Dec 08 Capitulation Not Over in Crude Oil Tom McClellan McOscillator

Capitulation Not Over in Crude Oil

 

 

December 05, 2014 

Tom McClellanCrude oil prices had a seemingly exhaustive washout selloff following the Nov. 27 OPEC meeting.  Oil bulls had been hoping for a production cutback at that meeting, but Saudi Arabia successfully led an effort to oppose such cuts. 

But the message from the Commitment of Traders (COT) Report data is that the washout is not yet complete.  An exhaustive move like what we have seen should produce capitulation among the small speculators, but instead the readings from recent weeks showed them them rushing in to buy.

Traders’ positions are reported each Friday in the COT Report, and they are broken down into 3 categories:

Commercial traders are the big money, and presumed to be the smart money.  They are “engaged in business activities hedged by the use of the futures or option markets.” 

Non-Commercial traders are ones who are not engaged in such practices, but who have large enough positions to merit individual reporting of those positions.  Think hedge funds.

Non-Reportable traders are those whose position sizes are small enough that the CFTC deems them not worth reporting individually.  They are the small speculators, and reliably considered to be the “hot money”. 

This week’s chart looks at the Non-Reportable traders’ net position in crude oil futures.  These traders tend to get more net long as prices move higher, and they get scared out or go short as prices go lower.  Generally speaking they have a bias toward the net long side, and so any time they actually go net short, it is usually a sign of a bottom for crude oil prices. 

Given the amount of the drop in crude oil prices, it would be reasonable to expect these traders to get shaken out of their long positions.  But that is not what they have been doing.  The “buy the dips” mentality was still active.  With the COT Report released on Friday, Dec. 5, they are finally starting to make more of a move to unload their long positions, but they are still not yet back to neutral or even net short, which is what it should take to mark the bottom of this decline.  

The COT Report is issued every Friday, and we feature a discussion of the relevant insights from that data every Friday in our Daily Edition. 

This oil price decline actually ties into the recent Hindenburg Omen (HO) signals which were triggered this week.  I was just on CNBC on Dec. 4 talking about the Hindenburg Omen, and you can see that interview here.  One point to understand about that video is that headline writers like to spice things up, and in ways not necessarily consistent with the actual story, or with the views of those who are interviewed. 

The reason why the oil price decline is related to the Hindenburg Omen is that HO requires seeing both New Highs (NH) and New Lows (NL) exceeding a certain number of issues on the same day.  There are also some other requirements.

A cursory review of the list of stocks making new 52-week lows shows a lot of stocks with the words “drill”, “energy”, or “resources” in their company names.  Were it not for the concentrated damage to energy stocks resulting from the oil price slide, we would likely not be seeing an HO signal now.  Not all HOs end up seeing a big market collapse, but they do tend to show up ahead of every big market decline so they are worthy of some attention.  To get a big slide now, the stock market is somehow going to have to fight off the bullish forces of positive seasonality, plentiful liquidity according to the breadth numbers, and more QE coming from other countries’ central banks.  Plus we are now in the year following the mid-term elections, which is nearly always an up year. 

That is a tough package of forces for the stock market bears to fight against.   

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Dec 08 BBBBB This past week in gold Jack Chan

This past week in gold

Jack Chan

GLD – on buy signal.
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SLV – on buy signal.
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GDX – on buy signal.
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XGD.TO – on buy signal.
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CEF – on buy signal.

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This long term chart helps me to stay focused on the big trends and ignore the noise.

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Dec 08 Gold Rushes Higher, Fresh Uptrends Transpire Demeadville

The Gold Update by Mark Mead Baillie --- 264th Edition --- San Francisco --- 06 December 2014 (published each Saturday)

“Gold Rushes Higher, Fresh Uptrends Transpire”

With a week under its belt since the "Swiss Miss", we've presently two initial impressions as regards Gold's current price of 1193. The first, quite obviously, is its ever-evident estrangement on the above scoreboard in the face of debasement. The second is its not succumbing to the warped will of Switzerland's bürgerschaft, (which, for you WestPalmBeachers down there, is not a fast food drive-thru lane), the country's once sensibly-shrewd citizenry that threw Gold down the toboggan chute.

Indeed: after the Swiss "NEIN" vote for their central bank to maintain a 20% Gold-asset base, etc., was known last Sunday, but prior to the market's opening that afternoon (15:00 Pacific Time), a close Swiss-related "family" member rang up as to Gold's perhaps getting walloped in the offing. I calmly suggested that the knee-jerkers would almost certainly send it bollocking down at the open, but come session's end on Monday, 'twould likely be higher than Friday's pre-vote close. When asked why that would happen, I simply said that, by the polls, the vote's result was already priced into Gold and moreover, that when 'tisso obvious which way a market is going to go, 'twill "unexpectedly" do the opposite.

And so off Gold went, gapping down from the prior Friday's 1167 settle to open Sunday at 1159 and then swiftly head further South to as low as 1142; but by the time the dust had settled last Monday at 1212, Gold had reached as high as 1221, a 79-point upswing. 'Twas not only the largest such intra-day points up-move since 16 April 2013, but the fourth largest since Gold's All-Time High, (1923 on 06 September 2011). And if your name is Claire Voyant, buying just one li'l ole Gold contract at the day's low and selling at the high earned you $7,900. (Too bad you didn't buy 1,000 contracts). Oh, but wait: you say you bought Silver instead? The single contract swing profit there was $13,275 (from 14.155 to 16.810). Dinner's on you baby.

