domingo, agosto 16, 2015



Gold's Artificial Lows

By: Adam Hamilton

Fri, Aug 7, 2015

With gold languishing near deep secular lows, its technicals look hopelessly broken. Sentiment is off-the-charts bearish, with traders universally convinced gold is doomed to spiral lower indefinitely. But gold's weakness this year is very deceiving, as it wasn't the product of global fundamental supply-and-demand forces. Extreme record shorting by American futures speculators spawned these artificial lows.

Gold's price is its price, so how the metal got way down here may seem irrelevant. But nothing could be farther from the truth! Fundamentally-driven lows are righteous. If the world gold supply expands faster than demand, or demand contracts faster than supply, then the resulting lows are real. They will persist for as long as fundamentals remain unfavorable, as gold's sellers have no obligations whatsoever to return.

And gold has certainly faced real fundamental headwinds this year. The elite researchers at GFMS, the group that supplies the World Gold Council with its comprehensive supply-and-demand data, recently reported global gold demand dropped 14% in Q2. Provocatively most of this was from plunging demand in China, as local investors were seduced into chasing that crazy stock bubble that subsequently burst.

But the massive year-over-year plunge of nearly a quarter in Chinese investment and jewelry demand for gold failed to impact its price. During that same Q2, gold merely slipped a trivial 0.9%. That means there were enough buyers elsewhere to offset China's popular-speculative-mania-induced drop in demand. And ending Q2 at $1172, gold was just 2% under its initial deep June-2013 low from 2 years earlier.

Gold's recent plunge that ignited a full-blown panic in the absurdly-undervalued gold stocks actually had nothing to do with global fundamentals. It was driven by American futures speculators' extreme record shorting. Such lows are artificial, which is defined as "not arising from natural or necessary causes, contrived or arbitrary". Even more importantly, they are never sustainable due to the nature of short selling.

Gold's latest woes began several weeks ago on Friday July 17th. That day the Chinese central bank finally announced it had much bigger gold reserves than long reported. The People's Bank of China declared its gold reserves were 1658 metric tons, a massive 57% jump from the previous figure which had been reported continuously since April 2009. China finally admitted it was accumulating reserve gold.

This was very bullish news, and probably just the tip of the iceberg. The Chinese government is very shrewd, and knows that if it reports the full extent of its gold buying speculators will pile in forcing it to pay higher prices in the future. So that disclosure was almost certainly only partial. Yet analysts had long been predicting the PBoC's gold holdings were at least 3500t, so the 1658t reported was a disappointment.

So that Friday gold lost 1.0% to $1134, which was unfortunately below this metal's major early-November low. So with gold slumping to a deep new 5.3-year low, it was very vulnerable technically. And American futures speculators' enormous short-side bets on gold were already just 0.1% shy of their all-time record high of 179.0k contracts seen the week before. It was their sharp rise that had battered gold.

It's hard to believe now, but back in late January gold was trading at $1303! Speculators' gold-futures shorts were down near 70.4k contracts then, normal levels. But over the next 22 weeks, they would gradually balloon these downside bets by a mind-boggling 154% or 108.6k contracts. That shorting ramp was wildly unprecedented, nothing close had ever happened before. That's why gold was weak.

Western investors have largely been missing in action in recent years, as capital fled gold to chase the Fed's extraordinary stock-market levitation. With investors out of gold, American futures speculators have free reign to batter the gold price around with their hyper-leveraged bets. Gold's price action since 2013 has been a tale of futures shorting, with the gold price strongly inversely correlated to speculators' shorts.

Even though they borrowed epic amounts of gold futures contracts they didn't own to sell them, and they were legally obligated to buy gold futures soon to pay back those massive debts, they were winning as gold slumped to that new low on Friday the 17th. So they decided to press their bets in a spectacular way as the following trading week opened. It was a devious and Machiavellian strategy that paid off big.

Provocatively, their extreme shorting attack on gold wouldn't even have been possible just a few weeks earlier. Back in early July, the CME shut down its US open-outcry gold-futures trading pits after many decades. Their daily hours of operation had long run from 8:20am to 1:30pm EDT Monday to Friday. So that span is when the vast majority of gold's meaningful price action took place. Shuttering the pits killed that.

The CME took all gold-futures trading electronic, with greatly-extended session hours. Starting in early July, gold futures would be traded from 6:00pm EDT to 5:15pm the following day, from Sunday to Friday. That gave American gold futures a 23.25-hour trading day. But that's problematic, as American traders are asleep or not paying attention for most of that time. There's good reason stock-market trading days are just 6.5 hours.

When most market participants aren't watching, liquidity and volumes are low so it is far easier for a big player to execute buying and selling orders specifically crafted to manipulate prices. And that's exactly what happened on Sunday night July 19th. In the initial hours of that Sunday-evening trading that had started at 6:00pm EDT, gold was stable at its Friday close like usual. Minutes before 9:30pm, everything changed.

