Are precious metals being manipulated?

Posted by Ray on March 30, 2010 under Main | Be the First to Comment

I am what some would lovingly, or not lovingly, call a gold bug, but I find that term somewhat offensive. I simply believe in precious metals based on supply, demand and the Federal Reserve’s horrible track record of continually printing money. Essentially, if precious metals guard against inflation and the Fed tries to keep inflation at +2-3% a year it just makes sense to have some money in precious metals under normal circumstances, but add in a little financial crisis and demand far exceeding actual supply and metals are a sure thing, in my opinion.

Ever since I first decided to research gold and silver, those were the first metals I ever bought, I found countless threads and blog posts about the price being manipulated by the Fed and major banks. I figured that most of this was just rhetoric by my fellow bugs, but after awhile it started to make sense. Of course, there was never any real proof, just USGA reports showing the U.S. exporting way more gold than it imported and COMEX inventory reports showing far more metal being traded than could ever be delivered. There was also some obscure Federal Reserve minutes, from the 1970’s, talking about selling gold on the open market to suppress the price. Finally, there was Greenspan saying that the Fed was ready to sell as much gold as it could to drive the price down, which makes sense since gold did poorly in the 1990’s while money supply grew at an unprecedented rate.

It was all very interesting, but there was no actual proof. Sure, we had GATA with their data points and going to the CFTC to lodge complaints, but nothing ever was done. It finally appears that the rumors and conspiracy theories may have been right after all. Last week GATA dropped a bomb on the public by announcing it had a whistleblower that proves JP Morgan and other banks are suppressing the price of gold and silver.

Andrew Maguire, the whistleblower or Exhibit A, sent a few emails to the CFTC shortly before the non-farm payroll data was released a couple months ago. Mr. Maguire clearly outlined, 2 days in advance, that JP Morgan (JPM) was shorting silver in the thinly traded after hours market driving the price down. He told the CFTC that there were 2 possible outcomes, the payroll numbers would be good and silver would go down or the payroll numbers would be bad (which is bullish for metals) and the price of silver would go down. Sure enough, 2 days later, the price plummeted and Mr. Maguire traded emails again to ensure the regulator received them, he did.

It appears that an investigation is being started which would be the first manipulation investigation since the Hunt brothers 3 decades ago. What is striking is that one of the largest banks in the world has been implicated in what could turn out to be the manipulation case of the century, if the claims are true, and no media source has picked it up. I even brought it to a reporter friend of mine for a lead, after days of not hearing anything, not even from CNBC, but nothing yet. If this is true there are large implications for the precious metals market and it is very bullish.

I always figured that if the price was being suppressed, more sellers than buyers, eventually the gig would be up because you cannot sell more than you have forever. Eventually someone will want their metal along the way which means the banks would have to deliver and buy it in the open market. If that happened the price would go through the roof, but, again, this was all speculation until the whistleblower came forward. Somehow, I know this might be hard to believe, I am sure the CFTC will find no wrong doing anywhere and everything will continue back to the way it was, dysfunctional, but if the allegations are true prices will surely rise rapidly.

It is crazy to think that silver, especially silver, would be trading so low considering it is rarely recycled and silver is used in everything from the common mirror to your cell phone. By all accounts most of the easy silver has already been mined and new mines are just coming online now, but they take a long time to get into full production. Let us not forget that silver is usually mined s a secondary metal to begin with, usually gold or copper is the primary metal being looked for. I have seen some estimates that silver reserves will be depleted in 5 years, but no one really knows and that is an aggressive figure to say the least. What I do know is that silver is in high demand, above ground reserves are declining and governments used to be net sellers of the metal, but now are net buyers of it, all of this is very bullish. My point being is prices are cheap and regardless of whether these accusations are true or not one should hold some precious metals in their portfolio, silver being a core holding.

Failed Auctions?

