Author: admin

Blink, and you missed the “sell off” from Italy’s failed referendum vote.

In the initial hours after yesterday’s vote which has cost Italy’s PM his job and ushered in a period of political limbo and potential chaos, markets were jolted by the scale of Renzi’s defeat which, as Reuters put it, “pointed to further turbulence and political crisis in the euro zone’s heavily indebted third-largest economy and particular uncertainty was focused on the country’s fragile banks.”  The euro fell to a 20 month low, as low as $1.0508 and the Milan bourse shed as much as 2% while Italian bond yields spiked sharply higher.

As confirmed by the following headlines, there was a palpable sense of panic about how markets would react:

• Renzi Quits as Italy Referendum Defeat Deepens Europe’s Turmoil
• Shares of Monte Paschi, UniCredit don’t immediately set opening price, limit down
• Pop. Milano drops as much as 6%, Banco Popolare as much as 5.9%
• While ‘No’ outcome shouldn’t be major surprise, “margin of rejection and news of Renzi’s resignation will spook the markets”
• Spread on Italian government debt seen widening further when markets open, stock market down
• Italy ‘No’ a Lost Opportunity; Won’t Impact Utilities: Bernstein
• Markets to Correct on Italy Vote, EU Survival in Spotlight: Citi

And then, just before the European open, everything changed on a dime, or rather in “three minutes” as Guillermo Hernandez Sampere, head of trading at MPPM EK put it: “After Brexit, it took three days for markets to shake it off, with Trump it took three hours, with Italy it took three minutes.The fast money, who expected markets to fall further with this outcome, are now covering their positions.”

Well, maybe not exactly three minutes but, well see for yourselves: the rebound was enough to prompt questions if the ECB now has its own plunge protection team.

What happened was the following: after global stock futures slid on Sunday night, European equities shrugged off the outcome of the Italian referendum to rally the most since the U.S. election, with the Stoxx Europe 600 rising as much as 1.4% in early London. In fact, European shares soared the most since the Trump presidential victory, even as Italian banks sustained losses and the cost of insuring their bonds against default jumped. Gold erased earlier gains to head for the lowest close since February, while equity volatility indices slid in Europe and the US.

Italian financials rose 0.5 percent having fallen more than 4 percent and shares in the world’s oldest bank, Monte dei Paschi were flat on the day after being suspended at the opening.

Political risk from Italy hasn’t spread beyond its borders as markets were correctly positioned for the anti-establishment mood sweeping around the world. This was a departure from the Brexit referendum and Donald Trump’s surprise election, when traders were caught out by populist votes.

The Euro, likewise, after falling to 20 month lows, rebounded strongly, and was trading virtually unchanged from its Friday levels, as the dollar and gold sold off, while 10y Treasury futures dropped to session lows, with the March contract touching lows of 124-09+ after block trade.

To be sure, not everyone was a winner on the news associated with Italy’s political limbo, and Italian namls Banca Popolare di Milano Scarl and UniCredit SpA both slid at least 2% as the outcome of the referendum raised questions about the nation’s plans to plug holes in the banking sector. Renzi’s reforms were aimed at simplifying the legislative process in a nation that’s seen 63 governments since the end of World War II. However, even Italy’s banks seemed ready to forget anything ever happened on Sunday night and were poised to move into the green at the first possible opportunity.

Bonds remained under pressure though. Italy’s benchmark 10-year bond yield jumped 11 basis points (bps) to 2.01%, widening the premium investors demand for holding Italian bonds over safer German bonds to 175 bps, before easing slightly.

“What the market is watching for is not so much the vote itself,” but the potential fallout from a Renzi resignation, said Ric Spooner, chief market analyst in Sydney at CMC Markets Asia Pacific Ltd. Payrolls “showed an improvement in the U.S. labor market and it’s all moving in the right direction for the Fed to continue raising rates.”

This is where we stand as US traders walk in: The Stoxx Europe 600 Index climbed 1.3 percent at 10:05 a.m. in London. Italy’s FTSE MIB Index, one of the worst-performing stock indexes in the world this year, rose 0.3 percent.  Futures on the S&P 500 Index were up 0.4 percent, after the underlying benchmark ended Friday up less than 0.1 percent.

Credit-default swaps on Italy jumped 14 basis points to 186 basis points, the highest since June. The cost of insuring Banca Monte dei Paschi SpA’s senior bonds against losses for five years jumped 27 basis points to 482 basis points, the highest since July, according to data compiled by CMA. Credit-default swap contracts insuring UniCredit’s senior bonds against losses rose 13 basis points to 224 basis points. 

However, while there was some Italy-focused risk, 10Y Treasury yields rose two basis points to 2.40% after shedding seven basis points on Friday, as concerns about a short covering squeeze in US Treasuries quickly faded.

As a result of the price action, a favorable narrative was quickly spun: “Our base scenario is a caretaker government which could be in place before Christmas, and no new elections before 2018,” Indosuez Wealth Management chief economist Marie Owens Thomsen said. “If indeed things pan out according to our base scenario, there would be little reason for any broad-based turmoil. It is still utterly unlikely that Italy would leave the EU or the euro.“

Others jumped on the bullish bandwagon: “Rather than fretting about political risk, companies appear to be gearing up for further expansion. Employment is rising at one of the fastest rates seen over the past five years,” said Chris Williamson, chief economist at Markit.

In short, it is as if Italy’s referendum not only never happened, but was a good thing all along, and with that S&P is set to rise back to new all time highs.

Market Snapshot

• S&P 500 futures up 0.6% to 2205
• Stoxx 600 up 1.3% to 344
• FTSE 100 up 0.8% to 6788
• DAX up 1.8% to 10704
• German 10Yr yield up 3bps to 0.31%
• Italian 10Yr yield up 8bps to 1.99%
• Spanish 10Yr yield up 2bps to 1.57%
• S&P GSCI Index up 0.6% to 388.8
• MSCI Asia Pacific down 0.6% to 135
• Nikkei 225 down 0.8% to 18275
• Hang Seng down 0.3% to 22506
• Shanghai Composite down 1.2% to 3205
• S&P/ASX 200 down 0.8% to 5400
• US 10-yr yield up 2bps to 2.4%
• Dollar Index up 0.18% to 100.95
• WTI Crude futures up 0.6% to $52.00
• Brent Futures up 0.6% to $54.79
• Gold spot down 1.1% to $1,165
• Silver spot down 1% to $16.57

Bulletin Headline Summary from RanSquawk:

• European equities enter the North American crossover in positive territory despite the victory for the ‘No’ camp in the Italian referendum
• FX price action this morning has been all risk based, with the sharp comeback in equities after Italy’s referendum vote mirroring that seen in the wake of the US election result
• Looking ahead, highlights include UK and US Services PMI, ISM non-Manufacturing PMI, Fed’s Dudley, Evans, Bullard, Draghi

Top Global Headlines:

