Month: September 2014

3 Important Gold Charts – Transparent Holdings Fall As Bullion Goes East To Russia and China

Chart 1: Changes in Holdings (millions of oz) vs Gold Price

Nick Laird of www.ShareLynx.com has compiled some great new charts on the transparency of public gold holdings over time. The charts were emailed to us Monday night. Sharelynx.com is one of the internet’s most comprehensive sources for market related charts and is well worth the subscription. The charts are very illuminating and provide great insight into how gold has shifted between non public sources and public sources over the last 10-12 years. Below we reproduce some of Nick’s charts and some GoldCore commentary on the trends that we find most interesting.

In his charts, Nick has defined transparent gold holdings as “Total Published Repositories, Mutual Funds and ETFs”, and the gold holdings in millions of ounces are derived from these sources. The data therefore covers known private holdings of gold but excludes both the holdings of central banks, the official sector, and holdings in private ownership including for example GoldCore Secure Storage holdings.

The first chart shows a long term view of transparent gold holdings since 1970. As the gold bull market began in the late 1990s, the amount of gold held in transparent holdings rose sharply and displays a very high correlation with the rising gold price.

Chart 2: Total Ounces by Source 2004-2014

While there would obviously be some data issues in collecting gold holdings data from periods such as the 1970s and 1980s, more importantly, there was a very limited choice of accessible gold vehicles and the futures markets were in their infancy. It was only since the early 2000s that the choice of gold vehicles, and therefore high quality holdings information, became available.

Beginning in 2001, when only a few millions ounces of private gold holdings could be tracked through publically available sources, the amount of gold held in public repositories exploded as the gold price rose, reaching 20 million ounces in 2006, 50 million ounces by 2009, and over 100 million ounces by the beginning of 2013.

Interestingly, as the gold price peaked in 2011, the amount of gold flowing into ETFs, mutual funds and other public repositories kept increasing and only peaked In January 2013 as the gold price began its fall from $1,700/oz through to $1,300/oz.

Chart 2 shows a ten year view from 2004 to 2014 and drills down into the sources that make up the transparent gold holdings totals.

These sources include everything from COMEX and the GLD ETF to the iShares ETF and the Central Fund of Canada, and also publically available data on some of the smaller ETFs and online gold retailers.

While the holdings represented by the futures exchange did grow over the 2000s, their growth was quite stable. By far the largest growth in trackable gold holdings was in the GLD and the other large ETFs such as the ETF Securities and iShares products.

Gold holdings in GLD grew consistently from 2005 to 2009, but then rocketed up from 2009 to 2011 before stabilising until the end of 2013. As has been documented elsewhere, there was then a huge outflow from GLD. The trend in the other ETFs is similar although on a smaller scale.

Chart 3: Total Weight (millions of oz) vs Total Value

Chart 3 compares total weight of gold held to total value in US dollars of those holdings. The key takeaway from this chart is that, again, as the price of gold rose, there was a huge mobilisation of gold out of non publicly tracked sources into vehicles and on to exchanges where it could be publically tracked. This mobilisation of gold at its peak was somewhere between 90 million and 100 million ounces (2800 tonnes – 3100 tonnes).

The question is where did all this gold come from? Some would obviously have  been from new mine supply, some probably from central bank sales, and some from dis-hoarding out of private hoards. Although HNW investors were more likely to have been buying gold in the years immediately preceding the global financial crisis and almost certainly were buying during the financial crisis.

An equally important question is that now that the public repositories have lost 30 million ounces in under 2 years, where has all that gold gone?

It would be realistic to assume that some has gone to China and the Far East since there has been evidence of such flows. Equally its possible that some of the gold that has disappeared from the ETFs and other products and sources has again gone back into private hands or else is being accumulated by the official sector such as emerging market central banks such as the Russian central bank and the People’s Bank of China (PBOC).