Posted by Ray on March 25, 2010 under Main | Be the First to Comment

The smart money is always in the bond market, mostly because it is institutional money instead of retail investors. Anyone watching the last 2 treasury auctions see something wrong, a major problem in fact. The auctions were duds, dare I say failures? The primary dealers are taking in a large swath of the last 2 auctions, this has actually been a trend over the last few weeks, and the direct bidders are now gone. Yields are perking up to levels not seen in months, something isn’t right.

Whether it is sovereign debt or the markets frothy valuation, the bond market is signaling trouble ahead. Yields are not increasing for any good reason other than there is no demand for the hundreds of billions the U.S. needs to raise to keep the lights on. Perhaps the market has had enough or the Chinese are just not buying because Krugman and Schumer called them currency manipulators, you never make your largest lender mad at you when you need to raise billions of dollars.

Either way you look at this there is a problem and I do not know what it is other than a general buyers strike. However, what scares me is that this is following some historical events. In the late 1970’s there was a huge treasury bubble and rapid inflation, this is no secret, which led to the dollar’s decline in value. This was no big deal until the treasury bubble burst in 1980 and the treasury market imploded. What happened was treasuries sold off and the primary dealers, still in bubble mode and required to suck in supply, began to buy when prices went lower. Their thought was this was a steal, it wasn’t. This happened for a few days and prices continued to decline to the point where the primary dealers were on the verge of failure.

This was a serious situation as the companies that raise money for the government, the primary dealers, were almost all gone because of massive losses, they bought on leverage of course. This led to Volcker doing what he is famous for and Carter issuing credit controls. No one talks about this, and I overly simplified the story, but it was perhaps the days that almost ended America. I am not saying this is happening now, but if the primary dealers have to bring in supply and the prices on treasuries keep dropping, this could be a major problem. Of course, everyone is too big to fail, but still.

While I do not know if this is a short-term problem or the beginning of bond buyers telling the U.S. to get its act together, I believe it is the vigilantes, I do know this has serious potential problems. We need to wait to see what happens over the next few weeks, but more ‘failed’ auctions may be a problem bigger than a worldwide embarrassment, but our lenders cutting up our credit card. This will lead to more quantitative easing and dollar destruction which would mean we would actually begin to see higher prices without money velocity, don’t think that can happen? It can and just might happen.

Most disturbing is that we are talking 5’s and 7’s that could not get placed, that is easy paper. I sure hope Washington is worried enough to take the national debt situation seriously after this week. If they do not we all could be in for a rude awakening very quickly.

China vs. The U.S.

Posted by Ray on March 21, 2010 under Economy | Be the First to Comment

I have written numerous times about the brewing trade war between the U.S. and China with many people thinking I was crazy. Well, it appears that this thing is escalating with the esteemed Paul Krugman weighing in on the issue, in a very unusual way. I am sure everyone is aware of Krugman’s political leanings, he is a bit left of center, and is a full blown Keynesian. While I am far from a Noble Laureate, actually I am nowhere close to ever receiving such a prize, but I am capable of doing nothing so you never know, but I do know what a street fight looks like and there is one brewing.

It all started many months ago over allegations from the U.S. of China dumping tires on our market, which is probably true, but during a recession I am not going to complain about cheaper products. It then escalated as China began to look into chicken products being imported from the U.S. From there it has just gone downhill with seamless pipes to automobile complaints. However, the one thing that has never stopped is the current administration, from its very beginning, has called the Chinese currency manipulators. Of course, Chuck Schumer, who would kill to get air time, literally, was weighed in on the issue as well.

Far be it from me to pick on a man who has never held a private sector job and knows as much about economics as my 10 year old, but Chuck is out of line. Krugman is not helping by saying that the RMB or Yuan is undervalued by 25% and the U.S. should place a tariff of 25% on all Chinese imports. Schumer points to this as validation of his mythical point, but I see it as one nut job helping out another. Regardless, Schumer and a few other Senators have sent a letter to Treasury demanding that the Chinese revalue their currency. This is all to save U.S. jobs and boost our exports, but it is protectionism at its worst.

