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By Monique Muise, as published on Global News

Canada sells nearly half of all its gold reserves

The government of Canada sold off nearly half its gold reserves in recent weeks, continuing a pattern of moving away from the precious metal as a government asset.

According to the International Monetary Fund’s International Financial Statistics, Canada held three tonnes of gold reserves as of late 2015.

 

The latest data, published last week, show the total Canadian gold reserves now stand at 1.7 tonnes. That’s just 0.1 per cent of the country’s total reserves, which also include foreign currency deposits and bonds. In comparison, the U.S. holds 8,133 tonnes of gold, while the United Kingdom weighs in at 310 tonnes.

The decision to sell came from Finance Minister Bill Morneau’s office.

“Canada’s gold reserves belong to the Government of Canada, and are held under the name of the Minister of Finance,” explained a spokesperson for the Bank of Canada on Wednesday. “Decisions relative to gold holdings are taken by the Minister of Finance.”

Reached by Global News on Wednesday evening, a spokesperson for the finance department said the sale “was done in the normal course of business for the government. The decision to sell the gold was not tied to a specific gold price, and sales are being conducted over a long period and in a controlled manner.”

This latest sell-off is indeed part of a much longer-term pattern of moving away from gold as a government-held asset. According to economist Ian Lee of the Sprott School of Business at Carleton University, Ottawa has no real reason to keep its gold reserves other than adhering to tradition.

“Under the old system, (gold) backed up currencies,” Lee explained. “The U.S. dollar was tied to gold. One ounce was worth US$35. Then in 1971, for lots of reasons I won’t get into, Richard Nixon took the United States off the gold standard.”

Gold and dollars were interchangeable until that point, he said, but in the modern financial world, the metal is no longer considered a form of currency.

“It is a precious metal, like silver … they can be sold like any asset.”

The amount of gold the Canadian government holds has therefore been falling steadily since the mid-1960s, when over 1,000 tonnes were kept tucked away. Half of those reserves were sold by 1985, and then almost all the rest were sold through the 1990s up to 2002.

By last year, Canada’s reserves were down to just three tonnes, and the latest sales have now halved that. At the current market rate, the value of 1.7 tonnes of gold comes in at just under CAD$100 million, barely a drop in the bucket when you consider the broader scope of federal finances.

According to Lee, there may soon come a time when Canada’s gold reserves are entirely a thing of the past. There are better assets to focus on, he argued, calling the government’s decision to dump gold “wise and astute.”

“It gives them more strategic flexibility to sell the gold, take the money and invest in U.S. government bonds, or United Kingdom bonds or French bonds or German bonds,” Lee said.

“Central banks can hold the government bonds of other countries, and they also hold actual dollars. The Chinese Central Bank actually holds hundreds of billions of U.S. dollars. Dollars are very liquid, so are government bonds, especially of a Western country.”

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…and credit is always right in the end!

1,100 is the target…

 

High Yield bond yields and Leveraged Loan prices are at their worst since 2009 as it seems the hosepipe of QE3 liquidity (its the flow not the stock, stupid) is slowly unwound from a buybacks-are-over equity market.

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Submitted by Brandon Smith via Alt-Market.com,

Many of us saw it coming a long time ago — increasing confrontation between liberty proponents and the corrupt federal establishment leading to increasing calls by political elites and bureaucrats to apply to American citizens the terrorism countermeasures designed for foreign combatants. It was only a matter of time and timing.

My stance has always been that the elites would wait until there was ample social and political distraction; a fog of fear allowing them to move more aggressively against anti-globalists. We are not quite there yet, but the ground is clearly being prepared.

Economic uncertainty looms large over our fiscal structure today, more so even than in 2008. Global instability is rampant, with Europe at the forefront as mass migrations of “refugees” invade wholesale. At best, most of them intend to leach off of the EU’s already failing socialist welfare structure while refusing to integrate or respect western social principles. At worst, a percentage of these migrants are members of ISIS with the goals of infiltration, disruption and coordinated destruction.

With similar immigration and transplantation measures being applied to the U.S. on a smaller scale (for now) the ISIS plague will inevitably hit our shores in a manner that will undoubtedly strike panic in the masses. I believe 2016 will be dubbed the “year of the terrorist,” and ISIS will not be the only “terrorists” in the spotlight.

