The Swiss Franc or Euro: Good as Gold…?

by Adrian Ash
BullionVault
Wednesday, 30 March 2011

Everyone wants out of the Euro except Swiss exporters. What choice does the SNB have?

ULTRA-CHEAP MONEY has caused a whole heap of mischief to date. But really, this is getting silly…

“Switzerland may be better off adopting the Euro as the Franc’s appreciation hurts exports,” reports Bloomberg from Basel.

“It’s a nightmare for everybody,” says Thierry Stern, chairman of luxury watchmaker (and glossy-magazine benefactors) Patek Phillipe.

“We have to adapt. Something will come. I don’t know when, but one day it will happen.”

Industrialists are always in favor of devaluation, of course. Who do you think approved and drove Germany’s Weimar inflation in the early 1920s? And with export sales accounting for one half of Swiss GDP pretty much the same proportion as Germany enjoys the thought of abandoning the Franc shouldn’t really shock your local bar-room economist. The get-ahead Euro sure helped Germany extend its competitive edge inside the currency union. No wonder the idea’s fast gaining ground, as Bloomberg reports.

The Franc is so “strong” right now, Swiss exports recovered barely 7.1% year-on-year at last reading. “In Germany, sales abroad jumped 15% in the same period,” the newswire explains, pointing its finger squarely at the “safe haven” Franc. Rising by one-tenth vs. the Euro since March 2010, it’s not even slipped against gold so far in 2011…! And what good’s a currency that doesn’t lose value?

Time was, as our chart shows, that the Euro itself was “as good as gold”. Butting up against €10,500 per kilo for the first 5 years of the single currency’s new century, gold didn’t break out until mid-2005.

And see how gold’s correlation with the Euro the extent to which it moved in the same direction as the single currency, versus the Dollar, on a rolling 1-month basis was pretty high throughout? It regularly peaked just shy of a perfect 1.0. Meaning that gold and the Euro very nearly moved exactly together. Only once did that correlation drop below minus 0.4, as gold and the Euro briefly moved in opposite directions.

Now compare and contrast with that middle period, when gold and the Euro moved together more often still against the Dollar…but gold consistently out-stripped the single currency’s gains, delivering sizeable returns to French, German and Italian owners. Since the start of 2009, in contrast, and especially since the start of 2010, the Euro and gold have spent a good deal of time going their own separate ways mostly gold up, Euro down as it happens taking the metal to new all-time highs for European holders.

History buffs may well recall that gold’s current Dollar bull market long-lived but far from steep enough to be called a “bubble” just yet began just after the Euro was launched, right around the time the Swiss public voted to remove the Franc’s famous gold-backing. Just as the gold sales which followed failed to knock the gold price lower (indeed, gold then turned higher after a 20-year bear market), so the loss of gold backing has so far failed to debt the Franc’s safe haven appeal. So too has the Swiss National Bank embracing inflation, slashing its base rate to zero, and actively creating new Francs solely to dump them into the forex market in a bid to depress their value.

Seems you can’t keep a “safe haven” down, in short. Not when retained wealth worldwide needs to escape active devaluation from money-printing and zero rates at home. What options are still open to the SNB besides killing the Franc entirely?

“I don’t see any chance that the flow of money into Switzerland will change,” says a New York money manager quoted by BusinessWeek. “People just want to get the heck out of the Euro.” People except Swiss exporters that is.

Anyone caught in the middle might want to consider buying gold instead.

Adrian Ash
BullionVault

Gold price chart, no delay | Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

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.

LGMR: Gold “Well Positioned” as New Risks Whack the Euro, Stocks, Silver and PGM

London Gold Market Report
from Adrian Ash
BullionVault
08:50 ET, Tues 1 June

Gold “Well Positioned” as New Risks Whack the Euro, Stocks, Silver and PGM

THE PRICE OF GOLD in wholesale dealing rose against all major currencies early Tuesday, hitting two-week highs against the Dollar above $1224 an ounce as world stock markets slumped almost 2%.

The Euro dropped nearly 2¢, hitting a new four-year low on the currency markets, after the European Central Bank warned that Eurozone banks face €195 billion in bad debts.

Gold priced in Euros rose within 0.4% of mid-May’s all-time record highs, trading back above €32000 per kilo.

