QE Removes Banking Collateral, So Gold Steps In And The Price Plunges

So says Jeffrey Snider of Alhambra Investment Partners, here, who sees it as a sign of big trouble ahead, with banks out front in the lead:

[I]n times of extreme stress, gold acts like a universal liquidity stopgap – when all else fails, repo gold. The operational reality of a gold repo is a gold lease, charged at the forward rate (GOFO). In terms of market mechanics, a dramatic increase in gold leasing is seen as a massive increase in supply on the paper markets. For various reasons in the past five years, collateral chains and the available collateral pool has dwindled dramatically. That has left banks to scramble for operational bypasses, but it also has led to periods of very acute stress. When we match the price of gold against these stressed periods, they coincide perfectly. In other words, whenever collateralized lending has become problematic banks appeal to the universal collateral. Unfortunately, that looks like gold selling to the uninitiated. These large declines in gold prices match date for date the extreme developments in the banking system across several currencies. And in each case the gold selloff has previewed a larger decline in systemic liquidity that eventually catches other asset classes.

Did you get that? The price drops on the appearance of a massive increase in supply, on the paper markets, when in actuality there is nothing of the kind.

Another Gold Bear Recognizes Fair Value Is Below $500 The Ounce

Noted by Bob Pisani, here:

Gold bears like MKM note that if gold had simply moved with the CPI basket since 1913, it would stand at $490 an ounce. Wow. That is more than 60 percent below it's [sic] already low price. I doubt it will go anywhere near there.

Pisani and just about everyone else is focusing on the run-up in gold since 2008 to its extraordinarily high levels of recent years, finding it nearly inconceivable that gold could lose all of those gains since 2008, while ignoring at the same time the run-up to 2008 which established gold's floor for the last five years' move to the stratospheric level.

It would be easy to blame the financial crisis and/or QE for the last five years of gold price rises to $1900, but QE had nothing to do with the five to seven years before 2008 when gold rose to $800 from $300. Perhaps easy money could be credited with that in the 2000s, but we've had easy money before 2003, too. Alan Greenspan's easy money from 1995 did nothing for gold, which continued down to $263 by late 2000. So what made gold skyrocket beginning after 2003? Everyone is ignoring who were the buyers then who helped drive up the price of gold.

The answer is buyers of GLD, the gold ETF launched in 2004. If puny little Cyprus can set off a wave of gold selling today with 14 lousy metric tonnes in question at the maximum, think about what GLD has done to gold buying, and thus to the gold price, over the years building up a wave of 1300 tonnes from 2004. GLD easily qualifies as the major player in the buying action in an annual production environment of about double that figure. It's just that now the limit has been reached under current conditions, and people are starting to realize that confiscation is becoming thinkable again. The gold price has slowly eroded from the September 2011 peak, and is now being shoved over the edge by confiscation fears.

You build a market and they will come, until actual ownership becomes more important than a paper proxy. That is a problem GLD cannot solve, nor any other gold "investment" which does not involve transfering physical possession to the buyer. Germany, for example, no longer trusts its gold in others' hands and wants it back in country. Try telling that to GLD, which won't be transferring gold to any "owners". I'd say that's very negative for GLD going forward, and very negative for gold prices generally because of GLD's sheer heft, just as possible confiscation of weak sovereigns' gold looming as a very real possibility is negative for gold prices because of their relative size and importance.

When it comes to GLD or any other form of paper gold, the only important question is, "Where are all the customers' yachts?"

Carnage in Gold Creates Near Perfect Gold/Oil Ratio of 15.2

The collapse in NY gold from $1501 on Friday to $1352 tonight adds a nearly 10% decline on top of Friday's 4% decline.

Oil closed down too, today, just below 89, yielding a nearly perfect gold/oil ratio of 15.2.

Based on the decline in the ratio down to this point, the buy signal for oil the higher ratio indicated comes off. But that doesn't mean we've got a buy signal for gold. Yet.

At 82.29, the US Dollar Currency Index is not indicating any real new strength on these developments.

Caution is indicated as gold may well continue down, and oil may follow it.

TIPS Sell-Off A Sign Of Deflation In The Economy?

Bloomberg has the story about the sell-off in Treasury inflation-protected securities, here:

For the first time since the depths of the financial crisis in 2008, mutual funds that target Treasury Inflation-Protected Securities have seen outflows for three straight months, according to Morningstar Inc.

Even after the Fed injected more than $2.3 trillion into the financial system since 2008, inflation is under control, bolstering the appeal of bonds while providing the central bank with more scope to provide stimulus as needed to foster the economic recovery. Commodity prices are down and wages have grown just 1.9 percent on average since 2009, below the 3.1 percent in the prior three years, government data show.