Out of the blue, gargantuan gold-futures sell orders slammed the American gold-futures market. Within just over a single minute, someone dumped nearly 24k gold-futures contracts controlling around $2.7b worth of gold! This selling was so extreme that twice within that single minute 20-second trading halts were triggered. That magnitude of selling in such a short time blasted gold $48 lower to $1086 in one minute.

Even before the data confirmed, it was blindingly obvious that this was an extreme shorting attack on gold. A normal long seller would never sell so many gold-futures contracts so fast, as the devastating price impact would impair its own exit price. And no normal seller would unload so much gold at such an illiquid low-volume time in the markets. When I learned of this that very evening, I knew it was short sellers.

Their timing was exquisite. Not only were American traders relaxing late Sunday evening and not paying any attention whatsoever since gold rarely moves then, Japanese traders were gone for a public holiday. And the Chinese markets were due to open within minutes at 9:30pm EDT, so there's no doubt these short sellers were hoping to spark a gold panic in China. $1086 was a fear-spiking new 5.3-year low!

But this extreme gold-price manipulation was so blatant that already-scared Chinese investors thanks to their stock bubble bursting didn't bite. Gold soon rebounded to regain nearly half of those shorting-attack-fueled losses. And this metal actually rallied in the Chinese session on Monday the 20th, with volume on the Shanghai Gold Exchange running 100x July's normal daily volume to that point!

By the time that old recently-ended 8:20am EDT US gold-futures open arrived that day, gold was already back up to $1115. It had gained back 60% of its extreme one-minute losses during first Chinese and then European trading. Considering the new secular gold lows and horrendous sentiment, this was a great show of strength. But then the Western financial media got involved, fanning the flames of panic.

Early on that Monday, all the major news organizations were soberly reporting that gold suffered heavy selling in China. They claimed Chinese investors were being forced to liquidate their gold holdings to meet stock-market margin calls, and implied that this Chinese selling could persist for a long time. But this was total rubbish, absolutely untrue! I was shocked at how false and deceptive that coverage was.

It wasn't Chinese selling, the Chinese actually bought gold that day. All that selling took place in a single minute in the American futures markets Sunday night! If something like the resulting flash crash had happened in the US stock markets, traders would have cried foul and immediately known it was an artificial manipulation attempt. But since no one follows gold anymore, they failed to look into the actual events.

Unfortunately Western traders started selling gold on the new secular lows and false threats of more Chinese forced selling. And gold continued slumping from there over the recent weeks, finally drifting back down to its original shorting-attack low just this week. Not only was the gold flash crash an artificial construct, so was the subsequent weakness. And the fact that short sellers were the culprits was soon confirmed.

Every Friday afternoon, the US Commodity Futures Trading Commission releases detailed reports on futures traders' positions current to the preceding Tuesday. Known as the Commitments of Traders, that week's proved gold's flash crash was a concerted extreme one-minute attack by American-market speculators. Their total shorts soared to a radically-unprecedented new all-time record high of 201.6k contracts!

That was a colossal 22.8k-contract jump in their total shorts in that CoT week, right in line with the 24k contracts that were dumped that Sunday evening. The magnitude of both that flash-crash-inducing short selling and the resulting record speculator gold-futures shorts is incredible. If investors and speculators understood how extreme and unsustainable this is, they would rush to flood into gold with a vengeance.

This first chart looks at American speculators' total long and short gold-futures positions in every CoT week over the past 15 years or so. And the extreme shorting that forced gold to flash crash is eye-popping in this critical chart. Our CoT data goes back to 1999, and speculators' gold-futures shorts had never been higher in that span. And I'm certain they've never been that extreme period, a new all-time record high!

Gold Futures Specs 2001-2015

American speculators' total shorts skyrocketing to at least a 16.6-year high, and almost certainly an all-time record, was astounding! This extreme short-selling ramp means 2015's gold weakness and the recent new secular lows are totally artificial. This critical knowledge changes everything on gold's outlook. Short selling is radically different from normal long selling, as it is guaranteed near-future buying.

Short sellers don't own the gold futures they hope to sell high and later buy back low for a profit. So they first have to borrow gold futures from other traders. These contracts must effectively be paid back and therefore repurchased. The actual mechanic employed to close a gold-futures short contract is to buy a long one to offset it. Short sellers are legally and contractually obligated to buy back all the gold they sold!

So exceptional or extreme levels of speculator gold-futures shorting always precede imminent major rallies in gold. This chart highlights many key examples with the red bars. When speculators borrow and sell gold futures so aggressively, they soon exhaust their selling. Short selling using the extreme leverage inherent in futures trading is among the most risky bets one can make in all the world's financial markets.

So there really aren't that many speculators willing to take on potentially-unlimited risk. After this group is already heavily short, only buyers remain. So gold soon starts rallying which forces the short sellers to quickly buy to cover to eliminate their enormous risks. Sentiment also plays a big role here, as the futures speculators get the most bearish right as gold is bottoming just like everyone else in the markets.