"Well, mmb, you did write last week that given these are precious metals markets, they can rise just as swiftly, if not more so, than they've fallen..."

Nice of you to point that out Squire, but the bottom line is, here at 1193, we've a very long row to hoe toward reaching pricing sanity at 2000+. Remember our axiom: change is an illusion whereas price is thetruth. Still, that strong intra-day upswing does beg the question, albeit for the ad nauseath time: is Goldfinally "sold-out" here?

Switzerland's rejecting a return to some fractional form of Gold standard certainly gave the Trading/Investing/Manipulating bearish powers-that-be the quintessential opportunity to crush price once and for all: why, the Swiss have comprehensively turned their back on Gold! 'Twas the chance to drive it into oblique obscurity, render it worthless, or at best make a weak cousin to Molybdenum (59¢/oz.), perhaps even drive the price sub-zero! But no: the nattering nabobs of Gold negativism couldn't even push it down to test the year's low at 1131. Have they who drive price begun to think twice?

One thing's for certain as we go to the weekly bars, Gold's power pop was more than satisfactory to flip the parabolic trend back to Long, the rightmost bar in the chart representative of price this past week having eclipsed the level of the red dots to record a new blue dot. So from here, the first higher goal is to trade up into the mid-1200s, and then to focus on moving above that 1240-1280 resistance band as bordered by the purple lines. 'Course, as you can see center-right of the chart, the last flip to blue was a flop -- fortunately an exception to our technical expectation that shan't this time 'round be repeated:

Also flipping to Long, which it'd almost done a week ago, is Gold's daily Price Oscillator study, the bars in the below graphic having turned to green. To be sure, the prior three occurrences of going green have sported mediocre follow-though rather than material up movement. Something more on the order of the green course charted last spring would place Gold into the 1300s and really start reeling in those who'd abandoned ship en route. When then gathering for high tea, one would appear terribly common to have missed the re-ascension of Gold: "Charles never actually sold his, you know...":

Quite. We might also point out that Sister Silver's daily Price Oscillator stance went positive as well this past week, such that the associated Market Rhythm target points to a price of at least 17.155. The white metal's settle yesterday (Friday) was 16.285.

Let's next pair up our precious metals below in this two-panel graphic. Both panels show the daily bars spanning the past three months along with their "Baby Blues" that depict the consistency of the ever-evolving 21-day linear regression trend. Clearly, the same case can be made for both metals, especially per their respective bars of last Monday (fifth in from the right). On the left for Gold, 'tis now twice, indeed thrice, been shown that trading sub-1150 is just too doggone low, per the red pointy fingers. On the right for Silver, 'tis the same analysis that trading sub-16, let alone sub-15, is just too doggone low, in her case dastardly so! Note the resolute, shorts-busting upside resilience in both cases: BANG!

Given the above graphic, methinks 'twill take one heckova concocted, dare I say conspiratorially, trumped-up myth to rationalize lower lows, (although we've a real doozie as you'll see at the foot of this missive). Nevertheless, let us reiterate one of our favourite time-honoured quotes, especially as we're in the thick of the StateSide football season: were the late great Green Bay Packers head coach Vince Lombardi to look up at our scoreboard, he'd yell "What da hell's goin' on out dere?!?!?" Well, take heart, Coach: by our graphics, the Gold Game looks to be turning around.

Indeed what's going on here is Gold's having out-performed the other primary BEGOS components month-over-month, the percentage performance of those five markets which comprise that acronym as next shown. And how arduously challenging it must be for some to grasp that Gold could be the period's the top performer given both the €uro -- and certainly so the ¥en -- succumbing to so-called "Dollar strength". Why even the S&P is higher too ... but then again, it never goes down. (And blame the chart's "compressed" appearance on Oil's recoil):

Yes, 'tis once again evidence that Gold plays no currencies favourites, (as 'twas detailed back in our 25 October piece entitled "Gold & Debunking Dollar Strength"). Today we've the EuroZone's economy sliding back toward recession, their most recent Purchasing Managers’ Survey achieving its lowest level in 16 months, with a further bond buying binge expected to be announced in January as part of the European Community Bank's €1 trillion Quantitative Easing strategy. Meanwhile Moody's has further reduced any yen for the ¥en in having just downgraded Japan's credit rating. And yet through it all, even including the Swiss Miss, Gold's defying to take further downside bait.

Still in the broader picture as noted earlier, the yellow metal's resilient post-Swiss Miss power pop pales in comparison to the reality of price's lowly position as we turn to our layered Structure chart, wherein we see Gold, per that great 1978 Van Halen hit, all but "Runnin' with the devil...":

Toward closing, let's pair up the 10-day Market Profiles for both Gold (left) and Sister Silver (right), followed by three quick quips on the way out, (including the doozie as promised). Again, the horizontal profile bars represent contact volume per price point for the last 10 trading days and the white bar in both panels yesterday's settle; from the trader's perspective, the longer the bars, the more expected their supportive or resistive qualities:

And we thus end it with these:

1) Here's the Kerfuffle of the Week: Jens Weidmann, who heads Germany's Bundesbank, seems dead-set against the ECB's imitating US-style money printing, such position of the Präsident said to be holding up the EuroZone's central bank from taking more aggressive QE action. The ECB indeed put forth that it“remains unanimous in its commitment to using additional unconventional instruments". At least the Germans are hedging by repatriating their Gold, (assuming 'tis still out there somewhere).

