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Early warning signs of inflation
As discussed in today's radio Weekly Wrap, there are very early signs all around the world that inflation is coming back. When London's The Telegraph runs a headline "Bond crash across the world as deflation trade goes horribly wrong" it gets your attention." and reports of $1.2trillion of paper losses just in the last few months, you take notice. Per the Weekly Wrap, PIMCO (the world's largest bond fund manager) just dumped 2/3 of its US Treasuries and is another tangible sign of a bond rout that has started globally with unknown consequences. After the US increased monetary supply by 400% in the 6 years since the GFC and similar money printing exercises repeated in Japan, EU, China and UK it should come as little surprise, but it is the pace of it that may surprise as that is quite simply an unprecedented increase in money (we prefer currency, gold is money). Already Oxford Economics is reported narrow M1 supply is expanding at an alarming rate of 16.2% and even the wider M3 at 8.4%. In the US M3 has just returned to post war averages of over 8%. And all this before the Fed supposedly increases rates causing growing concerns of a much more serious bond rout. One only has to look at what gold and silver did in the 70's as inflation took off. Remember this recent must read article too which applied the 70's to now and forecast over $20,000 gold. Finally this is how The Telegraph's Ambrose Evans-Pritchard summarised it:
"The bond ructions this week are an early warning that it will not be easy to wean the world off six years of zero rates across the G10, and off dollar largesse on a scale never seen before. Central banks have no safe margin for error."

 

Roaring Indian Silver Demand
In this recent article https://www.ainsliebullion.com.au/g...ilver-solar-usage/tabid/88/a/937/default.aspx
we talked of the surging use of silver for solar panels. But as mentioned in Friday's Weekly Wrap, AFTER this study was undertaken India have announced a significant increase in their solar power expansion, with solar exceeding wind for the first time ever and an investment of $200b over the next 7 years. Last year India shocked the world by importing an incredible 7063 tonne of silver. In the first 4 months of 2015 they have imported around 3000 tonne. Whilst it is a little premature to simply extrapolate that figure to a year for 2015, that figure would be 9000 tonne, a 27% increase on the already record 7063 of 2014. After last week's announcement such an extrapolation may well be conservative but it is worth noting too that much of the demand is India's citizens, many of whom turned to investment silver as their Government increased restrictions on gold. So how does 9000 tonne fit in to the big picture? Well it equates to a staggering 1/3 of global silver production!

 

GSR screaming "Buy Silver!"
Today the gold:silver ratio is sitting at 73.8 (those who subscribe to our daily email get a daily update of the GSR included) against a 100 year mean of about 45. Sir John Templeton once said the four most expensive words in the English language are "this time it's different". Technical analyst Hubert Moolman certainly believes this and recently applied his technical analysis to the gold:silver ratio with a startling result. He plots the similarity between the last bull market and this one, numbering each key point 1 to 5. He concludes as follows:
"The current pattern has not completed yet, and it would suggest that it will only complete at a point much lower than a ratio of 15. Such a completion of the pattern is consistent with the bullish fundamentals of silver (and gold) in relation to paper money understanding that a lower ratio will likely mean higher gold and silver prices.. Furthermore, it is consistent with the scenario that we are in a downtrend in the ratio; therefore, being, more likely to go lower over the next couple of years."
So let's apply this to the current silver price and assume that gold doesn't even move. At a GSR of 10 silver would be priced right now at over $150/oz up 637% on today's price. There is no witchcraft in this nor indeed Sir Templeton's oft repeated quote. It is mathematical fact that over a long period of time all such measures revert to the mean, overshoot that mean and revert yet again and so on. Sir Templeton would be suggesting ignoring this current GSR would be your lost opportunity


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SAXO Bank: "Gold will be the best performer"
Danish world banking and investment giant, Saxo Bank recently put forward its assessment of the next half year and it will be music to gold owners' ears. This is a little of what they had to say:
"The biggest "news" is that we are very close to thesecularlow in interest rates globally. This will have material impact on stocks, fixed income and asset allocation over the coming one to five years, and probably an "upside-down" return profile relative to performance since the financial crisis started.Commoditieswill outperform and yields will move up by another 100 bps before Europeonce again slides to downturn andthe USflirts with recession in early 2016.
The headlines for the next 6-7 months say:
US, German and EU core government bonds will be 100 bps higher by and in Q4 before making its final new low in H1 2016. US 10-year yield will trade above 3.0% and Bunds above 1.25%
Energy:WTI crudewill hit US $70-80/barrel, setting up excellent energy returns.
US dollarwill weaken to EUR1.18/1.20 before retest of lows and then start multi-year weakness.
Goldwill be the best performer in commodity-led rally. We see 1425/35 by year-end" [AUD1850/oz]
"The financial world today is now an island on its own separated from the real economy, as can be seen by the paradox of record high valuation in the stock market coinciding with record low inflation, employment , productivity and no hope. There is asset inflation, but deflation in the real economy."