We discussed this, hacking of the CME, JP Morgan and financial exchanges,  ‘peak gold’, Russian gold buying and producing and Russia and China’s plans for gold in a short interview at the weekend:


View here

MARKET UPDATE
Today’s AM fix was USD 1,277.75, EUR 974.42 and GBP 773.27 per ounce.

Yesterday’s AM fix was USD 1,287.25, EUR 979.34 and GBP 774.47 per ounce.

Yesterday’s PM fix was USD 1,286.50, EUR 979.44 and GBP 773.84 per ounce.

The US markets were closed for a national holiday yesterday.
 

Gold in Singapore fell by $10 in illiquid trading prior to further falls in London which saw gold fall to $1,270/oz. Silver slipped $0.30 or 1.55% to $19.17 per ounce in London trading. Platinum is down 0.35% to $1,420  after falling from $1,426. Palladium failed to hold above the key $900 level and fell 2% today to $890 from $909 yesterday.

Despite ongoing significant geopolitical tensions in Ukraine and elsewhere, gold has been pushed lower and was 1.6% lower today to $1,270/oz. Silver, likewise, has followed gold lower. This looks like a final wash out as the price falls today have become headline news and sentiment is appalling.

As the old adage goes never catch a falling knife  and buyers should hold out for a day or two of gains or a weekly higher close. However, given the fundamentals a real opportunity is set to presnt itself – potentially the last great buying opportunity of this phase of the bull market.

Prudent money is allocating to gold bullion in the realisation that, as the witch in Macbeth muttered, “something wicked this way comes”. 

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Submitted by Tim Price via Sovereign Man blog,

“Sir, Arnaud Montebourg, the former French economy minister and the sourest note in the Hollande repertoire, dares to complain of “absurd” austerity policies ? (“Hollande purges cabinet following leftwing revolt”, August 26.) If those policies are absurd, it is because they were not accompanied by the structural reforms so badly needed to make the French economy healthy. I am speaking of long outdated redundancy and seniority labour laws, oppressive regulations for the business sector and the unbearable bureaucratic roadblocks that stand in the way of start-ups.

 

“To these, one can also add the traditional Gallic mindset of envy, if not outright hostility, towards those French citizens and other Europeans who are willing to work longer, harder and smarter and want to make good money; a mindset that Mr Montebourg never hesitated to parade before the world. Now that he and his cohorts on the left of the Socialist party have departed the government, perhaps François Hollande can move forward and leapfrog France from the 19th to the 21st century.”

– Letter to the FT from Stan Trybulski, Branford, Connecticut, 28th August 2014.

 

“There’s a great deal of ruin in a nation.”
– Adam Smith.

 

“You will never understand bureaucracies until you understand that for bureaucrats, procedure is everything and outcomes are nothing.”
– Thomas Sowell.

Much of what we think we know isn’t necessarily so. The invention of the printing press with movable type? Traditionally credited to fifteenth-century Germany and Johannes Gutenberg, it was actually invented in eleventh-century China. Paper also originated in China long before it was used in the West. As did paper money and toilet paper (albeit today, these are pretty much interchangeable). English agriculturalist Jethro Tull is widely credited with the discovery of the seed drill in 1701. It was in fact invented by the Chinese 2,000 years beforehand. The first blast furnace for iron smelting is associated with Coalbrookdale – tragically close to schools in the West Midlands. It was actually introduced by the Chinese before 200 BC. The Chinese were also first to use the fishing reel, matches, the magnetic compass, playing cards, the toothbrush and the wheelbarrow. Perhaps even golf. So how did a society apparently so dynamic and innovative by comparison with the West then enter a centuries’ long decline?