• Italy Sinks Into Political Limbo as Defeat Sweeps Renzi Away: Prime Minister Matteo Renzi announced his resignation, Finance minister cancels trip to Brussels as cabinet meets
• Trump Takes On China in Tweets on Currency, South China Sea: President-elect had been criticized after call with Taiwan, offshore yuan drops amid concern China to be named manipulator
• Trump Warns U.S. Companies Against ‘Very Expensive Mistake’
• Norwegian Surges After U.S. Approves Trans-Atlantic Expansion: Carrier’s Irish unit receives approval for U.S.- Europe routes
• Dakota Access Oil Pipeline in New Setback as U.S. Permit Denied: Analysis, exploration of alternative sites needed, Army says
• Citi Makes a Clarion Call for Commodity Bulls With 2017 View: Bank bullish on oil, copper, zinc on 6 to 12-month horizon
• Novartis CAR-T Has 82% Remission Rate in Pediatric Study
• Burberry Gains After FT Says Retailer Rejected Coach Approach

* * *

Asian stock markets, many of which were not open long enough to take advantage of Europe’s miraculous ramp, traded lower amid European political uncertainty after the Italian referendum in which PM Renzi lost and announced that he is to resign. This pressured Nikkei 225 (-0.8%) and ASX (-0.7%), alongside weakness in US equity futures. Chinese markets conformed to the negative tone with Shanghai Comp. (-1.3%) further weighed by a disappointing liquidity injection by the PBoC, while the launch of the Shenzhen-Hong Kong stock connect only briefly helped stem downside for the Hang Seng (-0.4%) and Shenzhen Comp. (-0.8%). 10yr JGBs traded higher as risk averse sentiment resulted in a flight to safety, although upside was limited after the BoJ’s buying operations were for a relatively paltry JPY 370bn of JGBs.

Top Asian News

• Billionaire Li Ka-Shing Offers $5.4 Billion for Australia’s Duet: Cheung Kong Infrastructure offers A$3 per share in cash
• Modi’s Cash Clampdown Set to Shrink India’s Key Services Sector: Nikkei Services PMI plunges to lowest since December 2013
• China Regulator Slams Leveraged Stock Acquirers as ‘Robbers’: CSRC chairman questions funding sources of some acquisitions
• New Zealand’s John Key to Step Down as Prime Minister: Key says he couldn’t commit to serving another full term
• Trump Takes On China in Tweets on Currency, South China Sea: President-elect had been criticized after call with Taiwan
• Man GLG Asia Hedge Fund Managers Walsh and Vidale Said to Leave: Departure came after April closure of a GLG Asian equity fund
• Shenzhen Opens Stock Market Up to the World, Is Little Noticed

In Europe, as noted above, it was a story of a major rebound, even as the Italian referendum has stolen the headlines so far this morning, with the week kicking off in a busy fashion. The price action seen across asset classes has been remarkably similar to that seen in the wake of the Brexit and Trump victories, with initial risk off sentiment dictating play, before a sense of calm returns to markets to see the entirety of the risk-off price action reversed. This sees equities trade firmly in the green by mid-morning, including the FTSE MIB (+0.4%). However it is worth noting that Italian banks remain the underperformers, with Unicredit lower by 4.7%. In terms of reasons behind the reversal, views vary across major banks with Nomura highlighting that the No vote was already priced in, however with the likes of Citi and MS suggesting that a correction could be seen due to political volatility in the form of the likelihood of elections and the possibility of an ‘Italexit’. Also of note BNP Paribas suggest that the ECB are less likely to announce a scaling back of QE at their meeting. Bunds opened higher this morning, before paring their opening gains and falling to see a total move of over a point, while the GE/IT spread widened this morning by approximately 6bps.

Top European News

• Aixtron Sees Slim Path to Save China Sale After Obama Order: Decision leaves door open for sale if U.S. unit is split off
• RBS Will Pay Up to $1 Billion Over 2008 Rights Issue Claims: The bank says the settlement covered by existing provisions
• $38 Billion Finnish Fund Moves Assets to U.S. as Europe Founders: Ilmarinen used to be underweight U.S. assets
• U.K. Supreme Court Brexit Hearing Moves EU Exit Decision Closer: All 11 judges to hear government case on triggering Brexit
• VW’s German Ranks Gird to Face Questions as U.S. Pursues Execs: Dozens hire lawyers as Justice Department seeks cooperators

In currencies, the euro was unchanged from Friday’s close 1.0674, paring a slump of as much as 1.5% earlier in the session. Polls show an early election in Italy would see the anti-euro Five Star Movement sweep into power. The offshore yuan lost 0.1 percent as Chinese shares declined. U.S. President-elect Trump rejected criticism of his decision to take a phone call from Taiwan’s president and reiterated concerns over China’s currency and trade policies to his 16.6 million Twitter followers. The kiwi weakened 0.6 percent as New Zealand Prime Minister John Key said he’ll stand down and backed Finance Minister Bill English to succeed him. The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, jumped 0.3 percent following its first weekly retreat since Trump’s victory.

In commodities, gold swung fell 1 percent, extending a 0.5 percent decline last week that was its fourth straight weekly loss. Oil prices are also continuing higher, in line with risk sentiment, but driven by the coordinated intentions on production levels emanating from the OPEC meeting next week. Another OPEC meeting scheduled for the weekend ahead in Vienna. Base metals are also showing some modest gains in the early part of the week, with the risk on mood benefitting from growth/infrastructure spending prospects. Copper for three-month delivery rallied 1.6 percent, while zinc gained 1.8 percent and Nickel rallied 1.4 percent.

US Event Calendar

• 8:30am: Fed’s Dudley speaks in New York
• 9:25am: Fed’s Evans speaks in Chicago
• 9:45am: Markit U.S. Services PMI, Nov. F, est. 54.8 (prior 54.7)
• 10am: Labor Market Conditions Index Change, Nov. est. -0.2 (prior 0.7)
• 10am: ISM Non-Manufacturing Composite, Nov., est. 55.5 (prior 54.8)
• 2:05pm: Fed’s Bullard speaks in Phoenix

DB’s Jim Reid concludes the overnight wrap

Only one place to start this morning and that’s with the Italian referendum vote. With almost all votes accounted for, PM Renzi has formally announced defeat after a relatively wide margin of 60% versus 40% voted in favour of rejecting the reforms. Renzi has said that he will submit his resignation to Italy’s president, Sergio Mattarella, this afternoon and also said that he will not be available to lead a caretaker government. The reaction in markets has been fairly orderly so far although we may have to wait for the European open to see the full impact. The Euro is down a little over 1%, dragging a number of other European currencies with it. Equity markets in Asia are down anywhere from -0.50% to -1.50% while equity index futures are down -0.30% in the US. In rates 10y Treasury yields are just over 3bps lower.