 

Greece the final month ahead
Overnight we saw the strongest language yet from Greece's Prime Minister that he will not yield fresh off similar language from the IMF. There is a veritable sea of articles on the Greek default and Grexit but this succinct and balanced summary from Westpac's Adrian Corti walks you through the next month. Given the importance of the Greek situation we are breaking our 'short and sweet' rule just for today. Its worth the read
"The next four weeks could mark decisive phase in stand-off between Athens and creditors. The five-month stand-off between Athens and its bailout lenders may be entering its most critical phase. Leaders insist publicly that Thursday's meeting of eurozone finance ministers is the best chance for an agreement to release 7.2bn in rescue funds Greece needs desperately. But privately, officials admit their hopes that the gathering in Luxembourg will prove decisive are diminishing. Greece needs the funds to make a 1.5bn repayment to the International Monetary Fund by the end of June.
These are some of the key dates in the months ahead:
Thursday June 18: Best chance for a deal
Eurozone finance ministers gathering in Luxembourg for their regularly scheduled monthly hope a deal can be struck. But Yanis Varoufakis, the Greek finance minister who will attend, has made clear he is coming to Luxembourg with no new proposals. Eurozone officials are increasingly coming around to the view that no progress is likely and the discussion on Greece is set to be perfunctory. Although deadlines have come and gone in the crisis, many officials believe a failure to reach a deal on Thursday would take the five-month stand-off to a new, critical phase with Greece's bailout expiring at the end of the month. As such, there will barely be enough time to get approval of a new deal in eurozone parliaments particularly the German Bundestag, which would have to be called back from recess to approve any new deal.
Friday June 19: The morning after
Finance ministers will still be in Luxembourg for a second day of meetings, this time with all 28 countries in attendance. In theory all the actors who need to strike a deal will be in the same place at the same time. But unless there is a drastic change in circumstances a sudden market panic, for instance, or long lines forming at Greek banks no deal on Thursday means there would be little to discuss on Friday. If a deal is not reached, eurozone leaders will consider calling an emergency summit of the heads of government from the 19 members of the common currency, according to senior officials. The summit would likely be held on Sunday, although Donald Tusk, the European Council president who would be responsible for convening such a session, would need to announce the gathering shortly after the eurogroup failure.
Sunday June 21: Possible emergency summit
Some officials believe a eurozone summit would be redundant if no deal is reached among finance ministers, since it is those finance ministries that are best equipped to negotiate the substance of any bailout agreement. But other eurozone officials believe Alexis Tsipras, Greek prime minister, wants to strike a deal. He has insisted repeatedly that any agreement must be reached at the highest political levels, not among technocratic negotiators. Being locked in a room with Angela Merkel, German chancellor, and other EU leaders may be just the circumstances needed for a meeting of minds.
June 22 onward: Worst-case scenarios
If no agreement can be reached, worst-case scenarios begin to kick in, including capital controls to limit withdrawals from Greek banks and prevent a complete financial meltdown.
If a Greek bank run were to begin, the European Central Bank which is keeping Greek banks on life support by approving emergency central bank loans to local financial institutions could be forced to declare them insolvent and withdraw all assistance. Without the emergency loans, Greece's banks would collapse and the only way to restart them would be creating a new central bank with a new currency.
Capital controls would slow this process significantly, buying both sides more time to negotiate and prevent a Greek exit from the eurozone. But once imposed, capital controls are hard to roll back. Cyprus, which was forced to implement capital controls as part of its bailout two years ago, only lifted its final measures in May. In Iceland, it took nearly seven years.
June 25: Any other business
This is the date for the beginning of a long-scheduled EU summit. However, the meeting already has a full agenda, including UK prime minister David Cameron's promised unveiling of his plans for renegotiating Britain's relationship with the EU. Eurozone officials increasingly believe that by this point it will be too late to salvage a Greek deal.
June 30: Expiration date
The date Greece's current bailout expires and when it is due to repay 1.5bn in loan repayments to the International Monetary Fund. Without an agreement on a list of economic reforms, officials have said there is no hope of extending the programme for a third time, meaning Greece would be without an EU safety net for the first time in five years.
Unless the bailout funds are paid, Mr Tsipras has made clear he will not make the IMF payment. Although technically this is not a default, since IMF rules consider a non-payment "arrears", Greece would join a motley crew of developing countries including Somalia, Cuba and Zimbabwe that have current or former "overdue obligations" to the IMF.
Although credit rating agencies have said that non-payment to the IMF is not formally a default, the ECB would have to decide if it meant Greece was essentially bankrupt. If it was, the collateral used by Greek banks to get their emergency loans mostly Greek government bonds would be worthless. That would mean the ECB having to cut off emergency funding, likely forcing Grexit.
July 1: Uncharted territory
If the bailout expires and Greece fails to make the IMF payment but the ECB decides emergency loans to Greek banks can continue Greece enters what Mario Draghi, ECB president, recently called "uncharted territory". An economy hamstrung by capital controls, a government without any cash and a banking system struggling on life support, Greece would essentially begin a drawn-out process of economic suffocation.
Some eurozone officials believe such a state of affairs would lead to such anger towards Mr Tsipras domestically that his government would fall. This could mean either new elections or more likely a national unity government, like the one that existed under Lucas Papademos in early 2012, to clean up the mess.
July 20: Drop-dead deadline
This may be the real drop-dead deadline: the date two bonds totalling 3.5bn fall due to the ECB.
Although credit rating agency Standard & Poor's said recently it would not consider a failure to pay these bonds a full default it said only non-payment on bonds that are held by private creditors constitutes a default in their books it would be virtually impossible for Greece to survive inside the eurozone if it defaulted on the ECB."
Gold and silver are the ultimate safe haven.

