Gold Stocks: Its Time To Be BRAVE!

May 17th- 2013- Article by David Banister, Chief Strategist

I used to half joke with some of my investing friends that the best time to buy stocks is during or right after a crash.  Think 1987, 2000-2002, 2008-09, and now perhaps Gold Miners?? Well, before we get too far ahead of ourselves, lets examine evidence of a "Crash": I like to use crowd behavioral, empirical, and technical evidence in combination.

1.  In a recent money managers poll, virtually nobody was bullish on Gold or Gold stocks, and over 80% of those polled were bullish on the SP 500 and US stocks.

2.  The percentage of Dumb Money traders (non-reportable traders) in the futures markets with short positions on Gold is at all time highs, they tend to be very long at the highs and very short at the lows.

3.  The insider buying ratio of Gold Mining stocks to sellers is running over 10 to 1, the highest since October 2008 when Gold bottomed out at $685 per ounce from $1030 highs.  Quoting Ted Dixon, CEO of Ink Research, "such a high level of buying interest among officers and directors within their own businesses in the resource sector has correctly foreshadowed a recovery in share prices in the past: That high point of nearly five years ago came about six weeks before the Venture market bottomed on Dec. 5, 2008...While the excitement that surrounded mining stocks as recently as two years ago has waned, experienced value investors recognize that such periods of investor neglect often give rise to the best deals" Source:

4.  The ratio of the HUI Gold Bugs Index to the SP 500 is at multi year lows and in near crash mode on the charts. The RSI Index (Relative strength) on the weekly charts is at 10 year lows at -13.71, which is off the charts low!!

5.  Most trading message boards I view at Stocktwits and others are universally bearish on Gold and Gold stocks.

6.  Gold is in a wave B or Wave 5 down re-testing the 1322 lows which we have discussed here for weeks as very likely if 1470 was not taken out on the upside... this is a normal sentiment pattern and re-test.

7.  Gold has been in a 21 Fibonacci month correction pattern off a 34 Fibonacci month rally from 686-1923. In August of 2011 I penned articles from 1805 right up to 1900 warning of a massive wave 3 top forming.  Everyone was bullish, now it's the complete opposite.

8. Currency debasement continues around the world with negative real interest rates. This is bullish for Gold once this correction has run its course.

9. Hulbert Digest Gold Sentiment index is at an all time low (gold newsletters at -35 sentiment readings!!)

10.  Gold -Silver put to call ratios are at all time highs

I could go on and on with headlines and such, but you get the idea.  This is the same type of sentiment I wrote about on the stock market on Feb 25th 2009, here is that article... and nobody on the planet was bullish.

Below is a chart showing the Bullish % index for Gold Miners, as you can see the last time we were at 0% was late 2008 when Gold had bottomed out and insiders were also buying like crazy like now:


The Market Doesn't Believe Huge Volatility In Gold And Silver Markets Will Last

May 20 2013, 16:14  

By Sumit Roy
It doesn't take a rocket scientist to figure out that volatility in the precious metals markets has picked up in recent weeks. Gold, of course, saw a record decline on a dollar basis in April. Then today, silver plunged 7% only to rebound into positive territory later in the day.
But while gold and silver are currently volatile, traders don't necessarily think these outsized moves will last. The CBOE Gold ETF Volatility Index measures the market's expectation of 30-day volatility of gold prices by measuring the implied volatility on SPDR Gold Shares (GLD) options.

While this measure of volatility has spiked, it is within its range of the last few years. Moreover, implied volatility was higher in 2011, when gold was touching its record-high above $1,922 and much higher in 2008 during the financial meltdown.
Gold Volatility
A similar picture emerges for silver when measuring the implied volatility on iShares Silver Trust (SLV) options. The index only goes back to 2011, but clearly shows that market expectations for volatility were higher in the past.
Silver Volatility

Moody's: US Faces Downgrade Without Budget Deal

Monday, May 20, 2013 01:53 PM

By: John Detrixhe

U.S. policymakers must address debt loads projected to rise later this decade to avoid a 2013 downgrade, even as the latest budget projections are “credit positive,” according to Moody’s Investors Service.

The U.S. budget deficit will drop to $378 billion in 2015 from a record $1.4 trillion in 2009, according to Congressional Budget Office data. The federal government will post a $642 billion deficit this year, the first time in five years that the shortfall has been less than $1 trillion. Moody’s said Sept. 11 that the U.S.’s top Aaa rating would likely be cut to Aa1 if an agreement on the debt ratio isn’t reached.

“The fact that it showed much lower debt levels going forward, we view as a positive development,” Steven Hess, senior vice-president at Moody’s and based in New York, said in a telephone interview of the CBO forecast. “More needs to be done on the policy front to address this rising debt ratio.”

While projections from the non-partisan budget office forecast the ratio of U.S. debt to gross-domestic-product declining to less than 71 percent by fiscal year 2018, the CBO forecasts the measure will increase “thereafter, pointing to the uncertain long-term outlook if reform of entitlement programs does not take place at some point,” Moody’s said in a report.

Budget Proposals

President Barack Obama sent a $3.8 trillion budget to Congress in April calling for more tax revenue and slower growth for Social Security benefits. The House passed a plan that balances the U.S. budget by fiscal 2023 without raising taxes.

“All of the proposals that are out there, including the budget by the Republicans in the House, and also the administration’s Obama budget that was proposed, all of those show a lower debt ratio in the second half of the decade,” Hess said. “We will wait and see the outcome of all of those negotiations.”

Downgrades don’t necessarily correspond to higher borrowing costs.

Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December on Moody’s and Standard & Poor’s grades.

Debt Ceiling

S&P, the world’s largest credit rater, cut the U.S. ranking to AA+ from AAA in August 2011, contributing to a global stock-market rout and sending yields on Treasury bonds to record lows rather than driving up rates. Yields on 10-year Treasurys dropped 0.74 percentage point in the seven weeks following the downgrade to a then-record 1.67 percent. The yield stood at 1.97 percent. Moody’s is the second-biggest credit rater.

Political wrangling over raising the U.S. debt limit was among the reasons S&P downgraded the U.S. in 2011. Hess said the debt ceiling will likely be raised to avoid a default.

“It always has been, and we think always will be” increased and default avoided, he said.

The date the nation hits the ceiling on borrowing could be pushed back as far as mid-September to Sept. 30 from a previous estimate of late August to mid-September, Steve Bell, senior director of economic policy at the Bipartisan Policy Center in Washington, said in an interview. The date has moved as changes in tax policy and an economic rebound boost federal revenue.

There are “big differences between the parties still,” Hess said. “On the positive side, the economy is doing a bit better than one might have expected.”

© Copyright 2013 Bloomberg News. All rights reserved.

Up and Down Wall Street

SATURDAY, MAY 18, 2013

This Time, Gold Bugs May Have a Point


Illogical dumping raises questions about causes of the metal's sharp decline.

Stocks are for lovers and gold is for haters. That's how one especially supercilious strategist (is there another kind?) sizes up the two markets, and it's clear he's been feeling the love lately. Stocks are at new highs in the U.S. and many other venues, while Japan's market is strapped to a rocket ship, all propelled by money fresh off the printing presses of the world's central banks.

Fans of the yellow metal, meanwhile, are feeling rather battered and bruised these days from the beating they've taken over the past month or so and, indeed, for more than a year and a half. Given all the quantitative easing—which is how money-printing is referred to in polite company these days—one would think gold would be getting a little love (or a facsimile of the same that cash can sometimes provide.)

It's not just the likes of the Dow industrials or the S&P 500 at record levels; money is sending all manner of stuff soaring. Last week's auctions at Christie's in New York marked the beginning of "a new era" in the art market, the auction house declared, with nearly a half-billion dollars' worth of 20th-century works being snapped up by bidders who coveted them as much as stores of value as pieces of art. How else to explain Jackson Pollock's drip painting, Number 19, 1948, going for a record $58.4 million, about twice the $25 million-to-$35 million it had been expected to fetch?

And the superrich again are falling over themselves in yet another round of "can you top this" in buying up trophy homes. It isn't just Russian oligarchs looking to get their wealth out of the country by snapping up Manhattan condos in the tens of millions, or newly minted South American millionaires swooping into Florida to buy properties at knock-down prices that are even bigger bargains in devalued dollars. Howard Stern reportedly is buying a Palm Beach house for a tidy $52 million, yet another sign of a surfeit of money over taste these days.

But with all this dough being thrown around promiscuously at every so-called asset class—as indulgences such as mansions and art have come to be classified, even if they really are forms of conspicuous consumption—why doesn't gold get any ardor? After all, for reasons probably buried deep within the human genome, the precious metal has been sought for thousands of years as an object of adornment and, most importantly, a store of value.

That value has been battered of late, with massive outflows from gold-related exchange-traded funds, notably the SPDR Gold Trust (ticker: GLD.) For a brief time, it actually was the world's biggest ETF, eclipsing the SPDR S&P 500 (SPY), just before gold hit its high of about $1,900 an ounce in September 2011. Indeed, it has been the flight from "paper gold"—ETFs and futures or options contracts—that has sent the metal tumbling, from a recent high of $1,800 last October, to around $1,700 at year end, and about $1,600 as recently as the end of March. That was just before the market plunged—or was pushed—into a virtual free-fall in mid-April that slashed the price by more than $200 an ounce in just two sessions. So extraordinary was the 9.4% collapse on April 15, wrote Howard Simons of Bianco Research at the time, that the odds against such a move were 20 trillion to one—"a lower probability of occurrence than randomly selecting a [particular] $1 bill out of pile of singles representing the U.S. national debt."

These improbable moves have made gold bugs suspicious, which isn't unusual. Folks who own gold do so because they don't trust the status quo, especially when it comes to government-issued paper money. But just because you're paranoid doesn't mean somebody isn't out to get you. They point to bursts of selling on Friday, April 12, which resulted in prices plunging by more than 5%, and to dumping that resumed the following Monday in Asia, early in the day when markets are illiquid. That culminated in a 9% collapse by the time the New York market had settled. But a seller who wanted to unload a large position at the optimal price would have done precisely the opposite—liquidate as discreetly as possible. Instead, sellers dumped the equivalent of more than 300 tons of the metal in staccato-like blasts during those sessions.

THE SUSPICIOUS SELLING resumed this Friday, with the equivalent of 17 tons sold on the New York Comex in two bursts in the morning, according to market sources. And the declines continued after the settlement of futures trading in the early afternoon as the SPDR Gold Trust ETF slumped a total of 2.25% on the day, to close at 131.07, below the April 15 close of 131.31. (The ETF represents a bit less than 1/10th of an ounce of gold.) The current-month May futures contract plunged 1.6%, or $22.20, to $1,364.90 an ounce on the Comex.