The obvious question now is what next? Well clearly the immediate risk is political instability. We’ll refer back to DB’s Marco Stringa’s report from last week where he highlighted that the short term tail risk is an immediate election (not his base case but perhaps a higher risk with the large no vote yesterday). The trigger would be failure to form a new government due to unbridgeable divisions among traditional parties. A failure to find a compromise on a new electoral law could also have a similar impact but with a longer time horizon. All eyes would be on the banking sector in such a scenario and if a solution wasn’t found then stress could eclipse July 2016 levels. Marco’s central case is that a new government supported by a similar parliamentary majority to the current one, with a narrow objective – writing a new electoral law – and limited duration will be formed. This muddle through scenario means that Italy’s economy will continue to perform poorly in both absolute and relative terms and over the medium term there will have to been a convergence to either pro-reform government or a euro-sceptic government. So this is only the beginning of a long path ahead for Italy but expect swift political manoeuvrings this week as the country will need to try to find a solution quickly.

The other populist test this weekend was the Austria presidential election where the Green party backed independent candidate, Alexander Van der Bellen, came out on top versus the far right Freedom party candidate, Nobert Hofer, by a score of 53.3% to 46.7%. Hofer has since conceded defeat. As our economists highlight, despite this result, Austria still faces a complex political outlook. First, the populist FPO party is leading in the opinion polls by about 8pp and it will be interesting to see whether Hofer’s defeat narrows this lead. They note that at the moment, the FPO is heading towards the late 2018 parliamentary election in a position of strength. Secondly, Chancellor Kern, sitting atop a mainstream coalition of SPO/OVP, is struggling with his reforms. He rules out early elections, but there is nevertheless a non-negligible risk that his government collapses already in 2017, giving a second opportunity to test support for populism in Austria. For example, the longer the muddling-through of the grand coalition last and the stronger their underperformance in the polls, the more likely there will be an early election.

Continuing with the politics theme, the remaining weekend newsflow is focused on the latest round of comments from President-elect Trump. In a social media posting, Trump warned of heavy import tax tariffs for US companies moving production overseas and selling back into the US, suggesting a possible 35% tariff for those companies that do. Clearly the statement is pretty ambiguous for now and throws open a whole wide range of questions particularly for businesses with multiple entities and so forth. A wider question also might be how other countries respond to such possible tariffs. One to keep an eye on.

Switching over to this week’s main event, that being the ECB meeting this Thursday. As a base case our European economists expect the ECB to announce a 6-month extension of the current €80bn QE programme (an extension from March 2017 to September 2017). This is likely to be complemented by a move to improve the supply of eligible bonds, perhaps by the removal or softening of the yield floor. This would facilitate a steeper yield curve and incentive transmission. In an alternative scenario our economists believe that the market would react negatively to say a slowing in the pace of purchases to €60bn. Indeed our economists have derived three rules that need to be satisfied by spot and forward core inflation in order for the ECB to taper. The soonest these are likely to be satisfied is mid-2017. They go on to highlight that if the ECB’s above-consensus view on growth is correct, the euro exchange rate depreciates in line with DB’s house view and systematic financial crisis is avoided, tapering could be announced in June 2017. On the other hand if their below-consensus view on growth is correct and the growth/inflation relationship is weak, tapering could wait until end-2017. The last thing to note is today’s market reaction to the referendum result which also has the potential to influence Thursday’s meeting actions.

Wrapping up the rest of the markets in Asia this morning where the other focus in FX has been on the New Zealand Dollar which is down close to 1% following the unexpected resignation of the country’s Prime Minister, John Key. The PM has since backed his deputy for the role and said that he is stepping down for personal reasons. There’s also been a bit of data out of China this morning. The Caixin services PMI was reported as rising 0.7pts to 53.1 in November which is the highest level since July 2015. Combined with a weaker manufacturing reading however, the composite has held steady at 52.9.

A quick recap now of how we closed out Friday. For those that missed it, the focus in what was an otherwise fairly quiet session ahead of the weekend events, was on the US November employment report. In a nutshell it was a fairly mixed batch of data. The headline nonfarm payrolls gain of 178k pretty much matched expectations (180k) while cumulative net revisions amounted to a modest -2k drop. Most noteworthy was the unexpected drop in the unemployment rate from 4.9% to 4.6% (vs. 4.9% expected) and to the lowest level since August 2007. The broader U-6 measure also dipped two-tenths to 9.3% and to the lowest since April 2008. The interesting take on this came with the fact that the unemployment rate dipped as the labour force participation rate dropped one-tenth to 62.7%. Meanwhile the other interesting take away was the softness in average hourly earnings (-0.1% mom vs. +0.2% expected). It was actually the first monthly decline in earnings since December 2014 and had the effect of lowering the YoY rate to +2.5% from +2.8%.

Onto this week’s calendar now. This morning in Europe we’re kicking off the week with the remainder of the November PMI’s which includes the final services and composite revisions for the Euro area, Germany and France, as well as a first look at the data for the UK and non-core. Euro area retail sales data for the month of October is also out today. In the US this afternoon we’ll also get the remaining PMI’s as well as the ISM non-manufacturing print for November and labour market conditions index. Tuesday kicks off in Germany with the latest factory orders data before we then get the final Q3 GDP reading for the Euro area. In the US tomorrow we’ll get the October trade balance reading, Q3 unit labour costs and nonfarm productivity, October factory orders, December IBD/TIPP economic optimism reading and the final durable and capital goods orders revisions. Germany gets things going again on Wednesday when we’ll get the latest industrial production report. French trade data and UK industrial and manufacturing production will also be released. The only data due out in the US on Wednesday is JOLTS job openings and consumer credit for October. China will also release November foreign reserves data at some stage. The early data to get things going on Thursday comes from Japan where the final Q3 GDP reading will be released. China will then be following with important November trade data. There’s no data in Europe on Thursday but all eyes will be on the main event of the week, the ECB policy meeting outcome just after midday. The only data out of the US on Thursday will be initial jobless claims. We close out the week in Asia on Friday with the November CPI and PPI prints in China. In Europe we’ll get trade data in Germany, industrial production data in France and trade data in the UK. Over in the US we’ll get the final October wholesale inventories report along with a first look at the University of Michigan consumer sentiment report. Away from the data the Fedspeak this week all comes today with Dudley, Evans and Bullard scheduled.

via http://ift.tt/2gGE7pz Tyler Durden

Submitted by Koos Jansen from BullionStar.com

What came to light as on odd discrepancy between GFMS’ Chinese gold demand and "apparent supply" has proven to be a tenacious cover-up by the oldest consultancy firm in the gold market. And not only does GFMS publish incomplete and misleading data on Chinese gold demand, all its supply and demand data is incomplete and misleading. As a result, the vast majority of investors across the globe has been brainwashed to believe total gold supply and demand mainly consists of global mine output and jewelry demand. In reality, the supply and demand data GFMS publishes is just the tip of the iceberg. But the firm is reluctant to admit this publicly, lest their business model would be severely damaged.

GFMS has denied all allegations about their incomplete Chinese gold demand statistics by continuously making up false arguments. Therefore, BullionStar will debunk, once more, such arguments spread by GFMS – which are supposed to explain how from January 2007 until September 2016 the difference between GFMS’ Chinese gold demand and apparent supply reached over 4,500 tonnes – in order to expose true Chinese gold demand.