Niall Ferguson, in his excellent book ‘Civilization’ (Penguin, 2012) puts forward six “identifiably novel complexes of institutions and associated ideas and behaviours” that account for the cultural and economic outperformance of the West between, say, the 16th and 20th centuries:

• Competition
• Science
• Property rights
• Medicine
• The consumer society
• The work ethic

He defines these trends as follows:

1. Competition: “a decentralization of both political and economic life, which created the launch-pad for both nation-states and capitalism”.
2. Science: “a way of studying, understanding and ultimately changing the natural world, which gave the West (among other things) a major military advantage over the Rest”.
3. Property rights: “the rule of law as a means of protecting private owners and peacefully resolving disputes between them, which formed the basis for the most stable form of representative government”.
4. Medicine: “a branch of science that allowed a major improvement in health and life expectancy, beginning in Western societies, but also in their colonies”.
5. The consumer society: “a mode of material living in which the production and purchase of clothing and other consumer goods play a central economic role, and without which the Industrial Revolution would have been unsustainable”.
6. The work ethic: “a moral framework and mode of activity derivable from (among other sources) Protestant Christianity, which provides the glue for the dynamic and potentially unstable society created by “killer apps” 1 to 5”.

For our purposes we are most interested in Ferguson’s first “killer app”, Competition. But we will also refer to it in a slightly different context – “the lack of bureaucracy”. As the chart below shows, from 1000 AD to its high water mark in the 1960s, UK GDP relative to China’s was a one-way bet. Since then, however, the trend has gone into reverse.

Source: Niall Ferguson / Penguin Books

What can account for this dramatic reversal of economic fortunes? Economic reforms in China, led by Deng Xiaoping in the late 1970s, are likely to be responsible for at least part of the turnaround. But the relentless and sclerotic expansion of the State in Britain has also played a role.

UK general government expenditure (green) and private expenditure (black) as a proportion of GDP

Source: David B. Smith / Steve Baker MP

As the chart above shows, at the turn of the last century, UK state spending accounted for roughly 10% of the economy and the private sector accounted for the rest. But as the welfare state has swelled, government spending has mushroomed to account, now, for something like half or more of the entire economy. And state spending, by and large, is inefficient spending – at least by comparison with the inevitably more disciplined for-profit sector. In other words, our relative economic prospects have declined in inverse proportion to the expansion (metastasis) of the State. In turn, bureaucratic parasitism likely accounts for productivity differentials in the eurozone; the German State accounts for roughly 45% of its economy, the French State 56%.

Politicians have been able to swell the State thus far only with assistance by two groups: with the involuntary support of taxpayers, and with the connivance of central bankers. Popular resentment of what is laughably termed ‘austerity’ threatens the ongoing indulgence of the first group; the almost terminal straining of market forces by the latter runs the risk of a disorderly collapse of confidence in bond markets, after which continued Western deficit spending would be virtually impossible.

We seem to be close to the endgame. Even as perversely, record-low bond yields (indiscriminately – across markets as diverse as Austria, Belgium, Germany, Holland, Finland, Ireland, Italy and Spain) have sent desperate investors scurrying into stocks instead, those same investors are, with extra perversity, displaying a similar lack of discrimination and not even attempting to locate relative value within markets. Extraordinarily, the Wall Street Journal points out that

“Investors are pouring money into Vanguard Group, the epitome of the hands-off approach to investing, flocking to funds that track market indexes and aren’t run by stock pickers or star managers. The inflow has pushed the mutual-fund giant to almost $3 trillion in assets under management for the first time. The surge is part of a sea change in the fund business in which investors are increasingly opting for products that track the market rather than relying on managers to pick winners… Investors poured a net $336 billion into passively managed stock and bond funds in 2013, handily beating the $53 billion invested in traditional mutual funds of the same type, according to Morningstar. So far this year through July, investors put a net $177 billion into those passive funds, compared with $74 billion in actively managed funds… Through July, passively managed stock funds have seen a net $128.4 billion in investor in flows, compared with $18 billion for traditional stock funds…”

Nor is this lack of judicious investment a product of bullish US market sentiment. The same arbitrary index-following – at all-time highs – is being pursued in the UK. Trade magazine FTAdviser reports that

“Retail investors put more money into tracker funds in July than in any other month since records began, according to the latest IMA data.”

Index-tracking may have merit at the bottom of the market, but at the top?

