Month: October 2012

By Central Bank News

    The central bank of South Korea cut its base rate by a further 25 basis points to 2.75 percent, a move that was expected, with the bank expecting global growth to remain weak and the country’s economic output to remain below potential for a considerable time.
    The Bank of Korea (BOK), which already reduced its rate in July, also cut its economic growth forecast for 2012 to 2.4 percent, down from its previous forecast in July for 3.0 percent. For 2013, the bank forecast growth of 3.2 percent, down from a previously expected growth rate of 3.8 percent.
    The central bank also said it expects inflation to remain below the bank’s 3.0 percent mid-point target range due to low demand. It forecast inflation of 2.3 percent in 2012 and 2.7 percent for 2013, down from July’s forecast for 2012 of 2.7 percent and the 2013 forecast of 2.9 percent.
    Inflation in September rose an annual 2.0 percent, up from 1.2 percent in August.2.

    Expectations that the BOK would cut rates heightened recently after the bank said it would focus on economic growth and also told lawmakers that the output gap was likely to be negative until 2013.
    South Korea’s economy has been slowing in recent quarters, with the Gross Domestic Product expanding by 2.3 percent in the second quarter, down from a 2.8 percent rate in the first and a 3.4 percent rate in the fourth quarter of last year.
    “The Committee expects the pace of global economic recovery to be very modest going forward and judges the downside risks to growth to be large, owing chiefly to the spillover of the euro area fiscal crisis to the real economy and to the possibility of the so-called fiscal cliff materializing in the US,” the BOK said in a statement.
    At its meeting, the BOK’s Monetary Policy Committee also decided to set the inflation target for 2013 to 2015 at a range of between 2.5 and 3.5 percent increase in the consumer price index. This compares with its current target range of 2-4 percent.
    www.CentralBankNews.info
    
 
   

By MoneyMorning.com.au

‘The American public feels like there was no Old Testament justice. What they saw, banks bailed out and all these people make all that money, and including the banks that failed, people made a lot of money, and there’s some truth to that. There is some truth to that. I can’t make up for what other boards did and didn’t do, but there’s truth to that. There were people who destroyed their companies, virtually brought the United States down to its knees and walked away with $50 million. It pisses me off too.’

– Jamie Dimon, CEO JPMorgan Chase & Co.

Mr Dimon was talking to the US Council on Foreign Relations. He says that he too is annoyed at the banking bailouts…that bankers have done a lot of rotten things and gotten away with it.

It seems he’s abandoned the 1%ers and joined the 99%ers.

Well, not really. While it’s true that JPMorgan didn’t directly get a big banking bailout, JPMorgan has benefited just as much as any other big Wall Street bank from the US Federal Reserve’s low interest rates and money printing.

Without both of those, JPMorgan would have gone bust.

But before you praise Mr Dimon for speaking out against the banking industry, and by extension the Federal Reserve and US government, first read this news report from Bloomberg News in June 2011:

‘JPMorgan agreed to pay $153.6 million to end a Securities and Exchange Commission suit. The SEC alleged that the New York-based bank failed to tell investors in 2007 that a hedge fund helped pick, and bet against, underlying securities in the collateralized debt obligation they purchased. In July, Goldman Sachs paid a record $550 million for failing to inform clients in 2007 that it allowed a hedge fund that also bet against housing to help formulate the CDOs.’

Let’s get something straight; in the world of fractional reserve banking, they’ve all got their noses in the trough. There are no good banks and bad banks, there are only banks…and they’re all bad…

You see, the way things work in the US is the SEC effectively acts as a legalised extortionist. It judges the size of a firm’s balance sheet, and if the SEC believes it can extort a huge fine from the business without the business going bust, it will push for an out-of-court settlement rather than prosecute.

That’s why Jamie Dimon can say he’s ‘pissed off’, because he knows JPMorgan doesn’t have a recorded conviction. However, Mr Dimon and JPMorgan didn’t appear too pissed off when they flogged rotten securities to clients just as the market hit the skids in 2007.

But that’s how the banking system works.