Exhibit 1. Chinese gold supply and demand data. Apparent supply is reflected by the center columns (mine output + import + scrap supply). Withdrawals from the vaults of the Shanghai Gold Exchange serve as a proxy for Chinese wholesale gold demand. True Chinese gold demand is somewhere in between SGE withdrawals and apparent supply.

Since 2013 I’ve witnessed GFMS shamelessly present nine arguments in their Gold Survey reports, but along the way abandoned the arguments that I had debunked on these pages. Indeed, few of all these arguments have ever proven to be valid, illustrated by the fact that GFMS perpetually keeps making up new ones. What’s left is to disparage are the final three arguments from GFMS’ most recent annual report: the Gold Survey 2016 (GS2016). Because GFMS chooses their arguments to be ever more complicated, I’ll have to be precise in my wordings not to allow any margin for interpretation errors. For detailed information regarding the mechanics of the Chinese gold market and supply & demand metrics readers can click the links provided.

Debunking Final GFMS Arguments

In the Chinese domestic gold market nearly all supply (import, mine output, scrap supply) is sold through the Shanghai Gold Exchange (SGE), and so Chinese wholesale gold demand can be measured by the amount of gold withdrawn from the SGE vaults; data published on a monthly basis. As I’ve been reporting on withdrawals from the Chinese core exchange since 2013, the debate between me and Western consultancy firms like GFMS with respect to true Chinese gold demand has centered around these infamous SGE withdrawals (exhibit 1). Per mentioned above, GFMS has put out nine arguments in recent years explaining their reader base why SGE withdrawals do not reflect gold demand. Firstly, let us have a look at the five arguments now abandoned by GFMS:

1. Wholesale stock inventory growth (Augustus 2013) (Gold Survey 2014, page 88)
2. Arbitrage refining (Gold Survey 2014, page 88) (Reuters Global Gold Forum 2015)
3. Round tripping (Gold Survey 2014, page 88) (Gold Survey 2015, page 78, 82)
4. Chinese commercial bank assets to back investment products. “The higher levels of imports, and withdrawals, are boosted by a number of factors, but notably by gold’s use as an asset class and the requirement for commercial banks to hold physical gold to support investment products.” (Gold Survey 2015, page 78).
5. Defaulting gold enterprises send inventory directly to refiners and SGE (Gold Survey 2015 Q2, page 7)

No need to discuss these anymore, as GFMS dedicated a full chapter in the GS2016 report titled, “A Review And Explanation Of How China’s SGE’s Withdraw Numbers Are Impacted By Other Trading Activities”, in which the arguments above are not listed, implying GFMS ceased to recognize them as relevant. However, there are three new arguments listed, and one old one, that will be discussed in this post:

1. Tax avoidance (Gold Survey 2016, page 56).
2. Financial statement window dressing (Gold Survey 2016, page 58).
3. Retailers selling unsold inventories directly to refiners (Gold Survey 2016, page 58)
4. Gold leasing activities and arbitrage opportunities (in China gold is money at lower cost) (Gold Survey 2016, page 57, Gold Survey 2015, page 78)

Because gold leasing is an old argument it will only briefly be addressed here.

1. Tax Avoidance

This argument entails an illegal Value-added tax (VAT) invoice scheme. Although this scheme exists, it can not have the impact on SGE withdrawals like GFMS wants you to think.

GFMS introduces its special investigation chapter by stating:

TAX AVOIDANCE The first and foremost factor behind why we believe the SGE’s withdrawal number differs from the country’s total gold demand is related to China’s current tax system, with some people exploiting this grey area. … the number of industry participants mushroomed in 2014 and 2015 as other traders became aware of the potential loophole.

The GFMS team uses the terms “tax avoidance” and “loophole”. For the ones that don’t know, tax avoidance and tax evasion are two opposing practices. Tax avoidance is the legal usage of a tax regime to one's advantage in order to reduce the amount of tax payable by means that are within the law (Wikipedia). Tax evasion is the illegal evasion of tax payable (Wikipedia). In other words, tax avoidance is legal while tax evasion is illegal. In the introduction the GFMS team pretends the tax scheme is legal, while this is anything but true. In China one can risk life imprisonment or the death penalty when caught for tax evasion:

Whoever forges or sells forged special invoices for value-added tax shall, if the number involved is especially huge, and the circumstances are especially serious so that economic order is seriously disrupted, be sentenced to life imprisonment or death and also to confiscation of property.

Then, to add to the confusion, further down the GFMS team writes, “of course, all of the activities are considered illegal by the Chinese government.” Maybe GFMS doesn’t understand the difference between tax avoidance and tax evasion, two diametrically different practices, which makes their professionalism highly questionable.

GFMS writes, “the first and foremost factor behind why we believe the SGE’s withdrawal number differs from the country’s total gold demand is related to China’s current tax system”. So we’re supposed to believe that after all these years – GFMS is operational for decades – and all that has been written on the Chinese gold market, now GFMS has finally found the “first and foremost reason” why SGE withdrawals do not reflect demand? Or did it recently stumble upon this scheme to use in its defence? I think the latter.

The understand the details of this illegal VAT invoice scheme please read my post The Value-added Tax System In China’s Domestic Gold Market, written to substantiate this blog post.

Regarding using VAT invoices for tax evasion, the GFMS team must have read this news article by the Shenzhen Municipal Office. In the news, a company called Longhaitong used SGE VAT invoices for tax evasion. How does it work? For example: the prevailing spot gold price on the SGE is 234 CNY/gramme. Company X tells a mom-and-pop jewelry fabricator that they can supply good quality cheap gold, say the SGE spot price minus 2 CNY/gramme, but without a VAT invoice. The mom-and-pop fabricator wants to buy 1 Kg so it gives 232,000 CNY to company X (the mom-and-pop shop will fabricate jewelry from the gold to be sold covertly without VAT to consumers). Company X buys 1 Kg of gold on the SGE at the spot price of 234 CNY/gramme, paying 234,000 CNY. Then company X gives the gold to the mom-and-pop fabricator but keeps the VAT invoice. Up till now, company X has incurred a loss of 2,000 CNY (bear in mind, because of China’s VAT system buyers pay the spot price at SGE which doesn’t include any VAT, but when companies withdraw the metal they receive a VAT invoice from the tax authority that describes 17 % of the all-in price is VAT, because the gold leaves a VAT exempt environment). However, company X can then sell the VAT invoice for 4,000 CNY to, in example, a brick trader. Company X effectively makes 2,000 CNY. If the brick trader alters the subject header on the invoice from “gold” into “bricks” he can tax deduct 34,000 CNY (234,000 / (1+17%) * 17%) from his VAT payable. In this scenario, the brick trader effectively makes 30,000 CNY (34,000 CNY minus the 4,000 it paid to company X). Naturally, all exemplar numbers can vary.

For sure this illegal VAT scheme exists and has been used. But, only to a limited extent – in my conclusion I will tell you the upper bound. Mind you, in the scenario I just described the gold does meet demand, albeit through an illegal scheme!