2) Here's the Headline of Week: "French economy resilient but stagnant". Ok...

3) Here's the Doozie of the Week: On the off chance that you missed this one, it really does take the cake. There's a Dutch-born chap in New York who works for Citigroup as their Global Chief Economist by the name of Willem Buiter. He's quite bright, and assumedly so given his high-level stance at Citi, albeit he's on record now as likening Gold to Bitcoin. (I'm hearing your collective "Oh, C'mon Man!" as you read this). Still, Mr. Buiter is not denying that Gold can't climb to $5,000/oz., as it could be in a bubble for another 6,000 years. For after all, as he was so quoted in a FinMedia piece: Gold is a "fiat commodity currency, just as the U.S. dollar, the euro, the pound sterling … are fiat paper currencies and as Bitcoin is a flat virtual currency". I'll tell ya Folks, never has it dawned on me throughout all my years of analysis that the supply of Gold is unlimited. Who knew?

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Gold, Silver See Modest Strength At The Start Of The Week

Gold prices are starting the week relatively strong considering Friday’s surprisingly positive nonfarm payrolls report, but some analysts are expecting to see more pressure in the near-term.

Electronic trading of Comex February gold futures  open the Sunday North American evening/Monday Asian session at $1,191.20 an ounce, up from Friday’s pit close of $1,190.40 an ounce. Shortly after the open, prices started to fall, hitting an early session low of $1,187.30 an ounce. Prices have since bounced higher; as of 9:12 p.m. EST, February gold was trading at 1,193.80 an ounce.

Silver prices are also relatively strong, benefiting from gold’s performance. Electronic trading of Comex March silver futures opened the Sunday evening/Monday morning session at $16.250 an ounce, down from Friday's pit close of $16.258 an ounce. At the open, prices quickly fell to an early session low of $16.165 an ounce. Prices have recovered since the open and as of 9:12 p.m. EST March silver was trading at 16.275 a ounce.

Analysts at HSBC said in a recent note that they expect prices will continue to fall in the near-term as the U.S. economy picks up momentum. This was reflected in the stronger-than-expected employment numbers, adding expectations that the Fed will hike interest rates sooner rather than later.

“In short, the data are robbing gold of the oxygen it needs to fuel a rally,” HSBC said in a research note published Friday afternoon. “Against a powerful consortium of higher equities and rates, and stronger (US dollar), the appeal for gold as a perceived ‘safe haven’ evaporated.”

Looking at the U.S. dollar, analysts at Brown Brothers Harriman said that it remains king of the currency world.

“It continues to be supported by the divergence in growth and interest rate differentials,” they said in a note published Sunday. “In the coming weeks, it is difficult to envision anything that will undermine this general theme.”

Edward Meir, commodities consultant with INTL FCStone noted that they are expecting the gold market to struggle in the next three-to-six months. In a report published Sunday, he said that weaker energy prices “will lower inflationary expectations and increase real interest rates, yet another reason that we would be cautious about gold’s upside potential.”

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U.S. Mint To Start Offering 2015 Gold Coins Jan. 5, Silver Coins Jan. 12

The U.S. Mint plans to sell 2015-dated gold bullion coins beginning Jan. 5 and silver coins a week later, the agency said.

The Mint also said it has completed production of 2014 American Eagle and Buffalo gold bullion coins, which will remain on sale until inventories have been depleted.

The agency will begin accepting orders for 2015-dated Eagle gold coins – in one-ounce, one-half, one-fourth and one-tenth ounce sizes – and American Buffalo gold bullion coins on Monday, Jan. 5.

“As we plan to have sufficient quantities of all coins available, we will not be allocating the initial release,” the Mint said in a memo to authorized purchasers late Friday. “If the United States Mint has a remaining balance of one-ounce 2014-dated gold bullion coins, we will begin issuing them, on a fixed ratio basis, alongside the 2015-dated coins beginning with orders placed on Tuesday, Jan. 20, 2015.  Based on current inventory and demand, we do not anticipate having a large balance of 2014-dated one ounce gold bullion coins left.”

The Mint said it is transitioning Eagle silver production from 2014-dated coins to 2015.

“We will continue to sell the remaining inventory of 2014-dated coins, under allocation, until inventory is depleted,” the Mint said. “Based on current demand, we anticipate having enough coins to offer allocations through the week of Dec. 15th.”

The Mint will begin accepting orders for 2015-dated Eagle coins on Monday, Jan. 12. These coins will be sold under the allocation process.

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Dec 07 Will There Be Forced Official Sellers of Gold? acting-man

Will There Be Forced Official Sellers of Gold?

Possible Side-Effects of Plunging Commodity Prices – A Look at Russia

One of our readers wrote to us with a question on a topic that will surely be of interest to a wider audience. Here is what he asked:

“As FX reserves dwindle, surely there is some potential that Russia may be forced seller of Gold? I understand your views re gold market, but would be most interested to hear your thoughts on the possible impact? Are there other options? Talk of gold backed RUB, default on USD debts, etc.

It is clear that a number of major oil producers are in severe trouble. However, Russia’s central bank has actually increased its gold reserves in recent months. It is now the world’s 5^th largest official holder of gold, after increasing its stock pile to 1,150 tons in September (the most recent data available).

