Mike's Content
Michael goes after US Environmental Groups, who in the last decade have spent 300 Million Dollars in Canada sabotaging our industries. Now they are focused on a transportation industry, threatening hundreds of thousands jobs and our economic future.
Anyone who bought the media buzz about a September reduction of QE – called the “taper” – was very surprised when the Federal Reserve announced that stimulus would continue unabated. According the the official narrative, inflation is under control and the labor market is steadily improving. Why wouldn’t a modest taper be announced?
The reality is that the economic indicators the Fed claims to rely on to decide when to taper are all dependent on stimulus money. This is not a mystery to Ben Bernanke. Instead, this entire saga amounted to little more than a “taper fakeout” which sent hard asset investors for a loop.
Months of Anticipation
We can forgive the financial media for being blindsided by the Fed’s non-taper. Even after decades of deception, journalists by-and-large still believe that it is their job to report official pronouncements as fact. Every month of 2013, one Fed official or another has openly discussed the need for or possibility of tapering. In January, it was Lockhart; in February, Bullard; Plosser brought it up in March; and Williams talked taper in April.
Bernanke finally took up the taper torch in May, but it wasn’t until June that he hinted the Fed might start tapering QE “later this year” and end it entirely by the middle of 2014.
The markets went wild on these progressively foreboding statements, sending Treasury and mortgage rates upward and driving gold and silver into their biggest correction since the secular bull market started a decade ago. In spite of Bernanke’s caveats that the bulk of the stimulus would continue for the foreseeable future and that the federal funds rate would remain at record lows, the markets braced for the easy-money spigot to begin closing.
I was on the major news networks calling the Fed on its bluff, but once again, my forecasts were dismissed by anchors and co-panelists. [See the new video: Peter Schiff Was Right – Taper Edition] Then, on September 18th, the Fed did exactly what I expected.
A Möbius Strip
When the Fed announced that it was backtracking on its previous indications, Bernanke cited the “tightening of financial conditions observed in recent months” as a major reason for delaying the taper.
As an academic economist focused on the history of monetary policy, Bernanke had to know that warning of tapering would cause the market to prepare by raising rates. This is part of a clever strategy to appear serious about withdrawing stimulus but have a convenient excuse to (forever) delay the exit.
After all, if interest rates surged on the mere talk of tapering, imagine what would happen if tapering actually began!
Taper Talk Is Cheap
Bernanke may not understand how to grow a healthy economy, but he’s not foolish enough to dream that he can end QE without affecting interest rates. The real message behind Bernanke’s excuse for putting off tapering is that there is never going to be a taper. If the economy shows sign of improving, the Fed will start talking about tapering again. This will send interest rates higher, which the Fed can point to as “tight financial conditions” in need of further stimulus.
Sure enough, the day after the fakeout was announced, St. Louis Fed Chief James Bullard jumped onto the airwaves claiming that a tightening decision might come as early as October.
While some analysts think the Fed is in disarray, I think they’re trying to have their cake and eat it too. By hinting but not delivering on tightening, they can keep investors second-guessing themselves and ignoring the fact that the promised recovery never materialized.
Regime Uncertainty
On September 18th, the S&P and Dow closed at new record highs on news of the Fed’s taper fakeout. Precious metals surged as well. Whether this precipitated Bullard’s renewed advisory on tapering the following day I do not know, but his comments had the effect of smacking down the previous day’s gains.
Uncertainty over the Fed’s intentions leaves US investors in a bind. Even prominent Wall Street money managers are truly frightened by this market.
My advice remains the same: focus on long-term fundamentals, take advantage of discounts, and avoid the US Treasury bubble. While unfortunate timing may have cost some gold buyers short-term losses, the difference between $1300 and $1800 for gold will look less important when it is trading at $3000 or $5000.
This much is certain, when QE does unravel, the fallout will be devastating. In the meantime, opportunities abound for the precious metals investors.
Just this week, when gold failed to rally on the government shut down, as many assumed that it would, it promptly sold off $40 per ounce, as disappointed speculators bailed out. However, gold investors know that a government shut down in-and-of-itself is not bullish for gold. What is bullish for gold is that the shut down will soon end, and any government functions that were temporarily shut down will start right back up again.
In the end, it’s the government that will shut the economy down. But the one thing they will never shut down is the printing press. Now that is really bullish for gold.
Peter Schiff is Chairman of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices.