“Gold’s uptrend still look intact despite being over-bought short-term,” reckons one Hong Kong dealer in a note.

“The fear factor is still in the marketplace…which makes gold investment a reasonable alternative to equities,” says a Swiss commodity analyst, speaking to Bloomberg.

“Gold remains well positioned to benefit from risk aversion,” agrees Walter de Wet at South Africa’s Standard Bank.

“Speculative length [in Gold Futures] remains at acceptable levels despite gold’s rally of the past two weeks. As expected, platinum has seen a very large liquidation of non-commercial long positions.”

New data, released after Friday’s close, showed speculative traders in US gold futures and options reducing their bullish exposure in the week-ending last Tuesday.

The “net long” position of bullish minus bearish contracts held by non-gold-industry players shrank 9% to a four-week low equivalent to 921 tonnes of gold.

As London’s precious metals market re-opened after the Whitsun Bank Holiday on Tuesday, platinum and palladium prices fell a further 0.7%, extending May’s 10.5% drop.

Silver prices dipped with base metals and the platinum-group metals.

Crude oil fell hard, down to $72 per barrel as base metals also dropped.

“Safe haven” government bond prices rose, in contrast, pushing yields back down towards last week’s multi-month lows.

The British Pound also leapt to near a 3-week high, after the Prudential insurance group’s bid for AIG’s Asian unit was rebuffed, delaying if not killing the need for a $30 billion Sterling exchange.

Gold priced in Sterling reversed an earlier gain to trade unchanged from last week’s record-high monthly finish of £840 an ounce.

“We on [Credit Suisse’s] global strategy team remain overweight of gold,” says a new report from Andrew Garthwaite’s team in London, “and see…that the gold price could rise another 10% to 20%.”

Supporting the current bull-run in gold, Credit Suisse’s equity strategy team believe, are low real rates of interest; an “80% chance” that quantitative easing or the threat of a sovereign government default will continue; low gold allocations both at Asian central banks and global investment funds; the lack of “bubble behavior” in the gold price; sharply higher gold mining costs between now and 2015; plus the “shortage of a reserve currency” for investors to hold worldwide.

“There are no safe big-cap currencies,” says the Credit Suisse report, recommending investors buy what it calls “cheap” gold mining shares such as Newmont.

“German investors have not been put off the slightest by the high gold prices,” says Wolfgang Wrzesniok-Rossbach at refinery group Heraeus in Hanau.

“Increased [investment] demand was met by limited supply, so much so that despite increased production of bars (and certainly gold coins too) in the past two weeks, the waiting period for delivery went up considerably.”

Meantime in the government debt market today – where the European Central Bank said yesterday that it’s raised its purchases of Eurozone bonds – “By buying up Greek debt, the ECB keeps the prices of the bonds artificially high,” notes Germany’s Der Spiegel magazine online.

“French banks, in particular, benefit from this policy,” the magazine says, because French institutions now hold €80 billion in Greek government bonds. German banks, in contrast, have agreed with the Berlin finance minister not to sell their Greek bonds at all until May 2013.

“Thus, in a roundabout way, the [German] Bundesbank, by spending €7 billion to purchase the Greek securities, has already made a substantial contribution to bailing out banks in neighboring France,” says Der Spiegel.

Adrian Ash
BullionVault

Gold price chart, no delay | Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

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.

LGMR: Low Volatility Gold “Outperforms Stocks & Commodities”, Hits New Euro Highs

London Gold Market Report
from Adrian Ash
BullionVault
08:45 ET, Mon 26 April

Low Volatility Gold “Outperforms Stocks & Commodities”, Hits New Euro Highs as Greek Bail-Out Stalls

THE PRICE OF WHOLESALE gold bullion hit fresh record highs vs. the Euro early on Monday, holding onto Friday’s late gains for US investors as the single currency fell on the forex market.

World equities rose, as did commodities. Silver prices were little changed, remaining inside what bullion-bank Scotia Mocatta’s technical analysts call “a two-month up channel.

“[Silver] now looks poised to trade higher.”

Greek government debt meantime fell hard after Germany’s finance minister warned Athens that tough budget savings are “an absolute prerequisite” of the Greek bail-out – estimated at €30-80 billion, and now being discussed by Eurozone and IMF officials in Washington.

