Coffee output may rise substantially. And soon

by Agrimoney.com

Could soaring coffee prices bankroll a plantation revolution?

Prices which have hit a 34-year high in New York's Ice futures market, and set a record $2,424 a tonne in second-ranked producer Vietnam on Wednesday, are expected to stimulate farmers to raise output dramatically.

However, the increase may not play out as many investors expect, through growers in the major producing countries rolling out fresh plantations to accommodate extra trees.

There are far quicker, and less onerous, ways to increase coffee harvests than acquiring extra land, especially in Brazil, the top producing country, coffee expert Carlos Brando said.

'Slow and expensive'

"Will Brazil embark on a new massive coffee-planting programme? This is highly unlikely because coffee land prices have increased markedly, up to three times in some areas," Mr Brandon, at Brazil-based P&A Marketing, said.

"But actually, new planting is the slowest and most expensive way."

Besides the cost of acquiring land, on top of planting it, the three years or so it takes coffee trees to start producing cherries means that "by and large, by the time you starting harvesting coffee, prices have gone down".

Record ahead?

Substantial, and quicker, wins can be gained from better husbandry techniques, such as irrigation, pruning techniques and fertilizer.

"Even a small rainfall deficit can cause substantial crop losses," Mr Brando said, quoting research that, the Brazilian area of south Minas, 45% had been lost over a decade.

And, if trees are to be planted, more intensive strategies can reap dividends.

Brazil's jump in production this millennium has been achieved largely through a ramp up in trees per hectare, to 2,600 from 1,200 in the late 1990s, with "a lot of high yield growers getting close to 4,000 per hectare".

"The area planted with coffee has remained relatively stable."

In fact, assuming Brazil's growers opt for raising yields over major increases in plantings, "the 2012 and especially the 2013 crops should show sizeable increase, with a good potential for the 2014 crop", when new trees will have started producing, "to be the largest ever".

Yield gap

But this impact could be multiplied if other countries too fulfil their potential, Mr Brando said, noting that Brazil and Vietnam hold some 25% of world coffee plantings, yet account for one-half of production – implying yields three times those elsewhere.

"There is huge opportunity for other producing countries to increase their coffee yields."

Sure, some had a high proportion of shaded plantations, which will tend to produce lower yields.

"But there are many areas of South America, for example, which are not shaded at all, but produce lower yields," Mr Brando told Agrimoney.com.

'Think afresh'

The question is whether growers in the likes of Indonesia and east Africa do invest.

"If there is a lot of money around, you can afford to think afresh," Mr Brando said.

"There is room for countries to increase yields dramatically. Yet still people talk about more area, and taking land away from food production."

See the original article >>

Stock Market and Euro Elliott Wave Counts

By: WavePatternTraders

The markets are now coming into a target zone that will likely define the trend going forward over the coming weeks/months. As bears continue to try and top tick this rally from the lows made in Aug 2010. They are being forced to cover as the strength is overwhelming; anyone that tries to short this market is getting run over.

The trend is clearly still up and the easiest way to make a successful trade is to follow the trend, top tickers generally get wiped out, as being right once out of 20-30 times, does not constituent to a healthy account balance.

So where does this leave us in the long term view, now I want to point out I am not really a fan of these long term counts, simply because, to be wrong on these ideas can take years, as the bears have found out to their misfortune, just like back in 2006, when the bears were looking for the “3rd of 3rd” crash, they eventually had to switch bias as the market proved them wrong. I specialize in short/medium price action.

So where are we? 

The bullish count is an aggressive potential “3rd of 3rd” to the upside that is setting up, the bearish wave count, or at least still a medium bullish idea is that the market is still in a bear market rally but in a medium bullish trend, I will explain further.

The aggressive bullish wave count

Now readers, especially bearish readers, will probably look at this and say “no way is the market going to go higher”, well I want to point out, that each and every correction has been met with buyers, and the corrections have been in 3 waves, the importance of that is 3 waves on a decline in a uptrend is it confirms a correction. As long as the market continues to impulse higher and corrects in 3 waves, the trend is going to go higher, you simply can’t argue with price action, you can make all sorts of theories as to why the market is where it is, but those again won’t stop price action, either you accept what price action is doing or you don’t, it’s pretty simple.

Yes there is a high correlation to the POMOs and I suspect like most traders that the FED is the back stop for the funding, but as the saying goes you “can’t fight the FED”, being right about something is still wrong in my book if you are 2 years too late and wiped out your account, you either have to accept the situation or you fight it and likely lose in the short term, of course it remains to be seen what happens after the FED stops QE2.

The red labeling is the extreme bullish case, I say extreme, as the potential for the next move is one that pushes the markets aggressively higher in a “3rd of 3rd”.

Generally a retrace for a second wave stalls somewhere between the 61.8-78.6% areas so you can see the bears are really clutching at straws, the market has had tons of bad news thrown at it, and still it continues higher. Again let me make it clear, as long as the market trends higher and the corrections are in 3 waves, that still confirms the trend is going higher regardless how you want to count it.

The bear wave count

The bears have this in a final 5th wave, although I tend to think it needs more waves to fully embrace a completed wave count from the lows made at 1010SPX back in mid 2011, and overall move from March 2009.