While scanning the pages of mainstream propaganda machines like Reuters, I came across this little gem of an article, which outlines plans by the U.S. Justice Department to apply existing enemy combatant laws used against ISIS terrorists and their supporters to “domestic extremists,” specifically mentioning the Bundy takeover of the federal refuge in Burns, Oregon as an example.

“Extremist groups motivated by a range of U.S.-born philosophies present a “clear and present danger,” John Carlin, the Justice Department’s chief of national security, told Reuters in an interview. “Based on recent reports and the cases we are seeing, it seems like we’re in a heightened environment.”

“Clear and present danger” is a vital phrase implemented in this statement from Carlin and he used it quite deliberately. It refers to something called the “clear and present danger doctrine or test,” a doctrine rarely used except during times of mass panic, such as during WWI and WWII. The doctrine applies specifically to the removal of 1st Amendment rights of free speech during moments of “distress.”

What does this mean, exactly? “Clear and present danger” is a legal mechanism by which the government claims the right not only to prosecute or destroy enemies of the state, but also anyone who publicly supports those same enemies through speech or writing.

Recently, the prospect of allowing the Federal Communications Commission to target and shut down websites related to ISIS has been fielded by congressional representatives. Many people have warned against this as setting a dangerous precedent by which the government could be given free license to censor and silence ANY websites they deem “harmful” to the public good, even those not tied to ISIS in any way.

Of course, overt hatred of Islamic extremism amongst conservatives is at Defcon 1 right now, and with good reason. Unfortunately, this may lead constitutional conservatives, the most stalwart proponents of free speech, to mistakenly set the stage for the erasure of free speech rights all in the name of stopping ISIS activity. The greatest proponents of constitutional liberties could very well become the greatest enemies of constitutional liberties if they fall for the ploy set up by the establishment.

The Reuters article outlines the future implications quite plainly:

The U.S. State Department designates international terrorist organizations to which it is illegal to provide “material support.” No domestic groups have that designation, helping to create a disparity in charges faced by international extremist suspects compared to domestic ones.

It has been applied in 58 of the government’s 79 Islamic State cases since 2014 against defendants who engaged in a wide range of activity, from traveling to Syria to fight alongside Islamic State to raising money for a friend who wished to do so.

Prosecutors can bring “material support” terrorism charges against defendants who aren’t linked to groups on the State Department’s list, but they have only done so twice against non-jihadist suspects since the law was enacted in 1994. The law, which prohibits supporting people who have been deemed to be terrorists by their actions, carries a maximum sentence of 15 years in prison.”

The Justice Department goes on to explain that they are “exploring” options to make “material support” charges more applicable to “domestic extremists.”

So what constitutes “material support?” Well, as mentioned earlier, John Carlin just told us. His use of the phrase “clear and present danger” denotes that 1^st Amendment speech will be restricted, ostensibly because some speech will be labeled “material support” of terrorist organizations. The liberty movement, likely in the near future, is about to be outwardly defined by the establishment as a terrorist movement, and those who support it through speech will be designated as material supporters of said terrorism.

To be utterly clear, this could apply to any and everyone who promotes anti-government sentiments online, and will likely be aimed more prominently at liberty analysts and journalists. The argument for this move is rather humorous in my view — bureaucrats and others complain that it is “not fair” that Islamic terrorists are being treated more harshly than “white rural domestic extremists” and that material support laws should be enforced against everyone equally.

Yes, that’s right, the 1^st Amendment is under threat because the Justice Department does not want to appear “racist.” At least, that is their public excuse…

I'm not sure whether it is depressing or hilariously ironic that the U.S. government (along with many other governments) is preparing the groundwork for prosecution of liberty activists for material support of terrorism when it is the government that has been proven time and again to be by far the most generous material supporter of terrorist organizations.

Will this all take place in a vacuum? Of course not. Something terrible is brewing. Another Oklahoma City-stye bombing, perhaps. Or a standoff gone horribly awry. The standoff in Oregon continues without Ammon Bundy and is about to get worse in the next week according to my information (you will see what I mean). The point is, the narrative is being finalized in preparation for whatever trigger events may be in store, and that narrative closely associates ISIS with liberty activists as being in the same category.

“As law enforcement experts confront domestic militia groups, “sovereign citizens” who do not recognize government authority, and other anti-government extremists, they also face a heightened threat from Islamic extremists like the couple who carried out the Dec. 2 shootings in San Bernardino, California.”

