponentially larger than the present.

The only narrative I can imagine that can accommodate a long-term decline of per capita resources coupled to steadily worsening net energy from petroleum, AND simultaneously support the continued exponential expansion of claims against those resources, is one that steadily transfers this wealth into fewer and fewer hands.

After all, if relatively few people end up owning most of the remaining wealth, does it really matter to them that there’s less of it to go around on a per person basis?  No, not if they have plenty for themselves.

As the recent travails in Ukraine have showed us, there’s only so far that such a deranged, kleptocratic view can go before it breaks down.

Alternatively, and far more likely, there’s no actual rational narrative of any sort in play right now — and so the center mass of the investing world is simply operating off of untested and unexamined beliefs that mainly rest on the notion that a prompt and perpetual return to exponential growth is what the future holds.

Again, we see this as dangerously myopic. But sadly, this view is not only rampant on Wall Street, but it’s also prevalent with our government as well as endowments, pensions, and insurance pools — entities with long-term fiduciary responsibilities that really aught to be asking themselves some hard questions these days.

Conclusion

In summary, over the long haul — by which we mean the next ten to twenty years — current equity prices are making a colossal bet that exponential economic growth (which itself is linked to cheap oil) is going to quickly resume and persist long into the future. Are you comfortable making that bet? I’m not.

Of course there are a lot of variables in this story; but one could do worse than to simplify one’s economic prediction down to this: Until and unless the global supply of oil gets a heck of a lot cheaper, anemic economic growth will persist and therefore the holders of expensive financial assets that are priced for perfection will be badly disappointed.

Spoiler alert:  There are no new sources of cheap oil. We’ve already tapped the easy stuff.

So, there’s lots to be concerned about for those holding stocks for the long term. But what about the short term?

In Part 2: The Time To Short The Market Is Approaching, we explain why 2014 is beginning to look an awful lot like 2008; only worse. The ability of stock prices to deviate further from the fundamentals appears to be topping, and a heck of a mean-reversion looks in the cards. 

via Zero Hedge http://ift.tt/1kebc86 Tyler Durden

Submitted by Charles Hugh Smith from Of Two Minds

Ukraine: A Deep State Analysis

Some preliminary thoughts on a complex situation.

It doesn’t take any special insight into the situation in Ukraine to conclude that no one narrative illuminates all the dynamics. Various contesting Grand Narratives have emerged in the media–neofascist coup, rampant corruption, east versus west, to name a few–but these only describe a few of the regional fault lines and complexities.

At my request, correspondent A.C. offered a preliminary Deep State analysis of the situation. A.C.’s perspective is informed by decades of experience in Eastern Europe, Russia and the Baltic region.

I recently discussed the Deep State in The Dollar and the Deep State, and offered this definition by Mike Lofgren:

The term “Deep State” was coined in Turkey and is said to be a system composed of high-level elements within the intelligence services, military, security, judiciary and organized crime.

The Deep State is a hybrid association of elements of government and parts of top-level finance and industry that is effectively able to govern the nation without reference to the consent of the governed as expressed through the formal political process.

I describe the U.S. Deep State as the National Security State which enables a vast Imperial structure that incorporates hard and soft power–military, diplomatic, intelligence, finance, commercial, energy, media, higher education–in a system of global domination and influence.

One key feature of the Deep State everywhere is that it makes decisions behind closed doors and the surface government simply ratifies and implements the decisions. I have covered various aspects of geopolitics and the Deep State for years, for example:

The Great Game: Geopolitics and Oil (October 19, 2010)

The Banality of Evil and Imperial Over-Reach (December 14, 2010)

Speaking of Iraq–let’s start with the obvious Deep State agenda in Ukraine: energy. Nations with a strategic “vital interest” in the region’s energy mix include Ukraine, Russia, Poland, Germany (and the rest of the Europen Union, which currently depends on natural gas piped through Ukraine from Russia), Romania and (of course) the United States, which maintains a strategic interest in every square meter of the planet (including the seas and ice caps).

It’s not much of a stretch to say that Russia’s fiscal health and geopolitical influence are based on hydrocarbons–specifically gas and oil delivered to other nations for cash and/or political favors.

The maturation of fracking technologies have led to the exploration of western Ukraine, Poland and Romania by super-major oil companies such as Chevron: Where We Operate – Chevron

Chevron holds four shale concessions in Poland—Frampol, Grabowiec, Krasnik and Zwierzyniec—which total approximately one million acres. In the Grabowiec concession, drilling of the first well was completed in March 2012, followed by a diagnostic fracture integrity test in December 2012. A first well also was drilled in the Frampol concession in 2012. In the Zwierzyniec concession, drilling began in December 2012. Continued exploration drilling is planned for 2013.