The trend is higher against the last swing low made in the April 2011 just gone at 1295SPX, as long as that remains intact the trend is higher, no ifs or buts, although our caution area is against 1320SPX, we are still bullish against this current market regardless of which wave count, as long as any dip still holds above 1320SPX, we are still bullish this market.

Now what happens if we push lower under 1320SPX and actually back through the lows back in April this year at 1295SPX?

Well then firstly, the trend needs to be respected, as that is a minor momentum shift, and something the bulls do want to respect, although it does not do much damage on the longer term trend, we do have a few ideas that we are also working with, should the case arise that the lows made in April this year get taken out, but for that we would need to see weakness under 1320SPX, so we will cross that if we need to at a later date, as there is no point in dwelling on something that atm, does not look like it’s even going to be tested, although if it were, we will adapt and trade it as we always do.

Lately the momentum is starting to suggest weakness, and whilst it’s not an issue atm, it’s something that longer term could pose as a clue.

Taking a look at the shorter term view, there is the chance this is part of running triangle and in a wave [b] now or indeed as part of an expanded flat, again it would be in a wave [b] however, in order to suggest any of those ideas we would need to see weakness under the 1320SPSX area 1st.

Now whilst these ideas are valid, we would really only consider them fully, if more weakness is seen under 1320SPX, having pushed higher above the 1338-1344SPX area, that would need to be broken as a 1st clue. From what we have seen so far, the trend does not look like it’s in any jeopardy, only a sharp move under 1340SPX would be the 1st clue, then under 1320SPX.

So whilst the top tickers are out in force, we will continue to trade the trend, only when we see clues and break our key areas will be cautious about the upside.

Alternative idea to the bear’s crash idea.

Whilst it maybe a little too much for readers to accept an aggressive move higher, the alt view that we are also following, is that the markets are actually in a larger X wave, we are more inclined to believe this idea than the crash to Dow 1000 idea.

The market started its bear market from the 2000 highs, and completed wave W into the lows made into March 2009, what we are in the process of now is a 3 wave advance for wave X and then need a 3 wave move for wave Y, and likely to push just under the March 2009 lows, NOT the crash that the bears expect, although seeing the March 2009 again, would certainly see a seriously bearish sentiment, and once more present a buying opportunity.

Now there are many reasons for a decline, one could be what we are seeing now is a repeat of the 2008 period, where commodities are going higher as well as the US$ pushing lower, this is a very similar setup to that right now, and its remarkable in its similarities, the other is that QE2 will finish and not be activated again, although it would be something to see if Ben Bernanke actually does the right thing and not print.

VIX

The one thing that the bulls need to be concerned about is the very fact that the VIX will still need to push under this support zone at 15.30, with a rebound back about the 15.30 area, it’s going to need some aggressive price action on the US markets to push the VIX and keep it under 15.30 from here. If the market was indeed setting up for a large and aggressive move to the upside, I would expect the VIX to push far lower, even with complacency at these levels if price refuses to push lower, it’s going to leave the VIX holding these levels.

FTSE

Another market that we are watching for a clear idea, to decide if bearish or bullish is the FTSE in the UK.

The bear count from the March 2009 lows is that of a large ABC, the bullish count is that of a potential 12 12 and a very aggressive wave count that is suggesting a huge move to the upside; however one way to know which one is working is if the price action starts to wedge, that’s the classic signature of an ending diagonal, like most markets the trend does appear to be tiring, we do have a measured target just about 6260, if we do see this explode to the upside, I suspect the market then likely to test the Oct 2007 highs, this market is still bullish against 5858, although under 5900 is the 1st caution sign for the bulls.

If we see a move under 5900, we do have a few other ideas that we bring to the forefront.

EUR/USD

So what of the US$ and its counterpart the EUR/USD pairing, well FX traders know that if you follow the EUR/USD pair, it’s a sign where the US$ is going to end, being 57% of the DX weighting, it pays to watch this pair.

Long term because of the 3 wave decline the door is open to many suggestions, which on the face of it, is not that really helpful, unless you are a long term trend trader.

However the preferred count is that of a larger flat and we would need to see a move towards the 151-152 area to complete that wave count. Of course once completed that would then need to see an aggressive reversal.

There is an outstanding target of 15289 where a 1x1 measured target would be hit.

The alt idea is a potential long term triangle, but as you can see, all we have done for the past 3 years is zig zag, the crunch comes for the US$ if the EUR/USD pair accelerates above the 153 handle, as the US$ is going to be in a lot of trouble, but with the sentiment extremely bullish on the EUR/USD pair and sentiment extremely bearish on the US$, we believe now that an impending reversal is a very high odds/low risk trade, we think there is further to go on this current rally, as long as 147 area holds we are still bullish this pair. 

These are just a few ideas that we are following.

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ISM MISSES BY A MILE – IS IT TIME TO PANIC?

by Cullen Roche

This morning’s ISM Services report missed estimates substantially. Headline came in at 52.8 vs expectations of 57. The underlying data was even worse. New orders tanked 11.4 points to 52.7. Unemployment fell to 51.9 from 53.7. Meanwhile, prices, though falling, remain at very high levels.