With that long perspective in mind of just how extreme American speculators' gold-futures downside bets have become, let's zoom in to the past several years or so. They really prove that even in the most hostile environment imaginable for gold, extreme speculator shorting soon leads to sharp gold rallies as they rush to cover as a herd. The higher speculator shorts, the more bullish gold is in the near term.

Gold Futures Specs 2013-2015

The 201.9k contracts American futures speculators were short gold in this latest CoT week is crazy-extreme. The only remotely-comparable episode was back in early July 2013 when they hit 178.9k after the worst quarter for gold in 93 years thanks to wildly-unprecedented market distortions courtesy of the Fed. When gold initially plunged to $1199 in June 2013, everyone was convinced it would keep on dropping.

Yet the futures speculators had such extreme short positions that they had to buy to cover. Over the next 16.0 weeks, they bought 95.3k long gold-futures contracts to offset their record-at-the-time shorts. And as a result, gold rocketed up 18.2% in just 8.6 weeks. That's not trivial. Even from this week's miserable new 5.5-year gold lows, a similar rally today would blast gold back up above $1280. That's a serious rally.

Once speculators start to cover shorts, this process quickly snowballs and feeds on itself. Leverage in gold futures exceeds 30x at max, compared to just 2x in the general stock markets. At 30x leverage, a mere 3.3% gold rally would wipe out 100% of the capital risked by short sellers! So once gold starts to rally, growing numbers of them are forced to rapidly buy to cover or face catastrophic losses far beyond capital bet.

Since every single contract shorted has to soon be offset by buying a long one, the larger speculators' total short position the greater the subsequent rally as they're forced to cover. Even in the recent Fed-distorted years where gold suffered howling headwinds, we've already seen four massive frenzies of short covering by American futures speculators. Each left their total shorts back down near 75k contracts.

That has been the normal level of gold-futures shorting in recent years. It's in line with the normal-year average of speculators holding 65.4k gold-futures short contracts between 2009 to 2012 before the Fed spun up QE3 which seduced most capital into the levitating stock markets. So it's a high-probability-for-success bet that even in this environment speculators will cover enough shorts to shrink them to 75k again.

And that is incredibly bullish for gold in the next few months here. This single group of traders is on the hook to purchase 126.9k gold-futures contracts to repay their excessive debts. And this won't take long, as the average short-covering frenzy since 2013 took just 10 weeks. Once gold starts rallying, these guys can't afford to mess around in light of their extreme leverage and risk. So short covering happens fast.

Now 126.9k contracts of gold-futures buying is the equivalent of a staggering 394.8 tonnes of gold! That equates to a monthly buying rate around 157.9t over 10 weeks. And that is utterly enormous. According to the World Gold Council, global gold investment demand averaged just 68.4t per month in all of 2014. So as futures speculators rush to cover, investment demand would skyrocket to 3.3x recent average levels!

Believe me, when gold investment demand effectively triples gold is going to soar. This has happened multiple times in recent years, even with investors largely absent thanks to the Fed's gross distortions. And with the biggest gold-futures shorting spree ever witnessed fueling such anomalously-extreme record short levels, gold's going to enjoy a far-larger rally than the recent-year average of 16.2% over 10 weeks.

Every major gold low of this surreal QE3 era has been driven by excessive shorting by the American futures speculators. And thus every one of those lows was artificial and short-lived. Shorting-fueled lows are not sustainable, as the very selling that fed them must always reverse into proportional near-future buying. Shorting-driven lows are never righteous, unlike legitimate supply-and-demand-driven ones.

So gold's extreme artificial lows in recent weeks are incredibly bullish. The groupthink consensus view that gold will keep plunging is totally wrong. Gold-futures short selling is finite, and soon burns itself out. Once only a tiny fraction of short sellers decide the risk of a rally is too great to bear so they cover, the resulting gold-price gains force the rest to cover too. Their buying amplifies and intensifies this short covering.

There's nothing more bullish in the markets than extreme record shorts. This guaranteed near-future buying in gold that will catapult it higher can be played in physical gold bullion itself, the leading GLD SPDR Gold Shares gold ETF, or in the extremely beaten-down stocks of the gold miners. I prefer the latter, as they are trading at fundamentally-absurd price levels and will really amplify gold's coming gains.

It amazes me so few people are bullish on gold today given the record extreme speculator gold-futures shorts. Sadly most traders are content to simply run with the herd, to succumb to popular consensus instead of doing their own research. That dooms them to never buying low and selling high, instead they are duped into doing just the opposite. So instead of multiplying their wealth, the markets bleed it dry.

That's why you absolutely must cultivate a studied contrarian perspective on the markets. That's what we specialize in at Zeal. We've long published acclaimed weekly and monthly newsletters that go far beyond herd psychology to reveal the real picture. They draw on our decades of exceptional market experience, knowledge, and wisdom to explain what's going on in the markets, why, and how to trade them with specific stocks. Since 2001, all 700 stock trades recommended in our newsletters have averaged stellar annualized realized gains of +21.3%! Subscribe today, join us in buying the best of the gold stocks at once-in-a-lifetime bargains, and get 33% off!