Over in Asia, Seoul’s defense minister said “a heavy torpedo [was] the most likely cause” of last month’s sinking of a navy patrol boat near the maritime border with nuclear-armed communist dictatorship North Korea.

“Gold is benefiting from both investors’ preference for a safe haven and to some extent a recovery in risk appetite,” said one Tokyo fund manager to Reuters earlier.

“Despite high prices, physical selling was lacking in gold and surprisingly light two-way business was seen in platinum,” says a Hong Kong dealer in a note.

Recording an AM Gold Fix in London more than 1.2% higher from Friday afternoon for both US and Euro investors, the price also rose to a fresh 30-year high against the Swiss Franc early Monday.

Briefly touching CHF 40,000 per kilo today, gold peaked at CHF 43,600 on 21st Jan. 1980.

“The market is still extremely thin and is therefore susceptible to sharp moves,” says Swiss refinery group MKS in a note to clients.

“Until fresh news on Greece gives gold fresh direction, the yellow metal is likely to remain volatile.”

Gold remains less volatile than both world and US stock-markets, however, as well as less volatile than all major traded commodities, according to new analysis from mining-backed marketing group the World Gold Council.

“On a risk-adjusted basis, the yellow metal outperformed compared with the broader commodity complex and international equities” during the Jan. to March period, write analysts Juan Carlos Artigas and Louise Street.

Gold investment demand “remains high by historical standards,” they continue, noting lower but strong demand for coins and small bars in the first quarter of 2010, as well as “a moderate increase” in wholesale bullion positions adopted by investment funds and institutions.

“Gold’s strong performance in 2009 coupled with other considerations such as its portfolio diversification and inflation-hedge characteristics were likely behind the fresh wave of allocations that occurred at the beginning of 2010.

“Most of the [large 400-oz bar] activity has been in the form of ‘plain vanilla’ rather than structured products, in particular in the form of allocated gold positions” held securely for investors inside market-approved vaults. [Want to join the professionals in buying and owning the safest gold at the lowest prices? Go to BullionVault now…]

Back in Monday’s action, major developed-world government bonds rose together with equities and broad commodities as crude rose back above $85 per barrel.

Ten-year yields on Greek government debt leapt however as prices sank, hitting a new 13-year record above comparable German debt at 9.58% while the Euro currency dropped half of Friday’s late-rally from 11-month lows to the Dollar.

The Euro also fell to a new 8-month low vs. the Pound. UK investors saw gold drop 0.7% from last week’s finish as Sterling rose, but the metal still recorded its best London Gold Fix since the morning of 16th April – just before the US government’s legal action against Goldman Sachs sparked a sharp drop in prices.

Latest data from US regulator the CFTC says that hedge funds and other large speculative players in Comex gold futures and options cut their net betting on higher prices by more than 1 contract in every 20 in the week-ending last Tuesday.

Small speculators, in contrast, extended their “bull ratio” slightly, taking it to a 21-month high of nearly 74% of all Comex gold contracts they held.

“Gold has seen a decline in speculative activity. So has silver,” note Leon Westgate and Walter de Wet at South Africa’s Standard Bank today.

“As a percentage of open interest (OI), the net long speculative position stands at 34.4%…well below the 42% of OI hit in Sept. 2009 and slightly less than the average 35.8% seen over the past 12 months.”

With speculative pressure in the gold market lower than in either silver or crude oil, “We favor gold,” says Standard.

Adrian Ash
BullionVault

Gold price chart, no delay | Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

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.

Cash Futures, Physical Forwards, and London Gold’s “100-to-1 Leverage”

by Paul Tustain
BullionVault
Wednesday, 21 April 2010

A note on the LBMA, gold futures and forwards, and “100-to-1 leverage” in London’s wholesale gold bullion market…

SOME COMMENTATORS are alarmed that the amount of ‘physical’ gold in London is not sufficient to meet the immediate demands of the market.

This concern is based on a simple misunderstanding. Read what follows and you will have a much better idea of how gold futures, forwards, the spot and physical markets interact.

Professionals who trade gold over the counter use a convenient standard for specifying the form of the gold they will deliver between each other. The standard is written and maintained by the London Bullion Market Association (LBMA).

