For all the folks, talking heads, financial analysts, etc. that say this market MUST go up because those investment advisors that have not been in the market over the last 5 month MUST play catch-up before the year end performance figures are released (the whole "Alpha") thing, I say this:

Jump in, baby. If you are so shallow and are such a lemming that you will park your commonsense and jump into an overpriced market and bid that market up to even more over-priced levels, do it soon.

This will be nothing more than an even more sure-thing short opportunity for folks like me. What would make you jump into a bidding war over over-priced stocks with increasing unemployment and a devalued dollar (no, exports wont save you...we don't make much anymore) just to chase "Alpha"?

Should you choose to do this, you are not acting in a fiduciary manner for your clients but rather only in your own best interest.

Friends, ask your investment advisor about this before you get another "portfolio re-balance" at just the wrong time.

If you have been following the show, we have discussed poverty. Poverty is not something that needs to be studied or analyzed. The minute you do nothing or create nothing or do not improve your thinking ability, you have ceased creating value and you are poorer. Poor is the natural state of being. Success, productivity, personal improvement are all things that must be studied as you must do something to achieve these things. Do nothing and you are poor.

This also relates to our jobs, our community and our country. At what point do each of us say that voluntarily contributing to charities around the country and the world is good but voluntarily redistributing our wealth to others or other countries through a single payer healthcare system, "Cap and Trade" or the newly proposed "Copenhagen" treaties is bad? Do we want to voluntarily make us more poor? Do we want our poor to become more poor while we enrich the world with wealth redistribution and pollution reparations?

Your voice must be heard. Whatever your position, write your congressmen. A handwritten letter is thought to represent 15-25,000 voters. Make your letters count. But first, please understand the issues. There is nothing we can do to help you invest better if the national economy is in the dumper. You must understand the world that is coming before you can protect what you have and improve your purchasing power.

More on Thursday's show including a discussion of personal property rights.

This is a reprint of a great article about "Gold Leasing" from "Whiskey and Gun Powder". When "leasing" becomes transparent OR gold rises sufficiently on its own, leasing will cease and Gold will continue to vastly new highs.

The Gold Carry Trade

Jul 25th, 2007 | By Whiskey Contributor | Category: Gold

On July 24, 1998, Alan Greenspan stood before the House Committee on Banking and Financial Services and said, “Central banks stand ready to lease gold in increasing quantities should the price rise.”

That is exactly what the gold carry trade consists of. It is the process in which central banks lease out goldbullion to be sold on the open market to suppress prices.

Here’s the thing: The large majority of these transactions take place on the London Bullion Market (LBM). This is an over-the-counter (OTC) market in which there is little-to-no transparency. A number of organizations have conducted studies on the amount of gold lending that takes place. Some of the organizations include Gold Fields Mineral Services (GFMS), the World Gold Council (WGC), and Virtual Metals (VM). As a result of the lack of transparency, the numbers reported in regard to gold leasing vary slightly from one another. For the sake of argument, I will be using the most conservative figures reported.

This may be the most significant piece of the gold bull puzzle that will push gold to $2,000 and beyond. I will dig in and share my in-depth research with you, starting with how the process is carried out, then going into the market impacts of the gold carry trade, and concluding with the future of the market for gold leasing.

How Does the Gold Carry Trade Work?

Gold leasing takes three different forms: direct leasing, central bank swaps, and forward hedging.

Direct Leasing

I am going to run through this in a simple step-by-step process. Central banks don’t directly take their bullion to the market and lease it out. They use a vehicle called a bullion bank (BB).

Although bullion banks are numerous, some of the more well known are Barclays, Goldman Sachs, JP Morgan, Bank of America, UBS, and Citibank.

The central banks loan gold to the BBs at a rate of approximately 1%. The BBs take it to the LBM and sell it on the open market. The BBs take the cash from selling the bullion and in turn buy Treasuries.

So if the story were to end here, the bullion banks would just walk away with a net 4% return. But it doesn’t end, because they only have the leased gold for a certain length of time. They eventually have to give the gold back to the central banks, but now they are at risk of price swings in a very volatile market.

The answer to their problem is to go long the futures market. Essentially, they buy futures contracts to hedge their risk. In other words, they secure gold for delivery at a specific price, on a specific date in the future. Once they buy their futures contracts, it doesn’t matter what the price action of gold is.