 

This week's Ainslie Radio! ~ https://www.ainsliebullion.com.au/g...une-ainslie-radio/tabid/88/a/962/default.aspx

Winter Gold Sale
We are at the beginning now of an historic turning point. Bank of America Merrill Lynch released a report showing that since 2001gold bottomed between mid-June and mid-July before rebounding to late in the year matching similar research repeating this phenomenon in all but 2 of the last 27 years, a 93% correlation. Such is the power of the Indian market, a large driver of this trend is the Indian festival (Diwali) and wedding seasons. You could throw in too that most sharemarket crashes (seeing a flight to gold) happen in that September / October period. The graph below puts this into clear perspective. So in effect we are having our end of financial year or winter gold sale right now!


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Silver "upside fireworks"
Friday's COMEX Commitment of Traders Report showed another big decline in the Commercials (big bullion banks) short positions in silver futures. For new comers, 'shorting' the market is making a bet it will fall (and if you are big enough actually making it fall in the process). We reported a few weeks ago Ted Butler's claims around JP Morgan's role in all of this. We also mentioned in recent radio weekly wrap that the US Department of Justice has launched an investigation on manipulation of the gold and silver markets. This is just context for what Ted Butler had to say again last week:

"When I spoke of the coming silver price melt up in the past, JPMorgan was hardly on the silver scene. But starting with the rescue of Bear Stearns in early 2008, JPMorgan had become the new big Kahuna in silver, holding net short positions on the COMEX that exceeded 200 million ounces on a number of occasions.
Then, in 2011, the bank switched strategies and in addition to remaining the big COMEX short seller (and milking untold hundreds of millions and even billions of dollars of profits from the technical funds), began to accumulate the largest privately owned physical silver position in history, an amount I place at upwards of 350 million oz. Over the past few months, JPMorgan has taken a significant amount (12 million oz) in COMEX silver futures deliveries in its own name and moved all that silver into its own warehouse. As I've remarked previously, this highly transparent acquisition of silver suggests JPM's accumulation may be near completion.
Very recently (meaning over the past 2 or 3 weeks), I believe the bank has made aggressive moves to close out its giant short positions in both SLV (based upon the large and highly counterintuitive metal deposits of 11 million oz into the trust) and on the COMEX. When anyone appears to be finishing an epic accumulation of an asset, combined with an aggressive short covering in that same asset, it is not unreasonable to think upside fireworks may be close at hand."