In addition, the discrepancy between the GFMS Chinese demand figures and SGE withdrawal numbers first appeared in 2008, and have exploded since 2013.

Exhibit 2. Chinese gold supply and demand data.

In the GS2016 GFMS writes:

We initially became aware of the scheme in 2013 when it first emerged, but based on information gathered from our contacts, the number of industry participants mushroomed in 2014 and 2015 as other traders became aware of the potential loophole.

The GFMS team wants readers to believe that it was the tax scheme that caused the discrepancy between GFMS Chinese demand and SGE withdrawals since 2013, but the VAT regulation regarding gold has remained unchanged since 2002. Is it believable that criminals found the possibility of these illegal practices 11 years later, exactly when Chinese demand exploded? No. If you click this link, you will see a similar incident that happened in 2010 and was reported at the end of 2011. The VAT scheme has existed for many years and crime incidents happen, but not like GFMS wants you to think.

If the GFMS team was indeed aware of the illegal practices as late as 2013 and thought that was the year when these practices first emerged, then GFMS is not properly informed in the Chinese gold market.

More from GS2016:

One of our contacts with some understanding of this activity estimated that just from Shenzhen alone, such trading activities could have possibly impacted the SGE’s withdrawal volumes by a few tonnes per day. Approximately half of the gold being sold in the black market at discounts would eventually flow back to the SGE.

In my opinion this is speculation. According to the news available, buyers in the black market are those who want the gold to fabricate jewelry that eventually is being met by true demand. In contrast, GFMS wants readers to believe half of the gold involved in the scheme flows back to the SGE. But bars withdrawn from the SGE vaults are not allowed to re-enter, only if they’re recast into new bars by SGE approved refineries (the gatekeepers of the Chinese chain of integrity). For gold involved in VAT invoice schemes to flow back to the SGE, technically SGE approved refineries would be complicit. Though the SGE conducts a campaign to crack down on such illegal tax activities.

As stated above, the VAT scheme is real, though it can not involve as much gold as GFMS wants you to believe. Unfortunately we can’t compute the exact amount recycled through the SGE through this practice, we can only identify the upper bound, which we’ll do in the conclusion.

As background information: when gold is withdrawn from SGE vaults and promptly flows back to the SGE, this overstates withdrawal numbers as it creates equal demand and supply that has no net effect on the price. Therefore, such recycle flows should not be counted in supply and demand statistics. Readers can click this post for more information.

Financial Statement Window Dressing

The GFMS team writes:

Some companies attempted to build up their revenues by merely trading and withdrawing physical gold from the SGE vault so it would appear they have a high level of business activity, while in reality there is no real genuine demand behind this.

Trading can build up revenues but why do these companies withdraw gold? That doesn’t make economic sense. If a company buys gold on the SGE and leaves the gold in the SGE vault, the gold will be recorded as “inventory” on the company’s balance sheet. If the company then withdraws the gold, the gold is still regarded as “inventory”, so what’s point of withdrawing gold? Changing the location of the gold doesn’t change the accounting nature of the gold.

It is technically possible to buy gold on the SGE, withdraw, refine it into new bars, redeposit the bars into SGE vaults and sell the bars. However, this will incur expenses. When the point is “window dressing”, why incur unnecessary expenses? More logic would be to leave the gold in the SGE system. This argument is false.

Retailers Selling Unsold Inventories Directly to Refiners

In this section, the GFMS team writes:

Retailers often prefer to sell a portion of their working stock at a discount directly to refiners in order to maintain inventories at a desirable level.

Why waste the fabrication costs of jewelry when retailers can sell the products at a discount to customers? GFMS writes:

By selling to refiners, even if such a transaction may result in a financial loss, it still counts as revenue; but doing the latter only increases the expense category and provides no benefits to the company’s revenues or asset value.

Let’s assume an unsold jewelry stock is worth of 1,000 CNY. The retailer sells it to a refiner at 800 CNY, which results in a loss of 200 CNY. The inventory item on the retailer’s balance sheet is reduced by 1,000 CNY and the cash item increases by 800 CNY. The net result is that the total asset value of the retailer decreases by 200 CNY, then how can this practice provide benefits to the asset value? GFMS writes:

As an example, during a field research trip earlier this year, a local refiner indicated that one jewellery retailer has sold approximately 40 tonnes of unsold jewellery pieces to them in a single two month period.

But this quote doesn’t mention what the unsold jewelry pieces become in the end. Possibly, these pieces become gold wires, which might be used by jewelry fabricators instead of becoming gold bars that flow back to the SGE. GFMS pretend the majority of gold in China is continuously recycled through the SGE, which is not true. Many refineries are note even approved by the SGE to supply gold bars.

Gold Leasing Activities And Arbitrage Opportunities

This argument is one of the oldest and most persistent. But we can be short about this; in the Chinese gold lease market nearly all trades are conducted within the SGE system. Any speculator borrowing gold for cheap funding will not withdraw his metal loan, as his incentive is to sell spot for the proceeds. GFMS fools readers by mentioning high leasing activity, but it neglects to mention leases aren’t withdrawn from the vaults. Only a jewelry fabricator would withdraw borrowed gold because he wants to fabricate products to meet demand. For more information you can read this post on the Chinese gold lease market.

Even the World Gold Council has recently stated little borrowed gold leaves the SGE system [brackets added by me]:

Over recent years we have observed a rising number of commercial banks participating in the gold leasing market. … It’s estimated that around 10% of the leased gold leaves the SGE’s vaults. The majority is for financing purposes and is sold at the SGE [and stays within the SGE vaults] for cash settlement.

This argument is false.

Furthermore, it’s noteworthy that GFMS writes:

From the perspective of the bank, lending physical gold is an off-balance sheet item,…

But as I’ve demonstrated in this and this post the majority of the “precious metals” on the Chinese bank balance sheets reflects back-to-back leasing. Meaning banks borrow gold in the SGE system to subsequently lend out at a higher lease rate. So neither do the Chinese bank balance sheets influence SGE withdrawals. What withdrawals largely reflect are direct purchases by individual and institutional investors at the SGE. True demand.

Conclusion

There is a very limited extent to which the VAT scheme can explain the difference between GFMS' demand and SGE Withdrawals. I wrote previously that indeed there is certain amount of gold being withdrawn from SGE vaults, which, for various reasons, finds its way back to the SGE in newly cast bars – overstating SGE withdrawals as a proxy for wholesale demand. Unfortunately nobody knows exactly the volume flowing through the SGE that distorts withdraw data. But, we do know the upper and lower bound. The upper bound is the difference between SGE Withdrawals and apparent supply, the lower bound is zero. 

Exhibit 3. Chinese gold supply and demand data. As supply and demand are always equal, to estimate demand we can measure supply.

