Month: January 2013

By MoneyMorning.com.au

’2013 is the year that investors finally shake off their fear and dive back into the stock market.’

That’s something I’ve been hearing more and more often in recent weeks. There’s a ‘wall of money’ just waiting to pour out of bonds and flood into the stock market.

After all, why would anyone put more money into bonds? The returns are minuscule. Prices are so high and yields so low that even in the best-case scenarios, you’ll still barely make a bean. And with the worst of the crisis behind us, bonds now look very vulnerable to any rise in inflation.

So where else can people invest? It’s got to be good news for stocks.

At least, that’s what all the equity salespeople are saying. And their logic seems sound. There’s just one catch.

Bubbles don’t burst painlessly. And the bond bubble is highly unlikely to be any different…

1994 All Over Again?

2013 will be the year of what Bank of America Merrill Lynch analyst Michael Hartnett calls ‘the Great Rotation’.

Whatever you want to call it, it’s the point at which investors lose their terror of deflation, and instead start to fret about inflation. It’s the point at which they stop worrying about losing money, and start to worry about missing opportunities to make it.

And as far as the stock market bulls are concerned, it’s great news. All the talk of the ‘death of equities’ has been greatly exaggerated. This is their comeback moment.

This is when all that lovely money that has been locked up in the bond market comes flooding out and deluges the stock markets of the world, lifting all boats (not to mention fund managers’ pay packets).

It all sounds great. But as Hartnett points out: ‘the transition is very unlikely to be smooth’. He sees two big threats to ‘an orderly Great Rotation’ – 1994 and 1987.

First, there’s the ‘bond shock’ scenario. In 1994, yields on 30-year US Treasuries (‘the long bond’) jumped by 2.4 percentage points in just nine months, as Ambrose Evans-Pritchard noted in The Telegraph. In case you’re wondering, that’s a big move.

Why did it happen? There’s a good archived article from Fortune magazine on the 1994 crash here. It all sounds rather familiar.

‘In January 1994, the 34th month of economic expansion, bond yields were historically low and inflation seemed negligible: wages were going nowhere, and companies dared not raise prices.’

But there were some mild signs of inflationary pressures growing, with commodity prices rising. So the Federal Reserve started to very gently tighten monetary policy.

At the time, Fed governor Alan Greenspan thought that if he was seen to be acting to fend off inflation quickly, it would bring down long-term bond yields.

So he raised interest rates from 3% to 3.25% in February. That’s a tiny move. But markets weren’t expecting it. Yields on 30-year Treasuries leaped higher as prices slid. And it got worse through the year.

There were plenty of reasons for the slide, but it boiled down to this: investors had been planning for a low interest-rate world. They’d bought up bonds all across the globe, ignoring signs of burgeoning recovery, or the threat of political risk in emerging markets. And of course, they’d used borrowed money to do it.

So even a hint of a change in the mood music caused a panic as bond investors rapidly re-evaluated their positions.

As Hartnett suggests, if we see a repeat of 1994 this year – perhaps the Fed eases up on quantitative easing – then the hardest-hit would be investors in high-yield bonds and emerging market debt.

Or Worse Still – 1987?

The other danger, says Hartnett, is that we see a repeat of the October 1987 stock-market crash. As well as rising bond yields, one of the many factors driving this crash was tension between the major economies over currency valuations. Again, this sounds worryingly familiar.

Hartnett sees a repeat of 1987 as ‘a low probability event’. However, at the same time, ‘many countries are trying to devalue their way to growth, risking a currency war… should gold start to respond favourably to this backdrop, we would certainly worry that a major risk correction is imminent.’

In short, whatever the equity sales people like to suggest, there’s unlikely to be a smooth sweep of all that lovely money directly from bond markets to stock markets. And the more bullish investors are (and they’re very bullish at the moment), the more likely we are to see a nasty correction happen in the process.

What Should You Do About It?

We’ve been saying for a while that bond markets look expensive. The main scenario in which government bonds would make you money from here is if there’s a major dose of deflation, and that now doesn’t look likely.