 

Grank Run

Reading the paper today you'd think the Greek default 'can' has been kicked down the road with another 6 month extension and after another EUR1.8b ELA (Emergency Liquidity Assistance) on Monday after another EUR3.2b in cash was withdrawn from Greek banks over Friday and the weekend. But the problem with papers are they lock one bit of news in for 24 hours and this keeps changing. It seems now that Germany's Merkel is less confident, saying there is no consideration of an extension yet. This will continue until it doesn't, and probably with little warning. There is plenty of speculation in the market, some by none other than Goldman Sachs, that Germany et al may not care about a Greek default as it will conveniently weaken the EUR and the ECB will just fix it all up with even more quantitative easing (money printing, on top of its current EUR1.4 trillion program). You know, just like the US did after the GFC But what of the Greek people and the unintended consequences on derivatives and the like? On the former, the graph below tells a scary story its Cyprus all over again when/if the ECB pull the ELA support net. You see there are now less deposits than ECB support. Remove that support and the banks have no choice but to "bail in" ala Cyprus and take all the deposits. Classic catch 22 wherein that is the very reason why everyone is pulling out their money in the first place. The graph below paints a sobering picture. On the latter, it's the unknown ramifications on the $710 trillion derivatives market that has some very scared. We'll touch on that in another post soon
PS all the talk of "money" above is actually currency. It highlights the difference between gold (money) and cash (currency) in this new crazy global economic experiment.

 

Solar to lead renewable-energy boom

Bloomberg New Energy Finance plot global power markets to 2040 and last night reported solar will lead the way in an unprecedented multi $trillion investment surge in renewable energy. For more on silver demand and solar read this article. As you can see below solar will surpass all other energy forms reaching over 1/3 of all new energy capacity and see $3.7 trillion invested in it to 2040. Per the linked article, this is very bullish for silver demand at a time when supply is reducing. The first graph illustrates electricity capacity additions


The next graph (with rooftop in brighter yellow) shows the rooftop revolution driving investment demand

 

Roughly 80 metric tons of silver or approximately 2.8 million ounces of silver are needed to generate approximately 1 Gigawatt of solar power. This would indicate that solar is approaching 200 million ounces of silver currently with about 600 million ounces needed by 2040. If production and recycling stays the same, that's 60% of the market.

http://www.forbes.com/sites/greatsp...er-demand-by-the-solar-photovoltaic-industry/

 

Chinese gold demand to exceed 2013 record

One could assume that with the Shanghai Stock Exchange performing as it has (up 170% in one year) that the Chinese would be buying less gold. For a couple of months we did see a reduced demand but it's all relative and regardless they are seemingly back with a vengeance with 46 tonne withdrawn from Shanghai Gold Exchange just in the week to 14 June. 14 June is just 2 weeks from the end of the first half of the year and year to date withdrawals total a staggering 1061t. The all time record set in 2013 was 2200t for the full year so they are only 39t off the half year equivalent, something they'd ordinarily do in just one week. Its not like 2014 was any lull, as 2100t were withdrawn last year as well. The big difference with 2015 however is that India are back with a vengeance. With slight easing in their import restrictions official imports have surged and both official criminal convictions and anecdotal evidence shows smuggling is likewise. Read here for more on China and India with gold but this year they are set to consume essentially all global production. So it would appear the Chinese are happy to play their already faltering share bull market but are keeping their insurance reserves well and truly topped up for the inevitable crash.

 

This week's Ainslie Radio live now ~ https://www.ainsliebullion.com.au/g...6th-ainslie-radio/tabid/88/a/969/default.aspx