Over the past seven sessions, the metal has shed over $100, or more than 7%, all but wiping out the rebound after the stunning mid-April collapse. That slide had sparked a wave of bargain-hunting in physical gold around the globe, especially in Asia, where it was suddenly seen as cheap at the marked-down prices. The markets for paper gold and the actual metal thus showed a marked contrast in sentiment. The latter was eager to buy what the former dumped, something that makes you say 'hmmmm.'

There were a number of other curious aspects to the latest plunge in the GLD (everybody in the market refers to the big exchange-traded fund just by its ticker.)

Barron's options guru, Steve Sears, reports heavy buying in the GLD weekly put option with a 132 strike price that expired Friday. That option, which would have expired out of the money—and thus worthless—wound up solidly in the money after the ETF's drop.

Back in February, Sears began to pick up signs of increased GLD put buying and in his Striking Price column just before the big break ("A Hot Potato That Glitters," April 8), he suggested the purchase of weekly puts that paid off hugely the following Friday.

While the gold bugs point to this mysterious, concentrated dumping on big down days, it's clear that large-fund managers both followed and led the retreat in gold by selling their holdings of GLD. That's what our exchange-traded fund maven, Brendan Conway, pointed out Friday in his Focus on Funds blog on He noted that Commerzbank's commodity strategists had found that 75% of redemptions of GLD came from institutions, based on their quarterly filings with the Securities and Exchange Commission.

NORTHERN TRUST (NTRS) WAS THE biggest seller, liquidating the equivalent of 910,500 ounces, followed by BlackRock (BLK), with 428,500 ounces. In contrast, the iShares Gold Trust (IAU), the smaller ETF representing 1/100th of an ounce of gold and favored by individuals, saw lesser outflows.

At the same time, the options action has been weighted heavily to the put side, which has had the gold crowd on anxious alert.

Farallon Capital, the San Francisco hedge-fund operator founded by Democratic Party rainmaker Tom Steyer, listed in its first-quarter 13F filing 600,000 GLD put options, which sent ripples through the market. With each contract representing the right to sell 100 shares, that would have equaled 60 million shares of GLD, worth more than $900 million at quarter-end.

In actuality, the options position was equivalent to 600,000 shares of the ETF, as a revised filing indicated. A fund spokesperson said that the put designation "was put in the wrong column." Still, the fund listed a roughly similar amount of both calls and puts in its year-end 13F filing, evidently betting on a breakout either way. The latest data show it squarely on the short side of gold.

Gold bugs spy an agenda in all the concerted selling to discredit the metal and burnish the allure of stocks and bonds. The evidence remains circumstantial in that regard, but shouldn't be dismissed. The huge bouts of selling are irrational for a profit-maximizing investor.

Be that as it may, will the slide continue or is a rebound looming?

Charles Nenner, who heads the research firm bearing his name, watches recurring market cycles. Nenner, who advises hedge funds and sovereign-wealth funds, calls the current swoon a correction in gold's long-term bull market, from which he recommended temporarily exiting at $1,900 an ounce at the top in September 2011.

Now, Charles looks for a bottom sometime in June—but there could be another spill before then. The risk, he warns, is that gold tumbles to $1,284. So, don't try to bottom-pick just yet.

(As an aside, Nenner also recommended the sale of Apple (AAPL) at $700 last September. In case you've been doing a Rip Van Winkle since then, the stock closed Friday at $433.26.)

The last time gold was held in such low esteem was during the fin de siècle dot-com bubble. It's feeling as if we're partying like it's 1999 with darlings like Tesla (TSLA) doubling in the past month or so, and analysts playing "can you top this" with their price targets for Google (GOOG) as it soars past $900 and seemingly heads to quadruple digits.

I guess you could say love is in the air.

Washington Signals Dollar Deep Concerns

Paul Craig Roberts

May 18, 2013

Over the past month there has been a statistically improbable concurrence of events that can only be explained as a conspiracy to protect the dollar from the Federal Reserve’s policy of Quantitative Easing (QE).

Quantitative Easing is the term given to the Federal Reserve’s policy of printing 1,000 billion new dollars annually in order to finance the US budget deficit by purchasing US Treasury bonds and to keep the prices high of debt-related derivatives on the “banks too big to fail” (BTBF) balance sheets by purchasing mortgage-backed derivatives. Without QE, interest rates would be much higher, and values on the banks’ balance sheets would be much lower.

Quantitative Easing has been underway since December 2008. During these 54 months, the Federal Reserve has created several trillion new dollars with which the Fed has monetized the same amount of debt.

One result of this policy is that most real US interest rates are negative. Another result is that the supply of dollars has outstripped the world’s demand for dollars.

These two results are the reason that the Federal Reserve’s policy of printing money with which to purchase Treasury bonds and mortgage backed derivatives threatens the dollar’s exchange value and, thus, the dollar’s role as world reserve currency.

To be the world reserve currency means that the dollar can be used to pay any and every country’s oil bills and trade deficit. The dollar is the medium of international payment.

This is very helpful to the US and is the main source of US power. Because the dollar is the reserve currency, the US can cover its import costs and pay for its cost of operation simply by creating its own paper money.

If the dollar were not the reserve currency, Washington would not be able to finance its wars or continue to run large trade and budget deficits. Therefore, protecting the exchange value of the dollar is Washington’s prime concern if it is to remain a superpower.

The threats to the dollar are alternative monies–currencies that are not being created in enormous quantities, gold and silver, and Bitcoins, a digital currency.

The Bitcoin threat was eliminated on May 17 when the Gestapo Department of Homeland Security seized Bitcoin’s accounts. The excuse was that Bitcoin had failed to register in keeping with the US Treasury’s anti-money laundering requirements.

