26.6.13

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


Plague of Gold Bears Now Say "Gold Unsafe at Any Price"; What's the Real Long-Term Driver for Gold?

Posted: 26 Jun 2013 01:18 PM PDT

Over the past week I received numerous emails regarding my June 13 post Mish Buys a Basket of Miners.

People want to know if I am still in the trade. Others taunted they will be buying when I selling. Well good luck with that idea, because this is an investment not a trade.

One reader proposed "My prediction is when the Fed finally stops printing, gold will drop to $750 and when they start raising rates gold will drop to $500. What do you say about that?"

I answered "Your prediction seems as silly as those who knew gold would be at 2400 or even 3000 by now. No one can accurately predict such things."

I bought with the intention of holding for a lengthy period, stating "I believe precious metal miners represent true value, but I cannot state when the market will come to the same conclusion."

What's changed? The answer is "nothing". So am I selling? Of course not, and it seems silly to even ask.

Anti-gold sentiment is amazing, but sentiment alone is not a good timing factor. It can always get worse.

A Plague of Gold Bears and The 'Tapering' Myth

Acting Man touched on the sentiment theme in A Plague of Gold Bears and The 'Tapering' Myth.

Readers may recall that in 2010 and 2011, after largely ignoring the fact that gold had been going up for more than a decade, virtually all the major mainstream banks and brokers suddenly turned bullish on gold. It was a huge warning sign as we now know with the benefit of hindsight (and as a few people suspected at the time). At the time target prices for gold were all of a sudden raised by all these worthies. Not even one of them sounded an alarm.

These days, not a day passes when they are not ganging up on gold, practically falling over each other with ever more bearish forecasts. Here is the harvest from just the past two days:

Gold to Drop Even Further as Fed Increases Real Rates: Goldman Sachs

Deutsche Bank cuts gold, silver forecast for 2013

Credit Suisse cuts gold, silver, Brent forecasts

"Paradigm shift" to send gold sliding to $1,200 an ounce: SocGen

And last but not least, what is probably the funniest headline yet delivered by all these newly minted gold bears:"UBS Says QE's End May Render Gold 'Obsolete'"

A major theme of these forecasts is, you guessed it, the Fed's alleged imminent 'QE tapering', and/or 'raising of real interest rates'.

To the latter we would point out that real interest rates (nominal interest rates relative to inflation expectations) have indeed risen lately, but it was certainly not the Fed's fault. They are rising in spite, not because of the Fed. In fact, their recent rise, which has surely sent a few 'players' scrambling for cash (and many imaginary bank profits into the nether reaches of money heaven), is a strong reason to suspect that monetary pumping will not only not be 'tapered', but may well end up being increased. But that is of course speculation and is neither here nor there. Instead, we want to point out a different error in the thought process described above.

Keep in mind by the way, that the same banks that are bearish on gold due to the 'tapering' mirage are bullish on stocks inter alia because 'tapering' is thought to be 'still far away'. In reality, all they are doing is extrapolate recent trends, while making up 'reasons' for these extrapolations that are meant to make it sound as though they actually knew why markets are doing what they are doing.

It is really quite remarkable: for ten years while gold did nothing but go up, most of these these guys were largely silent. Their gold price forecasts were on average dead wrong with unwavering regularity – they kept predicting price declines. Then, as it approached its peak, they suddenly turned bullish and finally raised their price targets (again, on average). Now that it is going through the first major correction since the bull market began, its decline is accompanied by inordinate sound and fury. No other market has produced such a flurry of widely and loudly telegraphed grave dancing.

Grave Dancing

I invite you to read the rest of the article because it's worth a closer look.

Curiously, Just as Acting Man discussed above, talking heads say the stock market is up today because the lower GDP print means the Fed will not taper bond purchases, yet tapering is bad for gold.

For discussion of ECB and Fed tapering as well as the unexpected slowdown in US GDP, please see Draghi Announces ECB Exit From Easing Remains Far Off; Think the Fed Has an Exit Strategy?

What's the Real Long-Term Driver for Gold?

Most analysts are totally clueless about gold and gold markets. They cite jewelry, mining production, central bank sales, and all sorts of other irrelevant factors in their analysis.

If you really want to understand what gold is all about, I suggest you read an interview on Gold Switzerland with Robert Blumen: "What's really key for the price formation of gold?"

Blumen discusses assets vs. consumption, mine supply, jewelry, marginal demand, the alleged (and nonexistent "gold deficit"), and sentiment.

Blumen does not offer much commentary on the GATA price manipulation thesis other than say it's "plausible". I suggest most of what GATA says is at best strongly over-hyped, including the GATA alleged "gold deficit" (a point on which Blumen agrees).