In a perfect scenario, after the gold lease rate and price risk hedging, the bullion bank will walk with a modest 1–2% gain. The central banks will receive a return on their gold, keep the price of gold suppressed in order to keep real inflation suppressed, and get a boost in the demand for Treasuries. It’s a win-win situation for both the bullion and central banks.

Gold Swaps

Gold swaps are very similar to direct leasing. The difference is that gold swaps usually take place between two central banks. These types of transactions occur in two different forms.

The first is very simple. Essentially, two central banks swap gold reserves and then carry out the action of directleasing of each other’s gold. The reason for this is that it just adds more confusion for the accounting of the leased gold.

The second is slightly different. This transaction occurs when one central bank exchanges gold for currency with another central bank. Like gold leased to the BBs, a future date and price are set for the redelivery of the goldback to the initial central bank.

The IMF says of this type of gold swap, “Typically, both parties will treat the transaction as a collateralized loan.” Or the CB leasing the gold doesn’t remove the gold from its balance sheets, and the CB receiving the gold doesn’t add it to its balance sheet. As far as accounting goes, no transaction has even taken place. The goldmarket is flush with new supply and would beg to differ that a transaction hasn’t taken place.

In other words, the CB receiving the gold loans it out on the market while it is still on the balance sheet of the initial central bank. One might refer to this practice as double-counting the reserves.

Forward Hedging

Forward hedging is a form of gold leasing practiced by gold producers. The most famous of these is BarrickGold, but there are many other producers who partake in forward hedging.

Forward hedging is when a producer presells gold on the spot market that has yet to be extracted from the earth. Most of the buyers want delivery of physical gold. So the producer leases gold from a CB, with the idea that it will pay the CB back with future production.

The problem is that these producers often sell their gold at suppressed prices on the spot market and they often sell more gold then they can produce.

On the note of Barrick, did I mention that it has recently been sued for price fixing and price manipulation of thegold market? Barrick and its bank JP Morgan have admitted to price manipulation and that they have worked with the central bank in this process.

Implications of the Gold Carry Trade

The gold carry trade has one main goal, and that is to add huge amounts of supply to the market in order to suppress the price of gold. Although there are other added bonuses along the way for the participants, the main reason for suppressing the price of gold is so the world doesn’t know the true value of worthless fiat currencies.

I would like to use some statistics to inform you as to the implications of gold leasing on the market for gold. Remember that I will use the most conservative numbers I could find.

In 2005, according to GFMS, gold leasing was estimated to have added 2,970 tonnes of supply to the market. In that same year, jewelry demand was 2,700 tonnes, world investment was 736 tonnes, and official central bank sales were 656 tonnes. Over the last 10 years, average mine production has run at an estimated 2,500 tonnes per annum. So the amount of leased tonnage exceeded all of the above-mentioned statistics.

Remember that central banks are not required to report at all on their transactions of loaned gold. So those 2,970 tonnes of extra supply were also counted in central bank reserves, or they were double-counted.

Central banks are the largest holders of gold tonnage, estimated to have around 30,000 tonnes. So they have loaned out approximately 10% of their total reserves.

How Long Can This Go On?

If you are looking at this in a practical way, you probably came up with the exact questions I did when I first started to read about the gold carry trade. When the gold enters the market via a BB, it all has to be bought back at the end of the lease contract. Doesn’t that put us back at square one with the amount of supply in the market negating any long-term implications?

The answer would be yes if there were just a couple of transactions. But there are several gold leasing contracts signed every day. All the supply is constantly being recycled in and out of the market and there is always freshgold being leased into the market.

The length of a gold leasing contract can extend anywhere from one month to several years. This allows for the central banks to analyze these markets and best time their transactions and how long they will be, in order to suppress the price of gold.

So can this go on forever? Definitely not, and the implications of the gold carry trade coming to end will bring with it the most spectacular price actions ever seen in the gold market.

Let me tell you why the gold carry trade will not be sustainable forever. It’s very simple. All we have to do is look at the step where bullion banks have to buy back the gold sold on the spot market in order to pay back the central banks.