Washington has stifled the threat from other currencies by convincing other large currencies to out-print the dollar. Japan has complied, and the European Central Bank, though somewhat constrained by Germany, has entered the printing mode in order to bail out the private banks endangered by the “sovereign debt crisis.”

That leaves gold and silver. The enormous increase in the prices of gold and silver over the last decade convinced Washington that there are a number of miscreants who do not trust the dollar and whose numbers must not be permitted to increase.

The price of gold rose from $272 an ounce in December 2000 to $1,917.50 on August 23, 2011. The financial gangsters who own and run America panicked. With the price of the dollar collapsing in relation to historical real money, how could the dollar’s exchange rate to other currencies be valid? If the dollar’s exchange value came under attack, the Federal Reserve would have to stop printing and would lose control over interest rates.

The bond and stock market bubbles would pop, and the interest payments on the federal debt would explode, leaving Washington even more indebted and unable to finance its wars, police state, and bankster bailouts.

Something had to be done about the rising price of gold and silver.

There are two bullion markets. One is a paper market in New York, Comex, where paper claims to gold are traded. The other is the physical market where personal possession is taken of the metal–coin shops, bullion dealers, jewelry stores.

The way the banksters have it set up, the price of bullion is not set in the markets in which people actually take possession of the metals. The price is set in the paper market where speculators gamble.

This bifurcated market gave the Federal Reserve the ability to protect the dollar from its printing press.

On Friday, April 12, 2013, short sales of gold hit the New York market in an amount estimated to have been somewhere between 124 and 400 tons of gold. This enormous and unprecedented sale implies an illegal conspiracy of sellers intent on rigging the market or action by the Federal Reserve through its agents, the BTBF that are the bullion banks.

The enormous sales of naked shorts drove down the gold price, triggering stop-loss orders and margin calls. The attack continued on Monday, April 15, and has continued since.

Before going further, note that there are position limits imposed on the number of contracts that traders can sell at one time. The 124 tons figure would have required 14 traders with no open interest on the exchange to sell all together in the same few minutes 40,000 futures contracts. The likelihood of so many traders deciding to short at the same moment at the maximum permitted is not believable. This was an attack ordered by the Federal Reserve, which is why there is no investigation of the illegality.

Note also that no seller that wanted out of a position would give himself a low price by dumping an enormous amount all at once unless the goal was not profit but to smash the bullion price.

Since the April 12-15 attack on the gold price, subsequent attacks have occurred at 2pm Hong Kong time and 2 am New York time. At this time activity is light, waiting on London to begin operating. As William S.Kaye has observed, no entity concerned about profits would choose this time to sell 20,000 to 30,000 futures contracts, but this is what has been happening.

Who can be unconcerned with losing money in this way? Only a central bank that can print it.

Now we come to the physical market where people take possession of bullion instead of betting on paper instruments. Look at this chart from ZeroHedge. The demand for physical possession is high, despite the assault on gold that began in 2011, but as the price is set in the non-real paper market, orchestrated short sales, as in the current quarter of 2013, can drive down the price regardless of the fact that the actual demand for gold and silver cannot be met.

While the corrupt Western financial press urges people to abandon bullion, everyone is trying to purchase more, and the premiums above the spot price have risen. Around the world there is a shortage of gold and silver in the forms, such as one-ounce coins and ten-ounce bars, that individuals demand.

That the decline in gold and silver prices is an orchestration is apparent from the fact that the demand for bullion in the physical market has increased while naked short sales in the paper market imply a flight from bullion.

What does this illegal manipulation of markets by the Federal Reserve tell us? It tells us that the Federal Reserve sees no way out of printing money in order to support the federal deficit and the insolvent banks. If the dollar came under attack and the Federal Reserve had to stop printing dollars, interest rates would rise. The bond and stock markets would collapse. The dollar would be abandoned as reserve currency. Washington would no longer be able to pay its bills and would lose its hegemony. The world of hubristic Washington would collapse.

It remains to be seen whether Washington can prevail over the world demand for gold and silver. Can the dollar remain supreme when offshoring has deprived the US of the ability to cover its imports with exports? Can the dollar remain supreme when the Federal reserve is creating 1,000 billion new ones each year, while the BRICS, China and Japan, China and Australia, and China and Russia are making deals to settle their trade balances without the use of the dollar?

If the consumption-based US economy deprived of consumer income by jobs offshoring takes a further dip down in the third or fourth quarter–a downturn that cannot be masked by phony statistical releases–the federal deficit will rise. What will be the effect on the dollar if the Federal Reserve has to increase its Quantitative Easing?

A perfect storm has been prepared for America. Real interest rates are negative, but debt and money are being created hand over foot. The dollar’s demise awaits the world’s decision how to get out of it. The Federal Reserve can print dollars with which to keep the bond and stock markets high, but the Federal Reserve cannot print foreign currencies with which to keep the dollar afloat.

When the dollar goes, Washington’s power goes, which is why the bullion market is rigged. Protect the power. That is the agenda. Is it another Washington over-reach?

Bitcoin Note: On May 16, PCWorld reported: “The seizure of funds of the largest bitcoin exchange, Mt. Gox, was triggered by an alleged failure of the company to comply with U.S. financial regulations, according to a federal court document. The U.S. District Court in Maryland on Tuesday ordered the seizure of Mt. Gox’s funds, which were in an account with Dwolla, a payments company that transferred money from U.S. citizens to Mt. Gox for buying and selling the virtual currency bitcoin.”