It’s no coincidence that when the banks have done something wrong, they get a bailout or they get a slap-on-the-wrist fine.

But if you’ve done wrong and you don’t have a big balance sheet then it’s off to jail: Bernie Madoff, Allen Stanford, and Raj Rajaratnam.

Not that we’re shedding any tears for those crooks; the dual standard just amuses us. Big firm does wrong = big fine. Small firm does wrong = big jail sentence.

Bottom line, the SEC works just like the Mob. The Mob will always extort the protection money first. Only when you can’t pay up will they relieve you of your knee-caps (or worse).

But of course, dodgy banking is an overseas thing. It doesn’t happen here…

Aussie Banking Joke

Oh, that’s right, it does. Our old pal Nick Hubble has worked feverishly away to expose some of the Australian banks‘ dodgy lending practices.

We spent a lot of time from 2008 to 2011 bringing this to your attention. Well, Nick has taken it one step further. He wrote to you about it last week:

‘Do you have a mortgage? There is a 1 in 10 chance you have been tricked. We’re not sure if we can use the word ‘defrauded’ instead of ‘tricked’, although that was our first thought. The trick is the very same one played on borrowers in the US, Spain, and Greece.’

Yes, in the world of fractional reserve banking, all banks are the same. There aren’t good and bad banks, only banks…and they’re all bad.

Even so, the cheerleaders in the mainstream press continue to have a rose-tinted view of the Aussie banking sector. Take this from News Ltd’s Alan Kohler last week:

‘In fact it’s probably not going too far to say that the industry in which Australia is truly the world leader is not resources, it’s banking — not the sort that caused the GFC, but old-fashioned deposit-taking and lending, the business that Wall Street banks are trying to get back to.

‘What’s more, it’s this business on which the future of our economy really rests, not on mining and energy, where our only competitive advantage lies in the providence of having the stuff.’

Really? The future of the economy rests in banking? What a joke. It just goes to prove that excessive credit still bloats the world economy if people think the banks are still important.

As we’ve explained many times before, banking and finance is just the middleman in the transaction. Yes, they play a role, but they aren’t the key to the economy.

The key to the economy are the entrepreneurs and businessmen and women on one side of the ledger, and savers and investors on the other side of the ledger.

The bankers and financiers simply help the two meet (although if you read the only part of the Australian Financial Review (AFR) worth reading, the Alex cartoon strip, you’ll see that most of the time the bankers aren’t really that much help anyway).

The Hurdle to Economic Recovery

It’s no good having a supposedly strong banking sector if the economy can’t encourage businesses to do business, and investors to invest.

You only have to look at two recent headlines to see the harm of government intervention. First, this from yesterday’s AFR:

‘The Labor government has decided against making any significant changes to superannuation tax arrangements in the mid-year review of the budget.

‘While the government may announce some minor policy, sources say it has put off a more substantial overhaul of super tax concessions worth at least $30 billion a year to government coffers until next year’s budget.’

We always find it funny that the dopey mainstream press says that by not increasing a tax, it’s a cost to the government.

What they should say is that it means individuals get to keep $30 billion of their own money…and that it introduces the tax (as it will be, that’s what governments do), it will rob individuals of $30 billion a year of their own money.

That’s money individuals would otherwise save in their superannuation. And that they could use to invest in businesses, so those businesses can use it to create new products and services, and employ more people.

The other story comes from the Aussie Daily Telegraph:

‘Bosses will have to roster jobs around workers’ social lives and check that staff who yawn or daydream aren’t too tired to work safely.

‘Those proposals are contained under national laws being drawn up to fight workplace fatigue.

‘The government agency’s checklist for employers to spot worker fatigue includes headaches, daydreaming, constant yawning, low motivation and moodiness.

‘It has proposed that bosses “eliminate or reduce the need to work extended hours or overtime” so staff don’t get too tired.’

Seriously. This is what the Australian economy has come to. But don’t worry, if you believe Alan Kohler and the mainstream press, it doesn’t matter, as long as Australia has a strong banking industry.

