Ainslie Bullion - Daily news, Weekly Radio and Discussions

No bullets left
We speak often about the fact that all the stimulus since the GFC has created market bubbles without fundamentals. i.e. shares, that have poor or declining forward earnings, are increasing in price (demand) as money is forced to search for yield; or property prices continuing to surge, despite sky high price:earnings with rising unemployment and low/zero wage growth expectations, in our near zero interest rate environment. We've seen time and time again that when the US shares have sizeable corrections someone from the Fed waltzes in and talks up the prospects of continued zero rates or starting QE4. BUT last week US Fed Chair, Janet Yellen had this to say
"But if growth was to falter and inflation was to fall yet further, the effective lower bound on nominal interest rates could limit the Committee's ability to provide the needed degree of accommodation. With an already large balance sheet, for example, the FOMC [Fed 'rates & money printing' committee] might be concerned about potential costs and risks associated with further asset purchases [QE]."
That main stream media hasn't jumped on this is astounding. But first some further context The US Fed was formed in 1913. In the near century to 2007 they created $800b. When the GFC hit they started QE (Quantitative Easing). In the 5 years after the GFC, they 'printed' $3.3trillion. In other words they created almost as much money in each of the years since the GFC as they did for the nearly 100 before it. Their balance sheet now sits at $4.1t ($4,100,000,000,000).
What Yellen is saying above is that if the economy falls again, and their 'words' don't fool the market back up (please refer to "The Boy Who Cried Wolf" reference material) they have nowhere to go with rates and are unable to launch QE4 as they already have too much debt on their books. Of course they can join the negative rate bunch in Europe but one wonders how much that will really help when it is the clearest sign all is broken. It certainly seems like the current central bank fuelled bubble has run out of bullets.
 
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China to break Q1 gold record
It will come as no surprise to listeners of our Weekly Wrap that China appear set to break the first quarter record for gold consumption this year. As the quarter finished yesterday these are still estimates with the last confirmed figures as of 20 March, but up to then we've seen 561 tonne withdrawn from the Shanghai Gold Exchange. Extrapolating that on post Chinese New Year rates to yesterday would give in the order of 620 tonne. As we've discussed before there is some double counting for actual consumer demand but this is relatively minor and the number will likely still represent not just a new record (and up by no less than 10% at that) but also 79% of last years global gold production for that period!
A particularly telling sign of the investment demand strength is that numbers have held strong after the traditional Chinese New Year buying period with 149 tonne in the 3 weeks since.
When combined with what looks like is going to be an astounding 150t into India this month, and as we mentioned in last week's Weekly Wrap, it's a heady demand cocktail when the world's 2 biggest growing economies (7.8% India and 7.2% China) and 2 largest populations are also the world's strongest gold buyers.
This is no April Fool joke either, these are hard numbers. The fool's might be the West for letting it all go
 
NY Fed Vault Gold Exit
Many countries store some of their gold 30m underground in the New York Fed's vault. Germany now famously asked for theirs back in 2013 (c300 t) but have been given but a dribble. Netherlands recently got 122 t of theirs out and others are posturing as pressure builds on governments to repatriate their gold to reduce the counterparty risk of the US 'system'.
The graph below (courtesy of ZeroHedge) shows the new 'trend', a trend coinciding with that of the GFC period. Few know that all of Australia's 80t of gold is sitting in a similar vault in London. There is currently a petition doing the rounds in Australia calling for repatriation of that gold.