“With such weak labor markets, flat income growth and flat wages, and commodities weak, we just won’t see the inflation that the TIPS market is pricing in,” Dan Heckman, a fixed- income strategist at the U.S. Bank Wealth Management unit of U.S. Bancorp, which manages $110 billion, said in telephone interview April 9.

Art Cashin Looks For A Watering Hole, Out Of The Deflationary Wind

Five o'clock has been replaced. Our kind of guy:

"It's always noon somewhere."

On the Friday just past, here.

Illegal Immigration Magnet In Chief

They say,

"Obama's gonna let me go."

And,

“Where do I go for my amnesty?”

Story here.

Josh Brown Doesn't Think Too Much Of Your Paper Gold

Oliver Cromwell

And he's not too fond of the real thing sitting right in front of you, either, here:

'It is utterly uninteresting to me and gold equity investing - things like paper ETFs and the shares of horrible gold miners - seems to defeat the whole purpose of an end-of-the-world asset class in the first place. I promise, should a torrent of plague and genocide wash across the land on a roaring floodtide of blood and economic catastrophe, your stupid-ass "stock market gold" shan't be left unscathed.  And if I am dismissive of it as an investment, you can imagine how I feel about it as an actual real-life medium of exchange - I live in the United States of America in the 21st Century and I have no interest in exchanging dollars in my savings account for something that hedge funds and sovereign governments can pump and dump at will.'

Well, they can pump and dump worthless paper currencies, too, and are. That's the problem. But as I pointed out here last year, gold has been on a tear ever since paper gold in the form of GLD made its appearance in November 2004. At the time, the US Dollar Currency Index opened the month at 81.82, just a little under where it is today, and then promptly rose, but gold closed that year under $440 the ounce, as it had the year before. After dropping about 4% on Friday to $1,501 the ounce, gold today is presently down another 6% to $1,404, but even that is a price which is much too high even though gold is now technically in a bear market, down over 26% from the September 2011 highs around $1,900.

They have made a market of gold which didn't exist before, and the price went up, up, up, just as they have made a market of mortgages and of houses through securitization and commoditization, and the price went up, up, up, until it came down, down, down.

I'd say gold has about another $1,000 down to go to get to fair value, but if you follow Louis Woodhill a price in the $200s is more like it, and John Tamny rather likes it at $800. Which is to say, there is lots of distortion in markets generally which is preventing price discovery.

Time will tell. So keep your powder dry as they say, if you've got any left. If you don't, maybe you'll have to sell some gold.

"Invest" In Housing? Real Home Prices Up 0.2 Percent Per Annum 1890-1990.

So warns Robert Shiller, here:

"Home prices look remarkably stable when corrected for inflation. Over the 100 years ending in 1990 — before the recent housing boom — real home prices rose only 0.2 percent a year, on average. The smallness of that increase seems best explained by rising productivity in construction, which offset increasing costs of land and labor."

Tax Compliance Costs: Over A Full Week Of Your Time

The poll tax in the north for 1873

If it takes 6.1 billion hours to comply with the tax code as reported here, for 114.7 million households that's over 53 hours per household, or 6.7 eight hour days, each.

It took me four six hour days but still, this is insane. 

If Babies Had Guns . . .

Libertarian Megan McArdle Makes Me Want To Puke

Because she thinks there is anything which can make abortion humane, here:

"I knew about the Gosnell case, and I wish I had followed it more closely, even though I'd rather not.  In fact, those of us who are pro-choice should be especially interested.  The whole point of legal abortion is to prevent what happened in Philadelphia: to make it safer and more humane.  Somehow that ideal went terribly, horribly awry.  We should demand to know why."

Abortion at any stage is the brutal murder of another human being, the mark of an unrefined, barbarous people, and our country is full of them. To exercise humanity in this situation would be to sterilize every woman who comes into an abortion clinic, and every man who put her there. They should have no right ever again to inflict such pain and injustice on another utterly defenseless human being.

Robert Samuelson: Obama Is Timid, Lazy, Phony, Tiny and Small

"Timid, lazy, phony, tiny and small" doesn't quite have the same ring as "solitary, poor, nasty, brutish and short", but you never know, it might catch on.

Here:

There is something profoundly timid about President Obama's proposed $3.778 trillion budget for 2014. ... [T]he budget is a status-quo document. It lets existing trends and policies run their course, meaning that Obama would allow higher spending on the elderly to overwhelm most other government programs. This is not "liberal" or "conservative" so much as politically expedient and lazy. ...