To this it must be kept in mind that Russia itself is a major producer of gold, the third largest in the world in fact, mining about 250 tons per year. The central bank is involved in the marketing of this gold, acting as an intermediary for producers. In spite of increasing its gold reserves quite a bit, they still only represent about 10% of Russia’s total reserves. Here is by the way a chart of gold in ruble terms:

In ruble terms, gold is at a new all time high – click to enlarge.

So why has Russia’s central bank actually accelerated its gold buying (i.e., has retained more of the gold it markets for local producers than normally) in the face of increasing pressure on its foreign exchange reserves? As one commentator remarked:

“From the perspective of a sovereign which is concerned about aspects of geopolitical risk, it makes sense that they would have a bias toward physical gold,” Brian Lucey, a finance professor at Trinity College Dublin and formerly an economist for the Central Bank of Ireland, said today by phone. With lower gold prices, Russia may have viewed it “as good a time as any to pick it up,” he said.

Russian officials think about this exactly as Alan Greenspan does. When Greenspan was once asked why the US treasury shouldn’t sell its remaining gold reserves, he pointed out that in extremis, such as in times of war, gold is absolutely certain to remain a viable means of payment that will be accepted by everybody. He cited the experience of Germany during WW2 to buttress this claim empirically.

We would also note that while Russian reserves have been under pressure due to capital flight and misguided attempts to defend the ruble’s exchange rate with forex market interventions, its current account has been consistently positive since the mid 1990s:

Russia’s current account remains in surplus – click to enlarge.

The current account surplus may come under pressure as well in light of plunging oil prices, but Russia has used the years of plenty to build up a “rainy day” fund amounting to about $470 billion in addition to its central bank reserves. The current situation is presumably precisely what Russia’s government had in mind when it did that.

Note as an aside that the Russian government is in a very strong fiscal position – the kind most developed nations can only dream of. This is now also bound to deteriorate somewhat (although not as much as one might expect, as the ruble price of oil has barely declined), but Russia certainly still has a lot of fiscal flexibility:

Russia’s public debt to GDP ratio. The government is nearly debt free. As an aside, there is a flat personal income tax rate of just 13% in Russia – click to enlarge.

WTIC crude oil, monthly – as can be seen, prices are now back to where they already were in 2005-2006, pressuring all major oil producers – click to enlarge.

Readers may also recall that Mr. Putin has recently been persuaded by the free-market oriented faction of prime minister Medvedev that he should finally do something about official corruption, as a means to counter the effects of economic sanctions (see: “Russia Moves Toward Increasing Economic Freedom” for details). Putin agreed, as he evidently understands that Russia’s economy needs every bit of help it can get. We recently had official confirmation of the new approach in Putin’s annual address to the Duma. Here are what we believe are the most important points:

“I propose a full amnesty for capital returning to Russia. I stress, full amnesty. Of course, it is essential to explain to the people who will make these decisions what full amnesty means. It means that if a person legalises his holdings and property in Russia, he will receive firm legal guarantees that he will not be summoned to various agencies, including law enforcement agencies, that they will not “put the squeeze” on him, that he will not be asked about the sources of his capital and methods of its acquisition, that he will not be prosecuted or face administrative liability, and that he will not be questioned by the tax service or law enforcement agencies.

[…]

It is essential to lift restrictions on business as much as possible, free it from intrusive supervision and control. I said intrusive supervision and control. I will consider this in more detail later. I propose the following measures in this regard.

Every inspection should become public. Next year, a special register will be launched, with information on what agency has initiated an inspection, for what purpose, and what results it has produced. This will make it possible to stop unwarranted and, worse still, ‘paid to order’ visits from oversight agencies. This problem is extremely relevant not only for business, but also for the public sector, municipal institutions and social NGOs.

Finally, it’s crucial to abandon the basic principle of total, endless control. The situation should be monitored where there are real risks or signs of transgression. You see, even when we have already done something with regard to restrictions, and these restrictions seem to be working well, there are so many inspection agencies that if every one of them comes at least once, then that’s it, the company would just fold. In 2015, the Government should make all the necessary decisions to switch to this system, a system of restrictions with regard to reviews and inspections.

Concerning small business, I propose establishing ‘holidays from inspections’. If a company has acquired a good reputation and if there have not been any serious charges against it for three years, then for the next three years it should be exempted from routine inspections by government or municipal supervisory agencies. Of course, this does not apply to emergencies, when there is a danger to people’s health and life.

Business people talk about the need for stable legislation and predictable rules, including taxes. I completely agree with this. I propose to freeze the existing tax parameters as they are for the next four years, not revisit the matter again, not change them.

Meanwhile, it is important to implement the decisions that have already been made to ease the tax burden. First of all, for those who are just setting up their operations. As we have agreed, two-year tax holidays will be provided to small businesses registering for the first time. Production facilities that are starting from scratch will be entitled to the same exemptions.

(emphasis added)

It should be obvious that if this program of liberalization is successfully implemented, it will do a lot to halt capital flight – more than the capital repatriation amnesty would do by itself. However, the two proposals go hand in hand: if owners of “flight capital” can be persuaded that official corruption is going to be successfully tackled and state interference with private enterprise will be significantly reduced, they have a big incentive to bring some of their funds back.