The answers from respondents nicely summarizes the environment:

• “Business conditions [remain] unchanged. No supply impact from the Japan earthquake/tsunami, but continue to track with the supply base.” (Management of Companies & Support Services)
• “Revenues are picking up slowly, but the growth is positive as compared to last month and the same month last year.” (Real Estate, Rental & Leasing)
• “Looking forward with reserved caution. Cost of goods by this fall are a big worry.” (Accommodation & Food Services)
• “Continuing economic uncertainty will curtail or delay project spending for the immediate future.” (Educational Services)
• “Fuel prices continue to be challenging and in addition to shipping, are influencing the cost of materials.” (Public Administration)
• “We are seeing price increases in many areas, and the lead times are stretching out. Our business activities are improving at a moderate rate.” (Wholesale Trade)

So what we have is an economy that remains very weak where job’s growth is still muddling along and rising prices are hurting corporate profits. Those who are finding solace in the idea that this weak report confirms QE3 might reconsider. If anything, this report only confirms my findings that QE has had no meaningful positive impact on the economy. In fact, you could easily argue that the cost increases due to commodity price speculation are the only meaningful result of QE2 and are having a negative impact on the overall economy.

What does it all mean? Well, the good news is that the index is still expanding. Although 52.8 is a big miss it is still an expansion. So it’s not yet time to panic. It is worth noting, however, that lower ISM reports have correlated very highly with equity returns (see here for more). Although the ISM Manufacturing report remains robust at 60.4 it would be surprising to see the two indexes diverge permanently. Because these are diffusion indexes we can likely expect the ISM Manufacturing report to decline in the coming months. And as I discussed last month, that could be a significant headwind for equities – even though it doesn’t point to economic doom.

For now, I still believe the US economy is strong enough to maintain meager growth. The risks still are exogenous – primarily foreign related as China eases their economy and Europe remains mired in a debt crisis. Our balance sheet recession is very much alive, however, the government has done just enough to offset the negative impacts. Unfortunately, the Fed appears to have added another risk to the scenario in commodity prices. We should all hope that the price boom in commodities does not lead to a price collapse. If anything, all of this only confirms the thinking that “hedge in May” is a good idea.

See the original article >>

Global factors not supportive of base metals rebound

By Gautam Koderi

Economic uncertainty, recovery in the US dollar and rising inflationary pressure has painted the base metals’ market red. Copper prices at LME had managed to climb above $9600 per tonne last week supported by the weakness in the dollar; however, falling risk appetite killed the momentum.

In the broader sense, Industrial metals have been on the back foot after it climbed towards fresh peaks during mid first quarter of 2010. Employment and housing market of US is yet to stabilise and European debt troubles are still at large. In the East, inflation appears to be the bigger threat. The fundamental backdrop of industrial metals is grim and any possibility for pullbacks to erstwhile peaks is slimming.

Chinese inflation treaded at 5.4 percent, above the government target, in spite of the incessant effort of the country’s central bank (PBOC) to rein prices in. China has already raised reserve requirements for commercial banks four times this year and benchmark interest rates 4 times since last October.

The weaker than expected Chinese manufacturing PMI set the market tone weak on Tuesday in spite of the comment from the PBOC official that Chinese inflation will moderate in the coming days. Chinese manufacturing PMI fell towards 52.9 from the previous 53.4.

Nevertheless, the metals found solace in the decent factory orders and vehicle sales of US. But, MCX witnessed its industrial metals end the day with gains as the depreciation in the Indian rupee offset the weakness that gripped international prices.

At the time of writing, most active MCX copper May futures traded at 416.95 per Kg, up -1.48%. Lead, Zinc and Nickel closed at -0.53%, -1.40% and -0.59% respectively on Wednesday.

The market currently has adopted a wait and watch strategy ahead of the European Central Bank rate decision and US Non-Farm payrolls that will unfold later during the week.

The stock movements, on the other hand, of base metals last week were mixed. Copper inventories fell almost 10 percent for the sixth continuous week towards the lowest since December 2011. Aluminium stocks also fell during the period, but zinc and lead stocks climbed.

See the original article >>

Silver: Strong fundamentals to beat transient speculation

By Rakesh Neelakandan

Silver futures dropped for a third day on Comex as the exchange hiked margin money requirements. The drop is seen as the worst run for the commodity since January.

July silver contract on Comex dropped as much as 5% to touch $40.465 per ounce, subsequent to losing 7.6% Tuesday and 5.2 % on Monday.

CME Group—the owners of the Comex—announced this week that minimum amount of cash to be deposited for borrowing silver for trading would climb to $16,200 per contract at the close of business from Tuesday. Prior to that, the margin was at $14,513, according to a Bloomberg report.

A year before margins stood at $4,250 !

Back in 1980, silver prices dropped 78% subsequent to a rally that had taken silver to $50.35 an ounce.

We are yet to know if silver is in the same bubble though content to the tune of many a Gigabytes is available in this regard. Theories galore; facts hide and truth evades.

But let us dig a bit deeper and return to the basics; the fundamentals:

There are five reasons why silver prices would go up despite this correction. And they form the fundamentals:

1. Robust industrial demand
2. Bullion coin demand
3. Global inflation
4. ETF fund flows
5. Weak dollar

Robust industrial demand
Over the next five years, silver demand is slated to rise to 666 million ounces which would form 60% of total fabrication demand. The figure is a 36% increase over 2010’s demand of 487 million ounces; according to GFMS Ltd. The demand from the industry forms lion’s share of silver fabrication demand.

The recession of 2008 made a significant dent in silver consumption on the part of the industry, but demand surged and resurgence occurred in 2010.This demand trend is expected to continue.