Obama remains unwilling to grapple with basic questions posed by an aging population, high health costs and persistent deficits. Why shouldn't programs for the elderly be overhauled to reflect longer life expectancy and growing wealth among retirees? Shouldn't we have a debate on the size and role of government, eliminating low-value programs and raising taxes to cover the rest? The "spin" given by the White House -- and accepted by much of the media -- is that the president is doing precisely this by putting coveted "entitlement" spending on the bargaining table.

It's phony. Compared with the size of the problem, Obama's proposals are tiny. The much-discussed shift in the inflation adjustment for Social Security benefits to the "chained" consumer price index would save $130 billion over a decade; that's about 1 percent of projected Social Security spending of $11.23 trillion over the same period. ...

The work of politics is persuasion. It is orchestrating desirable, though unpopular, changes. (Popular changes don't require much work.) . . . Already, his small proposed cuts in Social Security benefits have outraged much of the liberal base.

So Obama has taken a pass. He has chosen the lazy way out. He's evading basic choices while claiming he's bold and brave. ...

Despite Gold's Drop, Gold/Oil Ratio Finishes The Week At Oil-Bullish 16.45

texasbullfights.com

Even at the spot price of gold of $1,477 after the NY close the ratio is 16.18, indicating that oil remains on sale relative to gold.

Gold closed at $1501.40, well below what is understood to be a key support level of $1,521. There is talk of price falling to below $1,300 by early 2014.

At current prices of oil around $90, $1,300 gold would be an attractive buy, but it remains to be seen if oil can remain that expensive in a period of reduced demand due to chronic, severe unemployment, increasing domestic supply from oil shales, replacement of diesel with natural gas and increased passenger vehicle efficiency standards.

Rising dollar strength from early February to as high as 83.22 on the index in late March may well be the result of these oil trends, along with relative constraints on US federal spending due to divided government and more certainty about government revenue streams due to the settlement of long-standing income tax impermanencies. 

Gold Fell Out Of Bed Today, Dropping 4%

The carnage continues in after hours trading with spot prices around $1,477 the ounce.

It is thought in some quarters that the terms of the Cyprus deal requiring Cyprus to sell some of its gold to contribute for its bailout sets a bad precedent for other periphery countries in the Euro who may also be asked to sell gold to help pay for bailouts. The increased supply would be hugely negative for prices.

Sounds like people got out of GLD in particular big time just as the rumors were breaking in the middle of the week, and today the facts are spreading a dim pall over the entire gold market.

Deposit confiscation, then sovereign gold. Are they going to start going through the safe deposit boxes, too?

Real Retail Remains In Depression, Still Over 8% Down From 2005 Peak

Doug Short explains his chart, here.

Real retail remains mired in a depression, despite the progress made digging out of the bottom of the hole reached in 2009. Adjusted for population and inflation, and backing out gasoline sales which Short rightly deems a tax, the current level remains over 8% off the 2005 peak, eight years ago.

Russia Was Just The Excuse For The Eurogroup To Steal From Cyprus

So says Ambrose Evans-Pritchard, here, for the UK Telegraph:

"First they purloin the savings and bank deposits in Laiki and the Bank of Cyprus, including the working funds of the University of Cyprus, and thousands of small firms hanging on by their fingertips. Then they seize three quarters of the country’s gold reserves, making it ever harder for Cyprus to extricate itself from EMU at a later date. ...

"Cypriots are learning what it means to be a member of monetary union when things go badly wrong. The crisis costs have suddenly jumped from €17bn to €23bn, and the burden of finding an extra €6bn will fall on Cyprus alone. ...

"The workhouse treatment of Cyprus is nevertheless remarkable. The creditor powers walked away from their fresh pledges for an EMU banking union by whipping up largely bogus allegations of Russian money-laundering in Nicosia. A Council of Europe by a British prosecutor has failed to validate the claims. The EU authorities have gone to great lengths to insist that Cyprus is a 'special case', but I fail to see what is special about it. There is far more Russian money – laundered or otherwise – in the Netherlands. The banking centres of Ireland and Malta are just as large as a share of GDP. Luxembourg’s banking centre is at least four times more leveraged to the economy. ...

"The original plan in Cyprus – approved by the Eurogroup, but rejected by the Cypriot parliament – was to steal the money from any bank regardless of its health, and from small depositors regardless of the €100,000 guarantee. They have shown their character. The Eurogroup don’t give a damn about moral hazard. They are thieves."