Click here for a free subscription to Peter Schiff’s Gold Letter, a monthly newsletter featuring the latest gold and silver market analysis from Peter Schiff, Casey Research, and other leading experts.
And now, investors can stay up-to-the-minute on precious metals news and Peter’s latest thoughts by visiting Peter Schiff’s Official Gold Blog.
Gold Markets are not Efficient, Don’t Reflect Fundamentals & Understate Gold’s Market Value (part 2)
Hedging
One of the biggest problems facing a miner, a refiner, a jewelry maker and anyone forced to hold gold for a period of time, when his business is not speculating on the gold price, is avoiding the price risk inherent in owning gold for such a time. Just the act of holding it for that time is a speculation. So what can these risk-averse gold holders do to get rid of the risk? The answer is that they hedge their gold.
If they’re going to have gold to sell gold to buy gold to refine or to make jewelry, and they know the period when they can get rid of that risk, they buy/sell that gold forward to the date when they get rid of the gold. So these professionals ensure that they either buy/sell an amount of gold (the reverse of their present position) or buy/sell an option that matures at that time. What they lose on holding the gold, they make on the futures position and vice versa.
This puts them where they should be as a business, using gold to make a product. They work for the profit margin on their product which they build into the price and eliminate the gold price risk this way. Any business of this nature that does not hedge in this way becomes a speculator on the gold price. Many businesses have gone bust doing this.
Dangers of Hedging
To highlight the problem that come with hedging we go back to the late ‘80’s then follow right through to 2005. During this period the central banks of the world and the authorities ruling the financial system wanted the world to turn to currencies as money and away from gold.
So they lent gold miners gold against the miner‘s future gold production. All knew that with central bank support and threats that they were going to sell their gold in the open market that the gold price was going to go down (it went from $850 to $272 over time). So what incentive would miners have to produce more gold?
It was existence of the futures market. By selling the gold they had borrowed from the bullion banks as far forward as possible, they would not only achieve the current market price but the interest on the proceeds of the sale until the maturity of the futures contracts. This is known as the “Contango”. By doing this they could turn a $300 gold price into above $500 and boost their profits enormously. The Directors of these mining companies were to be congratulated not only on their prudence but their ability to achieve greater profits outside of mining. This was fine so long as the gold price was falling or standing still.
But from 2005 the gold price started to rise!
As gold prices past the level of income the futures contracts were to achieve, these Directors realized that they had locked their income to a price that may well be lower than the market price. Suddenly shareholders had a sense of humor failure. The Directors of these mining companies were then quickly seen as speculators on the gold price using shareholders money to do so. Heads began to roll!
The policies of nearly all mining companies then changed dramatically as the miners realized they had to expose their companies to the spot price of gold for the benefit of their shareholders. This meant they had to ‘de-hedge’ their positions, or buy back the amounts of gold they had hedged in the futures market to uncover their positions. Around 3,500 tonnes of gold were bought back by the gold mining companies over the next few years, as the gold price roared up from $300 to $1,200. That ended the speculation on the gold price for them.
But businesses, like jewelers or refiners, still hedge their positions to eliminate risk and earn profits on the work they do. Some miners who need to finance their future production continue to hedge, but simply for the funds with which to develop a new mine. Such an exercise now is to finance, not to speculate. But the volume of hedging is extremely low.
The Speculator
But as with any system, certain evolutions take place that fall within the business of making profits. One of these was the creation of the “speculator” and with him entered the first distortion to the gold/silver price.
A speculator can buy gold on a forward (future) basis –on the physical market, usually in London—which he does not intend to accept delivery of. Let’s say he buys and arranges to accept delivery of his gold in 6 months’ time. He may put down a deposit in good faith, i.e. margin, and then hold the gold for say, 5.5 months before selling it.
While his actions take that gold off the market (on a forward basis) seemingly adding to demand he becomes a seller of the same gold adding to supply at that time. The impact is to push prices higher up front and prices lower subsequently, rather like an individual wave flowing in then ebbing out. The net effect on the gold price at the end of the exercise should be nil. But from a trader’s point of view, the move is usually sufficient to move the price enough for him to make his money. But he needs to know if the wave and the tide are flowing.