The bottom line is gold's deep new secular lows are totally artificial. They weren't driven by righteous fundamental gold selling, but by extreme record gold-futures short selling. Speculators seized a rare opportunity to foment a gold flash crash with a Machiavellian exquisitely-timed epic burst of shorting, and succeeded. This was falsely interpreted as legitimate selling, which greatly damaged psychology.

But short selling is anything but normal selling, as excessive shorts are guaranteed near-future buying. All those gold-futures contracts that were borrowed and sold have to soon be bought back and repaid. Thus after extreme gold-futures shorting events, gold always enjoys big and sharp rallies on proportional futures buying. And gold's imminent short-covering rally should be the largest ever, coming from record extremes.

The Right Time to Reform Fuel Pricing

Jeffrey Frankel

CAMBRIDGE – World oil prices, which have been highly volatile during the last decade, have fallen more than 50% over the past year. The economic effects have been negative overall for oil-exporting countries, and positive for oil-importing countries. But what about effects that are not directly economic? If we care about environmental and other externalities, should we want oil prices to go up, because that will discourage oil consumption, or down because that will discourage oil production?
The answer is that countries should seek to do both: Lower the price paid to oil producers and raise the price paid by oil consumers, by cutting subsidies for oil and refined products or raising taxes on them. Many emerging-market countries have taken advantage of falling oil prices to implement such reforms. The United States, which is now surprisingly close to energy self-sufficiency, so that the macroeconomic effects roughly balance, should follow suit.
Consider this: America’s roads and bridges are crumbling, and the national transportation infrastructure requires investment and maintenance. And yet the US Congress shamefully continues to evade its responsibility to fund the Federal Highway Trust Fund and put it on a sound long-term basis, owing to disagreement over how to pay for it. The obvious solution, which economists have long advocated, is an increase in America’s gasoline taxes. The federal gas tax has been stuck at 18.4 cents a gallon since 1993, the lowest among advanced countries.
And yet, on July 30, Congress adopted only a three-month stopgap measure, kicking the gas can down the road for the 35th time since 2009.
Fossil-fuel pricing is a striking exception to the general rule that if the government has only one policy instrument, it can achieve only one policy objective. For starters, the money saved from a reduction in subsidies or an increase in taxes in the oil sector could be used either to reduce budget deficits or to fund desirable spending (such as US highway construction and maintenance). At the same time, lower oil consumption would reduce traffic congestion and accidents, limit local air pollution and its adverse health effects, and lower greenhouse-gas emissions, which lead to global climate change. Fuel taxes are a more efficient way to achieve these environmental goals than most of the alternatives.
There is also a national-security rationale. If the retail price of fuel is low, domestic consumption will be high. High oil consumption leaves a country vulnerable to oil-market disruptions arising, for example, from instability in the Middle East. If gas taxes are high and consumption is low, as in Europe, fluctuations in the world price of oil have a smaller effect domestically. Subsidies to US oil producers have often been sold on national-security grounds; in fact, a policy to “drain America first” reduces self-sufficiency in the longer run.
Finally, although fuel subsidies are often misleadingly sold as a way to improve income distribution, the reality is more nearly the opposite. Worldwide, fossil-fuel subsidies are regressive: far less than 20% of the payments benefit the poorest 20% of the population. Poor people are not the ones who do most of the driving; rather, they tend to use public transportation (or walk).
The conventional wisdom is that it is politically impossible in the US to increase the gas tax. But other countries have political constraints, too. Indeed, some developing-country governments have faced civil unrest, even coups, over fuel taxes or subsidies. Yet Egypt, Ghana, India, Indonesia, Malaysia, Mexico, Morocco, and the United Arab Emirates have all reduced or abolished various fuel subsidies in the last year.
Besides raising taxes on fuel consumption, the US should also stop some of its subsidies for oil production. Oil companies can immediately deduct a high percentage of their drilling costs from their tax liability, which other industries cannot do with their investments. Likewise, the oil industry has often been able to drill on federal land and offshore without paying the full market rate for the leases.
Most politicians know that sound economics would call for these benefits to be eliminated; but those who complain the loudest that the government must not pick corporate winners and losers seem to be the least able to summon the political will to act.
A recent study by the International Monetary Fund estimated that global energy subsidies are running at more than $5 trillion per year, while fossil-fuel subsidies in the US have been conservatively valued at $37 billion per year (not including the cost of environmental externalities). As leaders in emerging-market countries have recognized, falling oil prices represent the best opportunity to implement reform. Governments that act now can reduce energy subsidies or increase taxes while sparing consumers an increase in the retail price from one year to the next.
For the US and other advanced countries, it is also a good time for reform from a macroeconomic standpoint. In the past, countries had to worry that a rising fuel tax could become built into uncomfortably high inflation rates. Currently, however, central bankers are not worried about inflation, except in the sense that they want it to be a little higher.
The US Congress will have to come back to highway funding in September. If other countries have found that what was politically impossible has suddenly turned out to be possible, why not the US?