That makes them a very expensive form of deflation insurance.

Gold on the other hand is one of the best ways to insure against inflation. While gold is certainly not cheap today, given the reasonably high chance of inflation taking off in the future, it doesn’t look expensive either.

As for the rest of your portfolio, the key is to make sure you have a plan and stick to it. Hang on to cheap equities, maybe take profits on some of your more speculative positions, and keep some cash in reserve to take advantage of any crash opportunities that arise.

John Stepek
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek</em>

By MoneyMorning.com.au

After spending more than 50 years in foreign hands, Germany’s gold is finally going home.

In a recent watershed decision the Bundesbank, Germany’s central bank, has decided at least half of its gold should be held in its own vaults.

Since the Bundesbank is the second-largest gold holder in the world, that’s going to mean moving 54,000 bars of the shiny metal.

So why does Germany want its gold back, and why now?

Part of it has to do with pressure from a grassroots group led by a group of economists, business executives, and lawyers, along with the German Precious Metals Association, who have put together a ‘Repatriate our Gold!’ campaign.

But that’s only part of the story…

Official pressure began last October when the German Federal Court of Auditors requested an inspection of the gold Germany stores in foreign central banks.

That sparked something of a political controversy since these gold reserves have never been thoroughly inspected and audited.

What’s more, the U.S. Federal Reserve had already refused to allow the Germans to verify their gold despite several attempts.

According to Der Spiegel:

‘Finally, in 2007, “following numerous enquiries”, Bundesbank staff members were allowed to see the facility, but they reportedly only made it to the anteroom of the German reserves.

In fact, auditors from the Bundesbank made a second visit in May 2011. This time one of the nine compartments was also opened, in which the German gold bars are densely stacked. A few were pulled out and weighed. But this part of the report has been blacked out – out of consideration for the Federal Reserve Bank of New York.

So why would the Federal Reserve deny the Bundesbank a full inspection and audit?

That question has been rich feed for the rumor mills ever since the news broke.

So let’s have a closer look at the surrounding facts…

The Significance of the German Gold Repatriation

According to the plan, Germany’s gold repatriation will take seven years to complete and by 2020, Germany will store 50% of its gold in Frankfurt. Several analysts consider that, since the gold will only be moving from one vault to another, this transfer will have no measurable market effect.

But I think it’s a mistake to make that assumption. Instead, this news could have a significant psychological impact.

Here’s why…

Others will follow Germany’s lead. The Dutch are already making similar noises, asking for an audit and full transparency. The Netherlands also only has 10% of their gold reserves at home, with the rest in New York, Ottawa, and London.

Now it’s only a matter of time before others start to ask the same kinds of questions. In a recent tweet, Bill Gross said what many are probably already thinking: central banks just don’t trust each other anymore.

Growing concerns about the Eurozone. There are suggestions Germany wants its gold because it’s worried its loans to less fiscally responsible sovereigns won’t be repaid. But I believe Germany is preparing in case the Euro were to eventually dissolve, so it wants its gold to potentially back a new Deutsche Mark. Perhaps they, too, recognize gold’s return to its role as money.

A list of unanswered questions. The first is obvious: Is the gold really there? If so, why would it take seven years for Germany to get its gold back? Would you take the risk of collecting it slowly, or would you want it much faster?

Some say the gold’s there, yet others disagree. Steve Scacalossi, vice president and director, global precious metals at TD Securities, says Germany’s gold is allocated, and therefore can’t be lent out, so it will not affect gold lease rates.

Meanwhile, Keith Barron, a geologist and consultant responsible for one of the largest gold discoveries in 25 years, recently told King World News:

‘I believe that most of the Western world’s gold, which is supposed to be in central bank vaults, has been leased out. Much of it is now in private hands in India, and what remains continues going East to China and other Asian vaults.

‘So most of the Western gold has vanished from the vaults and it’s now just a book entry. These various Western countries and bullion banks simply roll these leases over when they come due, and the gold never gets returned back to the countries. So it’s very interesting to see what’s going on. Obviously the trust is breaking down in the system.’