The Recovery Charade

But what does that matter if people can’t save because the government has taken their savings? And what does it matter if businesses don’t invest in their business because they have to work with stupid laws?

As long as bankers, banks and the banking system stay on a pedestal, where people and governments assume they’re the core of the economy rather than plain-old middlemen, there’s no hope of a genuine economic recovery.

In yesterday’s Money Morning, Murray warned that the economic recovery was a charade. And that it would only be a matter of time before stock prices reflected this.

Two days of falling prices doesn’t make for a crash, but it should certainly cause you to check that you’ve tightened your seatbelt.

Cheers,
Kris

PS. Remember that you can read our insights and analysis on non-financial news in the new free twice-weekly eletter, Pursuit of Happiness. Each Monday and Wednesday we’ll give you our take on the major events that impact your life, wealth and liberty. To check out the new website and subscribe for FREE, click here and enter your email address where indicated.

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By MoneyMorning.com.au

The four most dangerous words in investing are ‘it’s different this time’.

This piece of financial advice – made famous by Sir John Templeton – is so well-known that it’s a cliché. Everybody knows it.

Yet when push comes to shove, almost nobody pays attention to it. My reading pile is currently full of ‘yes but, it really is different this time’ articles.

That’s a danger sign. It’s a warning that investors are getting caught up in the hype of a bubble.

And so today I’d like to look at how you can keep your head when all about you are losing theirs.

Why Investors Are So Confused

I waded through excerpts from a pseudo-intellectual note from a fund manager, posted on the FT Alphaville blog.

Apparently, ‘the efficient frontier is now contorted to such a degree that traditional empirical views are no longer relevant.’ That gives you a flavour of the general tone.

In any case, via some tortured analogies, he arrives at the conclusion that the Federal Reserve is making it very hard to understand what anything is really worth.

The upshot was that investors can’t rely on the old rules anymore, because the Fed has turned things on its head.

Central bankers are trying to convince us all that the economy is in better shape than it really is, by artificially inflating asset prices. This in turn is distorting and mis-shaping the “real” economy. This is making it nigh on impossible to work out what’s risky and what isn’t.

It’s hard to disagree with this assessment. But what’s new?

Politicians and central banks have always interfered in the market. The whole bull market of the ’80s and ’90s was aided and abetted – maybe even created – by central banks and politicians.

From ‘big bang’ to constant fiddling with interest rates and tax rules – there was plenty of intervention during those decades. It was just that it was the kind of intervention that the market liked. It was pouring fuel on the fire, adding vodka to the punchbowl.

All that’s changed now is that instead of being in a bull market, we’re in a bear market. The Fed’s main goal – to keep the party going – is no different. But before, the central bank was pouring petrol on a roaring patch of dry kindling. It wasn’t hard to encourage the flames to go higher.

Now it’s trying to ignite a sodden bale of tightly-packed straw in the middle of a monsoon. That’s more of a challenge. But while the tactics have changed, the goal hasn’t. The Fed (and its fellow central banks) are trying to short-circuit the uncomfortable deleveraging process and go back to the bubble-blowing era.

The way they’ve chosen to do this, is by blowing up a bubble in the bond market. And this is what is scrambling otherwise highly intelligent people’s brains.

The Bond Market is in a Bubble

You see, if you have been subjected to an education in theoretical finance, then you think of the bond market as being ‘risk-free’.

Whatever rate you can get by investing in US government bonds is the ‘risk-free’ rate. So that’s also the price you use to calculate what the price of other assets ‘should’ be. After all, if you can get 1% ‘risk free’ in the bond market, then you should demand more from something riskier, like equities.

So when the Fed wades in and starts driving bond yields lower artificially, it messes up all the calculations that these people normally do. Suddenly, no one knows what the price of anything should be, because the ‘risk-free’ rate has been so badly distorted.

No wonder they’re all having existential crises.

You’ve probably avoided this indoctrination. So you can see that this is all nonsense.

Government bonds – of any government – aren’t “risk-free”. Bond prices can suffer very nasty falls if the wrong conditions arise. Sometimes they are expensive, and sometimes they are cheap.