Schumer and Krugman believe that we have the Chinese right where we want them, they own a ton of my debt and are very angry with us. Oh, I forgot to mention that we are heavily dependent on the Chinese to buy our debt to fund out current and future deficits, but that seems to slip Krugman and Schumer’s mind. I always hate pointing out the obvious, but if we need money and our largest creditor starts to cut you off that is a recipe for disaster. It is not the selling of the Chinese current treasuries that we should really worry about, well, we should worry about it, but not really, it is the future purchases of our debt that we need them for.

There is no doubt that the Yuan is undervalued, but who knows by how much and they need to raise its value anyhow to fight inflation. However, I have seen that the Chinese do not like being told what to do by the U.S. and payback could be a problem for all the ridiculous political posturing. Essentially, we want the Chinese to increase the value of their currency, which is pegged to the dollar I might add, making their products more expensive in the U.S., see the protectionism yet (?), so the Chinese will buy more of our products. In Schumer/Krugman land this will lead to massive U.S. corporate job growth and a return to prosperity, but reality is very different from fantasyland.

What will happen is the U.S. will begin to import more products from other countries where the dollar goes further, like Brazil, India, Indonesia, Pakistan, and a million other places. That means the job situation here will not get much better and other economies will flourish. Of course, Krugman/Schumer will then demand that all other countries increase the value of their currencies as well, it just will not work.  John Mauldin brought up a great point, we tried this in 1971 with Japan, as Krugman points out, and what happened was the Yen dropped from 350:1 to, now, 90:1 and what happened to Japan’s trade surplus? It went higher because the Japanese save their money, which if we saved our money it would be the solution to our trade deficit issue I might add. It did not work in 1971, really, and it is not going to work now because people will continue to buy from China because they like the products or they will find comparably cheap products made elsewhere.

Mauldin brings up another point, Canada’s Loonie is almost at parity with the USD so why shouldn’t Canada hit us with a tariff as well if this is the game we are going to play? Of course, this wouldn’t happen because we love Canada and they love us, I think. The point is that this is protectionism, pure and simple. It is a very dangerous path and if we follow it we may find ourselves in a Smoot-Hawley situation. I am not sure why Krugman doesn’t see it that way and maybe I am wrong, after all I am not a Nobel Prize winner, but like I said I know a street fight when I see one. This is turning into a street fight and we do not have China right where we want them.

It is possible that China would, this is highly unlikely, sell their treasuries to burn us if they get angry enough. The military already suggested using our debt as a weapon against us and it would work. Sure, it would hurt them, but you know what? Mao killed 70M of his own people, I am pretty sure they could like with losing a few billion. Plus, if they take down more gold they are hedged, kind of. It is not that I am taking China’s side on this, I think they are in the wrong, and I do not think they would blow up their treasury portfolio, I am just pointing out what they could do.

We can make the argument that they need us and they do, but if they do not increase the value of the Yuan and we impose a 25% tariff on all their products I am pretty sure all bets are off and they would have to learn to live without our business anyhow. Keep in mind, China’s trade with Europe and Japan is climbing rapidly. While we are the biggest market in the world they can survive by moving deeper into those markets along with other frontier markets and Africa. The other thing you have to remember is that China has been buying resource companies over the past few years, so they have been moving away from treasuries anyhow. Finally, perhaps we should look at our own dollar situation before we pick on china. If we had taken care of our currency to begin with the Yuan would be stronger anyhow.

The most comprehensive info on Health Care Reform to date

Posted by Ray on March 20, 2010 under Main | Be the First to Comment

Look, I know there is rhetoric on both side and we all fall for the one liner, me included. We all want something done about health care, but when you learn about how this thing was put together, you will think differently about this, maybe.