In order for this to be profitable for the BBs, the price of gold has to experience very limited gains during the time the gold is leased out. Or the price of the futures contract purchased by the BB has to be near enough to the price of gold when the bullion bank initially unloaded the leased bullion on the spot market. If the price of goldheads too high, it will not be profitable for BBs to partake in being the intermediary for such transactions.

All we have to do is look at the fundamentals for gold and we realize very quickly that the price of gold is definitely going to go higher one way or another, which will disallow future leasing in the gold market. You are probably well aware of the fundamentals: Every one of the major economies of the world printing money at a rate of over 10% per annum; the Mount Everest of debt from both budget and trade deficits; an inevitable recession here in the U.S.; the inability of the U.S. to raise interest rates, due to the complete mess of the housing market; rising energy costs putting downward pressure on the U.S. dollar and increasing inflation in every other aspect of the economy; mine supply at historic lows; a possible U.S. policy that would include trade protectionism against China; and, last, but definitely not least, a U.S. Federal Reserve whose main goal is to create credit by keeping interest rates below the rate of inflation (negative real interest rates).

Fundamentals are fundamentals, but there has been some action in the International Monetary Fund (IMF) recently on this very topic. Before I go any further, I just want to let you know that I don’t trust the IMF any further than I can throw it. And I don’t really expect any timely results from its actions. What is important is that the notion of the gold carry trade is coming forefront. Here’s what’s going on in the IMF.

Hidetoshi Takeda of the IMF’s statistics department recommended in early 2006 that all loaned gold be excluded from the central bank’s reserve figures. The IMF’s committee on reserve assets considered Mr. Takeda’s paper and came to the conclusion that a new definition of gold reserves excluding loaned gold needs to be officially documented. It also stated that unallocated gold loans should be disallowed. Nothing recommended in Mr. Takeda’s proposal was rejected. Full details of his report can be read here.

The IMF continued its research regarding the issue and made another report with a similar conclusion. What does this all mean? Well, the IMF is currently working on another official proposal to be worked through the system making it necessary to make all loaned gold public information and to exclude loaned gold from reserve accountings. The IMF currently “encourages” central banks to record gold loans/swaps, but does not “require” the recording.

If everything goes perfectly, and I don’t believe that it will, we could see these actions implemented by the IMF at the end of 2008. As I said, it seems like a far reach, but the more people become aware of the gold carry trade, the sooner it will come to an end. And I don’t like to put my bets on the IMF to make progress with in the accounting of leased/swapped gold, but it DOES have the power to change how central banks report the reserve holdings of gold.

The eventual unwinding of the gold carry trade, whether it be from the IMF or just market fundamentals, will bring amazing action to the gold market. Remember that gold leasing didn’t begin until after the precious metals run from 1979–1980. For the bull market in gold to continue, it will need to overcome the barriers set by central banks’ leasing of gold. But when this does occur, the floodgates will open and we can expect to see the price of our favorite yellow metal skyrocket.

Regards,
Nick “Child Prodigy” Jones

Whew! Finally a link back to our old blogging site.

We will keep this up to date each day.

On the show today we will open with Craig Smith, founder of Swiss America Trading Corp. He is a recognized expert in all things gold and, with today's news about denominating oil partially in gold, it will make a great conversation.

Also, for all of those that say that gold is only a commodity, it is a commodity, a currency, a rare element and the oldest store of value. There is very little of it EVER mined (about 2 Olympic pools full) and the us has less than $250B in gold reserves, less than 1/3 of the Stimulus Plan!

Stay tuned and stay alert to gold and its pretty cousin, silver.

This is why we have not yet begun to face our financial crisis. Here are the next two huge waves of home mortgage refinances. Our long term interest rates must stay low to allow these mortgages to reset at a rate that the debtors can service. That means that the rate on the 10 year Treasuries must stay in the 3% range until 2012 - nearly 3 years!

And, just to add a little complexity. this does NOT include retail or commercial mortgage obligations that require permanent financing. It is important to note that distress in the commercial and retail mortgage markets happens about 18-24 months AFTER the onset of residential mortgage distress.

Our media and government should be ashamed for not reporting these statistics. To jump on the recovery bandwagon is shameful. If you assume that we will begin to require higher rates of return to compensate for greater risk and inflation, this means that asset values will go down just as rates rise. This leads to a "death-spiral" effect for real property.