This standard is the Good Delivery bar which weighs about 400 troy ounces, and is traded 100% fine (i.e. gross bar weight * purity). A Good Delivery bar must have been manufactured by a recognized refiner which subjects itself to rigorous and ongoing scrutiny by LBMA referees. All their output is carefully assayed.

Professional gold dealers, and they are mostly banks, trade both these bars, and notional contracts which are underpinned by these bars, i.e. ‘derivatives’ of the bars. These are things like gold futures, forwards and options.

Gold Forwards
The demand for forwards comes from volume buyers of physical metal – like gold dealers who wish to supply jewelry manufacturers – while the volume sellers are often gold mines and refiners. Both will make very specific forward settlement dates and conditions for the bullion delivery on a forward trade.

Private individuals would struggle to trade on their own account on the forward market, because they lack the settlement facilities – like vaulting accounts at the accredited vaults – which enable them to take and make delivery of Good Delivery bars. But a miner might go to an LBMA bullion bank and open a forward sale, and then arrange its gold to be shipped from a registered refiner direct to the buying bank.

So forwards are deals in physical gold, but not necessarily for immediate settlement.

Gold Future Contracts
Futures are different. Everyone – including private investors – can speculate on gold futures very easily. So is there physical gold behind futures trades?

A few Clearing Members of futures exchange will have a depository account with some real gold in it, though Ordinary Members would be unlikely to, and therefore cannot usually settle with their customers in gold.

Clearing Members’ gold sits in the depository vaults, and title to it rests with warrants which are passed between Clearing Members on the occasions there is a net settlement of gold between them. (Several years ago BullionVault spent quite a while trying to find a way of owning gold in a Comex Depository Vault, through a Clearing Member, but we never found a satisfactory way. Perhaps someone else has been more successful. If they have we’d be happy to learn how, and publish the details.)

Because there is not ordinarily access to gold via futures markets the huge majority of Ordinary Members of the futures exchanges, and their customers, settle cash, not gold. The cash amount they settle is calculated by reference to a specific price formula which becomes very relevant when a future contract expires.

Futures & Forwards Together
Futures and forwards work hand-in-hand. Futures give the bank the opportunity to approximately hedge out any price risk they have taken on a specific forward trade. Futures are standardized, highly liquid and easily traded in volume. The beauty of futures is that all the gradual liquidity of three months of forward deliveries on specific dates can be concentrated in a standardized futures contract which you can deal with any trader, because all the contracts expire on the same day and with the same terms, regardless of which trader you choose. This exchangeability is the source of their liquidity.

Forwards, on the other hand, are hopelessly illiquid. Each was custom built ‘over the counter’ for a specific settlement day. But forwards really are deals in physical gold – which will settle as Good Delivery bars, on almost every day of the year. So the flow of forwards through the vaulting system is smoother than the flow of futures through a futures exchange, which rush to close en-masse at expiry.

Adrian Douglas’ Misunderstanding
The key concern that Adrian Douglas (a director of the Gold Anti-Trust Action Committee (GATA), who attended the recent CFTC hearing) seems to have is that there is a giant physical exposure which remains undelivered. Let me explain why that is confused, while granting that there was no good explanation given by Jeffrey Christian (managing director of CPM Group, a New York commodities-market consultancy), who was in the hot-seat of a CFTC hearing. It is easier for me with the written word.

Forward contracts are priced according to two things: the price of gold, and the cost of money to the forward date of settlement (i.e. interest rates). Forward prices of gold stretch out into the future for months and years, forming what’s called the forward curve.

The entire length of that forward curve is what the LBMA member’s trader calls ‘physical’. For them this differentiates it from the cash-only-equivalent of a futures contract. So, when they talk about ‘physical’ or about the open ‘physical’ position they are talking about a whole lot of forward deliveries which sellers are under no obligation to deliver today, and which the buyers neither immediately want nor can demand.

Those forwards will fall due for delivery a day at a time without causing more than a ripple in the market. But being extended into a series of physical settlements stretching out on that curve for years, the open physical position is of course much, much larger than the amount of gold which happens to be in the various London vaults today. That’s no big deal, it’s where gold mines and aeroplanes come in.