GFMS only measures consumer demand (jewelry, retail bar and coin, and industrial demand) and not institutional demand (direct purchases at the SGE). This is not speculation this is a fact, and in China everyone can buy gold directly at the SGE so this explains the immense withdrawals. GFMS is fully aware of this but refuses to acknowledge it – because that would ruin their business model. Instead GFMS pretends that the difference between consumer demand and SGE withdrawals is all caused by gold being recycled through the central Chinese exchange. But how is this possible? If the Chinese gold market would simply be a merry-go-round fest, how come the Chinese import thousands of tonnes of gold that are not allowed to be exported? What GFMS suggests is not possible. The fact China keeps importing reveals demand. Another chart:

Exhibit 4. Chinese gold supply and demand data. Apparent supply is reflected by the center columns (mine output + import + scrap supply).

Theoretically the upper bound for the VAT scheme to have recycled gold through the SGE equals the difference between SGE withdrawals and apparent supply (the difference in exhibit 4 between the red and center columns). That’s the sole leeway we can debate about. As supply equals demand, demand cannot be lower than apparent supply. I should add, not unimportant, we know GFMS’ scrap supply data does not include disinvestment (institutional selling directly to refineries). So disinvestment must be included in the difference between SGE withdrawals and apparent supply as well. Have another look at exhibit 3. But, because we don’t know the amount of disinvestment, neither do we know the amount of distortion (VAT scheme and other recycling flows).

That’s why in exhibit 1 I’ve disclosed the aggregated difference between apparent supply and GFMS demand. There can be no mistake about this volume, it reflects true demand and it has mushroomed into +4,500 tonnes since 2007. GFSM can present many more arguments in future reports, but it won’t change the fact that true demand is at least equal to apparent supply.

To be exact, from January 2007 until September 2016 apparent supply accounted for 11,541 tonnes, and GFMS’ Chinese gold demand accounted for  6,903 tonnes. The difference, which GFMS has pursued to conceal, has aggregated to 4,638 tonnes. And according to my analysis this was not bought by the Chinese central bank.

As over the aforementioned period SGE withdrawals accounted for 12,825 tonnes, we get…

True Chinese gold demand ballpark = 11,541 – 12,825 tonnes

GFMS' Chinese consumer gold demand = 6,903 tonnes

Let’s see how much longer GFMS can deny reality.

Exhibit 5. Chinese gold supply and demand data. Apparent supply is reflected by the center columns (mine output + import + scrap supply).

For more detailed information with respect to GFMS’ incomplete global gold supply and demand metrics view this post.

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ABN Amro firing off a new note on Total SA ($TOT) this morning. The outlet is rating Total at Buy saying the oil & gas Co. has proved to be resilient (though they don’t say in what manner) and also more cost efficient than most of the peers.

Looking out from my balcony I can see a ship Total leases to transport Bitumen and that little punk has been anchored for over two weeks. Maybe I don’t know what cost efficiency is but I digress.

Amro’s analyst says “We expect it to further build on its low cost price production pipeline (recently visible in Brazil and Iran) and indeed to be able to deliver a cash dividend of 5% for the foreseeable future.” The analyst also expects Cash Flows from Ops to recover in 2017 (pretty much the default comments as we exit and try to forget 2016) to $23B from $17B.

Shares of Total have gained just about 6.3% in 2016 while the S&P 500 has returned just about 7.3%.

(Source: Zacks)

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Submitted by Patrick Buchanan via Buchanan.org,

“I have in my possession a secret map, made in Germany by Hitler’s government — by the planners of the New World Order,” FDR told the nation in his Navy Day radio address of Oct. 27, 1941.

 

“It is a map of South America as Hitler proposes to reorganize it. The geographical experts of Berlin, however, have ruthlessly obliterated all the existing boundary lines … bringing the whole continent under their domination,” said Roosevelt. “This map makes clear the Nazi design not only against South America but against the United States as well.”

 

Our leader had another terrifying secret document, “made in Germany by Hitler’s government. …

 

“It is a plan to abolish all existing religions — Protestant, Catholic, Mohammedan, Hindu, Buddhist and Jewish alike. … In the place of the churches of our civilization, there is to be set up an international Nazi Church…

 

“In the place of the Bible, the words of ‘Mein Kampf’ will be imposed and enforced as Holy Writ. And in place of the cross of Christ will be put two symbols — the swastika and the naked sword. … A god of blood and iron will take the place of the God of love and mercy.”

The source of these astounding secret Nazi plans?

They were forgeries by British agents in New York operating under William Stephenson, Churchill’s “Man Called Intrepid,” whose assignment was to do whatever necessary to bring the U.S. into Britain’s war.

FDR began his address by describing two German submarine attacks on U.S. destroyers Greer and Kearny, the later of which had been torpedoed with a loss of 11 American lives.

Said FDR: “We have wished to avoid shooting. But the shooting has started. And history has recorded who fired the first shot.”

The truth: Greer and Kearny had been tracking German subs for British planes dropping depth charges.

It was FDR who desperately wanted war with Germany, while, for all his crimes, Hitler desperately wanted to avoid war with the United States.

Said Cong. Clare Boothe Luce, FDR “lied us into war because he did not have the political courage to lead us into it.”

By late 1941, most Americans still wanted to stay out of the war. They believed “lying British propaganda” about Belgian babies being tossed around on German bayonets had sucked us into World War I, from which the British Empire had benefited mightily.

What brings these episodes to mind is the wave of indignation sweeping this capital over “fake news” allegedly created by Vladimir Putin’s old KGB comrades, and regurgitated by U.S. individuals, websites and magazines that are anti-interventionist and anti-war.

Ohio Sen. Rob Portman says the “propaganda and disinformation threat” against America is real, and we must “counter and combat it.” Congress is working up a $160 million State Department program.

Now, Americans should be on guard against “fake news” and foreign meddling in U.S. elections.

Yet it is often our own allies, like the Brits, and our own leaders who mislead and lie us into unnecessary wars. And is not meddling in the internal affairs, including the elections, of regimes we do not like, pretty much the job description of the CIA and the National Endowment for Democracy?

History suggests it is our own War Party that bears watching.

Consider Operation Iraqi Freedom.

Who misled, deceived, and lied about Saddam’s weapons of mass destruction, the “fake news” that sucked us into one of our country’s greatest strategic blunders?

Who lied for years about an Iranian nuclear weapons program, which almost dragged us into a war, before all 16 U.S. intelligence agencies debunked that propaganda in 2007 and 2011?

Yet, there are those, here and abroad, who insist that Iran has a secret nuclear weapons program. Their goal: war with Iran.

Were we told the whole truth about the August 1964 incident involving North Vietnamese gunboats and U.S. destroyers Maddox and C. Turner Joy, which stampeded Congress into voting a near-unanimous resolution that led us into an eight-year war in Southeast Asia?

One can go back deeper into American history.

Cong. Abe Lincoln disbelieved in President Polk’s claim that the Mexican army had crossed the Rio Grande and “shed American blood upon American soil.” In his “spot” resolution, Lincoln demanded to know the exact spot where the atrocity had occurred that resulted in a U.S. army marching to Mexico City and relieving Mexico of half of her country.

Was Assistant Navy Secretary Theodore Roosevelt telling us the truth when he said of our blasted battleship in Havana harbor, “The Maine was sunk by an act of dirty treachery on the part of the Spaniards”?