Having singularly failed to reform or restructure their dilapidated economies, many governments throughout the West have left it to their central banks to keep a now exhausted credit bubble to inflate further. Unprecedented monetary stimulus and the suppression of interest rates have now boxed both central bankers and many investors into a corner. Bond markets now have no value but could yet get even more delusional in terms of price and yield. Stock markets are looking increasingly irrational relative to the health of their underlying economies. The euro zone looks set to re-enter recession and now expects the ECB to unveil outright quantitative easing. If the West wishes to regain its economic vigour versus Asia, it would do well to remember what made it so culturally and economically exceptional in the first place.

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Today was a significant day for many markets. For the 7th time in the last 8 months, US Treasuries opened the month with weakness (30Y up 8.5bps, 2Y +3bps from Friday). Significant JPY and GBP weakness pushed the USD Index to fresh 14-month highs (+0.25% on the week). USD strength smacked gold (-$20 to $1265), silver, and crude oil significantly lower (WTI under $93 and Brent testing towards $100, both down over $3). US equities decoupled (lower) from VIX and JPY-carry around the European close after hitting new all-time highs in the early session (over 2,006 for S&P Futs). Volume was better (but then it was a down day). Despite oil weakness, Trannies took off leading the day (with Dow and S&P closing lower from Friday). Credit traded with stocks for most of the day but ignored the late-day VWAP ramp in the S&P, closing at its wides. The ubiquitous late-day buying panic saved S&P 2,000… because it can.

 

2.5% of all trades today are for 1 share!

— Eric Scott Hunsader (@nanexllc) September 2, 2014

1 out of 4 trades today is for less than 100 shares. This is a record since odd-lots began reporting Dec 2012

— Eric Scott Hunsader (@nanexllc) September 2, 2014

Which helps explain the machines' new tactic for tickling stocks higher for VWAP sales (oddlots vs quote stuffing)

 

Because it's all about 2000…

From the "good" data this morning, stocks struggled… only to rip back positive into the close…

 

But from Friday's close, Trannies are up; Dow and S&P down…

 

Treasury yields surged…

 

The 'sell' Treasuries at the start of the month trade…

 

Perhaps September is recoupling month?

 

Credit decoupled towards the close…

 

And VIX decoupled around the European close…

 

The USD surged – driven by JPY and GBP weakness…

 

EURJPY and USDJPY decoupled entirely from stocks and after the US open, so did AUDJPY…

 

Which sent PMs (gold 3-month lows) and oil tumbling…

 

Crude oil prices plunged…

 

Gold and USDJPY appear to have recoupled…

 

Charts: Bloomberg

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If Angelo Mozilo’s lawyers are to be believed, the former orange head of Countrywide can not be sued by the government (for civil purposes obviously, no former banker in the US can ever be held criminally liable under the Obama administration) because he is, well, sick. However, the same disease apparently does not prevent the 75 year old from giving 30 minute telephonic interviews, such as this one he granted to Bloomberg’s Max Abelson before Labor Day from his 12,692-square-foot house in Santa Barbara, California.

A brief tangent: “interviews with Mozilo, 75, and three friends show what retirement looks like for a chief executive officer linked to the worst financial crisis since the Great Depression. Remaining out of public view like Lehman Brothers Holdings Inc.’s Richard Fuld or Jimmy Cayne of Bear Stearns Cos., Mozilo has submitted plans for Old West-style offices in California, taught students in Italy about finance, invested in a building in the Arizona desert that houses a Taco Bell and written about his life so that his grandchildren will “know the truth.” 

So what is the truth?

Here are some of the choice excerpts from the man who is “baffled by a new effort to punish him, proud of past triumphs and incensed by criticism.“

“You’ll have to ask those people, ‘What do you have against Mozilo, what did he do?’” he said in a 30-minute call with Bloomberg News before Labor Day, one of his few interviews since the firm’s downfall. “Countrywide didn’t change. I didn’t change. The world changed.”

Mozilo doesn’t understand why he and his firm, blamed by lawmakers and authorities for lax underwriting and predatory lending, have been seen as villains.