I was watching C-SPAN last night and saw this very informative video from MIT professor Jonathan Gruber, who co-wrote both the Massachusetts program and the current Federal bill being voted on. He was a paid participant and openly admits he is biased towards the bill, but I appreciate the honesty. What I found striking is that he openly admits that 90% of this bill is designed for coverage and only 10% is geared for cost controls. He also admits they are trying a “spaghetti approach” to controlling costs, meaning they are throwing 37 different pilot programs against the wall to “see what sticks.”

If you listen to what he is saying it is clear that the government will become the biggest premium payer to insurance companies through subsidies. The implications of this can lead to the government having the ability to start dictating what gets covered and what is not covered, in my opinion. The MA plan is the benchmark for the national plan and that should be of some concern to us all. Why? The cost of insurance did not come down with a mandate to everyone to be insured and competition never increased, there are 4 carriers in MA. Currently, according to the MA treasurer, 52% of all spending in MA is going directly to this insurance program or Medicaid, again showing that costs were not controlled. Of course, the MA bill was all about coverage and not about reducing costs, Mr. Gruber admits that.

If we look at the MA program there are problems with it, like most people have to go to community hospitals and those hospitals are only getting 60-70% of the reimbursement rate and 7 MA community hospitals are currently suing the state because they are going bankrupt. In order for everyone to get covered and for rates to not go through the roof insurers will have to pay doctors less, Mr. Gruber dances around that topic in his speech saying “surgeons used to be middle class people, but now they live in the Hamptons with investment bankers.” I have said that doctors do charge too much, $150 for a 2 minute office visit is nuts, but if private insurers have to adopt Medicare rates we will have less doctors, that is a fact.

Mr. Gruber is an economist, not a health care professional or insurance executive, which goes back to my point that no insurance person was ever involved in this process, but economists and lawyers are? I am sorry, but I do not like this approach because people often get left out of the equation in economists and lawyers models. He pointed towards the fact that doctors over test, which may be true, and that things like genetic testing is “too expensive.” He brings up some great points and says we will never have socialized or Canadian style health care in the US, I disagree with that as this bill will subsidize premiums up to, I think $80K in income.

This bill will do some great things, do not kid yourself, like the preexisting condition repeal and you cannot be dropped from coverage if you get sick, but those items could have been taken care of in straight up or down votes a year ago January. Regardless, Americans are furious over the process of what is happening and not being listened to. I want a straight up and down vote on the issue and I want to know for a fact that my Congressman read the bill, any Congress person saying this bill controls costs is not being truthful as the author tells you they are not sure this will control costs.

Mr. Gruber admits that when MA hit its financial trouble in 2008 they had to cut the program in MA. What does that mean on the Federal level where this thing is a trillion dollars? He says that by spending $950B to cover people now will save $30T over the next decade, I think he misspoke big time there as that is impossible. I also do not believe that the taxes collected over the next 4 years will not be spent, we are broke after all borrowing $200B a month remember, and the program will start in the red right off the bat in 2014. I also do not believe that the new taxes will only be on the top 5% of US taxpayers, like the AMT (alternative minimum tax) it started out on high net worth individuals and now it hits people below the $100K mark, unless Congress passes the AMT fix every year. Just like the AMT these new taxes will creep down because wealthy individuals got wealthy because they know how to avoid taxes.

CBO estimates, I hate CBO estimates, why? If you give the CBO the numbers you want to run you will get the results you want, it is that simple. They make little assumption on how these numbers will change over time, like people buying less income securities or dividend paying stocks so taxes drop or wealthy people decide to make $199,000 instead of $200K a year. They assume today’s numbers will stretch from here into infinity which is a joke. Look at Medicare projections back in the 1960’s, or the 1980’s or the 1990’s, you have to project the worst case scenario, not the best, and I can assure you that if they did that the numbers would be ugly. Basically, feed the CBO the data you want to get and bingo! Deficit reduction.