Derivatives a ticking "systemic event"
We touched on derivatives on Tuesday talking about the unknown consequences of a Greek default (which despite some positive press this week certainly aint over folks).
The last BIS update on total outstanding derivatives stood at an incredible $630 trillion. $505 trillion of those are interest rate contracts.
The discourse below from London's Ben Wright for The Telegraph is a neat summary but it was written before the Greek default looked likely. Just for a little context first, the world's largest derivative exposure is held by none other than Germany's Deutsche Bank with around Eur55 trillion compared to their Eur1.6 trillion balance sheet and the entire GDP of the Eurozone being less than Eur10 trillion
For further context, this week the manager of one of Britain's biggest bond funds, Ian Spreadbury, of the 4bn Fidelity fund warned that a "systemic event" could trigger another financial crisis. He told the Telegraph Money "Systemic risk is in the system and as an investor you have to be aware of that," and suggested the best strategy to deal with this was to spread your money widely into different assets,including gold and silver.
So on the topic of a "systemic event" over to Mr Wright on derivatives..
", the arguments employed by the derivatives industry sometimes sound similar to those employed by the pro-gun lobby: derivatives aren't dangerous, it's the people using them that you need to worry about. That's not hugely reassuring.
What could go wrong? Let's say that US interest rates do rise sooner and faster than the market expects. That means bond prices, which always move in the opposite direction to yields, will plummet. US Treasury bonds are like a mountain guide to which most other global securities are roped - if they fall, they take everything else with them.
Who will get hurt? Everyone. But it'll likely be the world's banks, where even little mistakes can create big problems, that suffer the most pain. The European Banking Authority estimates that the average large European lender still has 27 times more assets than it does equity. This means that if the stuff on their balance sheets (including bonds and other securities priced off Treasury yields) turns out to be worth just 3.7% less than was assumed, it will be time to order in the pizzas for late night discussions about bail-outs.
Barclays has predicted that if the yields on 10-year Treasury bonds reverted back to their historical average it would wipe nearly a fifth off the tangible book value of European banks. Yes, a fifth.
This is what is meant by interest rate risk. It's big and it's real and the banks know all about it. Their answer is to hedge the risk with interest rate derivatives. It's one of the reasons why there are so many of these contracts in existence. So that's all OK then.
Just one question though: who have they bought those derivatives from? Why, other banks of course. This creates what is known as counterparty risk. Bank A sells insurance to Bank B. But then Bank A gets into financial difficulties (a significant deterioration in their creditworthiness would be enough) and suddenly Bank B isn't as well protected as it thought it was.
Indeed, Bank A might start struggling precisely because of the insurance it has sold to Bank B. What if it can't honour the contract? This creates a potential Catch-22 situation: the derivatives work as long as they're not needed; calling them into action renders them useless.
This is precisely the kind of thing that occurred during the credit crunch - banks stopped trusting each other. New rules introduced since then require banks to actively manage their counterparty risk. In other words, banks are being asked to hedge their hedges. From whom are they buying the derivatives to do that? From other banks of course. Are you starting to feel uneasy yet?"
We pass on these facts to illustrate the basis behind the oft quoted philosophy of 'better to buy gold/silver a year too early than a day too late' because derivatives are just one of many lurking dangers in this over stimulated financial system that could snap without warning and with immediate and dire consequences. When the $294t of financial assets flock to the $1.5t gold market, the price might be the least of your worries you just may not get it.

 

Historic turning point for gold and silver
A frustrating reality of gold and silver pricing is that it can be so influenced by futures trades on COMEX by so called managed money / technical funds or often called American Speculators. It's frustrating because these guys can sell up big, expanded further by high leverage, and all with not an ounce of gold or silver to their name. We saw this in its starkest glory in April/May 2013 when we saw both COMEX and ETF's spark a market rout. You see these speculators have 'learned' that the only show in town is shares on the back of continual money printing and zero interest rate stimulation. It's no coincidence the 2013 rout happened just after the open ended $85b/month QE3 money printing program was announced.
The thing with these guys though is that when they go short they are selling something they don't yet own. This is great when done en mass as it is a self fulfilling prophecy as it drives down the price. However given they are speculators without metal and highly leveraged, when the price turns they need to quickly cover their contracts by buying and you get a 'short covering' spike in price. The graph below is very busy but simple if you remove the noise. The blue line is the gold price, the red line the number of speculators' short contracts and the green line the number of speculators' long contracts. See the pattern? After shorts peak you inevitably get a short covering rally. The bigger the peak the bigger the rally. Whilst the graph shows gold nearing a peak, the bigger news at the moment is that silver is through the roof. So one little trigger for an unexpected rise like say, you know, a Greek default and it can trigger an epic short covering rally.


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But don't just take out word for it here's what the guru of silver futures, Ted Butler, had to say this weekend after the latest COT report same out:
"What's good is that the technical fund traders in the managed money category are the weakest short sellers of all because they can't possibly deliver actual metal to close out their short positions and, therefore, must buy back at some point. Besides, history shows these traders always cover in unison as soon as the moving averages are penetrated to the upside and simply mathematics dictate the moving averages must be penetrated at some point. This guarantees (there are not many guarantees in life) that all these metals will rally in price when the managed money shorts buy back their short positions."