“No, no, no, we didn’t do anything wrong,” he said, adding that a real estate collapse was the root of the crisis. “Countrywide or Mozilo didn’t cause any of that.” Yes, the Moz talks about himself in the third person.

Revisionist history does not stop there at Casa Agent Orange. In fact revisionism is the only game in town:

He focused on his career’s highlights in the interview, recounting one business magazine calling Countrywide “The 23,000% Stock” and another naming him one of the most respected CEOs in the world.

 

“Go back and you’ll see that Countrywide was one of the most admired companies in the country,” he said. Mozilo added that he has “no idea” why the government is going after him again. “It’s unfortunate, but I try to make the best of it.”

 

“I don’t have a job, so I have to earn some money, and I do it through investments,” he said. Real estate is still the best option, he said. “Tides go in and out. This is just another tide.”

Perhaps it is time for CNBC to inquire the Moz-man just what stocks he is long here. The good news is that Mozilo’s $500+ million of money is certainly not on the sidelines. As for his other investments, here is the answer:

One investment is a stake in a building that houses a Taco Bell outside Phoenix. Mozilo said he hasn’t eaten there because he stays away from chicken and beef.

 

Another is a project in Templeton, a small Southern California town where he’s requested permits to build a two-story retail and office building on a vacant lot. Architectural sketches show a style suited for a quaint Western main street.

 

“It’s a throwback to a century ago,” Mozilo said. “I love America. I love everything about America.”

 

He talks investments with his friend Ken Langone, a founder of Home Depot Inc. “Equities, asset-backed deals, railroad cars, oil and gas,” said Langone, 78. “Private equity, structured finance, you name it.”

But if you can’t trade alongside Mozilo, you can surely learn finance from the man whose company has the reputation of being the worst M&A acquisition in history (a deal for which he should be commended: after all trillions in toxic crap is never easy to offload, even if the end buyer is the deadest of the brain dead banks, Bank of America, a deal for which it should forever cower in shame as a result of its impeccable “due diligence”).

Mozilo decided to teach undergraduates what he knows about finance last year. The former trustee of Gonzaga University in Spokane, Washington, said he spent about two weeks in Italy at Gonzaga-in-Florence, housed in the Mozilo Center overlooking a 16th-century Medici garden.

 

“I taught them the basics of finance based on my own experiences,” he said. “I really enjoyed being among them. It was very refreshing for me.”

But the punchline of the profile with the orange glow is surely this:

“Two of his friends, former Countrywide director Robert J. Donato and fellow mortgage-industry veteran Howard Levine, praised his spirit. Levine, a friend for at least 50 years, said Mozilo gives a $5 bill to each homeless person he sees on New York’s Fifth Avenue when they visit from California.”

It is unknown how many of these homeless people once used to live in a home with a Countrywide mortgage. In event, money goes full circle and all that.

In conclusion, while Moz is happy to wax philosophic about his life, and asked for a word that describes the state of his life he offered one before hanging up “peace”, he will never do so again on the record in a court of law: his lawyers have told prosecutors that Mozilo is ill, the New York Times reported last month. “I’m 75, so I have some health issues that I’m managing,” he said in the call. “I have not gotten my death notice yet.”

Or arrest warrant for that matter. Because it the New Wall Street Lackey Normal, there is justice for everyone, and then there are Wall Street criminals, who simply are too “systematically important”, even if only for the tanning booth industry, to go to prison.

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Do you believe in miracles? Morgan Stanley’s Adam Parker does, having given up on his sane bearish case long ago, he now predicts S&P to 3,000 because “if we get EPS growth of 6% per year from 2015-2020, that would drive S&P500 earnings to near $170; a 17x multiple would translate into a peak level for the S&P500 near 3000 under this scenario.” So, just some simple math, eh? But he does add, “of course, no one can predict unforeseen shocks to the economy,” but they will never happen, right?

 

To back up this simple statement of mathematics, Parker produces 27 pages of fluff that in now way supports the actual thesis with long-term projections, simply shrugging away the fact that this would be the longest period of expansion (with no recession) in history.