Mr. Gruber also wants to get rid of the tax break on health care premiums, the Cadillac Tax as it is called. Basically it is getting rid of the tax subsidy, or tax deduction, on plans that cost over $23K a year. This is not going to raise the money they think as most of the people with Cadillac plans are unions or a small portion of executive, a very small portion. There is no way that this tax deduction will stay at this level and plans that cost less than $23K will, eventually, lose their tax break as well, especially as the Cadillac Tax kicks in and those plans are dropped. Most of you have health insurance because, A) Your employer wants to remain competitive in the workplace; and B) Because they get a tax deduction for providing that benefit, why do you think they pay so much of the premium? You get rid of that and people will be left on their own, so it may be a good thing for employers, time will tell.

Oh, for all those who think we have the 37^th worst health care in the world, think again. Over 240K people come to America to get some form of treatment and only 12,000 Americans leave for treatment abroad. Mr. Gruber explains that it is social economics is the problem, essentially, and, in his example, a black baby in Washington DC has the same chance of reaching their first birthday as a baby in Jamaica, that is horrible. However, what he says is what I have been saying, this is because we have an access problem.

He also states that we are like the Roman Empire if we do not get health care under control. The issue is that health care is one leg of the three legged problem. The other two legs are Social Security and our national debt. This bill currently only might fix health care, but based on MA it probably will not and based on what we know about our elected officials the other 2 legs are not going anywhere. However, as Mr. Gruber pointed out earlier in his speech, this bill really might not control costs at all. This bill also does not control prescription drug costs, at all, and Mr. Gruber says we must pay more so the rest of the world can pay less, unreal.

There was a better way of getting to a middle ground and trust me I want a middle ground. I just do not believe that this bill is legal, the Federal government cannot force you to buy anything, in my opinion, and I do believe that deem and pass should be banned, look what happens and I have heard enough of “well, they did it too,” two wrongs do make a right.  I highly recommend watching this 1 hour 23 minute video to cut through the rhetoric. However, listen to what he says and what he kind of says. Listen to it without your own bias as you will hear some things that might not sit well with you. Sometimes what a person does not say means more than what they would actually say.

Oh, no illegal immigrants will get coverage, just an FYI.

I could not embed the video, below is the link.

The Real Health Care Information You Need to Know

http://www.c-spanarchives.org/program/ID/220887

The Fed lost its appeal!

Posted by Ray on March 19, 2010 under The Federal Reserve | Read the First Comment

Thanks to Bloomberg and Fox we might now find out who borrowed what and what was provided as collateral to the Fed during the crisis we may finally know thanks to a lengthy legal battle. The Fed might continue to fight, but it may not go much further, just show us already as this data is almost 2 years old, I am sure we can handle the truth.

However, you will see that the Fed took some very questionable items as collateral or so we think. Some bankruptcy documents do show that the Fed did take some stocks and other, well, crap for collateral during the height of the financial crisis. What many people do not know is that it is against the rules for the Fed to take credit risk since it is the U.S. governments bank. These documents will either confirm or deny those rumors, but I am betting on the former, if we ever really get to see them.

Could this be the end of the Fed as we know it? I hope so because since the Fed was enacted, in secret in 1913, we have witnessed the dollar lose 97% of its value, a depression in 1920-21, the crash of 1929 leading to the Great Depression (now known to be the Fed’s fault for tightening credit), more boom-bust cycles than any other time in history, the 1970’s (really, need I say more about the 70’s? I think they introduced bell bottoms too, but I cannot prove it), the 1980 near collapse of the U.S. treasury market, the first banking crisis, Long-Term Capital, the dotcom bubble, loose monetary policy for the last 30 years, the housing bubble, the complete meltdown of the financial system, and, for its final act, complicity to destroy the dollar’s value with its current balance sheet.

Really, I cannot think of any reason why we need to reform the Federal Reserve system.