Right now, prices of bonds are at ‘unprecedented’ highs. And something very simple happens when a price reaches an ‘unprecedented’ high. It falls.

It might not fall right away. It almost certainly won’t fall just because you have noticed one morning that the price is ‘unprecedented.’ But it will fall eventually. Most likely at the point when everyone is convinced we’ve entered a “new paradigm”.

That’s why market timing is not the road to riches for most of us. Because we’re terrible at it. We sell too early, then we buy too late, and then we sell too late.

This is why, of all the methods of investing out there, we like value investing best. You buy what’s cheap and hated, and avoid or sell what’s expensive and loved.

If you do this, then in the short-term, you will have to endure the psychological pain of holding assets that no one likes, and rejecting ones that keep going up. And this psychological pain does not stop.

When the assets you avoided eventually fall off a cliff, no one wants to hear “I told you so”. And when the cheap assets that everyone hated turn into expensive assets that everyone loves, you’ll be selling, just as everyone else is buying.

All you have as compensation is the knowledge that you’ll hopefully make enough money to enjoy a comfortable retirement. We suspect that’s compensation enough.

Examples of cheap assets include European and Japanese equities. Examples of expensive assets include bonds of almost all stripes, and industrial commodities.

And don’t worry about second-guessing the Fed or other central banks. But take out insurance, in the form of gold, in case the entire system implodes when this grand monetary experiment gets completely out of hand.

This might sound simplistic. But it’s not – believe me, it’s hard enough trying to work out which assets are cheap, without grappling with mind-bending “new paradigms”.

John Stepek
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek

From the Archives…

Beer and Tax in Retirement
5-10-2012 – Nick Hubble

Possibly the Most Important Thing You Will Ever Read in Money Morning
4-10-2012 – Nick Hubble

What Central Bank Money Printing Means for Small-Cap Stocks
3-10-2012 – Kris Sayce

This is What a Million Dollars of Liquid Gold Looks Like
2-10-2012 – Dr. Alex Cowie

Japan’s Energy Crisis and the Take Away for Aussie Investors
1-10-2012 – Dan Denning

The Bond Market Bubble Scrambling People’s Brains

By MoneyMorning.com.au

Alrosa, the world’s second largest diamond miner, [recently] plucked out a stone weighing 158.2 carats from its Nyurbinsk mine in Russia’s north-eastern republic of Sakha (Yakutia). That is a quite remarkable size; at auction that is worth about $1.5m, and by the time it has been cut and polished it will be worth a great deal more.

In fact, Alrosa produces 97% of all diamonds in Russia and accounts for about 28% of global production. It is a name you could soon be hearing a lot more of as it is rumoured to be preparing a stock market flotation.

That would cast the spotlight on the diamond mining industry. There is an air of optimism about the future of this sought after precious stone, as I discovered when I met Robert Bouquet, a director of diamond mining junior Botswana Diamonds (AIM: BOD).

Only 1% of Sites Turn Out Commercially Viable Diamonds

Botswana Diamonds has projects in Botswana, Cameroon and, potentially, Zimbabwe, a political hotbed but a country that hosts the extraordinarily rich Marange diamond mine. Bouquet was excited about the potential for the company, especially in Cameroon. But it was his insight into the industry that interested me.

The price of rough diamonds has shot up in recent years and quickly recovered from the financing crisis of 2009. Although, there was some easing of the diamond price this [northern] summer, sentiment is still bullish, and it is not hard to see why.

Diamonds are exceptionally difficult to find. Although there are some alluvial sources, washed downstream by ancient rivers, 95% of diamonds have erupted from deep in the earth’s crust and are found in vertical pipes known as kimberlites or, occasionally, lamproites.

The location of these kimberlites is known, but they do not necessarily yield diamond mines. Only about 1% of kimberlites discovered to date have proved to be commercially viable, so with this low success rate and a finite number of kimberlites left to explore, there is no chance of a sudden increase in supply.