No one ever proved that the Spanish caused the explosion.

Yet America got out of his war what T.R. wanted — Puerto Rico, Guam and the Philippines, an empire of our own.

“In wartime, truth is so precious that she should always be attended by a bodyguard of lies.”

So said Winston Churchill, the grandmaster of fake news.

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Fitch Ratings’ outlook for the Chinese banking sector in 2017 is negative, reflecting our view that weak profitability and strong credit growth will keep capitalisation under pressure. High and rising leverage in the corporate sector remains a key risk facing China’s banks.

 

China’s debt-resolution timeline is being pushed back by measures to lessen the debt burden on corporate borrowers – including low interest rates, loan rollovers, debt-for-equity swaps and a loosening of prudential controls. Leverage will continue to increase, especially at the corporate level, as long as there is reliance on credit to support GDP growth targets.We have revised up our estimates for growth in leverage, with Fitch-adjusted total social financing/GDP now likely to reach 258% by end-2016 and 274% by end-2017.

 

The authorities’ attempt to boost household lending may help to diversify risks. Household lending is relatively safe compared with corporate lending – given low LTV for mortgages, low household leverage and a high savings rate. However, rapid mortgage growth is driving sharp increases in residential property prices, and has the potential to fuel a further increase in corporate leverage since corporate borrowers use real estate as collateral to secure lending. Furthermore, policy guidance for banks to extend lending to struggling borrowers in over-capacity sectors also weighs on the banks’ risk-management and governance.

 

Fitch expects NPL and ‘special mention’ loan ratios to continue rising in 2017. Bank profitability will remain lacklustre and under pressure, owing to another likely cut in the benchmark one-year lending rate and further migration of deposits toward wealth management products (WMPs). WMPs now account for 17% of system deposits, and are a source of funding and liquidity risks for the banking sector.

 

Our forecast of flat profit growth and a double-digit increase in risk-weighted assets suggests that capitalisation will remain under pressure. The amount of announced AT1 and T2 issuance is not enough to keep pace with banks’ balance-sheet expansion, while equity-raising will be difficult in light of falling ROEs and questions over China’s medium-term growth.

 

Fitch’s previous research estimates that a one-off resolution of the debt problem would currently result in a capital shortfall of CNY7.4trn-13.6trn (USD1.1trn-2.1trn) – equivalent to around 11%-20% of GDP. The capital gap could rise further if current rates of inefficient credit are sustained and no additional capital is raised.

 

The Viability Ratings (VRs) of Chinese banks range from ‘bb’ to ‘b’, which reflects Fitch’s base case of varying-but-significant risks to capital and asset quality. These risks will linger unless there is a shift to a more stable operating environment, characterised by slower credit growth and higher loss-absorption buffers. Fitch’s stable rating outlook reflects our expectation of state support, which remains the sole rating driver for Chinese bank IDRs. More corporate debt is ultimately likely to migrate towards the sovereign balance sheet beyond the local government swap programme.

Here’s the past 10-years of Guggenheim’s China Real Estate ETF $TAO:

(Source: Zacks Research)

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For a nation stuffed full of credit-fuelled potemkin ponzi schemes, ghost cities, and fake Eiffel Towers, why would the construction of the world's first 1:1 replica Titanic surprise anyone…

As Sina.com reports, the project, with all the features of the Titanic, including the banquet hall, theater and other performances, is located in Chengdu and represents a total investment of more than Yuan 10 billion.

"probably nothing."

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Submitted by Michael Shedlock via MishTalk.com,

On the same day Matteo Renzi suffered a crushing defeat at the hands of alleged “populists” in Italy, German finance minister Wolfgang Schäuble ruled out debt relief for Greece ahead of a eurozone finance minister meeting.
 

Schäuble says Greece Must Reform or Leave Eurozone.

Greece must implement economic reforms if it is to keep its place in the eurozone, Germany’s finance minister has insisted, ruling out debt relief for the country ahead of a crucial euro group meeting on Monday.

 

As the finance ministers of member states using the single currency prepared to discuss fiscal plans for the coming year, Wolfgang Schäuble in effect presented Greece with an ultimatum: either it must enforce unpopular structural reforms or exit the bloc.

 

“Athens must finally implement the needed reforms,” he told the newspaper Bild am Sonntag in an interview [in German] published on Sunday.

 

“If Greece wants to stay in the euro, there is no way around it – in fact completely regardless of the debt level.”

 

Asked if German voters should be prepared for the inevitability of debt relief in the run-up to national elections next year, Schäuble quipped: “That would not help Greece.”

 

Schäuble, who also asserted the Greek budget was not burdened by debt servicing because interest rates were now so low, made the comments as speculation mounted over how best to put the thrice-bailed-out nation back on the road to economic recovery.

Facts of the Matter

1. Greece has an unsustainable €330bn debt load.
2. On May 6, In Leaked Letter IMF Tells Germany “Debt Relief for Greece or IMF Drops Out”.
3. On May 23, the leaked letter became an official announcement: The IMF warned “EU Must Give Greece Unconditional Debt Relief”.

In a strongly worded assessment, the IMF said that there was no prospect of Greece meeting the draconian terms of its current bailout plan and that interest payments on the soaring national debt would eat up 60% of the budget by 2060 in the absence of debt forgiveness.

 

The debt sustainability analysis by the Washington-based Fund said Greece should have longer to pay, have the interest rate on its loans fixed at 1.5%, and that its creditors should make debt relief automatic once the bailout programme ends in 2018.

 

“The implementation of debt relief should be completed by the end of the programme period”, the IMF said.

 

The IMF said that Greece’s national debt as a share of GDP would fall from just over 180% this year to around 140% by 2030 if debt relief was provided. The alternative, it added, was that Greece would face an ever-higher bill for servicing its rising debts.

Consequences

If Greece does not get debt relief, the IMF said it would drop out of the program.

If the IMF drops out of the program, Germany will have to pony up more money.

At one point the IMF worried about Greece having debt to the tune of 110% of GDP. Now, 140% seems acceptable and the IMF is even willing to wait until 2030 for such progress.

Schäuble’s Game

Schäuble has caught the IMF bluffing several times on such threats. Schäuble has caught Greece bluffing countless times.

Flashback May 24, 2016: Germany Calls IMF’s Bluff and Wins: Greece Screwed Again

Nonetheless, the facts show that history has not exactly rewarded complacency this year.

 

Cameron – UK -Gone
Sarkozy – France -Gone
Hollande – France -Gone
Hillary – US -Gone
Merkel – Germany -Pending
Rutte – Netherlands -Pending

— Mike Mish Shedlock (@MishGEA) December 5, 2016

 

Should lightning strike again, please remind me to put Schäuble’s announcement in my book of Great Timing Moments in Political History (as soon as I get around to writing such a book).

Schäuble will not be up there with …

• The Chicago Tribune announcement “Dewey Defeats Truman“,
• Hillary’s announcement in the New York Times that Clinton to Ring In Election Under a Real ‘Glass Ceiling’, or
• Newsweek’s now infamous issue “Madam President” that was delivered and recalled.