We would conclude from all this that the danger that Russia will become a forced seller of official gold reserves is fairly low for the time being.

Venezuela under Great Pressure

Socialist Venezuela is under far greater pressure to sell or swap some of its official gold holdings. We recently showed this chart of the black market Bolivar rate, which is a reflection of the dire straits the government finds itself in:

The bolivar has collapsed in the black market in Cucuta (a border town with a flourishing foreign exchange trade) – click to enlarge.

Under both Nicolas Maduro and his predecessor Huge Chavez, plenty of welfare spending and other government handouts have been funded with the country’s oil income. This policy was combined with massive inflation of the local currency, fixed exchange rates and price controls. As a result there are now shortages of goods as well as a growing shortage of foreign exchange reserves. The government is increasingly unable to pay for imports and foreign debt coming due concurrently. Its social spending has become unaffordable too. So there is a good chance that Venezuela will eventually be forced to sell some of its official gold holdings.

However, as we always point out, such news can at most have a short term psychological impact on the gold market. The gold market is so big that Venezuela’s potential sales won’t even be noticed.

Besides, it should be obvious by now that central bank gold buying in recent years has not helped the gold price one bit – QED.

Conclusion:

A few nations may indeed be forced to sell some of their official gold reserves as a result of plunging oil prices. It seems however not likely at this juncture that Russia will be one of them. Moreover, the impact on the gold market should be quite limited. We will discuss the other parts of the reader question above next week (i.e., the possibility of introducing a gold-backed ruble and the possibility of defaults on USD denominated debt).

Charts by: StockCharts, Bloomberg, BigCharts, Tradingeconomics, acting-man/dolartoday

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Dec 06 LBMA Implosion By Reversal of its Own Gold Leverage SafeHaven

LBMA Implosion By Reversal of its Own Gold Leverage

Discussion notes:

1. Gold Market: GOFO negative, surging gold lease rates, gold price backwardation

• 1-month GOFO or Gold Forward rate (GOFO = LIBOR - gold lease rate) has been negative for 30 days now and 6-month GOFO has been negative for 14 days for the first time on record.
• 1 month gold lease rate surged from 0% on Sept 17 to 0.72% on December 1 - indicator of physical gold shortage both in London and NY.
• Price backwardation, where the gold spot price is higher than the near-dated forward contract price, was theoretically argued not to be possible because of high gold stock-to-flows ratio (i.e. 5+ billion gold ounces already above ground).

- Gold should immediately be sold on spot market and bought with forward contract to extinguish the backwardation to secure guaranteed dollar profit - yet this isn't happening.

Gold price backwardation is a condition where gold is not bidding for dollars - guaranteed profit should be taken in dollars - an indication we are building toward currency crisis.

http://fofoa.blogspot.ca/2010/07/red-alert-gold-backwardation.html

"... This is the key to EVERYTHING!!! It is not "gold liquidity" that the bullion banks create... it is DOLLAR LIQUIDITY. Dollars bidding on MSFT stock set the value of that stock. If dollars are frantically bidding on MSFT (high velocity), the stock skyrockets. If dollars stop bidding for MSFT all at once (low velocity), the price falls to zero. This is true for everything in the world except gold.

Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero. This is backwardation!

Fekete says backwardation is when "zero [gold] supply confronts infinite [dollar] demand." I am saying it is when "infinite supply of dollars confronts zero demand from real, physical gold... in the necessary VOLUME." So what's the difference? Viewed this way, can anyone show me how we are not there right now? And I'm not talking about your local gold dealer bidding on your $1,200 with his gold coin. I'm talking about Giant hoards of unencumbered physical gold the dollar NEEDS bids from.

Think about it. You can't make it cold in July by simply rigging the thermometer....

2. Gold market trading volume

• NYSE stock trading volume is averaging $50 billion per day spiking to $120 billion per day.
• LBMA (80% of daily global gold trading) trades 160 M oz. of gold in gross daily trading volume in September 2014 using the LBMA's 10:1 ratio of daily gross trading volume to daily net settled trading volume http://www.lbma.org.uk/assets/Loco_London_Liquidity_Surveyrv.pdf
• $192 billion per day of gold gross trading volume (vs. NYSE $50 billion) on the LBMA is AVERAGE dollar value of trading in September 2014.
• In June 2013, LBMA traded 290 million oz. per day on average or $406 billion per day of gross daily trading volume.