While some could easily dismiss Germany’s behavior as that of a distrustful state, there’s precedent for Barron’s claims.

The Story Behind Portugal’s Lost Gold

In 1990 Drexel Burnham Lambert, one of America’s largest investment banks, filed for bankruptcy. Drexel’s failure is famously blamed on junk bond trader Michael Milken.

But few know that the central bank of Portugal had loaned 17 tons of gold to Drexel. When the firm failed, Portugal’s claim on its gold simply evaporated.

That was more than two decades ago at a time when almost no one was interested in gold, which then traded at US$380.

Today, gold sells for US$1,660 per ounce, and now a lot more people are paying attention.

The fact is, if Germany’s gold is really sitting in the vaults of the New York Fed and the Banque de France, it shouldn’t take until 2020 for it to make its way back home.

Seven months – maybe. Seven years means something else is up, and that raises suspicion.

Such a delay makes you wonder if these central banks aren’t being forced to “buy back” the gold they may have leased out.

Anthem Blanchard, CEO of Nevada-based Blanchard Vault, a precious metals storage company, appears to agree with PIMCO’s Bill Gross.

Mr. Blanchard recently told Canada’s Globe and Mail, ‘most importantly, the action of repatriation signifies the acknowledgement of credit risk and the Bund’s [Bundesbank’s] concern of any possibility that gold held at the Fed may be over-pledged in some manner.’

Meanwhile, the physical gold market is one that many already consider to be rather tight.

If Germany calling in its gold unleashes a run by other nations on central-bank-stored gold, the physical gold market could react with a massive squeeze.

That’s in addition to the fact central banks are stepping up their gold acquisitions. As a group, they bought more gold in 2012 than at any time in almost 50 years.

Now it’s entirely possible that fear’s been struck in the hearts of central bankers around the world.

That means the price of gold could skyrocket.

For investors, the lesson is simple: Learn from Portugal’s failure.

Be like Germany, and buy yourself some physical gold.

Peter Krauth
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in Money Morning (USA)

From the Archives…

Why the News Could Get Worse for Apple Shareholders
25-01-2013 – Kris Sayce

How to Play the EU Referendum for Profit
24-01-2013 – Kris Sayce

Here’s Why I’m Proudly Bullish About China’s Economy
23-01-2013 – Dr. Alex Cowie

How to Find Stocks for Troubled Times: Keep Scalable Businesses in Mind
22-01-2013 – Nick Hubble

Why It’s Still Not time to Buy the Japanese Stock Market
21-01-2013 – Murray Dawes

USDCHF stays below a downward trend line on 4-hour chart, and remains in downtrend from 0.9388, and the fall extends to as low as 0.9193. Resistance is at the trend line, as long as the trend line resistance holds, further decline is still possible after a minor consolidation, and next target would be at 0.9100 area. On the upside, a clear break above the trend line resistance will indicate that a cycle bottom is being formed and consolidation of the downtrend is underway.

Daily Forex Forecast

By www.CentralBankNews.info     Hungary’s central bank, which earlier today cut its base rate by another 25 basis points to 5.50 percent, said it would only consider further rate cuts if the outlook for inflation remains in line with the bank’s 3 percent target and the improved sentiment in financial markets is sustained.
    The National Bank of Hungary, which began cutting rates last August, said the short-term outlook for inflation had recently improved and it expects inflation to return to around the target as the impact of last year’s tax rises wanes and domestic demand remains weak.
    However, the bank also warned that if companies pass on higher production costs in response to government measures that affected the prices of non-core items, “it may pose an upside risk to the medium-term outlook for inflation” and it would closely monitor underlying inflation.
    Since August last year, the central bank has cut rates by 150 basis points to stimulate growth and this month’s guidance is largely similar to last month when it also said it would only consider further rate cuts if good financial market sentiment continues and the inflation target is achievable.
    Hungary’s inflation rate eased further to 5.0 percent in December from November’s 5.2 percent, with lower prices of durable goods, processed foods and fuels the major factor.