Just food for thought...

We sure hit it right during the last few minutes of the show on Friday.

There are plenty of possible reasons the government might act the way it does right now, regarding fiscal and monetary policy, but the only logical reason for the government to act the way it does is to intentionally stoke the fires of inflation.

With a recognized national debt of nearly $12T and unrecognized additional liabilities of $60T for social programs and additional $10T plus for recently authorized federal guarantees, our government has no hope of paying the debt down and very little hope of servicing the debt UNLESS the debt and the debt service are paid back in highly inflated dollars.

There is no reason to spend trillions of borrowed or printed dollars on useless "stimulus" construction plans that neither create long term revenue, when the projects are completed, nor create many short term jobs. And the jobs created are primarily in the construction industry. To be entirely politically incorrect, a rather large number of these jobs will not go to Americans.

The very idea that we might possible face deflation is absurd. Bernanke was right when he said deflation can be cured quite easily by throwing dollars out of a helicopter. This is a guaranteed inflation inducing act, no different from borrowing or printing money that is backed by nothing but a promise.

And I'm not referring to a gold standard. The zero inflation theory is that a dollar is created only when new assets are created and the new dollars represent the increased quantity and quality of assets held. When you print a dollar and there is no concurrent increase in asset value, you create inflation and devalue the dollar. This devaluation is said to increase the attractiveness of our exports but we must actually make things that have relatively greater value than our foreign competition.

Overall, the government's plan is very transparent but only if you keep your eye on the pea under the shell. The pea is our debt and no one wants you to focus on it. They want you to keep your eye on social issues that, while morally relevant to each of us in different ways, are entirely irrelevant to the financial survival of our economy.

The government will engineer every possible way to increase tax revenues while decreasing government services. This is the only thing that they can do. They know it. It is just the American people that I am concerned about.

Take a good look...this is the future of employment in the US...

Listen Wednesday as we discuss the "0% Solution" and how this radical investment concept is gaining traction.

Also, plenty of new information about the completely unstable banking world and the huge mistakes investors are making right now in this major bear market rally.

Learn how major banks, with terrible balance sheets, are using your tax dollars to purchase bad assets from other major banks, at a premium...and then will use mark-to-market to mark up their own assets to these newly inflated prices. This is exactly how the fraudulent real estate scams of the early '90's and lately were created except this time the fraudulent appraisals are based upon mark-to-market.

While Wall Street and Washington rearrange deck chairs, listen to The Wall Street Shuffle and learn how your money is being stolen each day. After all, the "Shuffle" is not a dance but really an elaborate confidence game...and you are the mark every time. Learn the game any you will never invest the same.

This from our "Spies in Washington", the new Car Capital of the World.

FLASH: GM releases latest prototype of the Obamamobile - a one world car, designed in Washington, by a committee of politicians. Welcome to The New World Order where even if you want to run and get away from your government...well...you might actually need to run as you could probably out run this thing.
"Like a rock..."

This chart should be interesting to anyone who thinks this current market drop is only a "bump in the road".

Short but very important gold lesson

Well, now we know a lot more about gold.  Today, gold was down about $30 to the $890 range.  Then, immediately upon the announcement that the Fed would buy long dated treasuries to "help" the market, gold reverses itself and went up about $20 to close above $930.

If there was ever a better indication that as long as the government continues to try to do things to "help" us, they will fail and gold will win.

You cannot take from those that have and give to those that do not and create wealth.  If you are exceptionally lucky, you won't have any effect.  But, in virtually every situation, this redistribution will hurt the economy and the dollar and help gold.

The next time you hear about a "market bottom" or the end to the recession or that it is time to jump back into real estate or anything like that, take a look at the 5 waves of mortgage problems. Notice that we are just now beginning to deal with the second wave.

We will talk more today about this but I suggest that you sear this into your mind before you make any long range financial plans.

But you should only be worried if you believe that bad mortgages and bad credit actually started this debt crisis. Also, you should not be worried if you think more bad credit can fix the existing bad credit!

I will let you decide...

Any idea who this is? If so, listen to our show today (031709), call in and take home something from the WSS gift shop.