A Supply Crunch is on the Way for Diamonds

Global production of diamonds amounted to 124 million carats in 2011, and according to a report by Bain, 13 new mines will add 23 million carats by 2012. Balancing this against the depletion of existing mines, aggregate diamond production is forecast to increase by 2.8% a year to 2020. But that figure is not sufficient to match forecast demand.

Although the USA remains the largest market for diamonds, the rapid growth of the Chinese and Indian middle classes is expected to have the biggest impact on the equation.

In these two countries the number of households with a disposable income of $15,000 is expected to rise to about 469 million in 2020 from about 220 million today.

That seems certain to boost demand for diamonds, and since consumers have a tendency to equate price with worth, rising prices could lead them to value diamonds even more highly than they do today.

The Trouble with Diamonds

And yet the diamond market is a strange one. Thanks to the efforts of De Beers, which cornered the market at the beginning of the 20th century, and came up with ‘diamonds are a girl’s best friend’, brides and grooms all over the world are now convinced that their devotion should be measured by this particular precious stone.

De Beers has now lost its stranglehold on the industry, and without a sustained and consistent marketing campaign, future brides and grooms could decide that emeralds, for instance, are no lesser tokens of love.

Also having an effect on the supply of diamonds is the Kimberley Process which, in theory anyway, prevents the sale of ‘conflict diamonds’ from financing brutal regimes. The other shadow hanging over the industry is synthetic diamonds.

It is possible to make diamonds in a laboratory and, given that these can only be identified by experts using advanced inspection tools, you can be certain that they would hoodwink the average consumer.

While the trade has managed to convince itself that consumers would not be satisfied with artificial diamonds, industrial users have no such qualms, and 95% of industrial diamonds are synthetic.

Finally, the attraction of diamonds is that, like gold, they last for ever. That means that every diamond that has ever been produced is still in existence. To the extent to which owners choose to pluck their grandmother’s diamond jewellery from the bottom drawer and flog it, supply will be affected.

The bullish case for diamonds is not all it might seem. But even with these reservations, the industry looks well placed.

Tom Bulford
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek

From the Archives…

Beer and Tax in Retirement
5-10-2012 – Nick Hubble

Possibly the Most Important Thing You Will Ever Read in Money Morning
4-10-2012 – Nick Hubble

What Central Bank Money Printing Means for Small-Cap Stocks
3-10-2012 – Kris Sayce

This is What a Million Dollars of Liquid Gold Looks Like
2-10-2012 – Dr. Alex Cowie

Japan’s Energy Crisis and the Take Away for Aussie Investors
1-10-2012 – Dan Denning

The Coming Supply Crunch in Diamonds

AUDUSD stays in a trading range between 1.0149 and 1.0274, as long as the trend line resistance holds, the price action in the range is treated as consolidation of the downtrend from 1.0624, another fall to 1.0000-1.0100 area is still possible after consolidation. However, a clear break above the trend line resistance will indicate that the fall from 1.0624 has completed at 1.0149 already, then the following upward movement could bring price back towards 1.0624 previous high.

Forex Signals

By OilPrice.com

After World War II the US government dumped millions of kilograms of unexploded bombs into the Gulf of Mexico. This is no secret; many governments dumped their unexploded ordnance into oceans and lakes from 1946 up until the 1970s when it was made illegal under international treaty.

Now that technology has advanced enough for oil companies to drill deep sea wells in the Gulf of Mexico, those forgotten payloads have become a real hazard.

The US designated certain areas around its coast for the safe dumping of explosives, nerve gas, and mustard gas. The problem is that the records of where these munitions were dumped are incomplete, and many experts believe that a lot of cargo was dumped outside of the designated areas. Now, decades later, no one has any idea of where the bombs are, exactly how many were dumped, or if they still pose a threat to humans or marine life.

William Bryant, a Texas A&M University professor of oceanography, summarised the situation by saying that the “bombs are a threat today and no one knows how to deal with the situation. If chemical agents are leaking from some of them, that’s a real problem. If many of them are still capable of exploding, that’s another big problem.”