The most spectacular speculative ‘hit’ on a market came in April of 2013. This was when two U.S. banks, JP Morgan Chase and Goldman Sachs took short positions on COMEX to the extent of over 400 tonnes this is a 95% ‘paper’ market, not a physical gold market. They threw gold at the physical market to the extent of at least 100 tonnes at a time when the sales from the major U.S. gold Exchange Traded Fund, the SPDR gold ETF was selling persistently around 20 tonnes a month/week. The daily supply of physical gold to the market is around 11 tonnes a day.
At the time the market was ripe for a fall, so the gold price fell $100 in a day easily. Overall the gold price fell from $1,650 to $1,180 making overall around $8 billion in the exercise. Take away this speculation and we feel that the gold price would still have been above $1,500.
A very recent example of speculation that distorts market prices happened on the day that the U.S. gov’t shut down on October 1st 2013. The gold price was completing yet another consolidation phase, but this time was different. It was when the gold price’s downward trend met strong support at the 1,300+ level. The mood of the gold and all other financial markets reflected the risks that lay ahead and the possibility of a U.S. credit default on the 18th October perhaps precipitating a ‘credit event’ similar to the mid-2007 ‘credit crunch’.
As the U.S. market opened the price plunged over $40 as it was realized that a strong move was about to happen. This was a perfect point for speculators to hit the market hard. We wait to see if these speculators will be beaten back by physical demand or not!
So here you have seen one instance over a long period of time, when the central banks/gov’t/commercial banks, blatantly manipulated the gold market price down. In the first instance the manipulation happened over a twenty year period. Once they ceased, the gold price eventually soared to $1,900 an ounce.
In the second instance, the sheer weight of money power that the leading U.S. banks have, was used to force the gold price down in a well-engineered shorting exercise. This too is a reflection of how the fundamental demand and supply picture can be distorted by speculators of size.
But despite their size they remain weaker than the long-term current of the market and have, at best, a tidal influence. What remains constant, over time, is the fact that the world sees gold as money. We quote the head of the French central bank who said this last week,
“Gold is unique among assets, in that it is not issued by any government or central bank, which means that is value is not influenced by political decisions or the solvency of one institution or another.”
-Salvatore Rossi, Chief of the Central Bank of Italy, 30 Sept 2013.
And with that in mind, we think gold will rise in price and importance in the future, no matter what efforts are made by manipulative financially important bodies.
In the third part of this series we look at other ways that the gold market can be distorted that are happening at this moment, less visibly.
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Thanks to the shale boom, markets already perceive the trade balance optimizing, energy prices are cheaper than they would otherwise be and we’ve even cut carbon emissions. And we are only getting started, according Tyler Cowen, New York Times best-selling author and one of the most influential economists of the decade.
While we aren’t likely to get past the American public’s irrationality over gas prices at the pump and their confusion about why this hasn’t translated into lower gas prices, that doesn’t change the fact that our shale boom is only just beginning to affect the global economy. The only question is who will be the next to latch on to this revolution.
Cowen gives us the long view in his most recent book,“Average is Over: Powering America Beyond the Age of Great Stagnation”, and in an exclusive interview with Oilprice.com, he discusses:
• Why energy-intensive investment is our real future
• Why peak oil isn’t an issue for at least 3 decades
• Why Syria is impossible to predict
• Why US gas exports are a win-win situation
• How the US shale boom has benefited the economy
• How the shale boom is just getting started
• What the general public doesn’t get about gas prices
• Why we can’t do much to stop energy market manipulation
• Who’s right about climate change? Wait and see…
Interview by James Stafford of Oilprice.com
Oilprice.com: You have written at length about “Great Stagnation” and its relation to technology and natural resources. How do we trace the “Great Stagnation”, and are we seeing the end of our unexploited natural resources?
Tyler Cowen: The Great Stagnation first shows up in the data in 1973, when income growth slows and productivity growth falters. It’s hard to avoid the conclusion that this has something to do with the end of the age of cheap energy. In my view sustainable economic growth is more dependent on energy than the share of the energy sector in GDP would indicate. Energy-intensive investments are more likely to build for our future, compared to the productivity mess known as our service sector.
I do not, however, think we are seeing the end of unexploited natural resources – just look at fracking. But every now and then we take a pause before extraction technologies race ahead once again. We’ve been living in that pause for much of the last 40 years–a scary thought.
Oilprice.com: Should we still be talking about “Peak Oil”?