Jim Cramer Still Thinks You Are A Fool. He May Be Right.

M1 since the 2008 panic

M2 since the 2008 panic

M2 is up $2.71 trillion since the crisis, M1 $1.05 trillion. That means since September 1, 2008, nearly 39% of the rise in M2 is directly the result of the increase in M1 (checkable deposits, i.e. the spending money in circulating cash and checking accounts).

Overall, M1 is up nearly 75% over the period, but M2 just 35%. But back out the M1 and M2 is up only 21% net, or $1.66 trillion. Still, that's a lot of moolah being saved and not flowing into stock markets.

Enter Jim Cramer, who here says that as CD instruments (M2) mature now, they will not be rolled over but get invested in the only thing going for return, namely stocks:

"Every-day CDs from the halcyon days of the middle of the last decade, when rates were going higher, will come due -- and the dramatic decline in the rollover CDs should force that money into the stock market. Invariably I hear that this flow won't amount to a lot of money. Just dismiss these people out of hand; they are either short or ignorant."

"Force"? "I hope" is more like it. I smell a book-talker.

Most of this CD and money market fund money is money of "households", small time stuff under $100,000. With plunging returns on savings over the period as the US Federal Reserve Bank pursues its policy of financial repression through zero interest rate policy, Cramer is hoping households will suddenly become the greater fools with markets at all time highs and plunge into stocks even though households have been net negative all along since the crisis, pulling out $250 billion from the stock markets according to widely reported figures from Standard and Poors.

In contrast to households it's the funny money which has been driving the markets higher, banks and other corporations doing stock buy-backs to the tune of $1.2 trillion net over the period. Most troubling of all, a year ago already banks were reported to be responsible for fully 32% of the ownership of the total market all on their own, rivaling the household sector's 37% share. If you want to understand how markets are up so much, you have to look there.

Suckers who took Cramer's sell advice in early October 2008, people who "need their money in the next five years", have entirely missed this bank-driven rally which has been aided and abetted by the Fed. And potentially they lost as much as 25% right up front in just the first three weeks after his sell announcement on the nationally televised NBC Today Program, before the markets opened on Monday morning, October 6, 2008, the Monday after TARP was signed.

And here he is, 4.5 years later, hoping people will take his advice again and plunge in because there's plenty of liquidity to keep markets buoyant. Well, plenty as long as you provide it.

You know. Sell low, buy high.

They should hang a warning label around that guy's neck.

For What The Nation Earns Homes Are Still Overpriced (15%)

So says Bloomberg Businessweek, here:

"[H]ouses are overvalued. From 1988 through 1999, median home values averaged 2.6 times the median annual income. As the bubble kicked into gear, prices pushed up to almost four times income. With the crash, that ratio has come down—but not far enough, largely because incomes have been stagnant, if not declining, in recent years. Home values are now at three times the median income—that’s 15 percent higher than they have historically been, relative to what Americans earn."

From the point of view of the Case Shiller Home Price Index, a 15% correction to the current index value of 136 would imply 115.

In the post-war period, we have witnessed 115 on the index in December 1982, March 1975, December 1973, September 1968, and December 1952.

Jim Cramer Blames President's Fear-Mongering Over Sequester For March Jobs Number

Here:

"I think the report can be totally explained by our Fear Monger in Chief (i.e., President Obama), who scared the heck out of everyone as he talked about the massive job losses coming from sequester. I am sure that'll be the case, but the real impact here was similar to the U.S.'s pre-cliff non-dive, when the country's business was frozen."

35% Of Long Islanders Seriously Delinquent On Mortgages, Banks Not Foreclosing

And the people just keep living in the homes so long the notices of default expire and have to be refiled.

So says Keith Jurow for BusinessInsider here, who thinks the recovery in the housing market is a mirage actually created by the banks to help them unload some inventory at higher prices:

"I have solid figures from the Federal Reserve Bank of New York on the number of first mortgages in both NYC and Long Island. So the latest figures from the NYS Division of Banking indicate that roughly 30% of all owner-occupied properties in NYC are now seriously delinquent. For Long Island, it is an incredible 35%. ...

"Had the banks been foreclosing in the NYC metro, then the total number still delinquent would certainly be much lower than the Division of Banking figures. But the banks are not foreclosing in the NYC metro. I have shown this in several previous articles. ...

"Once a filing (called a notice of default) has been active for three years, it expires under NY state law. So the attorney for the lender has to refile the notice and begin the process all over. Picture those owners living in their house for more than three years without having paid a nickel toward the mortgage. It’s crazy, but that is what is occurring throughout Long Island."