So when a professional market analyst like Mr Christian says the open physical position exceeds the amount of gold in the vaults all he is saying is that the gold which is due for physical settlement next week or next month has not necessarily been shipped in yet. But he knows (even if he does not express it very clearly) that the seller of a forward is on the hook for making the gold available on the appointed settlement date. And of course the seller will incur a severe financial penalty for failing to settle, which is why forward sellers don’t sell gold without being very sure they can deliver it.

Mr Douglas seems to have made an understandable and honest mistake caused by the slightly confusing language which is used by traders. I hope you now see that the LBMA’s open physical position on its forward curve – far from being a risk – is a genuine benefit to the gold market’s smooth operation. It defines the daily rate at which real bars are needed into the future, and firmly places responsibility on the seller to make sure the gold arrives in good time. This helps keep the world of real bars settling efficiently.

At BullionVault we and all our customers benefit from this, because it means we can buy real bullion a few thousand ounces at a time from an LBMA dealer who keeps bars on hand to satisfy our modest demands. We don’t have to organize the shipments. We settle 48 hours after dealing, by sending a bank transfer and getting ViaMat (our recognized vault operator) to collect the bars. This is called spot trading, which is, in effect, the nearest 2 days of that long forward curve.

How Banks Use the Forward Curve
When novices jump into the spot market and buy up all the immediately available stock (and this happens from time to time) the result is a spike in spot prices which reflects a lack of sellers capable of making immediate delivery. It may not represent a fundamental shift in the value of gold; there might – for example – be plenty of gold arriving next week, and all of it available at a cheaper price.

What a trader will do is look at the shape of the forward curve. If he sees that the curve has developed a lump at 48 hours, caused by that aggressive novice’s buying, it will be profitable for him to sell his spare gold at spot, and buy forward by a week. He can deliver his bullion bank’s on-hand gold which will be replenished next week when the aeroplane arrives. And he will make money from the aggressive buyer who has paid a premium price for urgent settlement.

Meanwhile, as he buys one week forward in anticipation of the aeroplane’s arrival the effect is to distribute the novice’s order along the curve, and to smooth it out again. You may have read of gold bugs who put huge orders into the spot market to prove the gold is not there. Well now you understand why no-one sells it to them!Selling physical gold which you cannot deliver on time is a big mistake which professionals don’t make. If the gold bugs ordered 2 months forward – allowing time for sourcing and shipments – there would be plenty of sellers happy to take their business.

BullionVault Gold
So where does this leave the private investor? Using BullionVault, you can buy ‘Good Delivery’ gold from stock which is already in the vault. You are not even waiting for spot markets to settle.

The unusual rule on BullionVault is that a seller’s gold must be on-hand, in the vault, for settlement; and the buyer’s cash must be cleared in the bank. That’s why we host the only gold market in the world which offers instantaneous settlement at the point of trade, and on a 24/7 basis. Thereafter, BullionVault simply looks after your gold. It’s your property. It isn’t available for any selling when the spot market goes to a premium, and we have neither the right nor the wish to play the curve the way a bullion bank does.

You can see this proven, each day, on our Daily Audit. If we were delivering gold out to make a few dollars on the forward curve our bar lists would show we were short of physical gold in our vault. This is why we regard it as so important to publish our bar lists, and their reconciliation to all customers’ holdings, on a daily basis. So far as we know we are the only gold business in the world which does this.

We hope this has cleared up any confusion about the amount of gold in London vaults. Now we’d like to finish with a quick look at who is manipulating the futures market, and how.

Gold Futures Manipulation
Futures brokers here in the UK routinely tell their new customers that 9 out of 10 private customers lose money by dealing in futures. We understand the regulators require this as part of the necessary risk warning.

Part of the reason – which has recently been alleged by GATA – is that it is quite likely that there is some price ‘manipulation’ of futures contracts at expiry. This sort of thing is not a gold problem. It is a problem relating to futures markets in general.

Imagine you are a professional futures market seller – not necessarily of gold, but of anything – and you have the ability to settle the underlying commodity, while private investors do not. You sell the futures whenever they appear to be at a premium over your forward curve, which will happen as the speculators get into a buying frenzy on the futures market.

Suppose that at expiry the futures price is low against the forward curve, which is quite likely if lots of private investors are on the long side and are rushing to close out their near contract. You – the professional – will be perfectly happy to buy the future back, so long as the discount to forwards remains worth it, because then your physical stock won’t have to be delivered out, and you won’t need to buy a new forward to arrange a relatively expensive new delivery of physical stock into your depository account. So you see private investors will only find buyers for their urgent sales if the buyers get a discount to fair value. The professionals are in the box seat because they can settle.