Rather than excerpt the interview, I simply suggest you read the article in entirety, save this one humorous anecdote at the end:

"People who say [gold is in a bubble]did not identify the equity bubble, did not believe that we had a housing bubble, nor have they identified the current genuine bubble, which in the bond market. But now these same people are so good at spotting bubbles that they can tell you that gold is in one. Most of them did not identify gold as something which was worth buying at the bottom, have never owned a single ounce of gold, have missed the entire move up over the last dozen years, and now that they're completely out of the market, they smugly tell us for our own good that gold is in a bubble and we should sell."

Unsafe At Any Price

Indeed, sentiment has soured so much that MercBloc president Dan Dicker says Gold Is Unsafe at Any Price

I leave it to the reader to decide if that headline is even more ridiculous than UBS Says QE's End May Render Gold 'Obsolete'

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Draghi Announces ECB Exit From Easing Remains Far Off; Think the Fed Has an Exit Strategy?

Posted: 26 Jun 2013 10:10 AM PDT

The Financial Times reports ECB exit from easing remains far off, Draghi says.
Speaking to committees in the French lower house of parliament, Mr Draghi said there were still downside risks to growth in the eurozone economy and the ECB was ready to take fresh action if needed.

"On our policy stance, let me say that it's been accommodative in the past, it is accommodative in the present time and will stay accommodative for the foreseeable future," Draghi said.

"Our exit – as Benoit Coeure [ECB executive board member] said a couple days ago – remains distant. At the same time we have an open mind about all other possible instruments that we may consider proper to adopt . . . we stand ready to act again when needed."
Taper Talk on "Strength" of US Economy

Bernanke says the US economy is solid enough that the Fed can begin tapering its balance sheet purchases later this year.

Given the stock and bond market bubbles the Fed has created, the Fed of course should taper (not that it should ever have expanded its balance sheet in the first place).

4th Quarter GDP barely crossed the zero line with 0.4% growth. That growth was via questionable GDP deflators.

Today, 1st Quarter GDP came it at 1.8% annualized, a dramatic downward revision from an estimate of 2.4% released last month. In turn, 2.4% was a downward revision from the first estimate of 2.5%.

GDP Trends



click on chart for sharper image

The above chart is courtesy of Doug Short at Advisor Perspectives who reports GDP Q1 Third Estimate at 1.8%: A Surprising Downward Revision

Note the linear regression trend of lower GDP over time.

Taper vs. Exit

There is absolutely no chance the Fed has any real "exit" strategy other than to hold its entire bloated balance sheet to maturity.

If the Fed "tapers" its purchases, it will not be because the economy is picking up steam, but rather because the Fed is clueless about the prospects for the economy, or perhaps out of very belated concern over the stock and bond market bubbles that it has created (nothing the Fed would ever admit of course).

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

Italy Faces Huge Losses on Derivatives Restructured in Eurozone Crisis

Posted: 26 Jun 2013 12:42 AM PDT

The Financial Times notes that Italy faces billions in losses on Derivatives Restructured in Eurozone Crisis.
Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the eurozone crisis, according to a confidential report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999.

A 29-page report by the Treasury, obtained by the Financial Times, details Italy's debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7bn.

Experts who examined it told the Financial Times the restructuring allowed the cash-strapped Treasury to stagger payments owed to foreign banks over a longer period but, in some cases, at more disadvantageous terms for Italy.

The senior government official who spoke to the Financial Times and the experts consulted said the restructured contracts in the 2012 Treasury report included derivatives taken out when Italy was trying to meet tough financial criteria for the 1999 entry into the euro.

Three independent experts consulted by the FT calculated the losses based on market prices on June 20 and concluded the Treasury was facing a potential loss at that moment of about €8bn, a surprisingly high figure based on a notional value of €31.7bn.

Early last year Italy was prompted to reveal by regulatory filings made by Morgan Stanley that it had paid the US investment bank €2.57bn after the bank exercised a break clause on derivatives contracts involving interest rate swaps and swap options agreed with Italy in 1994.

An official report presented to parliament in March 2012 found that Morgan Stanley was the only counterparty to have such a break clause with Italy and disclosed, for the first time, that the Treasury held derivatives contracts to hedge some €160bn of debt, almost 10 per cent of state bonds in circulation.

The Bloomberg News agency calculated at the time, based on regulatory filings, that Italy had lost more than $31bn on its derivatives at then market values.
The facts seem difficult to piece together, but the amounts are significant. Some of the derivatives date back to 1994-1996 when Italy dressed up its finances to meet Maastricht treaty criteria, including a budget deficit less than 3 per cent.

"Italy had a budget deficit of 7.7 per cent in 1995" but the deficit magically shrunk to 2.7% in 1998, the approval year for Italy joining the eurozone. The odds of that being legitimate are approximately zero percent.

ECB president Mario Draghi was head of the Italian central bank at the time much of this took place, so it's no wonder details are scant.

Recall that Bloomberg lost a freedom of information lawsuit against the ECB regarding derivatives used to hide Greek debt on the basis "disclosure of the files would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece".

I would be far more interested to see the complete Italy files, but clearly that's not going to happen either.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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