Reports subsequent to my column suggest that instead of funds being seized, a money transfer mechanism was shut down. Whatever happened, the government has demonstrated that it can disable or destroy Bitcoin at will. Bitcoin might be tolerated unless it becomes widely used. If the government regards Bitcoin as a refuge from the dollar, it can simply have its agents buy up the Bitcoins, driving the price skyhigh, and then dump the purchases all at once, just as tons of gold shorts were dumped on the gold market.

Bitcoin showed its vulnerability in April when, according to news reports, someone gave away $13,627 worth of Bitcoins, and Bitcoin values crashed from $265 to $105. Some people who watch this market concluded that the exercise was a covert central bank stress test.

The fact that I reported on Bitcoin does not mean that I oppose Bitcoin. The point of my article is to demonstrate that the government will take all steps to protect the dollar from Quantitative Easing.

Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His internet columns have attracted a worldwide following. His latest book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is now available.

Robin Hood in reverse – gold being taken down to make the rich richer

The legendary Robin Hood took gold from the rich to give to the poor: Today’s financial elite appear to be doing the reverse, but not with physical metal which is still flowing the other way.

Author: Lawrence Williams

Posted: Tuesday , 21 May 2013

The past week or three have been, to say the least, disappointing for precious metals investors. Gold and silver have continued to step downwards towards new interim lows as money continues to move from bullion (or at least from paper variations of it) to the general stock markets which have been continuing to perform well. All this despite, so we hear, continuing high demand for physical gold and silver from Asian markets in particular. But this physical metal demand growth seems to be being more than countered by some strange precious metals sales patterns – the latest of which saw silver plunge 10% in 4 minutes on a big computer sell order – from a single client according to a major Japanese bank – at a light trading time.

There was always a fear in the gold investment sector that if the massive build-up in bullion backed ETFs faltered or reversed, then we could indeed see a serious shake-out in the markets and this does indeed seem to have occurred – but precipitated by the above-mentioned sales anomalies in both gold and silver. While some accuse the U.S. Fed of complicity in such sales, it could just as well be due to some serious financial shenanigans in the markets with the massive sale orders of paper bullion seen surely as attempts to drive prices lower by banks and funds perhaps holding massive short positions, and having access to almost unlimited capital.

If anything out there demonstrates how the dice are loaded against the individual investor in today’s markets, then the recent goings on in gold and silver prices surely do. This is not a natural market. Sure, prices can move up and down and people can get their fingers burnt but when we come across sales of the kind of magnitude seen recently they have to be a hugely concerted attempt to move the market to the perpetrator’s advantage.

But the market movements won’t have just been due to these massive sales. The sales are undoubtedly a calculated move to drive the markets down instantaneously past trigger points where high frequency stop loss computer trades come in automatically and force prices down even further. This also persuades weak holders to sell (hence the movements out of the ETFs). We have been seeing recoveries from the excessive falls, particularly as physical buyers come in to take up ‘cheap’ metal, only to see prices decimated again as the next massive sale comes in. No wonder individual investors in gold and silver have been becoming disillusioned and want out.

At some stage all this will turn around and perhaps we’ll see paper gold and silver purchases in similarly strong amounts designed to drive prices up again and make huge profits foir the big money again. That’s how the major financial players with virtually unlimited resources can make squillions of dollars at the expense of people’s investment savings and pension funds. It’s all part of the great capitalistic rich-get-hugely-richer game and the legislators seem powerless to stop it – if indeed they want to as they themselves are often an integral part of the process. What is demoralising is that the perpetrators don’t appear to see what they are doing as unusual, or immoral – which it clearly is. Robin Hood in reverse – take from the poor and give it to the rich! Well perhaps not all from the poor – but from those about to become poor!

The only bright spot on the horizon is the big increase in demand for physical metal which is being seen. In the East, where this has been particularly strong, gold and silver price premiums are rising by the day as dealers find it hard to get their hands on the amounts customers want to take up – at least inside a reasonable period of time. This has been accompanied, we believe, by an enormous downturn in scrap sales making supplies of actual bullion tighter and tighter. This should have an impact to reverse the trend, but when paper markets dominate, to the extent they are at the moment, then it is hard to see an end except when the market players wish it to end.

The bullish commentators are looking for a short term turnaround as they feel that prices may have fallen too far too fast. Jeff Nichols, for example, notes “The key to recovery is in the paper market. What the hedge funds and other large-scale institutional traders need now is a sense that downside risks are retreating and some degree of comfort that prices have hit bottom. When that confirmation comes, pent up demand could give the metal a short-term boost . . . and, from there, who knows?”

But how much of this is wishful thinking? How deep are the pockets of those driving the prices down? With the U.S. Fed, the Japanese central bank, the ECB, the Bank of England and others all pumping money into their respective economies, at least some of which is finding its way into the markets at unprecedented levels, this liquidity is potentially enormous. A batch is going into the stock markets, which are on a sustained upwards trend, which suits the central bankers as a rising stock market helps hide the true state of the economy and promotes a feeling of financial well being.

But some is undoubtedly also finding its way into those hands which are knocking precious metals prices over and over – again a process which suits the central banks. If gold is falling all has to be right with the currencies the theory goes. But patently all is not right. As Rick Rule says – the U.S. dollar is the worst currency in the world – except for all the others! Its all relative. Quantitative Easing has to ultimately devalue all these currencies – and eventually it will when this particular bubble bursts, which it surely will one day. Then gold and silver will again have their days in the sun, but how long will we have to wait to see this? This year? Next year? Sometime? Never? The odds may well be on sooner, rather than later – but again this is a wholly indeterminate prediction!