 

Chevron holds more than 2 million acres in Romania, including a 1.6-million-acre concession in the Barlad Shale. We plan to drill an exploration well in 2013. We hold three additional concession agreements covering 670,000 acres in southeast Romania. Acquisition of 2-D seismic data across these concessions is expected to begin in 2013.

 

Chevron successfully bid for the right to exclusively negotiate with the government of Ukraine for the Oleska Block. The company is expected to operate and hold a 50 percent interest in the 1.6 million-acre concession.

Ukraine holds promise for shale gas despite uncertainty

The development of gas fields in these regions poses a direct competitive threat to the near-monopoly currently held by the Russian national oil company, Gazprom. This sets up a scramble for energy, where western Ukraine, Poland, Romania and the EU have powerful financial incentives to develop energy sources outside of Russian control, while Russia has an incentive to secure energy resources and assets in Eastern Ukraine and Crimea.

Here is A.C.’s outline of some of the key dynamics:

This gas pipeline map graphically illustrates Gazprom’s real problem. A major competing gas field is appearing literally underneath a major existing east-west gas pipeline running into central Europe. Drill wells and immediately begin selling to Germany and other existing Gazprom customers. And also undercut Gazprom’s pricing by a touch.

 

The extent to which US-based multinational oil and gas firms are directly displacing Russian enterprises in supplying the EU is remarkable. Chevron and Exxon are very prominent in the emerging offshore and shale plays.

 

I think the imminent threat of Ukrainian shale gas development is a factor in forcing Putin’s hand over the EU trade deal. Putin’s regional Great Power ambitions are backed entirely by strong arm hydrocarbon diplomacy. Putin’s domestic political position equally rests on stable and elevated hydrocarbon prices to fund the state budget.

 

He has no revolutionary ideology with mass appeal in religion, politics or economics. Nor does he possess a large internationally recognized sphere of dominance like Stalin obtained at Yalta in 1945.

 

Nor does he have a large land army with which to intimidate and subdue neighboring states. He’s only managed to convert a portion of the shrunken Army to “kontraktniki” (well-paid professional volunteers). These guys are the ones suppressing the Muslim insurgents in the Caucasus. If Putin attempted to openly intervene in the Ukraine with the available and virtually untrained conscript military forces it would produce a political explosion in Russia’s own internal politics. This is addition to the surge of Ukrainian nationalist opposition that would ensue.

 

Putin’s risk arises not just from the example being set for Russian domestic opponents. If Putin is seen to be responsible for alienating and finally “losing” the Ukraine he’ll find himself in trouble with the Russian Deep State.

 

What’s Happening in Kiev Right Now Is Vladimir Putin’s Worst Nightmare (New Republic)

 

Will Ukraine Break Apart (New Yorker)

 

As this piece notes, modern Ukraine in its present form is an artifact of the 1945 Yalta Conference and the post World War II order. Just like Yugoslavia. Unfortunately for all concerned, this latent instability is now compounded by a happenstance of geology and the recent maturation of the technology for exploiting shale gas reserves. Adjoining neighbors like Poland now have motives that were missing when the Ukraine was a poor and primarily agrarian land.

 

The gas pipeline map shows the major incentives and rational objectives of a partition strategy from Putin’s perspective. He can’t stop development in Polish Lublin or near Lviv. He at least needs to keep control of infrastructure in the eastern Ukraine. Offshore Black Sea oil and gas tract concessions are also at stake.

This suggests that the interests of all parties align in supporting a de facto partition rather than a civil war in Ukraine in which neither side could establish stable, long-term control of the other.

I asked A.C. for his view of the U.S. Deep State’s goals in the region.

The short two-part answer is:

 

1. Frustrate Moscow’s ambitions to dominate Eurasia. The operative strategic analyses employed are MacKinder’s World-Island Theory as subsequently and heavily modified by modern hydro-carbon fuel economics: The Geographical Pivot of History.

 

2. Continue to improve the EU’s Central European position with respect to its hydrocarbon fuel supplies. The Neocons were already deeply worried about the growth of NATO dependence on Gazprom and the eastern pipelines in the mid-1980s. This has been on their radar for decades.

 

The overall objective is to destroy Putin’s capacity to set marginal natural gas prices in Europe. If pipelines under the Baltic and Black Seas are feasible so are pipelines under the Mediterranean Sea from North Africa to France, and from the eastern Mediterranean and Aegean to Greece and southeastern Europe. Add some LPG terminals and European shale gas operations and this is achieved.