Tyler Cowen: I don’t see “peak fossil fuel” being a binding constraint over most of the next 30 years. That said, new supplies take a while to come to market, and the global economy is still constrained by oil supply scarcity. This was evident during the price spike dating from the time of chaos in Libya. There just wasn’t enough oil for the global economy to manage a higher growth rate, and only now is the US economy moving beyond that constraint. India still faces it.
Oilprice.com: There are rival theories concerning what a potential US direct intervention in Syria would do to oil prices. How do you see this playing out?
Tyler Cowen: It would depend what we do and when we do it, and in any case I don’t see this as an easy matter to predict. Perhaps the best prediction is that the situation festers and we don’t have a direct US intervention at all.
Oilprice.com: Does the conflict in Libya provide us with insight into what would happen to oil prices in the event of a US intervention in Syria?
Tyler Cowen: As mentioned above, the price experience and the growth slowdown from the Libyan crisis is far from encouraging. As for Syria, China would very much like to see a peaceful resolution of this entire situation and they do not care per se who comes out on top. Since the US and China want in broad terms the same thing from this conflict, there is a good chance that can happen.
Oilprice.com: As the debate continues over whether the US should export unlimited natural gas or keep it at home, what would be better for the US economy over the long-run, and why?
Tyler Cowen: Trade benefits both nations. And it will encourage the supply of gas all the more in the longer run. This is a win-win, and I see no good reason to restrict exports.
Oilprice.com: Approvals for US LNG export projects appear to be picking up momentum. Has the export question already been decided?
Tyler Cowen: The overall record of the US federal government is pro-business and pro-export, and I see no reason to bet against that record this time around.
Oilprice.com: How has the US shale revolution affected the American economy?
Tyler Cowen: Our trade balance will be coming into order and markets already see this. Energy prices are cheaper than they would be. We’ve even cut carbon emissions, unexpectedly.
Oilprice.com: What the general public remains confused about is why gas prices are so high amidst this shale boom. How do we address this on a level that is accessible to a general audience?
Tyler Cowen: The shale boom is just getting started, most of all on a global level. And a lot of complicated substitutions are required for shale gas to lower retail gasoline prices, for instance greater use of gas to power transportation. The US public never has been very rational about the price of gasoline, and don’t expect that to change anytime soon. Gasoline is a price which we see and pay very often, too often. That means voters remember it all too well.
Oilprice.com: How has the US shale boom affected the global economy, and how will US exports play into this?
Tyler Cowen: Our shale boom is only starting to affect the global economy. The question is who else will follow suit. Russia? Argentina? Poland? We will see, but I expect a lot more supply to come on line.
Oilprice.com: In the world of finance and banking, energy market manipulation has become a hot topic, most recently with the scandal around JPMorgan. How does this style of energy market manipulation affect consumers?
Tyler Cowen: Not much at all.
Oilprice.com: Is this a trend we can’t stop?
Tyler Cowen: We can’t stop it easily. Consumers are not really the losers here, rather some traders benefit at the expense of others. There is more churn than we would like to have in prices and short-term inventories. That’s a problem, but pretty far down on my list of worries.
Oilprice.com: On a social level, with the fashion for choosing to become a banker rather than, for instance, an engineer, are things like market manipulation becoming … acceptable-a sexier sort of crime?
Tyler Cowen: Finance is still where the big money is, though for fewer people than before. This is perhaps slightly encouraging, as I would rather see more top minds go into science, engineering, and other fields. But in finance a smart young person can make a mark quickly, more so than in most sciences or businesses (tech aside) so finance will remain a big draw for young talent.
Oilprice.com: As the “debate” over climate change has taken on polarizing political proportions, it’s better to ask an economist. How can climate change affect the economy?
Tyler Cowen: We’re going to find out, I have to say.
Tyler Cowen is the Holbert L. Harris Professor of Economics at George Mason University and General Director of the Mercatus Center. He received his PhD in economics from Harvard University in 1987. His book The Great Stagnation: How America Ate the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better was a New York Times best-seller. He was recently named in an Economist poll as one of the most influential economists of the last decade and last year Bloomberg BusinessWeek dubbed him “America’s Hottest Economist.” Foreign Policy magazine named him as one of its “Top 100 Global Thinkers” of 2011. He co-writes a blog at www.marginalrevolution.com and has recently inaugurated an on-line education project, MRUniversity.com.
For the fifth consecutive week Jobless Claims beat with a print of 308K, below the 315K expected, but above the upward revised 307K from last week. On a weaker note, Continuing Claims was higher at 2925 when expected at 2810.
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