Silver use is surging in electronic and thermal equipments. Stronger industrial demand from US and Asian countries like India and China through 2015 would keep silver prices up.

Given its unique characteristics silver cannot be substituted and hence its price inelastic.

Silver coin demand
American Silver Eagle coins are in short supply as investors ply to secure their cash by buying the coveted coin. The American Precious Metals Exchange has warned of potential delays running into Mid-May in Silver Eagles delivery. (APMEX is offering $3 premium over spot for any Silver Eagle coins in any quantity.)

Recently, director of Canada’s Royal Mint reportedly told that sourcing of silver was becoming “very difficult” with prices of the commodity climbing.

Silver prices and Canadian Maple Leaf and the Silver Eagle should go a lot higher so that people would find it attractive to sell.

Global inflation

Inflation is surging around the globe and people are eager for a hedge which they found in silver bullion. Global inflation made silver to touch an all time high in the international market recently ($49.820 on Comex).

ETF fund flows into silver
Silver assets being held by the ETFs dropped 1.1% to 15,169.80 metric tons on Tuesday in the event of correction in markets.
But, with the above said fundamentals being strong, it is highly unlikely that ETF fund flows into silver would dwindle.

Weak Dollar
Weak dollar gives buyers the necessary appetite for silver as well and the commodity surged almost 4% on the US futures market to a 31-year high of USD 47.90 recently. With the US debt at historic high levels, and QE2 in progress, the chances are that dollar will continue to remain weak unless the interest rates are hiked in US. But, this is a remote possibility.

Back in the past,.silver, touted the poor man's gold, was reportedly depressed artificially for a while by certain quarters. But strict norms, later effected changed the horoscope of the commodity. Fundamentals, rather than speculation began to drive silver.

May be the rally is silver’s cathartic exercise!

See the original article >>

China cannot for ever avoid oilseed imports

by Agrimoney.com

China cannot keep up its low pace of oilseed imports, signalling better times ahead for palm oil prices – with the country potentially facing an enhanced need for soybean purchases too.

Standard Chartered analyst Abah Ofon flagged an end to the weak rates of Chinese palm oil imports, which fell 37% month-on-month in January and a further 20% in February, once alternative supplies from state reserves run dry.

China, which vies with India as top buyer of vegetable oils - and is undispute leader in soybean imports - has capped prices of items including edible oils in a battle against inflation, which central bank governor Yi Gang on Wednesday said may yet require further "active measures" to control.

To assist vegetable oil and oilseed processors, left facing negative margins, the government has unveiled the release at a discount of agricultural commodities from state reserves, including 1.5m-2m tonnes of rapeseed oil, of which 1.2m tonnes has already been sold, and 3m tonnes of soybeans.

"Rapeseed oil reserves were estimated at 2m-3m tonnes before the start of the sales, so current stocks are likely to be low," Mr Ofon said.

"With limited soybean and rapeseed acreage anticipated over the coming season, China may have little choice but to turn to imports."

'Resurgent demand'

Furthermore, conversations with traders had suggested that China's palm oil demand "will be boosted by the onset of warmer weather", which is a particularly key factor for the vegetable oil, which solidifies at a higher temperature than rapeseed oil or soyoil, and so is less use in, for example, in biodiesel in the winter.

In fact, stronger energy prices were another reason to expect higher palm oil prices, which are set to rise from below 3,300 ringgit a tonne in Kuala Lumpur to average 3,700 ringgit a tonne in the July-to-September period.

While "bearish events", also including strong South American soybean production and recovering Indonesian and Malaysian palm oil output, would "dominate" the second quarter, "our overall outlook remains bullish in anticipation of resurgent demand from China and India", Mr Ofon said.

'May backfire'

The comments follow a caution from Oil World, the influential analysis group, that China's moves to stem domestic prices of edible oils may enhance import needs ahead, by dissuading growers from planting soybeans.

"The Chinese government's policy of imposing price limits on vegetable oils, which also pressured domestic soybean prices ... may backfire later this year by curbing domestic soybean output much below requirements," Oil World said.

On the Dalian exchange, the benchmark January soybean contract closed down 1.1% at 4,424 yuan a tonne on Wednesday, down some 7% from a high three weeks ago, and despite apparently continuing rises in food prices in the broader economy.

The group has also warned over the long-term efficacy of state soybean sales, given that Chinese processors consume some 4.0m-4.5m tonnes a month.

"Subsidised soybean sales of 3m tonnes can alleviate the situation for Chinese crushers only temporarily."

The comments follow continued concerns over China's demand for oilseeds, following a series of cancellations of soybean import shipments.

See the original article >>

Commodity markets slip as funds desert them

by Agrimoney.com

Agricultural commodities got off to another soft start.

Credit Agricole summed up the atmosphere in financial markets as "one of rising risk aversion, with commodities facing the brunt of pressure".

This was evident in falls in share prices of many Sydney-listed miners, such as BHP Billiton, as well as agricultural resources stocks such as fertilizer group Incitec Pivot, which dropped nearly 4%, following on from 3% losses in the likes of North American peers such as Agrium, Mosaic and PotashCorp on Tuesday.

And it was shown in commodity markets themselves, where crude dipped again, to two-week lows, and copper eased in Shanghai.