In 2011 BP had to close down its Forties crude oil pipe in the North Sea, which carries 40% of the UK’s oil production, after they found a four metre unexploded German mine laying just next to it. The giant mine was found during a routine inspection of the pipeline, and forced its closure for five days whilst engineers attempted to safely remove it and transport a safe distance away to be detonated.

Professor Bryant remarked that he has come across 227 kg bombs off the coast of Texas and well outside the designated dumping grounds. He also said that at least one pipeline from the Gulf of Mexico had been laid across a chemical weapons dump site.

Terrance Long, the founder of the underwater munitions conference, said “it makes more sense to start dealing with the munitions from a risk-mitigation standpoint to be able to conduct operations in those areas rather than trying to avoid that they are there.”

Source: http://oilprice.com/Energy/Energy-General/Thousands-of-Bombs-Dumped-in-Gulf-of-Mexico-Pose-Huge-Threat-to-Oil-Rigs.html

By. Joao Peixe of Oilprice.com

By Chris Vermeulen, TheGoldAndOilGuy.com

By The Sizemore Letter

Bond is back.  And so are the product placements.

Skyfall—the latest film in the James Bond franchise—opens in theaters next month, but the marketing blitz has already begun.  This week’s Economist opened with a two-page advertising spread for an Omega Seamaster watch—“James Bond’s Choice”—featuring Daniel Craig.

Not only does Craig endorse the Omega brand personally (see his Omega profile), but his movie character endorses it as well.  Per the Omega site,

“As James Bond appears for the 23rd time on the silver screen in SKYFALL, he will once again depend on the OMEGA Seamaster Planet Ocean as he takes down yet another onslaught of villains, all the while seducing the newest Bond girl the films are often so famous for.”

The Omega product page did not specify whether the new Seamaster fired laser beams or if its crown could be used as a grappling hook.

As I write this article, I cannot help but look down at my wrist and long to see an Omega watch on it. Perhaps it was the not-so-subtle implication that it would boost my appeal to women and help me to defeat the forces of evil.

I’m not alone. Every man secretly wants to be James Bond.  In Catch Me If You Can, Leonardo DiCaprio—playing real-life master con artist Frank Abagnale, Jr.—walks into a tailor shop and orders a suit exactly like the one he saw Sean Connery wear in Goldfinger.  Who could blame him?

In any event, I expect that Swatch Group (Switzerland:UHR), Omega’s parent company, will get a nice sales boost in the fourth quarter from the hype generated by 007’s latest adventure.  (I don’t know if I should be embarrassed or proud that I’ll probably be one of those sales.  And yes, I’ll get the exact same Seamaster model that Bond wears.)

Today, I’m going to take a look at a handful of other companies that stand to benefit from an endorsement by Britain’s most notorious spy.

Unfortunately, some of the higher-profile product placements—such as Bond’s Aston Martin or his bespoke Tom Ford suit—are not made by publicly traded companies (Aston Martin was recently sold by Ford to a group of private investors, and Tom Ford has never been public).

Still, we have quite a few traded stocks to choose from.  I’ll start with Dutch megabrewer Heineken (HINKY).  Bond purists may be a little disappointed to see 007 drinking a beer rather than his signature vodka martini, but Heineken forked over $45 million to ensure that he does.

To put this in perspective, Heineken’s paid product placement amounts to nearly a third of the movie’s $150 million production budget.  Having not seen the movie yet, I’m curious as to what exactly $45 million buys. I’m imagining a scene of Bond killing the villain with a blow to the side of his skull from a Heineken bottle.  Regardless, if viewers leave the theaters and stop to grab a beer on the way home, it might prove to be money well spent.

Oh, and as a bonus, in addition to being endorsed by Bond, movie junkies may remember that Heineken was also endorsed by the spoof agent Austin Powers in The Spy Who Shagged Me.  Yeah, baby.

I continue to view Heineken as an excellent long-term investment in the rise of the emerging market consumer.  When it is not quenching the thirst of British intelligence operatives, Heineken and its subsidiary brands are the beers of choice in much of Africa, Latin America and now, after its recent acquisition of Asia Pacific Breweries, Southeast Asia.