    Hungary’s inflation rate jumped last year due to higher indirect taxes, which triggered price hikes, a depreciation of the forint plus higher food prices from bad weather.
    “Hungarian economic growth is likely to resume following last year’s recession as the country’s export markets recover,” the central bank said, adding that output is significantly below its potential level and the labour market remains loose.
    It added that global risk appetite had continued to improve in the past month but the “contrast between buoyant sentiment in international financial markets and the subdued outlook for growth continues to pose a risk.”
    Hungary’s Gross Domestic Product fell by 0.2 percent in the third quarter from the second quarter, the third quarterly contraction in a row. Year-to-year, the economy shrank by 1.5 percent in the third quarter, up from second quarter decline of 1.3 percent and first quarter contraction of 1.2 percent.
    In 2011 Hungary’s economy expanded by 1.7 percent and the International Monetary Fund said in its annual review this month that the economy was projected to have shrunk by 1.5 percent this year, up from its October forecast of 1.0 percent.
    This year the IMF expects Hungary’s economy to stagnate with any rise in exports offset by weak domestic demand. Inflation in 2013 is projected to have eased to 3.5 percent from 5.6 percent in 2012, but the IMF said inflation expectations were still not well anchored.
    The IMF said further rate cuts by Hungary’s central bank should be “considered very cautiously” as rate cuts are unlikely to have a material impact on aggregate demand, given the difficult operational environment for banks, and the foreign currency exposure of private and public balance sheets remains significant so any sizable currency depreciation could be destabilizing.
    The central bank said its policy tools allowed it enough room to maintain a policy stance that is consistent with its inflation outlook and any expansion of its range of “unconventional policy tools may provide effective support only during times of acute financial market stress.”

    www.CentralBankNews.info

By www.CentralBankNews.info

By www.CentralBankNews.info     Hungary’s central bank cut its benchmark base rate by another 25 basis points to 5.50 percent, as expected, and said it would provide details of its decision later.
    The National Bank of Hungary cut its rate by 125 basis points in 2012 and said last month that it would consider further rate cuts but only if sentiment in financial markets continued to improve and there was evidence that the inflation target was achievable.
    In December Hungary’s inflation rate fell to 5.0 percent in December from 5.2 percent in November, still considerably above the bank’s 3.0 percent inflation target.
    Hungary’s Gross Domestic Product contracted by 0.2 percent in the third quarter from the second quarter, the third quarterly contraction, pushing down the annual rate of shrinkage to 1.5 percent from the second quarter’s 1.3 percent drop and the first quarter’s 1.2 percent contraction.
    The recession and high level of excess capacity is expected to keep downward pressure on inflation.

    www.CentralBankNews.info
 

By www.CentralBankNews.info     India’s central bank cut its policy repo rate by 25 basis points to 7.75 percent and reduced the cash reserve ratio (CRR) for banks by the same amount to 4.0 percent, citing tight liquidity conditions, saying inflationary pressures appear to have peaked and economic activity remains subdued.
    The Reserve Bank of India (RBI), which cut its benchmark repurchase rate by 50 basis points in 2012, said it was likely that inflation would remain range-bound around the current level in 2013-14 and this would allow it to focus on supporting growth. The growth forecast was revised downward.
    “This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks,” the RBI said in its third quarter policy review, citing the bank’s governor Dr. D. Subbarao.
    “This policy guidance will, however, be conditioned by the evolving growth-inflation dynamic and the management of risks from the twin deficits,” he added.
    Financial markets had expected the RBI to cut its repo rate due to weak growth, waning inflationary pressures and the bank’s statement in December that lower inflation would allow it to support growth. 
    The cut in the CRR should inject around 180 billion rupees into the banking system, RBI said. Other key rates, such as the reverse repo rates was cut to 6.75 percent, the marginal standing facility and the bank rate to 8.75 percent.