2015 To 2020: Summary Of The Changing U.S. Age Demographics

Jason Tillberg

Aug. 7, 2015 11:27 AM ET

  • US age demographics suggests weak growth in workforce age population.
  • Overall population will grow 4.17% from 2015-2020 with the majority coming from the 65+ age group.
  • Age demographics suggest sluggish overall economic growth for at least the next 5 years.
The U.S. age demographic picture is going to change even more significantly over the next 5 years Vs the previous 5 years.

From 2010-2015, the population of the U.S. changed like this:

(click to enlarge)

Overall, the population grew 4.35% or 13.43 million people. The 65+ age group gained 6.556 million and represented 48.8% of the overall population growth.

Per the Bureau of Labor Statistics consumer spending survey, which can show household spending by the age of the head of the household, we can get an idea of the spending cycle of a person by their age:

This chart above is from 3rd quarter of 2013 - 2nd quarter 2014.

The highest spending years are between the ages of 35 and 54, the child raising years. Upon reaching 55 and up, spending begins to decline and falls off especially in the 65+ age group.

So to give a summery to the population change from 2010-2015, while there was significant growth in the 65+ age group, there was still some growth in both the 25-44 and 45-64 age groups, 2.51% and 3.33% respectively. It is these age group that are the biggest spenders for the economy. However, the growth rates of those two age groups was below average. The 18-24 age group actually declined 1.58%.

The working age population of 18-64 year olds grew just 2.21%.

Overall, these were unfavorable changes in the age of the U.S. population from an economic growth standpoint.

The next 5 years should prove even more unfavorable.


The overall population of the U.S. will grow 4.17% from July 2015 - July 2020 to 335,804,000. However, the rates of change vary quite substantially by age group.

Here is a chart of the U.S. population and projections:

(click to enlarge)
Source for population projections taken from U.S. Census Bureau, 2005 interim state population projections Table C1.

The 18-24 year age group will see a decline again, this time 2.2%. We're going to see above average growth in the number of 5-17 year olds over the next 5 years. That age group will grow 5%. (I've got a 2 and 4 year old now that will be jumping into that category by 2020).
The aggregate growth in the number of American's between the ages of 18 and 64, the age when we're likely to be working, raising kids, and in our peak spending years, will only grow 1.17% over the next 5 years. That's a little less than 0.23% per year.

The age group 45-64 will actually be seeing a decline of 0.07%.

Meanwhile, of the 4.17% growth in the U.S. population that is expected in the next 5 years, which is 13.438 million new persons, 7.841 million will be added to the 65+ age group.

The 65+ age group will make up 58% of the overall population growth over the next 5 years.

This same age group saw the biggest rise in the previous 5 years as well.

The industry where age plays the greatest factor is the healthcare industry. Below is spending by age of the head of household on healthcare. The older the population, the more spending on healthcare.

Very favorable demographic trends have been in place for the healthcare industry. The Health Care Select Sect SPDR ETF (NYSEARCA:XLV) has steaditly outpaced the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) over the last 5 years now.

This favorable demographic trend is set to continue for the next 5 years as well. For the overall U.S. economy, the demographics are unfavorable for growth.

Here is a terrific chart from the Bureau of Labor Statistics that shows labor force participation rates by age and also offers a forecast for the year 2022:

The overall labor force participation rate is expected to go to 61.6% by 2022. As of June 2015, it stood at 62.6%.

When we couple both expected declining labor force participation rates and very slow population growth of 18-64 year olds, we can fully expect that overall employment in the U.S. will be below 0.5% per year for the next 5 years at least.

Here is a long terms monthly chart of the civilian aged 16+ labor force participation rate:

(click to enlarge)


Conclusion on age demographics:

Have very low expectation for economic growth in the U.S. economy for the next 5 years based on:
  1. A very slow growing working age population.
  2. A declining overall labor force participation rate.
  3. The starting point of a low 5.3% unemployment rate as of June 2015.

08/07/2015 08:15 PM

Plugging Leaks

Merkel's War on Germany's Press and Parliament

A sign reading RIP Press Freedom at a demonstration to protest recent legal proceedings against the blog  

A sign reading RIP Press Freedom at a demonstration to protest recent legal proceedings against the blog

In recent months, Germany's government and intelligence agencies have gone after journalists and parliamentarians in an effort to keep classified information secret. Now, their efforts have resulted in a bona fide scandal for Berlin. By SPIEGEL Staff

When former German Federal Prosecutor Harald Range greeted SPIEGEL journalists for an interview at the end of July, he seemed combative. The 67-year-old recalled his oath of office as a young public prosecutor in the university town of Göttingen, to investigate "independent of a person's standing."