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US employment numbers disappoint again
Over the Easter break the latest nonfarm payroll employment numbers were released in the US and they didn't make for good reading. The March number came in at an underwhelming 126,000 jobs, around half the 245,000 expected. All of these jobs were created in the 55 and older demographic whereas the number of jobs held by those under 55 years of age actually declined. This result was the weakest since December 2013. In fact, the average job increase over the last 3 consecutive months is now only 197,000. To put this into perspective, the job growth average for the last 12 months had been 269,000 and to make matters worse, the figures for the last two months have now been revised downwards indicating that the January and February data was erroneously high.
Another troubling statistic was the labour force participation rate which dropped to 62.7 with 93.175 million Americans now not working. One would have to go back to 1978 to find a labour force participation rate this low but remember that it was at this time that women were only beginning to enter the labour force. The participation rate for men alone has never been this low in US history.
In a sign of the impact of commodity prices, it was reported that mining jobs (including support activities for oil and gas extraction) actually declined by 11,000 in March bringing job losses in this industry up to a whopping 30,000 for this year alone. This has almost negated the 41,000 jobs that were created in the industry over the entire last year.
What is of additional interest is the reported 0.1 hour decline in the duration of the average work week which now stands at 34.5 hours per week.
This all makes for sobering reading for those who believe that the US is in a genuine recovery and makes it less likely that the Fed will be raising rates at any stage during this year.
 
The accuracy of central bank modelling
The Australian economist and author Steve Keen shared in a recent interview some insights about the validity of central bank economic modelling. According to Steve, there are obvious reasons why central bank intervention has resulted in record levels of debt, increased wealth gaps and inflated equity prices rather than genuine prosperity.
Steve suggests that central banks prefer to model capitalism "without consideration of banks, debt or money" and references a recent Bank of England quarterly publication regarding loanable funds as an example. He illustrates that when an individual borrows money from another individual, the lender must reduce their spending to account for the money that has been loaned out. There is a decrease in demand by the lender and an increase in demand by the borrower. Anyone who has ever entered into a private loan arrangement can easily relate to this roughly zero-sum scenario. On the macro level however, when a commercial bank loans money it records the loan as an asset and offsets this against the money it deposits into the borrowers account. When this money is then spent, there is a net increase in demand from the creation of the debt and this discrepancy is not adequately considered in central bank modelling.
Steve also highlights problems with models that are based upon the exploitation of free energy. Such modelling is predicated on growth being the result of capital and labour alone. According to US Congressional Budget Office projections for example, the United States is predicted to experience a generally smooth 3.3% GDP growth for the next 100 years. This model results in a US GDP in current dollar terms that is larger than the GDP of the entire world today by the year 2076. Given where we are with respect to oil, water, land and other finite resources, the concept of United States consumption alone matching today's level of global consumption by 2076 seems counterintuitive to say the least.
Given the hype around yesterday's RBA decision to keep interest rates on hold, it is an opportune time to be reminded that central bank actions are only as good as the data models that they use. As such, it is prudent to be objective about the level of faith placed in such entities and as always, strive to balance your wealth.
 
Australian gold attracts Indian interest
Melbourne played host recently to Rajesh Mehta, the owner of India's largest jewellery producer Rajesh Exports. The purpose of the visit was to explore gold mining acquisitions with the intention of securing a consistent and ongoing gold supply for the company.
The concept of an end user securing the natural resources it requires is not new and can be seen within the coal and copper markets for example. The Rajesh Exports proposition however would make it a pioneering engagement for an end user of gold.
The scale of the potential acquisition is a sizable US$700 million which is not entirely surprising given that Rajesh Exports currently consumes 140t of gold per year. To provide some context, this amount is approximately equivalent to half of Australia's estimated annual gold production and 15% of annual Indian consumption.
As a secondary interest, Rajesh Exports is exploring options for establishing a commercial presence in Australia which would be based on the business model of processing Australian gold in India and shipping it back to Australia for retail sale. The company currently utilises in excess of 80 stores in India alone. A reliable supply will additionally assist the company's management of peak demand periods such India's wedding season which is when 50% of total consumption occurs.
This interest in gold mines by a major commercial producer and our report last week on gold repatriation represent two small brush strokes in a larger picture. These are examples of observable events that provide a better indicator of real gold demand than a simple assessment of the spot price and the big picture is often more valuable than current valuations to an investor.
 