    The RBI already trimmed the cash reserve ratio in September and October last year and injected 470 billion rupees of liquidity into the banking system during December and January, but the bank said average borrowing from the its liquidity adjustment facility (LAF) of 910 billion in January have been above the bank’s comfort level.
    “This tightness could potentially hurt credit flow to productive sectors of the economy,” Subbarao said.
    In July the RBI projected Gross Domestic Product growth of 6.5 percent for the current 2012-13 year of 6.5 percent, but this was revised down to 5.8 percent in October and has now been revised further down to 5.5 percent as investment activity has been weak and policy initiatives by the government will take some time to reverse the investment slowdown and reinvigorate growth.
    Globally, sluggish global economic conditions prevail but “overall, global economic prospects have improved modestly since the Reserve Bank’s last review in October 2012 even as significant risks remain,” the bank said.
    In the third quarter of 2012, India’s GDP expanded by only 0.6 percent from the previous quarter for annual growth of 5.3 percent, down from a 5.5 percent growth rate in the second quarter.
    India’s main measure of inflation, the wholesale price index, eased to 7.18 percent in December from 7.24 percent in November due to the a sharp drop in the prices of non-food manufactured products. The bank’s survey also pointed to a softening of industrial output prices, suggesting that the pricing power of corporates has weakened.
    Food inflation, however, was contrary, moving into double digits, reflecting cyclical and structural factors, which will keep the headline inflation rate around current levels. 
    With demand pressures ebbing, the RBI called for an urgent solution to remove supply constraints and tackle India’s inflation which accelerated in late 2009 to over 10 percent in mid-2010 and remains over the central bank’s 4-5 percent comfort zone.
    “In the absence of an effective supply response, inflationary pressures may return and persist with adverse implications for macroeconomic stability,” the RBI said.
    The bank revised downward its March forecast for WPI inflation to 6.8 percent from October’s 7.5 percent.
    
    www.CentralBankNews.info

London Gold Market Report
from Ben Traynor
BullionVault
Tuesday 29 January 2013, 07:00 EST

WHOLESALE Gold Bullion prices climbed back above $1660 an ounce Tuesday morning, broadly in line with where they ended last week, as stocks and commodities fell slightly and the Dollar ticked higher against the Euro ahead of tomorrow’s interest rate decision from the US Federal Reserve.

“We are seeing a technical rebound following a few days of price decline,” one trader in Shanghai told newswire Reuters this morning.

“In the short run, gold is still going to drift without much conviction, though over the longer term it is still facing very heavy pressure on the upside.”

“We have neutralized our medium term forecast and also now have a short term bearish outlook,” says Commerzbank senior technical analyst Axel Rudolph, citing gold’s failure to breach its 55-day moving average at $1696 an ounce.

“The $1625.77 level is still key for the medium term trend. Failure here could provoke a sell-off to below the $1600 level.”

Like gold, silver regained some ground this morning after losses in recent days, climbing back above $31 an ounce.

Here in London, the FTSE 100 retreated from five-year highs this morning, as other European stock markets also dipped slightly.

In the US, the Federal Open Market Committee begins its two-day meeting today ahead of the Fed’s latest policy decision tomorrow.

“This week’s FOMC meeting and US non-farm payrolls [on Friday] will be key in setting gold’s price trajectory,” says a note from Barclays Capital.

“[Minutes from last month’s] FOMC meeting [show] that some FOMC members are looking for an exit to further asset purchases before the end of 2013,” says the quarterly preview from Standard Bank’s commodities desk.

“If the Fed stops its quantitative easing program, it should temper some of the upside for gold and silver – at least in US Dollar terms – relative to an environment where the Fed still expands its balance sheet…but to us, the Fed’s balance sheet is only one piece in a bigger puzzle of growing liquidity and negative real interest rates.”

The Fed will continue with $85 billion a month of asset purchases – comprising $40 billion of mortgage-backed securities and $45 billion of government bonds – until the first quarter of 2014, by which time it will have bought $1.14 trillion worth, according to the median estimate in a survey of economists conducted by news agency Bloomberg.

“To get to the point where Bernanke would be comfortable letting up, you have to have a good solid string of economic reports [this year] that you’re just not going to get,” says Eric Green, global head of rates and FX research at TD Securities in New York.