He also said he refused to allow his position to be influenced by politics in any way, adding that he "had so far" not been given any orders by the government. "I am free in my decisions," he said. But did he already suspect at that point that an investigation into two journalists would soon rock both his office and the government in Berlin?

Two weeks after the interview, Range stood in front of his admiring staff in Karlsruhe, where the federal prosecutor's office is headquartered. It was the day after he had challenged the federal government, which he accused of an "intolerable intervention" into his work. And it was a few hours after he had been terminated. He said it was more important to him to be able to look in the mirror than in a newspaper. "I did it for myself and I did it for the agency," he said. His staff showered him with applause.

The mood in Berlin was quite a bit different. In an almost unprecedented show of unity, Chancellor Angela Merkel and her cabinet distanced themselves from Range. They acted as though they had nothing at all to do with the investigation that cost Range his job -- an investigation that marked the first time the state had probed journalists for treason since the government of West Germany sought to prosecute DER SPIEGEL journalists 53 years ago.

Range is now gone, but what remains is a mess that could still lead to other politicians, ministers or agency chiefs getting pushed out. Within the course of just a few days, questions have arisen in Berlin that are fundamental to the meaning of democracy. And so far, the answers to those questions have been insufficient. How do prosecutors and members of Germany's domestic intelligence agency, the Office for the Protection of the Constitution (BfV), perceive freedom of the press? How independent is Germany's judiciary system? And are parliamentarians charged with oversight of the country's intelligence agencies able to do their jobs?

Intimidating Journalists and their Sources

In recent days, the chancellor, Justice Minister Heiko Maas and Interior Minister Thomas de Maizière have santimoniously thrown their support behind freedom of the press. But reality often looks different. In reality, senior government officials and intelligence agency heads in Germany have long been pursuing a policy of intimidating and deterring journalists and their sources.

Leaks and whistleblowers are being hunted down and criminalized. Treason, a word that had hardly been heard for decades, is once again being used as part of the repertoire of politicians in Berlin -- and all in the alleged name of protecting the common good. Security is to be increased in order to better protect the country from terrorism. At the same time, however, the balance between the executive, legislative, judiciary and the press as the Fourth Estate is being thrown off.

Range's fall is the culmination of events that have been developing since American whistleblower Edward Snowden went public in 2013 with his revelations about the global spying activities of the National Security Agency.

Ever since, the German government and its security agencies have made every attempt possible to ensure that they control what information becomes public. It is Merkel's cabinet alone that determines what is defined as a state secret. And any person who casts doubt on that right, even if it is for good reason, runs the risk of being pursued with the full force of the law.

The extreme sensitivity appears to be a reaction to a long string of leaks and investigative stories in the media as well as the work of the parliamentary investigative committee that is probing NSA spying in Germany. The tactics used by the government -- a mix of sealing itself off from the outside world and lashing out -- shows just how edgy Merkel and her people have become. They are increasingly dogged in their efforts to protect what they allege to be state secrets. The result is that they don't even trust their own parliamentarians any longer.

That has been particularly clear in the approach the Merkel administration has taken to the NSA investigative committee in parliament. Whenever the committee requests files from the government, they receive incomplete documentation with a grotesque amount of redacted passages. Even the wives' program during a visit by an NSA director to Germany was considered too sensitive to share with the investigative committee.

As hard as the government is trying to plug the leaks, new revelations are continuing to make their way to the public. And it has become clear that the "classified" stamp is often used to cover up problematic intelligence operations. For example, when Germany's foreign intelligence agency, the BND, tapped a data cable in Frankfurt for the NSA and then tried to deceive the parliamentary committee about the true scale of the operation. Or when the domestic intelligence agency set up a fake apartment together with the CIA in the Rhineland region in order to combat terrorism, but in the process undermined privacy protection laws. At times German spy agencies undertook operations without even informing the Chancellery, which is responsible for their oversight. The government would like to have kept all of this hushed up. But it was unable to.

Indignant in Berlin

Indignation among senior officials has become a common response. Hans-Georg Maassen, for example, the head of the BfV domestic intelligence agency responsible for monitoring extremism, has repeatedly threatened to issue a criminal complaint against the Parliamentary Control Panel, which meets in secret and is responsible for scrutinizing the intelligence agencies, for betrayal of state secrets. In conversations with those close to him, he has said he believes the panel should be dismantled because, as he put it, even journalists are more discreet.

Together with Klaus-Dieter Fritsche, Merkel's intelligence services coordinator in the Chancellery, Maassen has warned members of parliament that if the Americans discontinue intelligence cooperation in the war on terror, and if an attack is subsequently perpetrated in Germany, then parliamentarians will have the victims on their consciences.

Interior Minister de Maizière is also exerting pressure on potential leakers. In a letter to the Parliamentary Control Panel, a high-level official in his ministry complained about alleged indiscretions committed by the parliamentarians. The letter helpfully noted that revealing state secrets was punishable by law.