"Last week there was talk that a few of the larger hedge funds were going to exit their commodity positions including grain and take their money elsewhere to play and maybe that is exactly what is taking place as we begin the new trading month," Jon Michalscheck at Benson Quinn Commodities said.

'Not helping sentiment'

Back in China, prices of financial assets looked distinctly off the boil, with Shanghai shares down 2.3%, on track for their lowest close since February, and many, if not all, agricultural commodity futures on the slide too.

Cotton (of which China is the top producer, consumer and importer) for September slid 2% on the Zhengzhou exchange.

And that provided a negative backdrop for New York cotton, which resumed its downward movement, shedding 2.3% to 153.86 cents a pound for July delivery, as of 07:20 GMT, after a bounce in the last session attributed to dry weather in Texas and flooding in parts of the Mississippi basin, major US growing areas.

Similarly, soybeans, of which China is also the top importer, dropped 1% for September, a negative sign for futures in Chicago, where the oilseed dropped 0.5% to $13.57 ½ a bushel for July delivery.

"Weak demand from China is also not helping sentiment," Australia & New Zealand Bank said, adding that soybean prices were also feeling the pressure from the prospect of US sowings increasing as farmers prevented by rain from planting corn switch instead to the oilseed, which can be later seeded.

Mike Mawdsley at Market 1 said: "It does appear likely there will be less corn and more soybean acres."

'Done by this weekend'

Not that corn itself escaped a sell-off either, even the new crop December lot, which proved resilient in the last session, but shed 0.5% to $6.58 ¾ a bushel this time on the improved, if not ideal, sowing conditions.

"We know locally the planters have been rolling big time and some will be done by this weekend," Mr Mawdsley, based in Iowa, said.

The old-crop July contract lost 0.3% to $7.21 ½ a bushel, still feeling pressure from Tuesday's unexpected delivery by ADM against the expiring May contract, signalling, in the words of Commonwealth Bank of Australia's Luke Mathews, "that nearby futures prices are currently too high".

Tour results

And with its fellow grain continuing to struggle, wheat eased too, down 0.7% at $7.87 ½ a bushel in Chicago for July delivery, with early results from a US crop tour a depressant to prices too.

Initial chatter from the Wheat Quality Council's ride around wheat in Kansas, the top wheat-growing state, showed improved yields from last season and good soil moisture levels, although this was from areas not affected by the well-publicised drought.

A tour of some of these farms is on the agenda for Wednesday.

Kansas-traded hard red winter wheat for July lost 1.0% to $8.89 a bushel.

'Situation is worsening'

Not, of course, that America's weather woes are the only market movers. ANZ noted that Western Australia, usually Australia's top grain-growing state, "remains dry" as the planting window opens.

"Further rainfall remains critical for planting. For the next week the Western Australia wheat belt will be heavily influenced by several high pressure systems, resulting in no forecast rainfall through to at least next Wednesday," the bank said.

"How extensive the forecast rain for France will be on the weekend" will also have a big influence for prices.

The signs aren't good: "In France, the situation is worsening and no rainfalls are forecast for the next [few] days," Paris-based consultancy Agritel said, noting that "crop development is 15-18 days early", a sign of stress rather than a reason for farmers to cheer.

Still, with commodities taking the brunt of investors' move from riskier assets, such factors were drowned out in early deals.

See the original article >>

The Hidden Consequence of Inflation

by Claus Vogt

Last Wednesday Federal Reserve Chairman Ben Bernanke repeated what he stands for: A rampant inflationary monetary policy. He seems totally oblivious with the sad history of inflationary policies. And he obviously ignores the grave outcome that his and Alan Greenspan’s money printing policies had on the financial markets, the economy, and general welfare. 

So I’d like to discuss an often overlooked consequence of money printing: The relationship between inflation and poverty.

Inflation Replaces
Thrift with Theft

Inflation leads to an impoverishment of great cross-sections of the population. During hyperinflationary phases, such as experienced by Germany in the early twentieth century or by Zimbabwe in the twenty-first century, this process happens quickly. With relatively moderate inflation rates, it occurs far more slowly. But in either scenario, thrift is replaced by theft — it reduces your wealth.

Why? 

The newly created money, which is not backed by tangible assets, always goes into circulation at some point within the economy. In other words, someone is always the first to possess the new money and the first to spend it. 

These first beneficiaries are the inflation winners — they enjoy an incalculable advantage, for they can make purchases on the market at old prices, before the new demand drives prices higher. 

However, those who are last in line to get the new money are the inflation losers, forced to pay higher prices.

Bubbles Distribute
Wealth Unfairly 

That is also the result when inflation manifests itself in the form of speculative bubbles. Examples include: The stock market bubble of the late 1990s, the recent housing bubble which was accompanied by an echo stock market bubble, and now, during the current echo stock bubble. 

The new money causes asset prices to rise sharply. Those who own them may see their wealth grow significantly, at least in nominal terms. And Fed members even brag about this so called wealth effect. 

But those who don’t own such assets and can’t afford to buy them are left behind, unable to compete or cope. 

The relatively small group of asset holders becomes richer, while those depending on fixed incomes or earning low wages become the losers. The longer this policy keeps going, the wider the gap becomes between rich and poor. 

And now all over the world, especially in the U.S. … 

The Gap between Rich and
Poor Is Growing! 