3. Leverage in the LBMA will destroy the LBMA

• Current implied open interest using 2x 160 M oz. daily trading volume is 320 million oz.; using 3x trading volume open interest is 480 million oz.
• The LBMA refuses to divulge gold and silver open interest to the public.
• Primarily 'unallocated' (virtual) gold contracts being traded with only notional gold backing (compare this to the Shanghai Gold Exchange where 1 kg of gold must be deposited for each 1 kg spot contract that is created).
• LBMA indicates that 90% of daily trading is spot trading - you can create the price but cannot create the metal with virtual trading and gearing of trading instruments.
• Two examples of creating leverage in the LBMA gold and silver market (i) Unallocated positions as well as (ii) rehypothecation of forward contracts creates exceedingly high claims per gold oz. available for delivery.
• This paper leverage (multiple claims per physical gold oz.) quickly puts the LBMA into distress as physical metal is called for delivery and withdrawn collapsing gold backing by an estimated 100x for each gold oz that is withdrawn.
• Many countries now accumulating gold in size and hearing of houses that have borrowed forwards and sold spot (shorting gold) are being called to deliver gold.
• Swiss vote was a transient factor (1,500 tonnes to be accumulated over 5 years) but the global secular trend for physical delivery and withdrawal from artificially manipulated markets continues. A crisis at the LBMA will grow as physical gold and silver continues to be withdrawn at an accelerating rate due to the impact of reverse application of the virtual gearing of physical metal contracts that have been used to manipulate precious metals at the LBMA. The LBMA will in the end be detonated by this reverse application of the LBMA's own paper manipulation of precious metals using leverage of trading instruments (which price manipulation has also allowed manipulated of global interest rates).
• The price action of gold despite the physical gold shortage as visible through backwardation, high lease rates etc., is indicative of just how disconnected the LBMA is as a gold market.
• Ignore the 'wave action' of daily price action of gold and other precious metals and be aware that a massive tide is rising for all precious metals which will overwhelm paper manipulation of physical precious metals.

4. Deflationary Collapse and John Exter's Warning

• John Exter, who was on the Federal Reserve's Board of Governors, has warned us that an untethered fiat (paper) money system as we now have will collapse in a deflationary collapse ending in currency failure and gold being the ultimate safe haven asset
• The deflationary collapse is driven by excess debt that is created when paper money allows the creation of debt without limit which is what has now happened with global debt at 315% of global GDP compared to an historically stable level of 150% of GDP
• https://en.wikipedia.org/wiki/John_Exter
• http://www.goldmoney.com/research/research-archive/a-banker-for-all-seasons-the-life-and-times-of-john-exter-champion-of-sound-money
• http://www.goldmoney.com/research/research-archive/A-BANKER-FOR-ALL-SEASONS-PART-II
• http://www.goldmoney.com/research/research-archive/a-banker-for-all-seasons-part-iii

IN SUMMARY

• Physical gold is being withdrawn from the financial system especially at the London Bullion Market Association (LBMA) metals market
• Reversal of the estimated 100:1 paper-to-physical metal gearing at the LBMA will lead to an accelerated collapse of the LBMA
• Withdrawal of physical gold from the market is a secular trend that is accelerating due to the mispricing of gold and silver through the leveraged paper trading on the LBMA and NY COMEX markets
• Investors should ignore the daily 'wave action' from the paper metals markets and focus on the unstoppable 'rising tide' that will lift precious metals to enormous heights

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Dec 06 Why OPEC Will Tolerate Cheap Oil John Browne

Why OPEC Will Tolerate Cheap Oil\

By: 

 John Browne

Despite falling oil prices, the Organization of Petroleum Exporting Countries (OPEC) voted on November 27th not to cut production in order to boost prices. The key to this decision appears to have been the attitude of Saudi Arabia, which has long been the first among equals in the coalition. Not surprisingly, the decision led to further oil price declines, and led many observers to conclude that OPEC has largely lost the ability to upwardly influence the price of petroleum. But this determination ignores the wider geopolitical considerations that may be convincing Saudi Arabia to be perfectly content, for now, with lower prices.

 

With about 20 percent of the world's proven oil reserves and producing between 10 and 13 percent of the global oil usage, Saudi Arabia is the world's leading oil producer ahead of the U.S., China, Iran and Canada. Perhaps more importantly, with its developed and easily accessible oil fields, Saudi Arabia has some of the lowest "lifting costs" in the world. Some estimate that it only costs the Saudis less than $5 to extract a barrel of oil from its fields. This is stark contrast to the much higher costs in rival countries and offshore and of shale producers. This permits the Saudis to withstand a protracted price slump far easier than other countries. The Saudis can use this ability as a weapon to achieve its strategic ends.

 

Modern U.S./Saudi relations were shaped towards the end of WWII by negotiations between President Franklin D. Roosevelt and the Saudi King Ibn Saud. In return for Saudi cooperation over oil, the United States guaranteed Saudi Arabia military protection. Despite the clear ideological differences between a conservative Wahabbi Sunni Kingdom and a Western democracy, this policy has largely held for some 68 years. Saudi Arabia exercised moderation and consistency over oil supplies from the Arab Gulf. In return, the United States led an impressive Allied military defeat of an Iraqi threat to Saudi Arabia in Gulf War I.

 

While the current dip in energy prices clearly does hurt Saudi Arabia, it hurts her enemies far more, particularly Iran and Russia, which has been a key enabler of Iranian power and an international pariah on its own. Putting pressure on Russia has also become a key strategic interest of Washington.

 

For many oil exporting nations, the tax revenues generated from petroleum constitute a major portion of government budgets and have become essential to the maintenance of long-term solvency. Nations like Russia, with oil generating 50 percent of tax revenues in 2013, according to the Ministry of Finance, are assumed to have a 'Budget Break Even Cost' (BBEC) of around $105 per barrel based on Citi Research's data. Obviously the current price, less than $70 per barrel, is placing a great deal of strain on President Putin's finances. Iran has a BBEC of some $131 oil. Recovering from recent sanctions, Iran has few currency reserves. Therefore, oil at $70 will necessitate an early cut in government spending, risking civil discontent and possible regime change.