Now suppose the opposite: that at expiry, the future is at a premium over the forward curve (which is what happens when lots of short sellers who can’t settle have been dominating the speculator’s market, and are now rushing in to buy to close before expiry). Now the professional will act as the seller, but only if the future is offering him a premium over the forward curve, otherwise he’ll run his open long to settlement. So once again the professional has the whip hand over a crowd all trying to do the same thing to avoid settlement. Whichever way the market moves the professional is in the driving seat if he can sort out settlements, which is the position few (if any) private investors are in.

It gets worse. Rolling over to the new futures contract doubles the opportunity for the professionals to profit.If, having just sold at a discount, lots of private investors are rolling forward to buy the new futures contract for the next quarter then that future will offer the professionals a premium over the smooth forward curve, and the professional will willingly sell it to them as soon as the premium is sufficient to make it profitable.

So you see even when private investors are offered rollover at apparently attractive terms (e.g. at middle prices and half the commission) the reality is that they are selling the old at a discount and buying the new at a premium. Wherever your trade is in the same direction as a large number of market participants who lack the ability to run their position until settlement you will probably lose out in this subtle way.

This is where the artificiality of futureswrings profit out of un-sophisticated investors who wish to speculate. Who’s to blame? It’s hard to accuse a seller of price manipulation when he runs his two month old trade to settlement, and it’s very hard to blame the opportunist professional buyer for supporting a low price by buying at a discount at expiry! The only people who can really be blamed for the expiry and rollover costs are the people who bought futures without both the money and the storage facilities to settle, and that’s usually those private investors who are its victims; which is ironic.

That’s futures, and it’s ultimately each investor’s own choice. If you choose to play you are dealing in a marketplace which may force you to trade at the time of your maximum disadvantage.

At BullionVault our position is that you might cautiously use futures for short term speculation. But we think you’d do better to avoid them for long term capital preservation, which for many is what buying gold is about.

Instead, you should choose physical gold through services like ours, where there are no artificial barriers placed in the way of smoothly continuous trading and settlement. All you need to do to avoid an unfair price dip in futures at expiry is buy the real thing, and although that’s difficult with pork-bellies, with gold it’s easy.

Paul Tustain
BullionVault

Paul Tustain is founder & CEO of BullionVault, the world’s largest store of privately-owned investment gold bullion.

(c) BullionVault 2010

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.

US Debt: Look At It This Way

by Adrian Ash
BullionVault
Friday, 15 January 2009

Seven ways to put the United States’ national debt into perspective…

The SHEER SIZE of the US government’s debt hasn’t put off new bond buyers so far in 2010.

You’ve got to wonder what kind of news – or debt – it might take to deter them.

In just two days this week, the Treasury issued $61 billion in new debt – twice as much money as Japanese households put into their domestic equity funds during all of 2009, itself a 50% jump from 2008.

Yet one “big bidder” still opted to lend the federal government one fifth of that sum, according to bond analysts speaking to the Financial Times at least. And overall, the government’s creditors offered to lend Washington three times the money it sought.

Now, if the Treasury didn’t need that $61,000,000,000 to cover 6.3 days of spending, the money raised in new bonds between Tuesday and Wednesday this week could cover 12 days of interest due on the outstanding debt, already running above $12.3 trillion and outweighing the market value of every company listed on the New York Stock Exchange.

Put another way, the United States national debt is greater than the GDP forecast this year for Japan, China, Brazil and Canada added together. (That’s excluding the $107 trillion of unfunded liabilities yet to come, of course.) If today’s lenders ever see their money again, they could just about buy all the gold ever mined in history – all 165,500 tonnes of the stuff – twice over at today’s prices.

Or they could simply pay twice today’s gold price, of course.

Repaying the US national debt looks a struggle, however. Settling $1 per second – rather than racking up an extra $37,132 every second, as the federal government’s scheduled to do in 2010 – would take until the start of February A.D. 392,372. Settled for cash, and piled up in $1 bills, the current US debt would reach to the moon…and back…and back to the moon again…and then round the moon’s equator ten or perhaps 20 times, depending on how much you squashed them.