Today the small number of super-rich holds a far greater share of total wealth than a few years ago. This is not always a bad thing, as long as the wealth is generated by entrepreneurial effort. 

After all, the men and women behind great interventions and products that make the world a better place should be rewarded. This is indeed a necessary mechanism propelling progress and wealth accumulation.

Yet it is precisely this connection — between effort and reward — that is increasingly weakened during speculative booms and inflationary periods based on easy money! 

Here’s what happens: The government bloats the money supply. And rich rewards are lavished on those who contribute little value to society. Then the connection between effort and reward becomes so arbitrary that it becomes meaningless.

In that kind of environment, real interest rates are negative. Consequently, he who saves money is constantly losing buying power, as illustrated in the following chart.

So it’s not a shock that during the late 1990s the savings rate in the U.S. fell to the lowest levels ever seen. 

And as you can see on the chart below, in spite of rising swiftly during the past recession, the U.S. savings rate is still historically low.

Savings are important. They are the source of real investments and therefore the basis of wealth creation. But this important piece of economic knowledge seems to be lost with our politicians and central bankers …

They are in the bubble blowing business — doing everything in their power to discourage saving and encourage risk taking and speculation. What’s more, they’re neglecting the devastating aftermaths of previous burst bubbles.

 

Unstable Money Threatens

Unstable Money Threatens

Tthe Foundation of Society

Stable, reliable money is the foundation of healthy, balanced, and sustainable growth. In contrast, abusing the printing press to create money leads to the impoverishment of broad sections of the population. 

The policy of extreme easy money pursued across the globe, which Ben Bernanke is advocating so emphatically, is highly unjust. It’s in many respects a fundamental assault on society. Not only does it lead to growing income inequality, it also threatens to disrupt the very social harmony that Keynesian politicians pay lip service to.

Ben Bernanke has again made clear that money printing will be with us as long as he is in the lead. This tells me that the secular bull market in gold is not in jeopardy. 

Therefore I continue to suggest gold bullion and gold ETFs, such as SPDR Gold Shares (GLD). Yes, there will be corrections from time to time, even severe ones. However, they should be greeted as buying opportunities.

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Gold Falling to $1290 Suggests “Three Peaks and the Domed House” Pattern

By: Lorimer_Wilson

Nu Yu, Ph. D with Lorimer Wilson writes: There are a number of different ways to look at what has been happening with the price of gold and silver of late and to anticipate what is next in store for this precious metal. One of the most unique ways of assessing past, present and future movement is by taking a look at the "Three Peaks and the Domed House" and "Bump and Run" chart pattern. Indeed, the "Three Peaks" pattern suggests that gold has peaked and will now decline by 17% to $1,290 per ozt. in June. Let me explain.

"Three Peaks and the Domed House" Pattern for Gold is saying...

My version of George Lindsay's basic model uses a macro or "phase-counting" approach which is different from Lindsay's classical micro approach (which uses "number-counting" from 1 to 28) in that it divides the "Three Peaks and the Domed House" pattern into five major phases as follows:

1. Three Peaks
2. Basement
3. First Floor
4. Roof
5. Plunge

In the following chart with an intermediate-term time frame we can see that:

• the "Three Peaks" phase in gold developed from last November to last December
• the "Basement" phase (bear trap) formed in late January of this year when gold had a separating decline to reach a low at $1310 per ozt.*
• the "First Floor" phase of the Domed House was built in March after a rapid advance in the price of gold in February
• the "Roof" phase (bull trap) has been underway since early April with gold having overshot my target price of $1,540 which was a projection based on a measured move with the same length and duration as the advance move right before the "First Floor" phase.
• the "Plunge" phase has now begun and gold should experience a 17% decline to $1,290 per ozt. by the end of June.

*(For an explanation of what "ozt." means exactly please read this explanation.)

Please note that the "Three Peaks and the Domed House" pattern model will end with the "Plunge" phase and it has no future projection either in the upside or downside after the "Plunge" phase.

"Bump and Run Pattern" for Gold is saying...

As mentioned in my article in December here gold was forming, and is continuing to form, a Bump and Run pattern in a long-term timeframe which is shown in the weekly chart below. This pattern typically occurs when excessive speculation drives prices up steeply. According to Thomas Bulkowski, this pattern consists of three main phases:

1. A lead-in phase in which a lead-in trend line connecting the lows has a slope angle of about 30 degrees. Prices move in an orderly manner and the range of price oscillation defines the lead-in height between the lead-in trend line and the warning line which is parallel to the lead-in trend line.
2. bump phase where, after prices cross above the warning line, excessive speculation kicks in and the bump phase starts with fast rising prices following a sharp trend line slope with 45 degrees or more until prices reach a bump height with at least twice the lead-in height. Once the second parallel line gets crossed over, it serves as a sell line. Gold currently is in the bump phase, and its uptrend may continue as long as prices stay above the sell line.
3. A run phase in which prices break below the sell line often causing a bearish reversal to happen.
   
   

Looking at the current "bump-and-run" chart for gold above it is evident that gold is still very much a hold with its price well above the sell line at $1,350 per ozt..

"Bump and Run Pattern" for Silver is saying...

When a price breaks below the sell line of a "run" phase it often causes a very bearish reversal to happen. Based on the current projection for the price of silver (see chart below) its sell line is near $46. With silver now trading below that level we could see silver correct down to the $39 level (i.e. -15%) and possibly go down to the $33 level (i.e. -28%) which would correspond to the "Plunge" phase of the gold index.