Can Two Senators End “Too Big To Fail’?

John Mauldin

May 20, 2013

I am often on a panel or at dinner with Barry Ritholtz (The Big Picture), and he will remark, "I am going to have to rethink my position – I agree with John, and that can't be right." While I don't share that bias, I do agree with Barry about his recent take on legislation – which might actually pass – that would deal with too-big-to-fail banks in the US. Barry's latest take on that issue is this week's Outside the Box.

I have not written all that much on the topic lately, other than to say that Dodd-Frank was designed by big banks for big banks – the best legislation they could buy, I have been very critical of allowing too-big-to-fail banks to put taxpayers at risk, and I don't think it should ever be allowed to happen again. Dodd-Frank did not deal with that.

There is bipartisan legislation making its way through Congress that is a huge step in the right direction. The Senate passed it 99-0. Barry explains it below. Both as a taxpayer and an investor, you should be paying attention. And as a voter, call or write your Representative and tell him or her to vote in favor. We will find out who is on the big banks' side on this one.

While I would go further in requiring even more capital for the larger regionals, this legislation will not only remove taxpayer risk but also give small banks a more even playing field, and they are the ones who fund small businesses, the engine of the economy. And I agree, it is a template for how bipartisan legislation can be passed without the usual rancor.

I am back from Tulsa, where my daughter Abbi's wedding came off beautifully. We were lucky in that the tornadoes that sadly have plagued Oklahoma this weekend avoided our area. My heart goes out to those whose lives were shattered by the violent weather.

I have been going to weddings for 40+ years, and they have become a good marker, at least for me, of how different the generations are, as weddings seem to do such a good job of reflecting the subculture in which they are conducted. It is not just the differences in dance styles – those change just to make sure they're different from what the previous generation did. That's what young people do: they try to put their own personal stamp on how they express their lives.

But one of the key differences I have begun to notice is how this 20-something generation communicates. I was sitting with Abbi and her bridesmaid prior to the wedding. She was in her gown and looking radiant, if a little anxious. But they were all on their cell phones, talking and sending pictures, texting and updating their Facebook accounts, checking to see who was coming to the wedding (as their friends updated their Facebook accounts) or sent texts. "

[Someone] posted a picture of Abbi (insert expletives)." "Make sure that Stephen [the groom] does not check that Facebook account so he doesn't see the picture of Abbi [more expletives]. Don't they know he can see that account? They are 'friends' with each other!" In a world of constant online, they still adhered to the old standard of the groom not being allowed to see his bride on the day of the wedding – not even on Facebook!

Can Two Senators End “Too Big To Fail’?

By Barry Ritholtz

Last month, an unlikely pair of senators – Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican – introduced a non-binding resolution calling for the end of the implicit subsidies that “too big to fail” (TBTF) banks enjoy.

The Senate voted 99-0 in support of the measure.

This month, they have pushed their ideas into actual legislation: They introduced a bill called the "Terminating Bailouts for Taxpayer Fairness (TBTF) Act of 2013." This bipartisan legislation would help eliminate the government subsidies that put taxpayers at risk and also give the largest US banks an advantage over their smaller competitors.

Just how much of a subsidy are the banks receiving? An International Montetary Fund Working Paper quantified it as creating an 80 percent basis point advantage to TBTF banks. A 2012 FDIC study found similar advantages. The implicit government guarantee that these banks would not be allowed to fail allowed them to obtain credit at a more advantageous rate. Bloomberg calculated that this amounted to a taxpayer subsidy of $83 billion a year to the 10 largest U.S. banks, ranked by assets – and $64 billion to the five largest. At the request of Brown and Vitter, the Government Accounting Office is trying to more precisely quantify the annual subsidy to megabanks from the U.S. government.

In this column, I want to look at two broad issues: First, what does the legislation (TBTF Act, S. 798) purport to do? How would it affect the competitive landscape for community and regional banks? Could it prevent future megabank bailouts?

Second, has this left-right duo crafted a bill that, if it were to pass, could serve as a formula for for getting things done in a divided Congress?

Let’s begin with the broader strokes of the TBTF act. The bill’s appeal is its simplicity. It does not require complex formulas. Enforcement is simple and easily executed. There is no need for new regulatory apparatus that might one day become "captured" by its charges. Rather, it uses basic formulas to mandate adequate capital reserves. The legislation eliminates most opportunities for banker shenanigans, such as hiding liabilities off the balance sheet or in "side pockets." It also treats all asset classes and liabilities equally – including derivatives.

The broad strokes of the TBFA Act:

●Mandates a flat 15 percent capital requirement for any institution with more than $500 billion in assets

●Does not rely on ratings agency grades

●Removes off-balance-sheet assets and liabilities as different classes — they are treated as if they are on the balance sheet

●Requires derivatives positions to be included in a bank’s consolidated assets

●Requires that the capital cushion a bank holds be liquid

(Note that these five elements are much stricter than Basel III regulatory requirements. Brown-Vitter renders it irrelevant to U.S. banks).

Who could be opposed to such a straightforward form of taxpayer protection and risk management? Start with the TBTF companies themselves. The largest U.S. banks – JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, Bank of America and Wells Fargo – meet the new TBTF criteria of $500 billion in assets. None of these companies is going to be happy about actually having to have real liquid reserves to hold against future losses.

Reduce their leverage and back out the government subsidies, and suddenly these banks look a whole lot less profitable. That won’t be good for the outsized bonuses that senior management has been paying themselves. Hence, it is no surprise that the American Bankers Association, the lobbying organization often associated with the largest banks, is also against this.