 

BIS joins in warning of CB consequences

The Bank of International Settlements, the so called central bank of central banks, just released its annual report. As with previous communications they are warning of dire consequences for the behaviour of the world's central banks (of which RBA is ours). Today we are dished up 2 stark examples in the Greece and Puerto Rican defaults, the results they say are a "toxic mix" of private and public debt used to try and fix economic mismanagement rather than "badly needed" structural reforms. Simply we are using more debt and artificial stimulus to get out of the debt induced GFC quagmire rather than, God forbid, living within our means.
Here are some key takeaways from the report:
"Persistent exceptionally low rates reflect the central banks' and market participants' response to the unusually weak post-crisis recovery as they fumble in the dark in search of new certainties."
This is a graph of real interest rates in the G3



"Rather than just reflecting the current weakness, they may in part have contributed to it by fuelling costly financial booms and busts and delaying adjustment. The result is too much debt, too little growth and too low interest rates."
"In short, low rates beget lower rates."
"The economies worst hit by the last crisis are now suffering the costs of persistent ultra-low rates, which could inflict serious damage on the financial system, sapping banks and weakening their balance sheets and their ability to lend."
"The continued misallocation of resources during busts prompted by central banks' rock-bottom interest rates has also hammered productivity growth as a prolonged reliance on debt had been used in its place."


"This problem is compounded as the world's populations continue to age making debt burdens harder to bear. Yet politicians have relied too much on temporary growth boosts by using debt, rather than making painful choices."
"The world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crises."

 

Happy New (Financial) Year
2015 will be a 30 June we remember for some time as it coincided with the Greek default and exit threat, bank and sharemarket closure, Puerto Rico announcing it too will default on $72 billion in debts, and China's sharemarket officially entering a bear market exceeding 20% losses and ending their longest ever bull market despite desperate stimulus attempts. The financial year finished with the All Ords up 1.6%, Gold up 9.4% and Silver down 7.6%. However in the first half year without QE since the GFC (2nd half of FY15), how did things fair? The All Ords was essentially flat finishing 0.66% up, in contrast Gold was up 6.1% and Silver up 7.3%. Apart from Sydney, gold and silver would have comfortably out performed property in that period as well (and let's face it Sydney's performance could well trigger a nationwide correction at any time). So whilst gold and silver prices are currently low, they have still performed well in this post US QE period. Reflecting on the possible contagion possibilities of the opening sentence above it could well be the buy of the century right now.
Note, for Self Managed Super Funds and other reporting entities we record the 30 June prices each year which we include under Bullion Information > Historic Pricelists on our website or just click HERE for FY15. https://www.ainsliebullion.com.au/Portals/0/HistoricPricesheets/PricesheetEOFY2015.pdf

 

quote: " financial year finished with the All Ords up 1.6%, Gold up 9.4% and Silver down 7.6%. "

I assume this does not take into account yield from investing in the all ords. Yield is a very big part of the benefit, and franking credits on that yield. Also if I sell the all ords I get the quoted price whereas if I sell gold or silver I might get less than the quoted price (I.e less than spot). Also it costs me nothing in storage or insurance for stocks and I do not have to pay freight when I buy and when I sell. Then I would impute some cost for the potential enormous inconvenience of protecting lumps of metal, esp silver.

 

China, Not Greece is the word?

There are strong views that the relative lack of market reaction to Greece's woes are because it was largely expected and already 'priced in'. Indeed UBS director of floor operations and the New York Stock Exchange legend Art Cashin in an interview yesterday said "I think China may be more important than Greece. Stick with the drill -stay wary, alert and very, very nimble."

Analyst Lance Roberts agrees and refers to the following chart showing where China's sharemarket is at relative to previous bubbles/busts and how that relates to US shares. It's a pretty compelling story.