In mid-October 2014, members of the NSA investigative committee received another letter, this time from Peter Altmaier, Merkel's chief of staff. It contained the subject line: "Transfer of classified information from the federal government to the press media." In it, Altmaier listed four cases of alleged leaks, including one to SPIEGEL and another to the blog

He conceded it had been "an outflow of information that had not yet been clarified." But he also issued a threat, saying he would press charges against unknown persons if it were to happen again.

Four weeks later, intelligence coordinator Fritsche announced to the Parliamentary Control Panel that he would undertake measures, saying the betrayal of government secrets had gone too far and that he would pursue a criminal complaint.

At first, nothing happened. Chancellor Merkel herself is reported to have personally intervened and warned against escalation. The word from the Chancellery even today is that "the political message takes precedence." The intelligence coordinator yielded, but he didn't forget.

Anti-Whistleblowing Legislation

In parallel, the government is also taking on whistleblowers by trying to push through legislation criminalizing their activities. The draft legislation is packaged inside a national data retention law and has gone largely unnoticed by the public. Observers expect the legislation will make it harder for journalists and informants to work together. Although it stipulates that the telecommunications data of journalists, among others, would not be exploited, that data would still be saved. The German Journalists' Association has criticized the provisions in the law, saying they will undermine the media's ability to protect sources.

Another paragraph in the draft legislation also seeks to criminalize some aspects of investigative journalism. The provisions deal with the receipt and publication of classified information that has been obtained illegally from a source. It could include things like the CDs of tax evaders that have made their way to the media in recent years. In the future, receiving stolen data from a source could be a prosecutable offense carrying "a sentence of up to three years or a fine." Holders of public office are excluded from the draft law.

Journalist are excluded as well, but only if they have received the data as part of the "preparation for a concrete publication," as the legislation notes. But this is entirely at odds with the reality of everyday journalistic practice, because a journalist is only able to determine whether data is appropriate for publication after he or she has had a chance to see and analyze it.

"The risks pertaining to the work of a journalist will clearly be greater," says Ulrich Schellenberg, president of the German Bar Association. He views the legislation as part of a broader and dangerous development. "The German government is massively increasing its surveillance measures while at the same time going even further to protect its own secrets," he says.

To do so, they have not shied away from tricks and deceit. That, at least, is what members of the NSA investigative committee have believed since Feb. 4, the day Chancellery intelligence coordinator Fritsche and BND President Gerhard Schindler appeared in front of the committee. They said they had sensitive things to tell the committee and brought them to a bug-proof meeting room. They wanted to talk about an issue that, if it became public knowledge, would be very damaging to Germany, they said.

Given that context, the kind of carelessness that ensued at the meeting is astounding. Without even reviewing whether the staff of the committee members present in the room had security clearances to receive top-secret information and without paying attention to the possible presence of mobile phones in the room, the men spoke freely about a sensitive operation carried out by the BND together with Britain's GCHQ intelligence service in 2012 and 2013. The joint endeavor they spoke of, as is known today, bore the codename Monkeyshoulder.

Is Government Sabotaging NSA Investigation?

Such carelessness made members of the committee suspicious. Before Schindler and Fitsche could even finish, they withdrew to consult. In a group that is very often divided, there was unusual agreement that a trap was likely being set. If details of the intelligence operation became public, the government could point to the investigative committee as being the culprit. The committee decided to immediately end the meeting.

Around 12 hours later, the German news site Focus Online posted an article about the top secret operation, also providing details that members of the parliamentary investigative committee said had not been discussed in the previous day's meeting. So who leaked the information to journalists? And what were they trying to accomplish?

Even prior to this incident, members of parliament had begun to suspect that there are people in the government and its agencies who are playing dirty and trying to sabotage efforts to investigate NSA spying on Germany. "People are clearly afraid that more might come out," says André Hahn of the Left Party, who chairs the Parliamentary Control Panel.

"We first find out about a lot of the leaked information we are blamed for when we read the newspaper," says Christian Flisek, the leading official from the center-left Social Democratic Party (SPD) on the NSA Investigative Committee. "The real leaks are in the Chancellery, in the BfV and other agencies."

Well-placed sources in Berlin security agencies say the nervousness is particularly palpable in the Interior Ministry and BfV. And that's no surprise, says Konstantin von Notz, a member of the NSA investigative committee with the Green Party. "The Office for the Protection of the Constitution is only just now becoming a focus of our work on the committee -- and its officials will likely have a lot of explaining to do."

Georg Maassen is the man who will have to answer to those questions. A former career civil servant at the Interior Ministry, Maassen rose to become the head of the domestic intelligence agency as a result of his work in handling the scandal surrounding the National Socialist Underground, a neo-Nazi terrorist cell responsible for killing nine immigrants, most men of Turkish origin, between 2000 and 2006. Since taking on his new role, his position has been consumed largely by crisis management, a role that clearly weighs on him. On an increasing number of occasions recently, Maassen seemed to have trouble maintaining his composure in public. On one occasion, he even snapped that it was painful to him to be insulted as the head of some kind of "idiot-filled authority."