Then there are the rating agencies. The Brown Vitter TBTF act renders their ratings irrelevant, so far as the biggest banks are concerned. Note that rating agencies like Standard & Poor’s and Moody’s were the grand enablers of the credit crisis and financial collapse. Their ratings were a form of pay-for-play analyses, bought and paid for by Wall Street banks. Not surprisingly, Standard & Poor’s has already come out against the proposed legislation.

Brown Vitter has already gotten further than any other legislation that has sought to end TBTF. Why?

Simplicity: The most common complaint heard during the debate over Dodd-Frank was its complexity. Dodd-Frank mandated regulatory rulemaking from a patchwork of agencies requiring "10s of 1000s of pages" of new regulations.

The beauty of the TBTF Act is its simplicity – hard numbers for capital reserves. Banks must maintain a 15 percent capital reserve. For those people who complained that Dodd-Frank was too complex, let’s see how they like “the new simplicity.”

Broad ideological support: A diverse cross-section of parties has found that their interests align with this legislation.

Anyone who opposed the bank bailouts likes the ideas of adequate capital buffers. So, too, do those people who dislike broad regulatory complexity and the bureaucratic infrastructure it creates. Hence, support for the bill comes from a broad spectrum of political thought.

By removing competitive advantages megabanks have over smaller and regional community bankers, the bill is a straightforward support of industry competition. That appeals to libertarians and consumer advocates alike.

Splitting the bank lobby: Perhaps the most significant development has been among the banking lobby itself. Before Brown-Vitter TBTF, the industry responded to all proposed regulatory reform legislation in lockstep. The new proposal splits the industry cleanly in half, with the megabanks on one side and everyone else on the other.

Consider the Independent Community Bankers of America , which has more than 5,000 member banks with more than $2 trillion in deposits and assets. In a news release applauding the bill, the organization urged all community banks to join the association in advocating passage of the bil. Bill Loving, the ICBA’s president and chief executive of Pendleton Community Bank, added, "This legislation will reduce systemic risk, protect taxpayers and put our nation’s community banks on a competitively balanced playing field."

Cleaving the bank lobby in two may give the bill a fighting chance of passing where prior legislative proposal had no chance.

Federal Deposit Insurance Corp. support: Also of note is the fact that the FDIC’s vice-chairman Thomas Hoenig, a longtime critic of TBTF banks, is in favor the legislation. The FDIC guarantees deposits when banks fail, and anything that reduces the risk of bank collapse garners its support.

The idea that two senators from opposite sides of the ideological spectrum can find common ground to attack a problem with a simple solution is novel in the Senate these days. If Brown and Vitter manage to end the subsidies to banks deemed “too big to fail,” they will have accomplished more than “merely” preventing the next financial crisis. They will have helped to create a blueprint for how to get things done in an era of partisan strife.

That is a worthy goal all Americans should be grateful for.

Harnessing the Remittance Boom

Kanayo F. Nwanze

18 May 2013

ROME – For more than a decade, Asia’s economies have been on the move – and so have its people. The scale of migration from rural to urban areas and across international borders is historically unprecedented, and twenty-first-century Asia is its focal point.

In Asia’s developing countries, the power and potential of remittances – the money that migrant workers send home to their families (many of whom live in poor and remote areas) – is immense. Currently, over 60 million migrant workers from the Asia/Pacific region account for more than half of all remittance flows to developing countries, sending home about $260 billion in 2012.

China, India, and the Philippines are the three largest recipients of remittances, while Bangladesh, Indonesia, Pakistan, and Vietnam are also in the top ten. The money is often a lifeline: it is estimated that 10% of Asian families depend on payments from abroad to obtain their food, clothing, and shelter.

But, while remittances to developing countries are five times higher than official development assistance, the enormous potential returns for society have not been realized – and can be secured only if the flow of money can be channeled into effective rural and agricultural development, particularly in fragile states and post-conflict countries. Doing so would contribute significantly to creating jobs, enhancing food security, and fostering stability in countries emerging from strife.

In order to establish such channels, we must scale up key initiatives, identify new opportunities, and map out the road ahead. The fourth Global Forum on Remittances, which runs May 20-23 in Bangkok, will do just that. Convened by the International Fund for Agricultural Development (IFAD) and the World Bank, the forum will bring together policymakers, private-sector players, and civil-society leaders to chart a course for leveraging the development impact of remittances sent home each year in Asia and around the world.

At IFAD, our starting point is always the three billion people who live in the rural areas of developing countries. We work to create conditions in which poor rural women and men can grow and sell more food, increase their incomes, and determine the direction of their own lives. We believe that diasporas and the global donor community can leverage the flow of migrant investment if they form partnerships with national governments for long-term development of the rural communities that are so often the beginning of the migration chain.

More than 215 million people around the world live outside of the countries they call home. But most families that rely on remittances operate outside of the world’s financial system as well. Despite the global prevalence of electronic money transfers, most migrant workers are excluded from the convenience of modern banking services, dependent on costly cash transfers that often require rural recipients to travel significant distances.

As a result, migrant workers are forced to initiate more than one billion separate transactions worldwide each year. That means more than one billion trips for rural women and men to collect their money. Adding up the cost of the transfer, travel, and time, remittances are far too expensive for people living in poverty.

IFAD has been working in more than 40 countries to ensure that rural families can have easy access to remittances, and are better able to use them as savings or investments that go back into their communities. The amount of money at stake is staggering: It is estimated that over the next five years, more than $2.5 trillion will be sent in remittances to developing countries, with almost 40% – coming in the form of payments of $50, $100, or $500 at a time – destined for rural areas. While the majority of family remittances will always be used to meet immediate needs, IFAD’s experience shows that rural families would seize opportunities to save and invest, even small amounts, if they had better options.