Nonetheless, Schäuble’s timing appears to be perfect. Angela Merkel will not exactly be pleased if the IMF drops out of the Troika at this moment given all that is going on with Italian banks, the Italian referendum, Beppe Grillo, and Marine le Pen.

via http://ift.tt/2gXpXB3 Tyler Durden

We’ve gone through a succession of events and processes that were supposed to make gold go up. The following list is by no means exhaustive:

1. Quantitative Easing
2. Bernanke’s Helicopter Drops
3. Janet Yellen’s Keynesianism
4. Obama’s Deficits (US government debt is now a hair away from $20,000,000,000—and that’s just the little part of it they put on their balance sheet)
5. The election of Trump
6. The Italian Referendum (current as we write this)

Each has been good for a little blip that has been forgotten in the noise. We are seeing articles now that have moved on to the next old-new story. It seems that Trump is going to spend a lot on infrastructure. This will require massive deficits. But the market will distrust that the government can pay. So we will see a twin sell off of the US dollar in terms of other currencies, and Treasury bonds in terms of dollars. This will cause the mases to Discover Gold and the gold price is going to skyrocket. Click here to buy our fine gold, we have the very best gold.

We get it. Everyone thinks that interest rates are going up because inflation because more spending. Actually not quite everyone—our view is that the drivers which have caused the interest rate to fall for 35 years are still in full, deadly effect. Nor the folks who are bidding on junk bonds, or stocks for that matter.

But most everyone. Rates have to go up, because they’re lower than ever before history. Right?

And if rates are going up, then so is gold, right?

The Treasury bond is payabl only in US dollars. The US dollar, which is the liability of the Federal Reserve, is backed on by Treasurys. It’s a nice little check-kiting scheme. But besides that, the two instruments have the same risks. If you don’t like the bond, then you won’t like the dollar either. The day will come when en masse, the market decides it doesn’t like both of them, and gold will be the only acceptable money.

With due respect to our old friend Aragorn, today is not that day!

We believe interest rates are headed lower, not higher. But that said, we do not see any particular causal relationship between the interest rate and the price of gold. The former is the spread between the Fed’s undefined asset and its undefined liability. It is unhinged and while it could shoot the moon from Truman through Carter, it’s sailing in the other direction now. Down to Hell.

The price of gold is the exchange rate between the Fed’s liability and metal. So long as people strive to get more dollars—most especially including those who bet on the price of gold, and those who write letters encouraging the bettors—there is no reason for this exchange rate to explode.

Again, to plagiarize the Ranger from the North, the day will come when gold goes into permanent backwardation. But today is not that day!

Today (Friday’s close), the price of gold is down seven Federal Reserve Notes from where it was a week ago.

So where to from here? Are those dratted fundamentals moving?

We will update those fundamentals below. But first, here’s the graph of the metals’ prices.

       The Prices of Gold and Silver

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It fell a bit more this week. 

The Ratio of the Gold Price to the Silver Price

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph.

       The Gold Basis and Cobasis and the Dollar Price

The price of gold fell (i.e. the price of the dollar rose, green line), and the basis (abundance) fell and cobasis (scarcity) rose just a bit.

Our calculated fundamental price of gold fell about ten bucks, now about $1,200 even.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

In silver, we see a 14-cent rise in price but the cobasis is up.

The fundamentals got ever-so-slightly tighter. And our calculated fundamental price moved up to just under $15.

We note that speculators bid silver up this evening (Arizona time) in the wake of the Italian vote, some 30 cents to just under $17. But as of this publication, they couldn’t hold the line and the price fell back and is now a nickel below Friday’s close.

 

© 2016 Monetary Metals

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We’ve gone through a succession of events and processes that were supposed to make gold go up. The following list is by no means exhaustive:

1. Quantitative Easing
2. Bernanke’s Helicopter Drops
3. Janet Yellen’s Keynesianism
4. Obama’s Deficits (US government debt is now a hair away from $20,000,000,000—and that’s just the little part of it they put on their balance sheet)
5. The election of Trump
6. The Italian Referendum (current as we write this)

Each has been good for a little blip that has been forgotten in the noise. We are seeing articles now that have moved on to the next old-new story. It seems that Trump is going to spend a lot on infrastructure. This will require massive deficits. But the market will distrust that the government can pay. So we will see a twin sell off of the US dollar in terms of other currencies, and Treasury bonds in terms of dollars. This will cause the mases to Discover Gold and the gold price is going to skyrocket. Click here to buy our fine gold, we have the very best gold.

We get it. Everyone thinks that interest rates are going up because inflation because more spending. Actually not quite everyone—our view is that the drivers which have caused the interest rate to fall for 35 years are still in full, deadly effect. Nor the folks who are bidding on junk bonds, or stocks for that matter.

But most everyone. Rates have to go up, because they’re lower than ever before history. Right?

And if rates are going up, then so is gold, right?

The Treasury bond is payabl only in US dollars. The US dollar, which is the liability of the Federal Reserve, is backed on by Treasurys. It’s a nice little check-kiting scheme. But besides that, the two instruments have the same risks. If you don’t like the bond, then you won’t like the dollar either. The day will come when en masse, the market decides it doesn’t like both of them, and gold will be the only acceptable money.

With due respect to our old friend Aragorn, today is not that day!

We believe interest rates are headed lower, not higher. But that said, we do not see any particular causal relationship between the interest rate and the price of gold. The former is the spread between the Fed’s undefined asset and its undefined liability. It is unhinged and while it could shoot the moon from Truman through Carter, it’s sailing in the other direction now. Down to Hell.

The price of gold is the exchange rate between the Fed’s liability and metal. So long as people strive to get more dollars—most especially including those who bet on the price of gold, and those who write letters encouraging the bettors—there is no reason for this exchange rate to explode.

Again, to plagiarize the Ranger from the North, the day will come when gold goes into permanent backwardation. But today is not that day!

Today (Friday’s close), the price of gold is down seven Federal Reserve Notes from where it was a week ago.

So where to from here? Are those dratted fundamentals moving?

We will update those fundamentals below. But first, here’s the graph of the metals’ prices.

       The Prices of Gold and Silver

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It fell a bit more this week. 

The Ratio of the Gold Price to the Silver Price

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph.

       The Gold Basis and Cobasis and the Dollar Price

The price of gold fell (i.e. the price of the dollar rose, green line), and the basis (abundance) fell and cobasis (scarcity) rose just a bit.

Our calculated fundamental price of gold fell about ten bucks, now about $1,200 even.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

In silver, we see a 14-cent rise in price but the cobasis is up.

The fundamentals got ever-so-slightly tighter. And our calculated fundamental price moved up to just under $15.

We note that speculators bid silver up this evening (Arizona time) in the wake of the Italian vote, some 30 cents to just under $17. But as of this publication, they couldn’t hold the line and the price fell back and is now a nickel below Friday’s close.

 

© 2016 Monetary Metals

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