Next on the list is Sony Corporation ($SNE).  007 has toted a Sony mobile phone in the last several movies, and according to the website James Bond Lifestyle (yes, it really exists; try the link), he will be carrying a Sony Experia T.

Sony has fallen on hard times of late, and I doubt if even James Bond is charming enough to convince viewers to forgo an Apple ($AAPL) iPhone or a Samsung Galaxy S3.  But then, this is being written by a person who intends to buy an overpriced luxury watch precisely because he saw James Bond wearing it.  We shall see if Sony’s plight improves.

Finally, I’ll leave you with international spirits powerhouse Diageo ($DEO).  Though Heineken will be stealing the limelight in Skyfall, Bond is best known for sipping his vodka martinis—and shaken, not stirred.

Diageo’s Smirnoff—its most popular vodka brand—has long been a mainstay in the Bond film franchise.  Don’t be surprised if the general level of Bond buzz translates into higher sales of Smirnoff and of Diageo’s higher-end vodka brands like Ketel One and Cîroc.

Like Heineken, Diageo is a core holding in Sizemore Capital portfolios as a long-term play on the rise of the emerging market consumer.  I consider it one of the few stocks I would be truly willing to “buy and forget.”

Disclosures:  DEO, HINKY and UHR are held by Sizemore.  Charles Sizemore.

Related posts:

• Schizophrenic Bond Vigilantes and Other Market Tales
• There is NOT a Bond Bubble — at Least Not Yet
• Diageo: The Ultimate 12- to 18-Year Play

London Gold Market Report
from Adrian Ash
BullionVault
Weds 10 Oct, 07:40 EST

U.S. DOLLAR gold prices slipped for a third day in London on Wednesday, rallying from 2-week lows beneath $1761 per ounce as world stock markets also fell once again and industrial commodities held flat overall.

Silver bullion prices ticked higher to approach $34 per ounce. The Euro currency steadied above a 1-week low of $1.2850.

“The range [in gold prices] has been sideways since mid-September,” say Scotia Mocatta’s technical analysts.

“Negative divergence [in the Relative Strength Indicator] points to an imminent consolidation and short-term sell off,” reckons Axel Rudolph at Commerzbank.

“Gold support is at $1755 and resistance is $1775,” says the Commodities Daily from Standard Bank in London.

“Real economic data from China continues to disappoint,” adds the Standard Bank note, pointing to the near-7% drop in August’s rail freight from a year earlier.

“Weak freight volume data implies a bearish outlook for industrial commodities. It signals weak underlying real demand.”

Gold prices in India – the world’s #1 consumer market – meantime rose today to 1-week highs as the Rupee fell heavily on the currency market.

“Deals are there, but not in a big way,” one private-bank dealer says.

Ahead of late October’s wedding season and the run of Hindu festivals in November, “Buying momentum is slow this week,” he adds.

High gold prices have pushed upper and middle-class Indian families to buy imitation or “fashion” jewelry instead, reports today’s Business Standard, saying there are now 500 shops promoting such items in the state of Gujarat alone.

“The use of fashion jewelry has almost doubled in the past one year due to high gold prices,” says Lalit Lathiya of Bhuvneshwari Creation in Rajkot, “and not only in India but overseas as well.”

After cutting East Asian and European growth forecasts sharply this week, the International Monetary Fund today warned that the Eurozone could see capital flight of $2.8 trillion unless the region’s leaders “act swiftly to restore confidence.”

Italy saw its 12-month borrowing costs jump this morning from 1.69% to 1.94% at an auction of €8 billion in new short-term debt.

The Red Cross charity meantime launched a campaign specifically aimed at raising €30 million to help Spain’s 300,000 poorest citizens.

Ahead of Wednesday’s $21 billion auction of new US debt – part of $66bn in fund raising due this week – Treasury bonds slipped, nudging 10-year yields further above 2.0%.

“The industrialized world is stuck in a severe debt and growth crisis,” says Andrew Bosomworth, head of portfolio management in Germany for US bond-fund giant Pimco, quoted by German news magazine Spiegel.