And today's Ainslie Radio! - https://www.ainsliebullion.com.au/g...e-radi-10th-april/tabid/88/a/896/default.aspx

Japan's two big problems
Tsuno o tamete ushi o korosu. The remedy is often worse than the disease. Regardless of the language, the idea is that Japan's actions in recent history appear to have created a situation worse than the deflationary spiral and stagnant economic growth they were intended to fix.
Two major problems are at play. Firstly, Japan has the world's most rapidly aging population due partly to a low birth rate and to a cultural rejection of any bulk immigration that would assist in the repopulation of the country. The attached chart courtesy of The Asahi Shimbun illustrates Japan's increasing death rate and decreasing birth rate trends. It is predicted that in 45 years, Japan's now 130 million strong population will be as small as 90 million and a whopping 40% of those are anticipated to be over 65. Projecting this out to 95 years and the population is set to sit at only 45 million with an even greater percentage falling within the over 65 bracket.
This issue is not insignificant because of the second major problem which is Japan's steadfast adherence to the collective Keynesian policies that comprise Abenomics. Devaluing the currency and attempting to inflate the economy to prosperity has seen Japan claim the dubious title of the most indebted nation in the world at more than 225% of GDP. There is now much experimental evidence that largely disproves Keynesianism and its adoption by a country with the population trends described above throws fuel on the fire.
Consider the destiny of a shrinking population burdened with ever increasing debt and comprised of growing numbers of retirees who don't purchase the consumer items required to support economic growth. Japan's grand currency printing is an attempt to forfeit the yen as we know it in a desperate attempt to produce growth.
The people of Japan are not oblivious to the peril facing their currency. As an example, already a year ago Tanaka Kikinzoku Jewellery reported monthly gold sale spikes of more than 500% as people sought to protect their wealth. A chain is only as strong as its weakest link and one important lesson from the GFC is that economies don't fail in isolation.

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^^^ Maybe Japan will choose to resist the perpetual growth paradigm and instead opt for a stately decline on their terms rather than continue on the increasingly hopeless path of frenzied growth and later go down in flames.
 
Cornering the Silver Market
As regular readers know we don't write often on the COMEX manipulation theories. Theory or fact, regardless it is compelling reading. Devoted silver analyst, Ted Butler, estimates (from COT and Bank Participation report analysis) that JPMorgan has amassed a short side corner in the COMEX silver market now at about 18,000 contracts. If you consider each COMEX silver contract is for 5,000 troy ounces or 156kg, that is 90m oz or about 2,800 tonne of silver! But what makes it truly amazing is the massive physical long position which he estimated earlier this year at 300m oz. So, short the market down with paper silver whilst stocking up long on physical Just last week he had this to say
"Aside from the massive 7.5 million ounce of silver that JPMorgan acquired in the March delivery month, the key difference between its acquisition of silver and the Hunt Bros. or Buffett's acquisitions, is that JPMorgan was the largest paper short seller on the COMEX over the time of its physical accumulation. This is manipulation on its face and just today [Wednesday] the federal commodity regulator, the CFTC, brought charges against Kraft for manipulating wheat futures in the same manner as I allege JPMorgan has used in acquiring silver at depressed prices.
JPMorgan is now in position to reap a fortune on sharply higher silver prices and that is almost tantamount to a personal invitation to investors to join in and reap a fortune as well by buying silver. When what is arguably the most powerful and well-connected financial institution in the world sets itself up for a score on the upside by buying more of something than ever bought before, that is an invitation to all investors to buy silver. Of course, JPMorgan is not intending to encourage you to buy silver due to their own actions; that's just an unintended consequence.
Still, JPMorgan has been in the driver's seat for silver for more than seven years (since acquiring Bear Stearns) and the unmistakable evidence that they have acquired a truly massive position in physical silver points to the bank driving silver prices higher. That's as close to an insider investment invitation as it gets."
 