 

Parker’s Bottom line is a little less exuberant than the headline-makers would like you to believe…

Business cycles don’t die of old age, they die of overheating. Debt dynamics, particularly in the US, paint the picture of a more prudent household sector and well-managed corporate sector, both of which remain far from the heights of leverage typically associated with risks to business cycle expansions. Moreover, volatility in the economy has trended lower over time, owing in part to technological advances that have helped companies remain nimble when sudden changes in aggregate demand occur, and in part to a rising share of companies that carry no inventory.

 

The current expansion is more than five years old, and with little evidence of global synchronicity, there are no signs as yet that the global economy is overheating. The current US expansion has already lasted longer than the average expansion in the post-WWII period, but the factors we monitor and have discussed here lead us to conclude that it isn’t unreasonable to expect that this expansion could be the longest on record. In a scenario where the cycle does extend for several more years, earnings could grow modestly as well. The US Equity Strategy team notes that EPS growth of 6% per year from 2015-2020 would drive S&P500 earnings to near $170. A 17x multiple would translate into a peak level for the S&P500 near 3000 under this scenario.

 

Of course, no one can predict unforeseen shocks to the economy – be it fiscal or monetary policy missteps domestically, geopolitical events abroad, or even major natural disasters. But our title, “2020 Vision”, is our tongue-in-cheek way to desribe the idea that the current US expansion could prove to be the longest ever and perhaps last until 2020.

 

There are a number of ways the current expansion could get derailed. Europe and China are already slowing and near recession in some parts. Japan is highly dependent on the success of policy. US reforms on key issues like the budget, taxes and entitlements, and immigration seem a long way off and are likely to cause much angst in the coming years. And after a prolonged period of unprecedented monetary policy accommodation, we are on the cusp of removal of that accommodation – also in an unprecedented way. So by no means can we say that six or seven more years of expansion are an obvious outcome. But, all else being equal, the metrics we analyzed in this note are unlikely to be the root cause if this expansion were to be cut short.

*  *  *

Wait, what, there are risks to this call?

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While only ‘humanitarian adviser’ boots on the ground are present in Iraq (and Syria), Reuters reports that preparations are under way near Ukraine’s western border for a joint military exercise this month with more than 1,000 troops from the United States and its allies. As Obama told reporters last week, “that a military solution to this problem is not going to be forthcoming,” it seems a little odd ‘strategically’ to go ahead with the Rapid Trident exercise Sept. 16-26 as a sign of the commitment of NATO states to support non-NATO member Ukraine, entailing the first significant deployment of U.S. and other personnel to Ukraine since the crisis erupted.

As Reuters reports,

As fighting between the army and Russian-backed rebels rages in eastern Ukraine, preparations are under way near its western border for a joint military exercise this month with more than 1,000 troops from the United States and its allies.

 

The decision to go ahead with the Rapid Trident exercise Sept. 16-26 is seen as a sign of the commitment of NATO states to support non-NATO member Ukraine while stopping well short of military intervention in the conflict.

 

…

 

“At the moment, we are still planning for (the exercise) to go ahead,” U.S. Navy Captain Gregory Hicks, spokesman for the U.S. Army’s European Command said on Tuesday.

 

…

 

But Rapid Trident will entail the first significant deployment of U.S. and other personnel to Ukraine since the crisis erupted.

 

…

 

“It is very important to understand that a military solution to this problem is not going to be forthcoming,” Obama told reporters at the White House last week.

 

…

 

The United States European Command (EUCOM) says the exercise this month will involve about 200 U.S. personnel as well as 1,100 others from Ukraine, Azerbaijan, Britain, Canada, Georgia, Germany, Latvia, Lithuania, Moldova, Norway, Poland, Romania and Spain.  

 

Focused on peacekeeping, it will include command post drills, patrolling and dealing with improvised explosive devices.

*  *  *
Sounds like de-escalation to us… buy moar stocks.

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