 

There may be a third goal in trying to set an example for domestic Russian opponents, which exist in great numbers. I think it’s more likely the Russian Federation’s Deep State will find another leader first.

Thank you, A.C., for your perspective on this complex, fast-evolving situation. Sometimes strategic goals can be met not by establishing overt control (i.e. becoming a target) but by indirectly thwarting the goals of competing Deep States.

via Zero Hedge http://ift.tt/N9anzo Tyler Durden

According to the Economic Policy Institute, a Washington think tank supported by organized labor, the answer to generating up to 6 million more jobs is as simple as ending global currency manipulation. But not in the sense of ramping USDJPY or AUDUSD at key market inflection points which mostly benefits such FX-rigging chatrooms as “the Cartel”, no: they are thinking more big picture, in the “central bank manipulation sense.”

The report says that “several foreign countries devalue their currencies to make their products cheaper, making it difficult for U.S. manufacturers to compete, the report said.” In essence what the group suggests is that the US currency is overvalued relative to the rest of the world, and that by “realigning exchange rates, U.S. trade deficits would be reduced by up to $500 billion per year by 2015. Such a move would increase U.S. gross domestic product by up to $720 billion per year and create up to 5.8 million jobs, the report said.” Said otherwise: stop foreign currency manipulation, but allow and encourage the US to keep pushing its own currency even lower.

This is all wonderful, however it appears the unions or their mouthpiece thinktank have never heard of the Fed, whose job over the past 5 years has been, among other things, to keep the dollar weaker than it would normally be. If anything, the rest of the world is merely mimicking the policies of the Fed, which have been adopted first by the Bank of England, next the Bank of Japan, and soon, maybe, the European Central Bank. We can’t wait to see how much screaming and yelling will ensue if and when Mario Draghi does indeed engage in unsterilized QE, and sends the Euro plunging (now that there is supposedly no fear of redenomination) and by implication, the USD soaring making exports of US goods and services to Europe even more prohibitive. And don’t tell labor unions about the recent collapse in the Chinese Yuan: that would really put their noses out of joint.

Because while superficially they are absolutely correct, a weaker dollar would on paper boost US exports and potentially generate a few million extra jobs (assuming there are no robots who can fill those positions at a fraction of the cost and none of the wages), the flip side is that it would crush all export-reliant emerging economies, resulting in many more millions of job losses in countries that unlike the US, have no welfare-state safety nets, and thus send the risk of global revolutions through the roof, which in turn would jeopardize the most precious thing of all: the global stock markets, currently at all time highs, courtesy of precisely the kind of currency manipulation that all the central banks – not just the Fed – are engaging in.

The story, as reported by the LA Times, continues as expected:

Realigning exchange rates could also prompt increased tax revenue and reduce federal budget deficits by up to $266 billion in 2015, the EPI said.

 

“Congress and the administration have a new focus on manufacturing because they understand its value to the American economy,” said Scott Paul, president of the Alliance for American Manufacturing. “But they are ignoring the most important job-creating opportunity for manufacturing: stopping currency manipulation. The key to an economic recovery, especially in California, is restoring manufacturing job growth. To shore up those jobs, Washington should launch a national manufacturing strategy that starts with passing bipartisan legislation to end currency manipulation.”

 

A bipartisan majority in the Senate and the House has signed letters urging the Obama administration to address “foreign currency manipulation” in the talks with Japan and the other nations.

 

And there has been an outcry in congressional and business circles, particularly the auto industry, over Japan’s weakened currency. The yen has fallen about 25% against the dollar in the last year, helping boost that country’s exports and profits by making its goods cheaper in foreign markets.

 

“Currency manipulation can negate or greatly reduce the benefits of a free-trade agreement and may have a devastating impact on American companies and workers,” said the Senate letter, signed by 60 members and led by Lindsey Graham (R-S.C.) and Debbie Stabenow (D-Mich.).

What was unsaid is that it was currency manipulation by others that is what is at stake here. As for the Fed: why, give us more. But just pray that the pent up inflation doesn’t finally crack the Fed’s dam door, and floor all these workers who are demanding more of the same, because then they will really see what the side effects of manipulated, artificial global markets truly is.

And finally, who cares about trade anyway? Recall what the latest IMF “forecast” (and its previous iterations) have to say about world trade (hint – not much):

 

A far better option for all the disgruntled workers engaging in such an old normal concept as actually creating exportable goods, is to get an E-trade account, request a few grand from Obama (call it populist bailout venture capital), and bet it all on Tesla. After all, there is just one “trickling down” wealth effect left in the room.

via Zero Hedge http://ift.tt/1cXTjGa Tyler Durden