Silver leads the way in Q1 2015
It's been a tough year for commodities. The graph below shows their relative performance for the first quarter in USD. Silver is a standout exception, second only to the resurgent Uranium price and with gold almost even. But for Aussie investors this is only half the story. A lot of gold's troubles have been the surging USD. So when we look at gold and silver in AUD it's a very different picture. For the first quarter of 2015 gold was UP 7.0% and silver double that at 14.1%. We saw much higher of course at the end of January with the Swiss National Bank incident which gave us just a little preview, with a globally relatively small 'shock', at what happens when there is such a shock in financial systems. Many investors would be happy with 7% or 14% returns when the majority of talk is still about those markets 'struggling'.

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The thin paper line
A recent report by Thomson Reuters GFMS revealed the gold market to be one of the most leveraged financial markets in the world. Monday's post gave you a little insight into the same for silver.
They estimate 183,600 t of gold has been produced in all of human history and that in just 2014, around 3 times that was traded in that single year, worth around $22 trillion. $22 trillion is more than the total trades on the Dow Jones and S&P500 combined! The vast majority of that was paper trades (Futures and ETFs) where not an ounce of gold was delivered. To give you an idea of how 'western' dominated this paper trade is, they estimate 80% was through the loco London centres.
A key differentiator of the gold market is the difference between total supply (in theory around 180,000t or $7 trillion) and 'market supply' gold actually being available and not locked out of the market (jewellery, CB reserves etc) which has been estimated at around 40,000t or $1.5 trillion.
So consider that all financial assets (shares, bonds etc) total around $294 trillion. Consider the daily occurrences of another financial peer expressing concern at the central bank induced bubble like nature of these markets. Finally, consider 2 scenarios when (not if) this bubble starts to pop:
What if these highly leveraged paper trades in gold ask for delivery of real gold?, and
What if there is a rush of that $294 trillion in paper financial assets into the age old proven safe haven of the little $1.5 trillion physical gold market?
Hint: the words "epic squeeze" might come to mind Or pictorially..

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The thin paper line

What if these highly leveraged paper trades in gold ask for delivery of real gold?

Why would they ask for delivery of real gold when they know that it doesn't exist? The only reason would be to destroy the system that they are making money from, in which case they can no longer make money from it and they still don't get any gold. And in order for the system to collapse, a significant number of the players would have to get together to crash it, one person with a grudge wouldn't be able to do it unless they were very rich and didn't mind losing their wealth.

What if there is a rush of that $294 trillion in paper financial assets into the age old proven safe haven of the little $1.5 trillion physical gold market?

Why would people think that something which didn't exist would be a safe haven. In particular, why would people who gamble with other people's money for a living be looking at parking money in a safe haven? Surely they wouldn't make any money that way.
 
Jislizard said:
The thin paper line

What if these highly leveraged paper trades in gold ask for delivery of real gold?

Why would they ask for delivery of real gold when they know that it doesn't exist? The only reason would be to destroy the system that they are making money from, in which case they can no longer make money from it and they still don't get any gold. And in order for the system to collapse, a significant number of the players would have to get together to crash it, one person with a grudge wouldn't be able to do it unless they were very rich and didn't mind losing their wealth.
Click to expand...
Would this be a feasible scenario? Maybe one big investor, rightly or wrongly, thinks the system could imminently collapse, leaving them with nothing, so they immediately dump their paper trades and shift to physical gold. This by itself is insignificant, but is taken as a signal by the rest of the market, triggering an escalating cascade of traders doing the same thing and the original investor's fear becomes a self fulfilling prophecy.
 
Clawhammer said:
AinslieBullion said:
The thin paper line
A recent report by Thomson Reuters GFMS revealed the gold market to be one of the most leveraged financial markets in the world.
Click to expand...
Really?
'Cough' 1.2 Quadrillion dollar derivatives market 'Cough'
:)
http://www.globalresearch.ca/financ...lion-dollars-20-times-the-world-economy/30944
Click to expand...


And horray for Greek bond derivatives too! Like watching a trillion dollars get fired into a bobsleigh run.