 

Saudi Arabia is assumed to have a lower BBEC of some $98 per barrel. And although current prices are lower than that, over decades Saudi Arabia has accumulated vast foreign exchange reserves. As a result, many observers believe she can sustain her economic budget for a considerable time with oil selling at below $93 a barrel. Meanwhile, countries such as Russia, Iran and, particularly, Venezuela, which already is nearing default on its debt, must start cutting government spending to reflect depleted oil revenues. These outcomes are firmly in the interests of both Saudi Arabia and her longtime strategic partner, the United States.

 

And although U.S. consumers are now enjoying the benefits of lower fuel costs, which will help spark consumer demand, the threat to the U.S. energy industry should not be overlooked. U.S. oil companies have invested heavily in horizontal oil drilling and so-called fracking to increase well yields. U.S. domestic oil production has risen significantly over the past five years and now approaches 8 million barrels per day based on data from the U.S. Energy Information Administration (EIA). However, much of this investment was made on the basis of $100 oil. If the price stays below $70 for long, the continued viability of some smaller U.S. oil companies might be threatened, particularly in Texas and South Dakota. Citigroup Inc.'s recent forecast that the U.S. would pump 14.2 million barrels per day by 2020 could prove illusive and result in job losses.

 

However, there are more serious strategic concerns currently in play. The Obama Administration's recent engagement with Iran may be of great concern to the Saudis, who consider Iran to be a mortal threat. Currently, the U.S. and Iran are in protracted negotiations over Iranian nuclear capabilities. The U.S. appears to be willing to acquiesce to Iranian desires in exchange for more cooperation against ISIS.

 

These concerns may have escalated this week when it was announced that Iran had recently conducted air strikes against ISIS insurgents within Iraqi territory. U.S. Secretary of State John Kerry reacted to these revelations as a "welcome development." Although ISIS should be considered an enemy to both the U.S. and Iran, American acceptance of Iranian military intervention in Iraq can be seen as a clear shift in Washington's policy towards Tehran.

 

If such is the case, the Saudis may begin to feel 'dumped' by Obama, and may be tempted to turn more forcefully towards China, the world's largest oil importer, offering cheap oil in return for strategic protection against a new American-backed Iranian regional threat.

 

The effects of international recession and the U.S. 'oil boom' were slow to create a production glut because, until recently, production from Iran, Russia, Iraq and Libya was curtailed by sanctions and war. Cheap oil likely will protect and increase Saudi Arabia's oil market share.

 

The real costs of Obama's dropping the U.S.'s 68-year friendship with Saudi Arabia in favor of Iran are becoming increasingly apparent. If Saudi Arabia is forced closer to China, taking with her other Arab Gulf States (OAPEC), the long-range implications could be extremely serious for America and Europe.

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Dec 06 Chinese GDP Surpasses USA (*when Measurement Adjusted) Keith Weiner

Chinese GDP Surpasses USA (*when Measurement Adjusted)

A story has been echoing around the financial news for a few weeks. One article about it, It’s official: America is now No. 2 by Brett Arends at MarketWatch, came to my attention. Arends asserts that the Chinese economy is now larger than the economy in the US. Here’s what he said.

“We’re no longer No. 1. Today, we’re No. 2. Yes, it’s official. The Chinese economy just overtook the United States economy to become the largest in the world.”

With GDP data from the IMF, we can easily see that the US economy is bigger than China’s. The IMF estimates 2014 GDP at $10.4T for China and $17.4T for the USA. So how does Arends claim the contrary? He uses different data that IMF adjusts. By this methodology, the Chinese economy is “really” $17.6T.

Really?

Although Chinese GDP is lower when measured in yuan and converted to dollars, Arends and others claim that this isn’t right. Goods and services are cheaper in China. So they don’t think we should convert yuan to dollars using the market exchange rate. They use a concept calledPurchasing Power Parity (PPP). PPP is used to determine a different exchange rate for the yuan than the market rate. This is how they arrive at a “real” Chinese GDP of $17.6T.

We have long been trained to accept purchasing power as the means of adjusting the dollar from historical periods. For example, JP Morgan was worth $68M at his death in 1913. To calculate what that’s worth in today’s dollars, most people would refer to the Consumer Price Index. They use CPI to adjust the $68M figure from 1913 to a $1.6B modern value. As I wrote on Forbes, that approach is wrong. They should use gold which, unlike the dollar, is the same in 1913 as in 2014. Morgan was worth 3.4M ounces of gold, which is $4.1B today.

Adjusting the Chinese economy by PPP is simply applying the consumer price idea to a whole economy. If we use prices to adjust dollar figures from historical periods in the US, why not use them to adjust foreign but contemporary dollar amounts? If we can use consumer prices to measure the net worth of a man who died in 1913, then it seems like we can use them to measure the economic output of China also.

The approach is fatally flawed, because the value of a currency isn’t derived from prices. As an analogy, suppose you are using a steel meter stick to measure a rubber band. When you stretch the rubber band, it gets longer. This is not equivalent to saying that the meter stick gets shorter. You do not measure meter sticks by how many rubber bands fit end to end. Measurement is one-way.

Money is the meter stick of economic value (though this principle is clouded in paper currencies, because they are falling). Prices rise or fall for non-monetary reasons. Prices may be cheaper in China for a variety of reasons, such as lower wages. Money measures these changes, not the other way around.

By the same principle, prices may be higher in New York than in Phoenix. Does anyone dare to say that these are different dollars? Should we adjust New York dollar downwards towards the Phoenix dollar, based on PPP? How about the Scottsdale dollar (Scottsdale is a ritzy suburb) vs. the south Phoenix dollar?