This is why I have consistently argued against giving any extra-judicial powers to our already bloated federal system. I am a staunch opponent of Islamic immigration and terrorism, but some people are so desperate to fight one monster that they are willing to give unlimited powers to another monster thinking it will give their minds ease. These people are fools, and they are putting the rest of us at risk.

If you want to fight ISIS, then fight them yourself. Do not give the same government that helped create ISIS and then deliberately transplanted them to Europe and the U.S. even more legal authority over our lives to supposedly “stop” ISIS. This would be absurd.

In the meantime, I would point out that regardless of how the federal government wishes to label us, the liberty movement could not be more different from the Islamic State:

1) We don’t enjoy covert funding and training from the government at large as ISIS does. (Though according to leftists, we all take our marching orders from the Koch Brothers).

 

2) Most of us were born in this country and are rather attached to it.

 

3) ISIS fights to dismantle traditional Western values. We fight to restore traditional Western values, and we will not only fight ISIS but also cultural Marxists and collectivists who share the same disdain for liberty.

 

4) Many of us are far better trained than ISIS goons, so if anything, we are a more severe threat to the enemies of free society. (We actually look down our sights when we shoot rather than hiding behind cars with the rifle over our head and squatting like a constipated dog. We can also operate their AK-47s better than they can).

 

5) We are as opposed to Sharia Law as we are to martial law. In fact, we see them as essentially the same unacceptable circumstance.

 

6) We don’t cannibalize our enemies. (Who would want to take a bite out of Henry Kissinger’s spleen?)

 

7) We might look down on the insane ramblings of today’s feminists, but at least we would not stone them, enforce female circumcision, then rape them, then throw acid in their faces, then slap a hijab on them and take away their driver’s licenses. So maybe, just maybe, we toxic masculine conservative barbarians aren’t as bad as they seem to think we are.

 

8) We understand that black pajamas are not the best camouflage, but ISIS may have better fashion sense than we do.

 

9) Our beards are all-American. Their beards are just plain creepy.

 

10) They fight to be martyred. We fight to win.

When all is said and done, who is the greater threat to you and your freedoms? A psychotic theocrat that has taken his religion so far into the forbidden zone that any evil, no matter how heinous, is justified through the circular logic of zealotry? The criminal government that funded that psycho, trained him, slapped a rocket launcher in his hands and then gave him a free plane ride to your favorite shopping mall? Or, some weirdo that stores lots of food and gas masks in his basement and every once in a while talks to you about 9/11? Come on, think about it…

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First, it was The BoJ's utter collapse from omnipotence to impotence. Then came the collapse of The Fed's credibility in the short-term…. and the longer-term. And now it is the turn of Mario Draghi's ECB to face total failure, as the European banking system – the prime beneficiary of "whatever it takes" – has crashed back to pre-Draghi levels.

 

 

As former Morgan Stanley guru Gerard Minack explains, the most corrosive factor for markets currently is the downgrading of perceived central bank potency.

There are several recent hints of this decline.

 

Mario Draghi’s ‘whatever it takes’ comment in 2012 was, in my view, the single most important central bank action of the past 5 years.  However, European bank stocks – a principal beneficiary of ‘whatever it takes’ – have now almost given up all their ‘whatever it takes’ gains, despite recent ‘whatever it takes with steroids’ comments from Mr. Draghi.

 

Likewise, the Bank of Japan’s bazooka now seems to be firing blanks.  The yen strengthened and equities fell after the cash rate was cut below zero – the opposite of what was presumably expected.

 

Second, the central bank bubble seems to be deflating.   Central banks have long been over-rated in my view; markets seem to be starting to agree.

The equity sell-down is changing: it had been led by economically-sensitive sectors but is now shifting to financial risk ….financial stress is not good for growth.

Some further clarifications from Bloomberg:

Financial markets are signaling that investors have lost faith in central banks’ ability to support the global economy.

And some more:

"The markets are wondering, well, we’ve had these non-conventional monetary policy experiments for the last six or seven years and they haven’t caused a sustainable boost to global growth, so what will the latest moves do,” said Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd. “It’s a reasonable question to ask given the events of the last few weeks.”

 

“The notion that central banks and regulators could not act if the financial panic were to turn into a serious threat to the real economy and hence to jobs looks wrong,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Central banks can bolster confidence if they really have to in order to support the real economy.”