Conclusion

Many precious metals analysts (see here) are of the opinion that gold and silver prices are going to go parabolic in the months and years ahead. My analyses suggest, however, that at least short term, both gold and silver run the risk of experiencing major corrections along the way.

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Gold Prices Remain a Dollar Play Despite Recent Events

By: Bob_Kirtley

The dash from $1425/oz to $1563/oz came to a halt today on news that is perceived to be good for the USD. The technical indicators are firmly in the overbought zone so a breather was on the cards. Note that the RSI had peaked well above the '70′ level and has now come back slightly, to sit at 73.50, still oversold, so this correction may continue for a few more days.

Apart from the chart status of gold prices there have also been not one, but two events that have played their part in capping golds progress. The first is the announcement by President Obama, that Osama Bin Laden has been killed. This initially gave the US Dollar a much needed boost with the oscillations continuing as we write. The bounce by the dollar had a negative effect in gold and so gold prices have corrected by around $20/oz, which is nothing to write home about. This news item is a one off event and will soon pass with the spotlight being re-focused on the plight of the dollar.

The second event was market intervention by the powers that came in the form of a rule change regarding the purchase of silver as follows:

Investors in the standard '5,000 Ounce Silver Futures Contract', had the initial deposit required to purchase a contract increase to $12,825 from $11,745.

This rule change is in effect a margin call for for those investors who own silver futures contracts, so they had to either put up more cash or reduce their exposure by selling some of their contracts. This is not a one time event as the rules can be changed at a moments notice as we have experienced in the past. However, the effect on silver prices, a $4.00/oz correction, also casts a shadow on gold prices as any market intervention creates an air of uncertainty for all concerned.

For now we will allow the dust to settle and look to see if there is a bargain of a buying opportunity out there somewhere.

One Black swan event and a change to the margin requirements for the purchase of silver futures contracts conspired to reverse silver prices.

Silver on the Comex division of the New York Mercantile Exchange dropped considerably on Monday as investors were forced to stump up more cash or sell some of their holdings following the CME Group raising its margin requirements. Rule changes are a form of market intervention and should be part of an investors criteria during the decision making process alongside political risk etc.

However, if you have physical silver in your very own hands then you will not be subjected to such pressures. Sure the price of your silver drops in value when such actions are inflicted upon us, however, the silver tide is rising and the effect of this particular action will be short lived. On this occasion margin requirements were raised 13% by the CME Group, who are the owners of the Comex. The volatility indicator is moving towards 'severe' so we must now expect silver prices to move in order of four to five dollars, in either direction on any given day. The silver space is not a playground for those of a nervous disposition. So once having acquired your core holdings be prepared to sit through whatever this rocky road throws up and remember that nothing goes up in a straight line and the bears will have the odd moment in the sun.

Our strategy remains the same , physical metal in your hands is number one, followed by a selection of quality producers and finally, a few well thought out options trades. Ignore the bubble calls, that's nonsense and stick with the script.

Taking a quick look at the chart we can see that this pull back has taken the steam of the RSI, however, the MACD and the STO remain in the overbought zone. Should silver prices fall further treat it as the buying opportunity that you have been waiting for.

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Did the Stimulus Quench America’s Economic Thirst?

Graphic Art

For the next financial crisis, what would be the best way to spend stimulus dollars? While some economists suggest a national fire sale and some pharmacists heaping helpings of hormones, an examination of how the current stimulus-dollar cascade has helped or hindered the recovery bears examination.

That’s what graphic artist Stanford Kay has done with buckets of data drawn from the Congressional Budget Office’s scintillating bestseller from last September, “The Economic Outlook and Fiscal Policy Choices,” plus the Bureau of Labor Statistics and Department of Commerce.

While what strange fruit may arise from the downpour of dollars will not be fully known until 2015 or even beyond, some key bits of knowledge can be harvested. Perhaps the most standout fact based on the policy debates that actually happened: spending on unemployment is an excellent way to get stimulus spending stimulating quickly, while reducing income taxes going forward is among the slowest. Reducing employee payroll taxes — think of the 2 percent reduction in Social Security withholding in the U.S. this year — falls roughly in the middle.

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Why global coffee prices are soaring?

by Sreekumar Raghavan

Adverse weather in growing regions, rising consumption in exporting countries and tight supplies have created a situation where coffee prices are witnessing record highs in futures markets.According to International Coffee Organisation (ICO), in March the monthly average of the ICO composite indicator price rose by 3.8%, from 216.03 in February to 224.33 US cents/lb, the highest level in 34 years. The price increase was marked in the case of Robusta, reducing the differential with prices of Other Milds by 2.6%.

Meanwhile in futures market, Arabica coffee rose to the highest price in almost 14 years as adverse weather threatened crops in Colombia, the world’s biggest producer after Brazil, according to Bloomberg. Arabica coffee for July delivery rose 1.05 cents, or 0.3 percent, to settle at $3.0615 a pound on ICE Futures U.S. in New York. Earlier, the price touched $3.089, the highest since May 1997, the report added. In London, robusta-coffee futures for July delivery rose $56, or 2.2 percent, to $2,611 a metric ton on NYSE Liffe.