Standards of living certainly vary based on local prices, but that is a separate issue. The dollar is the same in New York as it is in Phoenix. We say that the dollar is fungible—a dollar is a dollar is a dollar, and each is accepted in trade the same as any other.

Arends uses the Starbucks venti Frapuccino as an example, which he says is cheaper in Beijing than in Minneapolis. A cup of coffee produced in China cannot be sent to Minneapolis where it will fetch a higher price. However, money is unlike coffee. It can go from Beijing to Minneapolis instantly. That’s why there is one price for the yuan globally, but a different price for coffee on every street corner. Bulk commodities are of course more transportable than cups of coffee, but even they cost time and money to transport.

It’s an essential property of money that it is quick and cheap to send it somewhere. Money will always move from where it has less value to where it is valued more highly. The result is that money’s value is consistent everywhere.

This consistency allows us to convert the yuan to dollars, to compare Chinese GDP to American GDP. This is perfectly valid (well, if you accept that GDP itself is valid), because the comparison is instantaneous. We do not have to worry about the falling value of either currency that occurs over longer periods of time. We could use gold to compare the Chinese economy to the American, but it’s not necessary in this.

The price of Frapuccino in China may be important to caffeine addicts who travel to Beijing, but it cannot be used to adjust a currency or a country’s GDP.

Chinese GDP is a lot smaller than American GDP. Will that change? Maybe, but it’s not the job of economists to embed such speculative assumptions into the data.

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Gold Market To Keep An Eye On Dollar After Strong Jobs Data By Debbie Carlson

The U.S. dollar climbed to its highest level since 2009 after a much higher-than-expected nonfarm payrolls report, and gold-market watchers said how much further the dollar climbs could influence the metal next week.

February gold futures fell Friday, settling at $1,190.40 an ounce on the Comex division of the New York Mercantile Exchange, up 1.27% on the week. March silver fell Friday, settling at $16.258 an ounce, up 4.5% on the week. 

In the Kitco News Gold Survey, out of 36 participants, 21 responded this week. Seven see prices up, while 10 see prices down and four see prices sideways or unchanged. Market participants include bullion dealers, investment banks, futures traders and technical-chart analysts.

Several market participants said they were impressed that gold did not sharply extend its losses after the jobs report. Gold prices dropped under $1,200 following a blowout November nonfarm payrolls report. The U.S. Labor Department said employers created 321,000 jobs, the biggest gain since January 2012, and far above economists’ expectations for about 230,000 new jobs. The previous two jobs reports saw upward revisions in employment gains, and wages also rose. The job gains in 2014 are the fastest rate since 1999.

“Gold instantly printed $10 lower as expectations are now that the Fed will start talking about the Fed funds going higher than expected - not generally a positive things for commodities,” said Steve Scacalossi, director, head of sales, global metals, TD Securities.

The U.S. dollar rose on the news, building on the gains seen Thursday when the dollar index rose above 89 for the first time since March 2009. Scacalossi said that level was the height of the post-global financial crisis rally.

Kevin Grady, owner, Phoenix Futures and Options, said gold is holding on better than he would have expected given the rise in the dollar and the fall in crude oil prices. Values were still weak; however, he said, gold prices should be down $25 an ounce given the news. What’s keeping the yellow metal from breaking further is strong buying interest under the market.

“There is a big buyer under the market. The fact that we had a huge jobs number, the dollar is up 600 points, the energy market is getting killed and gold is only off $12,” he said, adding that the strong buying at lower levels is keeping gold from falling further.

Some market watchers said while it’s admirable that gold did not sell off sharply when the jobs data came out, gold also struggles to extend its gains when it tests the upside of the current range.

Sean Lusk, director of the commercial hedging division at Walsh Trading, said he expects gold might test the bottom of the current range next week.

“Near term, gold is getting a little toppy here. There’s the (U.S.) dollar strength, weakness in crude. Prices should revert back to the downside, although we’ve seen a little uptick in physical (demand)…. We never really saw a follow-through push higher over $1,200. Part of that was waiting for today (and the jobs numbers),” he said.

The nonfarm payrolls data show the U.S. economy is improving slowly, he said. “We’re reaching an important threshold that the Fed (Federal Reserve) has put out there for the first Fed rate hike to happen,” Lusk said.

With this nonfarm payrolls report out of the way, Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said for next week the job openings and labor turnover survey, known as the JOLTS report, will shed more light on the U.S. labor market.

This is a broader measure of the labor market and the Fed under Chair Janet Yellen puts a greater emphasis on this report, he said.

Analysts at Nomura said job openings rose by 821,000 so far this year and are above prerecession levels. “Although hiring continues to lag behind, we are starting to see some signs of a pickup, with hirings jumping to a near seven-year high in September…. Based on the reported increase in the share of firms with job openings not able to be filled in the October NFIB (National Federation of Independent Business) jobs report, there is a higher chance that the JOLTS measure of job openings will increase in October after declining in September.”

Other economic reports out next week are Thursday’s retail sales and Friday’s producer price index report. Nomura said higher vehicle sales in November should boost the headline retail sales figure, and lower gas prices could give consumers should more disposable income. The November PPI reading is expected to fall 0.1% because of lower farm and energy prices, they said.

By Debbie Carlson 

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