Whilst Gold held up against the fall in shares on Greek news it hasn't jumped as some hoped. This is likely largely due to this still being perceived as a Euro problem and hence a flight to the perceptually strong USD which works against gold. A major crash on Wall Street however might bring into question the whole US strength argument and see the money go to gold rather than USD. The graph above suggests that may not be far off Finally the Greek situation is far from resolved and we are reminded of these comments from legendary Jim Rickards on Bloomberg back in February:
"If Greece left the Euro there would be no end to the catastrophe. Lehman Brothers (one of the triggers of the GFC) is a good example. All the balance sheets are bigger.
'The whole thing that was too big to fail then is bigger and more complex today"

 

Don't Fear a Rate Rise

It would be fair to say the world's financial markets are fixated on when the US Fed will raise interest rates. Every piece of economic data and every word that comes out of any from the Fed's mouth is analysed for clues. That's why we report on these each week in our Weekly Wrap. The majority of analysts (albeit the same ones who consistently expect data to be better than it ends up being) are calling for a rise in September. Each time people expect a rise gold gets hit and usually so do shares, the latter because it is signalling a tightening in the loose monetary policy that has inflated markets beyond fundamentals, and gold because it strengthens the US dollar and signals 'all is ok'. But a number of analysts believe it could just be the trigger for setting gold off to the upside. Again, listeners to our Weekly Wrap (https://www.ainsliebullion.com.au/g...lie-bullion-radio/tabid/88/a/974/default.aspx) know full well the supposed US recovery is much weaker in reality than in the minds of hope fuelled markets. Analysts believe the share and bond markets are dangerously overinflated and a rate rise, if even modest or token, could trigger the crash waiting to happen. As we commented yesterday, a US crash will be far more bullish for the gold price than anything going on in Europe. A major US lead crisis could see loss in faith of the USD and bonds, leaving gold as the ultimate safe haven as it has been repeatedly over thousands of years. The other thesis by some is that an interest rate rise is a sign they are worried about inflation and as we all know, gold loves inflation.

 

When Will 'Real' Win?

There continues to be a tug of war between 'real' gold & silver trade and 'paper' gold & silver trade. For a start the graph below shows very clearly that demand just from 3 of the BRICS countries exceeds global gold production (the grey line in the bottom graph). Secondly the latest Swiss import and export data shows an increase (not the decrease the press speculate) in gold demand by the East at 10% over last year. Gold leaves the vaults of London, goes to Swiss refiners who turn them in to the kilo bars the Chinese and Indians prefer, and then export them there. Hard evidence from the country that refines 2/3 of the world's gold. Anecdotally too, demand in bullion stores like ours has increased dramatically of late. So why isn't the price going up on all this physical demand? Without getting into speculative deliberate price suppression, part of the story may be the epic set up in futures contracts on COMEX as discussed here https://www.ainsliebullion.com.au/g...r-gold-and-silver/tabid/88/a/970/default.aspx where Managed Money / Technical Funds are incredibly "short" at the moment, indeed an all time record in silver. But as analyst Ted Butler explains:

"The best setup is quantified by the largest managed money short position because these traders can't possibly deliver metal to close out their short positions and, therefore, must buy back those shorted contracts at some point. The larger the technical fund short position more bullish because it guarantees larger future buying. This is not just a theory there has never been an instance where the managed money traders have not bought back all or nearly all of recently added short contracts. It follows that the largest managed money short position in history would equate to most bullish setup ever."

Real, "mother nature, fundamental supply and demand whatever you like to call it must always ultimately prevail. It then comes down to whether you buy at the bottom or the top


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'Sub Prime' Sovereign Debt

As we touched on yesterday global retail demand for gold and silver has spiked recently on the back of the Greek saga. Why? Possibly because whether directly affected or not (and there are many reports of strong Greek buying) Greece and Puerto Rico are clear, real life, indicators of a broader debt born issue - again. Gold and silver also protect your wealth from currency failure. If Greece went back to the Drachma they would inevitably see a significant decline in purchasing power previous examples lead to hyperinflation. As the Russian's saw last year, if you have gold and silver they protect your wealth as they are US spot price denominated Russians saw their gold price nearly double in Rubles. It's the same for Aussies as most predict a sizeable devaluation of our dollar this and next year as economic reality sets in.

It is, however, the threat these 2 sovereign debt default examples present to global markets that might be more instructive to purchasers of gold and silver. It was mismanaged sub prime debt that triggered the GFC. Ultimately unserviceable sovereign (country) debt is no different to unserviceable mortgage debt. Greece shows us that a country can fail just as a house owner can fail. Few would have predicted a bunch of sub prime mortgages could trigger the 2nd biggest crash in history. Many are still not giving Greece and Puerto Rico the weight they deserve. Let us leave you with an excerpt from the Financial Crisis Inquiry Commission on what caused the 2008/9 GFC

"dramatic failures of risk management at many systemically important financial institutions, [and] excessive borrowing"

Sound familiar?