Or to put the US national debt into historical perspective – a very historical perspective – the US government has borrowed the equivalent of $2.46 each and every day since the beginning of time…last computed to have occurred some 12.7 billion years ago, back when $2.46 really meant something.

For creationists sticking with Archbishop Ussher, that’s $2 billion per year since God said “Let there be light”…back when fiat really meant something, too.

And lo! The bond market still kept on buying.

Adrian Ash
BullionVault

Gold price chart, no delay | Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

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.

LGMR: Gold “Nearing Break-Out” as Obama Stimulus Judged “Too Small”

London Gold Market Report from Adrian Ash
BullionVault
08:55 EST, Tues 7 July

Gold “Nearing Break-Out” as Obama Stimulus Judged “Too Small”, CFTC Looks to Curb Crude Oil Trading

THE PRICE OF GOLD gained more than 1.0% for both US and UK investors on Tuesday morning in London, unwinding yesterday’s losses as European stocks rose but volatility hit the currency markets.

As the price of Gold rose to $931.40 an ounce, government debt prices ticked lower and bond dealers reported “very little trading”, pushing the yield on 10-year US Treasuries up to 3.55%.

The Euro bounced sharply towards $1.34, pushing the Gold Price for Eurozone buyers back down to €661, while crude oil bounced higher from a 6-week low of $64 per barrel.

“We believe the Dollar’s status as reserve currency will be confirmed [at the G8 summit in Italy] on Thursday,” writes Walter de Wet at Standard Bank today.

“Suggestions and comments by non-G8 member countries might un-nerve the market, but we see Dollar weakness on the back of such statements as an opportunity to sell gold.”

“The market cannot be deemed bearish just yet,” counters MKS Finance in Geneva. “The market will remain dull and range bound unless either the 920 or the 950 level is breached.”

“The back and forth price action reflects some indecision,” agrees Scotia Mocatta, the London market-maker today, “and cautions that a break-out is approaching.”

Longer-term, however, “Any correction in the Gold Price [will be] short-lived given our belief that a tightening in the US monetary remains a distant prospect,” says a new report from Deutsche Bank analysts Michael Lewis and Xiao Fu, who maintain their “mildly bullish outlook for gold into the second half of the year.”

“We believe the macroeconomic environment remains broadly supportive for gold, namely negative US real interest rates when deflated by core CPI, skittish global equity markets, and a relatively weak US Dollar.”

Overnight the State of California’s debt rating was slashed to triple B by Fitch Ratings – just two notches above “junk” – after several major US banks said they will stop accepting its I.O.U. promissory notes in lieu of cash this coming Friday.

Facing a $24 billion budget shortfall for 2009, California plans to issue over $3bn of I.O.U.s to pay its creditors in July.

“Global investors and officials are concerned about the credibility and the sustainability of our fiscal policies. So am I,” writes Richard Berner, managing director and chief US economist at Morgan Stanley.

“They fear that we will adopt policies that will undermine the Dollar and the domestic value of dollar-denominated assets through a combination of risk premiums and inflation…Interest rates may have to rise significantly to compensate investors, including reserve portfolio managers and sovereign wealth funds.”

Investors looking to defend against inflation with crude oil or commodity-index positions may find their speculation capped by new restrictions, US regulator the Commodity Futures Trading Commission said today.

CFTC chairman Gary Gensler announced hearings to decide whether “federal speculative limits should be set to all commodities of finite supply, in particular energy commodities, such as crude oil, heating oil, natural gas, gasoline and other energy products.

“This will include a careful review of the appropriateness of exemptions from these limits for various types of market participants.”

Today US advisor Laura Tyson joined vice-president Joe Biden in calling the Obama government’s $787 billion stimulus package “a bit too small”.

Latest CFTC data showed Monday night that the outstanding number of US Gold Futures and options ticked higher as the Dollar Gold Price added 1.5% in the week to last Tuesday.

The net long position held by speculative traders fell to a 7-week low, but the “smart money” of commercial industry players raised its bearish betting faster than its bullish position in gold, pointing to caution amongst refiners, wholesalers and bullion banks as the seasonal summer lull in Buying Gold wore on.

“At the moment, the safe haven money is more directed into bonds and the Dollar because of the low inflation level,” reckons James Steel, head of commodities analysis at HSBC in New York.