While remittances should and can be leveraged to bring about impressive results in poverty reduction, let us not forget that there is an underlying issue that needs to be addressed. Young people, the leaders and farmers of tomorrow, are leaving their rural communities behind in search of better opportunities. We need to turn rural areas into vibrant and economically stable communities that provide opportunities for young people to earn a living, build their capacities, and start a family.

We should not ignore the enormous development potential of remittances to rural areas. Let us empower families to use their hard-earned money in ways that will help to make migration a matter of choice, not a necessity for the generations to come.

Kanayo F. Nwanze is President of the International Fund for Agricultural Development (IFAD), an international financial institution and a specialized United Nations agency based in Rome, Italy.

The Flawed Origins of Expansionary Austerity

Jeffrey Frankel

20 May 2013

CAMBRIDGE – Several of my Harvard University colleagues have recently been casualties in the crossfire between fiscal “austerians” and fiscal stimulators. The economists Carmen Reinhart and Kenneth Rogoff have received an astounding amount of press attention since it was discovered that they made a spreadsheet error in a 2010 paper that examined the statistical relationship between debt and growth. They quickly conceded their error.

Soon after, the historian Niall Ferguson – also at Harvard – received much flack when, asked to comment on Keynes’ famous phrase, “In the long run we are all dead,” he “suggested that Keynes was perhaps indifferent to the long run because he had no children, and that he had no children because he was gay.” Ferguson, too, quickly apologized.

But Reinhart and Rogoff’s estimates in 2010 had already been superseded by a 2012 paper that they wrote with Vincent Reinhart, which used a more extensive data set that did not contain the error. And “some of Ferguson’s best friends” are gay, while Keynes actually tried to have children.

Clearly, as the austerians’ barricades have weakened under the continuing onslaught of facts (most notably the recessions in Europe, and now Japan’s conversion to expansion), the stimulators have found the missteps of Reinhart/Rogoff and Ferguson to be convenient weapons. But they are the wrong weapons.

Neither controversy bears on the Keynesian claim that under conditions of high unemployment, low inflation, and low interest rates (which hold in rich countries today, as in the 1930’s), fiscal expansion is expansionary and fiscal contraction is contractionary. The Reinhart/Rogoff papers’ basic finding continues to hold up: growth tends to be lower on average among countries with debt/GDP ratios above 90%. But that finding, like the policy advice that they offered in the aftermath of the 2008 financial crisis, was not intended to support the proposition that a recession is a good time to undertake fiscal contraction.

The Ferguson controversy is even less relevant, because Keynes’s phrase concerning the long run was not about fiscal policy when he wrote it, and it was not an argument against deferred gratification. Nor was Keynes in favor of uninhibited fiscal stimulus, regardless of economic conditions; rather, he argued that “the boom, not the slump, is the right time for austerity at the Treasury.”

But research by yet another Harvard colleague, Alberto Alesina, does bear much more directly on the proposition that austerity is appropriate under today’s conditions. Alesina’s influential papers with Roberto Perotti in 1995 and 1997, and with Silvia Ardagna in 1998 and 2010 suggested that fiscal contraction is not contractionary, and that it may even be expansionary.

It is true that sometimes a country may have no alternative to fiscal “consolidation,” if its creditors insist on it, as has been the case with Greece and some other eurozone members. But that does not mean austerity is expansionary, especially if the currency cannot depreciate to stimulate exports.

As with Reinhart and Rogoff, the Alesina papers themselves are much more measured in their conclusions than one would think from the claims of some conservative politicians that such academic research finds fiscal austerity to be expansionary in general. Nonetheless, the conclusions seem to leave little room for doubt: “Even major successful adjustments do not seem to have recessionary consequences, on average,” while “several fiscal adjustments have been associated with expansions even in the short run.” Moreover, “spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns.” Most recently, a May 2013 paper with Carlo Favero and Francesco Giavazzi reports that “spending-based adjustments have been associated, on average, with mild and short-lived recessions, in many cases with no recession.”

Alesina’s recent policy advice is that the US should cut spending right away. By contrast, the advice of Reinhart and Rogoff leans more toward financial repression, postponement of fiscal adjustment (trim entitlements in the future, but increase infrastructure spending today), or, in more far-gone cases like Greece, debt restructuring.

A new attack on Alesina’s econometric findings comes from an unlikely source. Perotti, his co-author on two articles, has now recanted, owing to methodological problems (which also affect Alesina’s later papers with Ardagna). Under the dating scheme that they used, the same year can count as a consolidation year, a pre-consolidation year, and a post-consolidation year, and it turns out that some of what they treated as large spending-based consolidations were, in fact, never implemented. Currency devaluation, reduced labor costs, and export stimulus played an important part in any instances of growth (for example, the touted stabilizations of Denmark and Ireland in the 1980’s).

Perotti concludes that “the notion of ‘expansionary fiscal austerity’ in the short run is probably an illusion: a trade-off does seem to exist between fiscal austerity and short-run growth.” As a result, “the fiscal consolidations implemented by several European countries could well aggravate the recession.”

This is a more powerful indictment of the reasoning behind recent attempts to justify spending cuts during a recession than is a spreadsheet error or a flippant remark about Keynes’s sexuality. Neither misstep supported the case for austerity, and reality has been far more damaging to it.

Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.