“Central banks are fighting the disease with monetary infusions of previously unknown proportions, and the side effect is a slow but dangerous devaluation of money.”

“Gradual inflation has a numbing effect. It impoverishes the lower and middle class, but they don’t notice.”

Writing in the Irish Times, “The monetary environment has rarely looked more favourable for gold,” says economic analyst and consultant Charlie Fell.

“The structural headwinds to robust economic growth, not to mention central bank rhetoric, virtually assure negative real short-term policy rates for many years to come. As a result, it is highly unlikely that the bull market in gold is set to end in the immediate future.”

Following largely peaceful protests in Athens on Tuesday against German chancellor Merkel – who visited prime minister Samaras to discuss the next €31.5 billion of bail-out funds – Greek unions today called an anti-austerity general strike for Thursday next week, 18 October.

So-called “fast-track” approvals of four gold mining projects in Greece will see it become Europe’s largest producer by 2016, according to a Bloomberg report.

“The most fundamental problem of the mining industry,” said Mamphela Ramphele, chairwoman of the world’s fourth-largest listed producer Gold Fields in an interview yesterday, “is that it has a 19th century business model which depends on cheap labor, low-skilled labor, and therefore large numbers of workers.”

Some 24,000 GoldFields workers remain on illegal strike, with other wildcat protests demanding higher wages still shutting some 40% of South Africa’s total gold mining output.

Adrian Ash
BullionVault

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Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

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The USD/CHF is foreseen to head north as buoyant US economic data and a speech by Swiss National Bank Chairman Thomas Jordan are seen to shore up demand for the US dollar. A report yesterday from the US revealed that consumer confidence is on the rise while Jordan reiterated that the SNB’s Franc cap is the appropriate policy for the foreseeable future.

Coming off a positive jobs report which saw the Unemployment Rate drop to 7.8 percent, its lowest level since January 2009, the IBD/TIPP Economic Optimism index rose to a 71-month high in October. The index increased from 51.8 points to 54.0 points this month, exceeding forecasts of a modest rise to 52.3 points. The figure is also 13 percent above its 12-month average of 47.6 points. Despite high gasoline prices, recent strides in the labor market and higher stock prices likely buoyed confidence among Americans. Household purchases account for approximately 70 percent of economic activity, and improved sentiment likely suggests that the US economy could recover in the second half of the year after expanding by only 1.3 percent in the June quarter. Also awaited today is the release of the Federal Reserve’s Beige Book, which details economic conditions among the different Fed districts across the nation. Should the report reflect the steady improvement especially in the jobs and manufacturing sector last month, the markets could take this as a sign that the Fed’s quantitative easing could be terminated sooner that initially planned. Considering these, expect a firmer Greenback today.

Meanwhile, the Swissie is perceived to be weighed by comments from SNB Chairman Thomas Jordan as he spoke at the Swiss Chamber of Commerce and Industry in Tokyo today. Jordan said that with challenging times still lie ahead for Europe and the rest of the world. He forecasts growth to be at a bleak 1 percent this year as Swiss exports continue to face a difficult situation with the Franc remaining highly valued. Hence, he says that the Franc cap at 1.20 per Euro remains appropriate for the time being.

Likewise, European debt concerns are deemed to continue apply downward pressure on the Swissie. A meeting by German Chancellor Angela Merkel and Greek Prime Minister Antonis Samaras seemingly failed to reassure investors that an agreement is imminent on Greece’s next aid tranche. While proclaiming her desire to keep Greece in the Euro Zone, Merkel maintained pressure on the government to fulfill its austerity pledges, saying that much remains to be done. The Greek government has been negotiating with the so-called troika of lenders for more than two months over a program of spending cuts, which is key to triggering the next 31 Billion Euros in aid. Uncertainty over a possible bailout for Spain is also hurting sentiment after Spanish economy minister Luis de Guindos said yesterday that the nation is looking at the wider implications of a bailout request, again failing to provide a clear response on whether an official request is imminent. Considering these, a long position is recommended for the USD/CHF today.

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