“The Fed is resuming rapid expansion of the monetary base,” says Don Coxe, former strategy advisor at BMO Financial Group, in his final issue of his monthly BMO strategy journal ‘Basic Points’.

“Japan will soon be flooding the currency markets with Yen. The European Central Bank remains expansionary…it is almost impossible to conceive of a more bullish long-term backdrop for gold.”

Coxe also sees demand from India and China, two countries that account for around half of world gold demand, continuing to support gold prices.

Indian exports of gems and jewelry are expected to rise by 15% this year to more than $44 billion, with silver exports seen jumping 30%, according to Pankaj Kumar Parekh, vice chairman of India’s Gems and Jewellery Export Promotion Council.

“At such high prices, gold is going out of budget for many youngsters,” says Parekh.

“A wrist bracelet of white gold is now replaced with sterling silver as it is cheaper.”

Ben Traynor
BullionVault

Gold value calculator   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics. Ben can be found on Google+

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

The British pound is foreseen to extend its losses alongside the Euro today on expectations that the Bank of England is preparing to take more aggressive action to boost the UK economy, which is teetering close to a triple-dip recession. Meanwhile, the Euro is deemed to be supported by positive signs that the German economy is rebounding quickly from a contraction in the fourth quarter.

Economic indicators have ominously pointed to the UK economy entering its third recession since 2008. The Office for National Statistics reported last week that Gross Domestic Product fell 0.3 percent in the December quarter as a North Sea oil production slump, weaker factory output and a hangover from the London Olympics dented output. Yesterday, Hometrack revealed that UK house prices stagnated in January and fell by 0.3 percent on an annual basis, painting another bleak picture of the housing market. With the harsh weather, economists are wary that the economy will enter another recession if it shrinks yet again this quarter.

With the economy at risk of entering an unprecedented triple-dip recession, the markets are increasingly speculating that Mark Carney, who takes over a chief of the Bank of England in July, will unveil new policies aimed at stimulating growth. In a newspaper interview, Carney said he was more focused on boosting growth than on tackling inflation, likely raising the odds of the central bank taking steps to increase the money supply. Speaking at the World Economic Forum over the weekend, he also said that central bankers need to be prepared to take aggressive measures to help economies achieve an “escape velocity,” likely an indication of things to come when he takes over the BOE.

In contrast, views that the Germany is gaining steam after contracting in Q4 of 2012 are seen to buoy the common currency today. The GfK Consumer Climate index is estimated to rise from 5.6 points to 5.8 points this month, suggesting that consumer activity is apt to boost growth in the current quarter. The report follows data last week which showed business sentiment climbed to its best reading since June and business activity surged to its fastest rate of growth in a year in January. Recent stabilization in the financial markets have likely translated into improving prospects for the Germany economy, suggesting that the country is once again seen to lead region in its economic recovery. Considering these, a long position is then recommended for the EUR/GBP trades.

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EURUSD

After its increase to the current high of 1.3479, the EUR/USD entered the consolidation phase. Drops down to 1.3425 continue to attract customers, and the growth is limited by the resistance near the level of 1.3480. Apparently, Bulls are going to break through the 35th figure, but it is possible that it will happen after a deeper decrease. The 34th figure will now act as the support and in theory, it should limit all the bears’ attempts to seize the initiative. Even if this level has been broken-through, the bulls have no reason to worry about it until the pair holds above 1.3300. Thus, the level of 1.3400 looks attractive for purchases, and the bulls’ ability to hold above will be the evidence for maintaining the growth potential towards the 35th figure.

GBPUSD

As for the overall picture in the GBP/USD pair, it is unlikely that Bulls will see something good. The pound was loosing its positions through the whole day yesterday, then it overcame the support at 1.5745 and dropped to 1.5674. The increasing attempts are still unsuccessful and they only attract a fresh wave of sellers. However the pair’s oversold condition increases, as well as the overbought condition in the EUR/GBP pair, and every decrease increases the risk of the upward correction. The rise to 1.5900 — 1.6000 can be used to open short positions.