On another, he stated that the true NSA scandal is the fact that members of parliament and journalists are weakening the intelligence agencies through the constant reporting on internal secrets.

He also called the recent criticism of his boss, Interior Minister de Maizière, "inappropriate." On the sidelines of the same event, he suggested creating a support program for journalists who agree to quit working for SPIEGEL. It was meant as a joke, but it also shows what little regard Maassen has for investigative journalism. "He's very thin-skinned," one security community source says.

The Bombshell

But on March 25, Maassen did something that overshadows anything else he has done up to this point. He filed a criminal complaint with the State Office of Criminal Investigation in Berlin, following it with a second complaint in mid-April. Both related to confidential or top secret budget plans by his agency to increase an online surveillance effort -- plans that had been posted online by journalists at in Berlin.

Maassen had the support of the Interior Ministry, which had followed the developments more closely from the very beginning than it initially wanted to admit. Ministry officials say today that Interior Minister de Maizière sees "no reason to object to the proceedings."

Maassen has sought to convey the impression that he did not intend to accuse anyone directly with his legal complaint, which is directed "at persons unknown." But that is a half-truth at best. The reference in the subject line to the request for criminal prosecution may be "persons unknown," but the substantiation clearly states: "The blog is operated by a person named Markus Beckedahl. The article was written by a person named Andre Meister."

That's not all. In both complaints, Maassen explicitly cites the Bundestag's Parliamentary Control Panel, which decides on the intelligence services' budgets. But there is no mention whatsoever in the complaint of the fact that the budget plans that were ultimately published by Netzpolitik were also broadly disseminated among his own staff.

By doing so, he is trying to shift the focus onto two groups that could potentially betray government secrets: journalists and parliament. Relations between the nine members of the Parliamentary Control Panel and the government intelligence agencies have been tense for months. Members of parliament speak of a "combative atmosphere."

"After the blocking and cover-ups in the NSA and BND scandal, now they are also trying to criminalize those investigating it," grouses Martina Renner of the Left Party.

Diverting Attention

A few weeks later, Maassen filed a third complaint. This time, it had to do with the premature publication of details from a confidential report pertaining to the mysterious death of an intelligence informant. The article was in the Munich-based Süddeutsche Zeitung.

"Mr. Maassen is trying with all means at his disposal to divert attention from his own possible errors," says SPD politician Flisek. Should the recently released WikiLeaks documents about comprehensive NSA monitoring of the German government be substantive, Flisek says, "it would mean a complete failure in this area of the office under Maassen's leadership."

But the diversionary maneuver, if indeed that's what it was, ultimately had consequences that not even Maassen himself had considered. His complaint rapidly found its way to the federal prosecutor's headquarters, where an initial suspicion was confirmed. At the end of last week, Harald Range then notified of the investigation. The move triggered a storm that ultimately cost Range his job.

A scapegoat? Perhaps. From the very beginning, the federal prosecutor was rather half-hearted in his pursuit of the investigation. He seemed driven less by the thrill of the chase than by the fear that he could get in trouble if he did not pursue the case. But he apparently drastically underestimated the political effects of a treason investigation into journalists.

Justice Minister Maas quickly abandoned his noble resolution to allow the prosecutor's office complete independence in all of its decisions. After the investigation was made public, Maas' ministry decided to present Range with a choice: either shut down the investigation, or go.

Publicly, Maas announced that he had doubts about the treason accusation against Merkel joined him, as did, ultimately, Interior Minister de Maiziére -- who allegedly received advanced notification neither of the initial complaint nor of the steps that followed.

'Significant Threat'

Since then, the word "scandal" has become a popular one in the halls of the public prosecutor's office.

Some even believe Minister Maas is guilty of hindering the investigation and Berlin prosecutors are looking into opening an investigation into the SPD cabinet member. The association of judges and state prosecutors at Germany's Federal Court of Justice is furious, and speaks of a "significant threat" to the rule of law.

Maas will still have a lot of explaining to do. On Thursday, lawyers in his ministry came to the unsurprising conclusion that the revelations published by were not state secrets. Meanwhile, after Range left, the public prosecutor's office began making preparations for the discontinuation of the investigation.

That would mark the end of this assault on press freedoms. But the accusations against the justice minister -- of doing nothing for weeks only to suddenly sabotage the investigation for political reasons -- remain pertinent.

Maas is sullied. So too is Maassen. Both attorneys and journalists are in an uproar. Whether in the Justice Ministry, the Interior Ministry or the Chancellery, nobody will emerge unscathed from this scandal. And everyone must be prepared for the question as to how far they are prepared to go to protect even those secrets that belong in the public sphere.

By Maik Baumgärtner, Jörg Diehl, Matthias Gebauer, Dietmar Hipp, Martin Knobbe, Ralf Neukirch, Jörg Schindler and Fidelius Schmid