Noting that Gold Prices were left unmoved by weekend news of rioting in China and fresh ballistic missile tests by North Korea, “Such indifference by gold to ostensibly bullish events may be an indication of underlying weakness,” he believes.

Meantime in India, the traditional summer lull in gold and silver demand has been compounded by yesterday’s doubling of precious-metal import duties, LiveMint reports from Mumbai.

“The duty hike is holding traders back now,” says IndusInd Bank’s Pinakin Vyas. “We will not be able to achieve targeted imports due to this duty.”

“The weak Rupee following the [new Indian] budget also dented demand,” another bank dealer tells the website.

“Evidence from other key gold markets around the world [says] higher taxation regimes can lead to the trading of gold along non-official channels,” warns World Gold Council director Dharmesh Sodah, quoted by Bloomberg.

Over in Vietnam – where the lifting of gold-export restrictions flattered the Jan-July trade balance by US$2.6 billion – gold demand is rising “in dribs and drabs” as local prices tick down, says VietNamNet Bridge, cutting the 2.5% premium to world prices seen late last month.

The Solidarity trade union in South Africa, formerly the world’s No.1 Gold Mining producer, warned yesterday against calls by militant politicians to nationalize the nation’s mineral assets.

“The statements that are now being made and the [ruling party] ANC’s current support for debate are an ominous sign,” said Solidarity spokesman Jaco Kleynhans. “The statements could not have come at a worse time.

“Commodity prices have dropped sharply and nearly 35,000 employees in the industry have already lost their jobs this year. Mining companies hate uncertainty and serious investors will not invest in South African mining.”

South Africa’s annual gold output has more than halved in the last decade.

Last week the government began temporarily closing selected operations in a bid to stem fatalities in the industry, already running at 277 over the last 12 months.

Adrian Ash
BullionVault

Gold price chart, no delay | Gold in 2009

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

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.

South Africa’s annual gold output has more than halved in the last decade.

Last week the government began temporarily closing selected operations in a bid to stem fatalities in the industry, already running at 277 over the last 12 months.

Adrian Ash
BullionVault

Gold price chart, no delay | Gold in 2009

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

US Spending & Income: Two Charts

by Adrian Ash
BullionVault
Friday, 26 June 2009

“Everyone says higher saving rates are needed. Just not yet please…?”

“STOCKS SEESAW as savings rate jumps,” said the AP on Friday, amending its earlier “Stocks decline” headline to try and fit the moves to the news, rather than the other way round.

Either way, reckon the newswires, “Investors are nervous because consumers are saving more than they’re spending.”

But if it really was the 15-year high in US personal savings rates way up at 6.9% of gross income that spooked investors, just wait until Wall Street gets down to crunching Uncle Sam’s give-and-take in the latest Commerce Dept. figures.

And heaven forbid the Chinese take a peek at US consumers’ earnings…

Falling below zero for the first time since 1960 or earlier, nominal US wages have fallen off a cliff in the last six months.

Gross income earned from employment has fallen year-to-date each month in 2009, dropping in May to its lowest level since Oct. 2007 and down more than 2% from the peak of last August.

So how come consumers spending AND saving both rose last month, while pay packets shrank?

“Obviously, for the long run, it has been desired for decades that Americans save more,” said one fund manager to Reuters from Illinois. “But in the midst of this recovery [sic] and the stimulus packages that have been put forward, the hope would be to have them spending the money now.”

And there’s the devil in the detail: the government stimulus.

The Bureau of Economic Analysis’s Personal Income & Outlays release shows government benefits last month hitting a record both in Dollar terms and as a proportion of gross personal earnings, rising above 17.9% of income across the economy.

For comparison, Uncle Sam’s donation to US personal income peaked at 14% during the early 1990s recession. The five-decade average is 11.1%.

Unemployment insurance benefits, meantime, were almost twice the Dollar volume in May of October last year. And yet the Street’s apparently worried by US citizens putting too much money aside, rather than by how much Washington’s stepped up to support them.

Still think the fiscal or monetary stimulus will make for the exit any time soon…?

Adrian Ash
BullionVault

Gold price chart, no delay | Gold in 2009

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault winner of the Queen’s Award for Enterprise Innovation, 2009 where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

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.