I'd be surprised if gold leveraging matched that on US T-Bills but hey ho it is a mad old world.
 
SilverPete said:
Jislizard said:
The thin paper line

What if these highly leveraged paper trades in gold ask for delivery of real gold?

Why would they ask for delivery of real gold when they know that it doesn't exist? The only reason would be to destroy the system that they are making money from, in which case they can no longer make money from it and they still don't get any gold. And in order for the system to collapse, a significant number of the players would have to get together to crash it, one person with a grudge wouldn't be able to do it unless they were very rich and didn't mind losing their wealth.
Click to expand...
Would this be a feasible scenario? Maybe one big investor, rightly or wrongly, thinks the system could imminently collapse, leaving them with nothing, so they immediately dump their paper trades and shift to physical gold. This by itself is insignificant, but is taken as a signal by the rest of the market, triggering an escalating cascade of traders doing the same thing and the original investor's fear becomes a self fulfilling prophecy.
Click to expand...

I don't think it would be feasible, from my understanding most of the people investing in paper gold don't seem to be doing it because they want gold, they do it because they can trade it like any other commodity without needing to store, insure or transport the stuff.

I am not sure how the system works, and I am not sure that any system which sells more than actually exists could be described as 'working', but I understand that there is 'some' physical gold that could be given out.

If someone took a large amount of gold out the theory is that the people supplying the gold would probably have to buy some gold to pick up the shortfall in their stocks. This would cause the price of gold to rise (supply and demand) and either make the people holding paper gold richer (in fiat not gold) or crash the entire system. Which I believe has been tried, half halfheartedly, with a silver short squeeze that was going to bring down JP Morgan but actually only sold some moderately expensive silver rounds.

So the people holding paper gold have now got more value and when they go to collect their gold they are told, sorry no gold, but here is a check for the full amount.

I think if someone got a bit concerned they might ditch their paper gold but if you have concerns about gold, you probably wouldn't want to get gold in return. The most I can see is someone panicking, selling their paper gold, triggering maybe a few copycats doing the same, leading to an algorithm or two tripping and there being a mass selling of paper gold, prices plummeting and the people holding physical gold wondering what just happened to the value of their investment.

Or something like that, anything that is so obviously crooked I generally tend to avoid and not look into in much depth.
 
The new China, stimulus and Australia
It's been a rough week for China with more economic data released showing the world's economic engine continues to slow. So you'd think their shares would be tanking too yeah? Of course not. Not in this new world of central bank knights to the rescue. Indeed the news is so bad everyone assumes the money printing will be ramped up, interest rates dropped again, and stocks will fly. So in the week they updated their growth forecast to its lowest level in 6 years (at 7% GDP) this happened

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The Chinese stock market has nearly doubled in the last 6 months. In that period we saw the horrific March trade data that saw imports down 12.3%, exports crash to -14.6% (versus estimates of +8.2%) and their trade surplus at just RMB18b (versus estimates of RMB250b)!
Such stimulus assumptions would in the recent past see Aussie markets surge too on the assumption it would mean more building and more of our resources. But not this time and maybe not again. The data showed steel production dropped (1.7%) for the first time on record. The penny has dropped (even front page of today's AFR) that such stimulus is more likely to see financial market rises and no longer demand for our resources.

This has a few obvious implications for gold and silver investors. Firstly it will see more downward pressure on our dollar (Westpac revised its forecast to 72c by September this year) seeing an increase in the AUD value of gold and silver. It will also put more pressure on the RBA to lower interest rates, reducing the opportunity cost of the non yielding investment. Harder economic conditions in Australia mean diversification of your portfolio to include a defensive hard asset becomes more important. As the graphs below show, it will exacerbate the craziness of this world experiment of central bank stimulus where China have already printed more than anyone else and may be about to go harder If graphs showing unprecedented monetary stimulus, yielding ever decreasing GDP results yet bubble like high share markets don't make 'economics 101' sense to you then maybe investing in the world's oldest proven safe havens will

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