OK, now that we have the previous two posts out of the way, Monday (03.16.09) we will discuss how the markets and the US Economy are linked but not dependent upon each other.
Essentially, our economy is based upon the number of domestic jobs, the average $/hour/resident of the US and the general mood and optimism of these residents.
The markets, however, are based upon expected earnings after taxes (both domestic and foreign) and the general mood and optimism of investors.
I hope you noticed the domestic and foreign earnings part. Remember, if you are a CEO of an international company (and virtually all listed stocks are international), you are rewarded based upon your consolidated earnings (foreign and domestic) and, consequently, your stock price. There are no rewards for making the US, or US residents, more prosperous.
Globalization is Kryptonite to national economies IF you are a "have" and not a "have not". Globalization levels the playing field. The game is to increase profits, at the expense of the "haves", without destroying them. It is not quite a zero sum game but the US and its residents will think it is.
Think about the higher value (meaning "wage") jobs that have been lost - maybe for a very long time. Unless we replace these jobs with new and equally high value jobs, this means less disposable income, less consumption, less tax revenue for federal, state and local governments. But the countries that landed these jobs improve their standard of living - though their revenue does not go up as much as our revenue goes down.
And that is the trick. Companies seek to globalize to the point where marginal cost equals marginal revenue. This is the old Economics 101 MC=MR graph. At this point, it takes $1 of cost to generate $1 of revenue or a break even. But, right before this $1 came a $1 of revenue that cost just slightly less than $1 to generate - and that is earnings - and that creates value in the share price.
The same is true for the global production/consumption. You globalize right up to this point. It helps you to reduce the costs for your company (even if you eliminate US jobs) just so that you do not kill consumption in the US.
But, as you reduce jobs in the US, the debt stays the same. And here we are...fewer jobs, less income, same debt, more defaults, falling asset prices. We crammed too much debt down the throats of consumers at the same time we cut their jobs and wages.
Finally, just for reference, all of the stimulus the US can throw at our economy won't work because you cannot take from those that have (through taxes, borrowing and inflation) and give it to those that don't and change a thing. And, if you are going to borrow the money, what ever you spend the stimulus on better make money after you build it. But if you REALLY want to muck things up, just print the money. Now you have fewer jobs, less income AND inflation - exactly the definition of stagflation.
And, for the record, stagflation is the mortal enemy of equity markets - IF you use purchasing power as your measure.
We are so screwed...

Here is a quick guide to using our web site. Every day is topical and we use a lot of sources for research. If we use articles, we will tag them and they will be listed on the "News and Events" tab (this tab name will change just as soon as figure out the coding!) under "Research Links" and "My Delicious Bookmarks".
This research will remain linked to this site. Each bookmark has a date tag on it and that date corresponds to the date of each show. So, if you choose to listen via Podcast, you can listen to the show and read each link. If you listen live to the show, you can read the research.
Some days, we will post graphs and charts to this blog and refer to them in the show.
We are an open source for information, articles, research and links. Our blogs tie into each show. If we can figure out a way to make our research more user friendly and find more ways for you to enjoy the show, you can bet that we will.
Still no charge for the research...or our opinions...

Just for everyone's enjoyment, here are the lyrics to "The Wall Street Shuffle"...written nearly 35 years ago! The group was 10cc. What a song! Not much has changed as far as the "Shuffle" goes - just today, it is played with many more zeros and commas - but it is the same old greed game...

Enjoy and go buy a copy of the song...

Do the Wall Street Shuffle
Hear the money rustle
Watch the greenbacks tumble
Feel the sterling crumble
You need a yen to make a mark
If you wanna make money
You need the luck to make a buck
If you wanna be Getty, Rothschild
You've gotta be cool on Wall Street
You've gotta be cool on Wall Street
When your index is low
Dow Jones ain't got time for the bums
They wind up on skid row with holes in their pockets
They plead with you, buddy can you spare the dime
But you ain't got the time
Doin' the....
Doin the....
Oh, Howard Hughes
Did your money make you better?
Are you waiting for the hour
When you can screw me?
`cos you're big enough
To do the Wall Street Shuffle
Let your money hustle
Bet you'd sell your mother
You can buy another
Doin' the....
Doin' the....
You buy and sell
You wheel and deal
But you're living on instinct
You get a tip
You follow it
And you make a big killing
On Wall Street