 

"The period of central bank ‘shock and awe’ operations is likely to be behind us," Stephen Jen, co-founder of SLJ Macro Partners LLP in London and a former International Monetary Fund economist, wrote in a note on Friday. "This will be the year that ‘gravity’ will overwhelm the central bank policies," he said, recommending selling equities during rallies.

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By now all of our readers should be familiar with JPM’s head quant Marko Kolanovic whose unblemished track record of accurate market calls is not only second to none, but is the equivalent in absolute value terms of Dennis Gartman’s consistently wrong calls, which is why we won’t spend time introducing him.

Instead we cut right to the chase with the highlights of his latest note released moments before the market close today, in which he lays out the biggest risks to the market, which are as follows:

• deterioration of sentiment and fundamental selling (hedge funds, pensions, wealth funds, retail, etc.).
• deleveraging of Equity Long-Short hedge funds is an overhang
• quant funds may pare gross leverage.
• increased volatility, deleveraging, rotation out of momentum, and weak sentiment will continue to be a headwind

Kolanovic then explains how to hedge against this ongoing storm (“increased allocation to gold, cash and VIX”), with the section on gold particularly delightful for his crucifixion of the strawman created by the most famous Obama tax advisor and crony capitalist from Omaha:

The arguments against gold that we have heard were along two lines: The first is what can be loosely called “Warren Buffet’s” argument: “Gold is a relic of past; aliens visiting earth would be puzzled why people hold it at all.” As the argument is non-quantitative in nature, one can only address it as such. If indeed aliens could overcome space-time barriers, they would also know that the metal was used as a store of value longer than any other real asset. Since the beginning of written history, countless currencies and governments emerged and failed while gold kept approximately the same purchasing power (albeit with some volatility, and positive correlation to levels of risk).

All we can say here is that when JPM employees viciously attack Buffett for his position on gold, hold on tight.

Kolanovic also crushes Wall Street’s penguin momentum train:

The second argument was that of Momentum: “if an asset was going down, it will keep on going down,” We have concluded that many of our competitors rely on momentum in their commodity forecasts (e.g., when oil is $150, they forecast $200; when it is $30, they forecast teens). This type of trend following can always be rationalized (e.g., oil will go down because it is very difficult to store it – so it has to be sold; and Metals will go down because it is very easy to store them – so production will not slow down). While a simple momentum prescription does work most of the time, the key is to assess the likelihood of market turning points during which one can lose years of profits in a matter of days (less painful for a sell-side analyst and more for an investor).

More apropos to the current global bear market and economic slowdown, is Kolanovic’ warning that a recession as a result of the market’s loss of trillions in market cap now seems inevitable:

Global markets are now facing a significant ‘negative wealth effect’ that has a potential to result in a recession. This negative wealth effect of low commodity prices and a strong USD combined with the slowdown in China could be comparable to that of the 2008/2009 crisis (it involves diverse effects ranging from layoffs in the Global Energy sector to a lack of EM Sovereign wealth flowing into developed market equity hedge funds). While the economists were debating if the low-priced oil is good or bad for the economy, the equity markets never had any doubts – Oil and Equities were moving down together.

Finally, to our applause, Kolanovic concludes by slamming ole’ crony uncle Warren one final time (no point in wasting too much time on the senile billionaire).

Finally, we think the aliens from the previous section would likely be surprised: not with the gold price, but with markets and an economy that are driven by a handful of central bankers taking active market views.

The aliens would quickly understand, however, when they realize they are dealing with a banana planet in which the central bankers only serve a handful of billionaire oligarchs, while leaving billions of people to fend for themselves.

* * *

Kolanovic’s full note:

EQUITIES: Exposure of systematic strategies (CTA, Risk Parity, Vol Targeting) to equities is relative low, which reduces some downside tail risk for the S&P 500. Currently, the main risk comes from deterioration of sentiment and fundamental selling (hedge funds, pensions, wealth funds, retail, etc.). Deleveraging of Equity Long-Short hedge funds is an overhang as well, given the poor performance YTD (see, for example, HFRXEH index). Quant funds took a significant hit with the momentum sell-off during the first week of February (see HFRXEMN index) and may pare gross leverage. A market-neutral portfolio of Momentum stocks declined ~6% in the first week of February and has been recovering slightly over the last two days. Increased volatility, deleveraging, rotation out of momentum, and weak sentiment will continue to be a headwind for the S&P 500 in coming days.
 
GOLD: Since the end of last year, we have been advocating increased allocation to gold, cash and VIX. Specifically on gold, we have argued that it would benefit from the main market concern, which is the rising risk of a global recession, as well as potential mitigation of these risks: the Fed turning more dovish and a weaker dollar removing pressure from emerging markets and the commodities sector. In an unlikely tail scenario that we see as a temporary loss of confidence in central banks, gold would likely benefit as well. The arguments against gold that we have heard were along two lines: The first is what can be loosely called “Warren Buffet’s” argument: “Gold is a relic of past; aliens visiting earth would be puzzled why people hold it at all.” As the argument is non-quantitative in nature, one can only address it as such. If indeed aliens could overcome space-time barriers, they would also know that the metal was used as a store of value longer than any other real asset. Since the beginning of written history, countless currencies and governments emerged and failed while gold kept approximately the same purchasing power (albeit with some volatility, and positive correlation to levels of risk).

The second argument was that of Momentum: “if an asset was going down, it will keep on going down,” We have concluded that many of our competitors rely on momentum in their commodity forecasts (e.g., when oil is $150, they forecast $200; when it is $30, they forecast teens). This type of trend following can always be rationalized (e.g., oil will go down because it is very difficult to store it – so it has to be sold; and Metals will go down because it is very easy to store them – so production will not slow down). While a simple momentum prescription does work most of the time, the key is to assess the likelihood of market turning points during which one can lose years of profits in a matter of days (less painful for a sell-side analyst and more for an investor). We have written on market turning points from a theoretical perspective, as well as in the context of recent market moves, specifically in terms of positioning, gold CTA signal turning positive, etc. For a further rationale behind the gold thesis, see notes from our Metals strategist (here and here). 
 
CENTRAL BANKS AND OIL: Central banks outside of the US have been trying to push on a string recently with negative rates. It has not produced desired results (e.g., a sell-off in the banking sector). Our view is that over the past 18 months, the Fed has been too concerned with the risk of inflation, and perhaps too little with global deflationary pressures and a crisis outside of the US. This has contributed to a rapid strengthening of the USD and put additional pressure on Emerging Markets and certain segments of the US economy. As a result global markets are now facing a significant ‘negative wealth effect’ that has a potential to result in a recession. This negative wealth effect of low commodity prices and a strong USD combined with the slowdown in China could be comparable to that of the 2008/2009 crisis (it involves diverse effects ranging from layoffs in the Global Energy sector to a lack of EM Sovereign wealth flowing into developed market equity hedge funds). While the economists were debating if the low-priced oil is good or bad for the economy, the equity markets never had any doubts – Oil and Equities were moving down together.
 
So, if the negative rates and more bond purchases are losing effectiveness, what else could central banks do at this point? Could they buy commodities (other than gold)? Should they urge for a fiscal stimulus (they are governments’ biggest bondholders)? Perhaps as a start, a hold could be placed on all planned rate hikes. Finally, we think the aliens from the previous section would likely be surprised: not with the gold price, but with markets and an economy that are driven by a handful of central bankers taking active market views (on inflation, oil, etc.). Last but not least, they may wonder how the current levels of oil production outside of the US make any economic sense.
 

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Day after day we are told that the plunge in oil prices (just like the collapse in The Baltic Dry freight index) is a “supply” issue… it’s transitory and global demand is doing fine thank you very much. Sadly, as everyone really knows deep down inside their Keynesian hearts, this is utter crap and as Barclays shows the shocking 18% YoY crash in distillates “demand” – something that has never happened outside of a recession – blows the one-sided argument of the energy complex out of the water.

 

 

Still gonna claim “it’s a supply issue?”

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Neither USDJPY nor Japanese stocks can hold a bid in the early going in Asia markets which has dragged both into the red post-QQE2. Since Kuroda took over from The Fed by doubling down on his cunning plan in October 2014, Japanese stocks are down 11.4%, USDJPY is unchanged, and only Japanese bonds have made any gains (up 3.7%).

 

So what we want to know is – how will Abe et al. explain to the Japanese people how they lost so much of their retirement funds by forcing GPIF to allocate so much to stocks?

Worst still – Japanese real household earnings have tumbled!

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