World coffee exports amounted to 10.45 million bags in March 2011, compared with 8.74 million in March 2010. Exports in the first 6 months of coffee year 2010/11 (Oct/10 to Mar/11) have increased by 15.4% to 52.9 million bags compared to 45.8 million bags in the same period in the last coffee year. In the twelve months ending March 2011, exports of Arabica totalled 67.3 million bags compared to 59.9 million bags last year; whereas Robusta exports amounted to 33.7 million bags compared to 34.1 million bags

Crop year 2010/11 is still underway in many exporting countries and production is estimated at 133 mn bags, representing 8.1% rise over previous year. Crop year 2011/12 has begun in Brazil, Indonesia, Papua New Guinea and Peru. In Columbia, coffee plantations ahve been damaged by rain and landslide; adverse weather will continue to impact the region's coffee output.

The market fundamentals for coffee continues to remain tight, according to ICO. Volume of opening stocks in crop year 2010/11 was 13 mn bags, inventories held in importing countries were estimated at 18.3 mn bags as of December, 2010. World consumption of coffee has grown to 134 mn bags as against 130.0 mn bags in 2009.Coffee consumption is growing rapidly in exporting countries of Brazil, Ethiopia and Vietnam while consumption at traditional importing nations is growing at a slower rate, notes ICO.However, compared to 2009 an increase of 1.6% in consumption has been recorded in the European Union and the United States of America in 2010. Other importing countries including Canada and emerging markets have recorded an increase of 3.3% in 2010. The average annual growth rate of world consumption during the last ten years is around 2.4%.

In India too the crpo situation is no different with production of both arabica and robusta lower in the 2010-11 crop season. According to Coffee Board, the post monsoon crop forecast for the year 2010-11 is placed at 299,000 MT, which showed a reduction of 9,000 MT (2.92%) over the previous post blossom estimate of 308,000 MT. The arabica and robusta break up is 95,000 MT and 204,000 MT respectively. Arabica production has shown a decline of 4,500 MT (4.52%) while robusta also declined by 4,500 MT (2.16%) over the post blossom forecast. The majority of the decline in production is attributed to Karnataka state (87%) alone while Kerala contributed 12%.

Meanwhile analysts have pointed out that the rally in ICE arabica coffee could be speculative and not based on fundamentals considering some recent export figures. Some traders expect some sell-off before prices approach 14-year high of $3.18 a pound.

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Glencore upbeat despite commodity market jitters

by Agrimoney.com

Glencore, unveiling a valuation of up to $58bn from its stockmarket float, trumpeted prospects for commodities markets even as many investors wavered, depressing prices of many raw materials as well as shares in sector operators.

The world's biggest diversified commodities trader said that the "strong conditions" seen on commodity markets in the first three months of the year were "continuing into the second quarter".

"Despite recent events in Japan and the Middle East, the directors remain confident that economic activity and commodity demand remain robust, and that Glencore remains well-positioned for the remained of 2011," the company said.

However, the comments came as commodities continued a soft performance which has seen silver tumble 16% in three days and, in agricultural commodities, corn fall to its lowest levels since late March, amid fears for the impact of tighter monetary policy on demand for raw materials.

New York sugar on Tuesday gained for only the fourth session since April 5.

'Rising risk aversion'

"The market environment remains one of rising risk aversion, with commodities facing the brunt of pressure," Crédit Agricole said, in comments which followed warnings too from Goldman Sachs and Societe Generale over weaker prospects for raw material prices.

At grain broker Benson Quinn Commodities, Jon Michalscheck said: "Last week there was talk that a few of the larger hedge funds were going to exit their commodity positions including grain and take their money elsewhere to play and maybe that is exactly what is taking place as we begin the new trading month."

Prices of shares in many groups linked to raw material sectors have also lost ground, with BHP Billiton following up losses in Sydney by opening 1.2% lower in London, and Rio Tinto stock shedding 1.9%.

Among farm-related companies, shares in German potash group fell 1.1%, following declines of some 3% in peers such as Canada's Agco and PotashCorp, US-based Mosaic and Australia's Incitec Pivot.

Agribusiness giant Archer Daniels Midland stock lost nearly 7% on Tuesday after results from its agricultural trading division fell short of market expectations.

Dividend pledge

However, Glencore said that its own marketing operations had started the year "strongly", particularly in oil, where "market volatility and tighter supply conditions" and "increased arbitrage opportunities".

The group's industrial activities, such as mining, had "delivered a substantially improved performance over the first quarter of 2011", thanks to raised commodity prices and production increases.

The group restated a pledge to declare an interim dividend of $350m in August, when it will publish its first results, for the half year, as a listed company.

'Strong investor interest'

Glencore revealed a price range of 480p-580p for its shares, which are expected to begin trading in London and Hong Kong later in the month. The final price will be set on May 19.

At the mid-point of the range, the flotation values the company at some £36.5bn, or $61bn.

Ivan Glasenberg, the Glencore chief executive, said the group had been "pleased by the strong investor interest shown in Glencore's unique commodity business model", with 12 so-called "cornerstone" investors agreeing to buy $3.1bn of stock.

These include US fund manager BlackRock, Swiss banks Credit Suisse and UBS, and hedge fund Och-Ziff Capital Management.

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The Forgotten Stock Market “Flash Crash” One Year Later

By: Gary_Dorsch

One year ago, few traders were expecting a pullback of any significant degree, with the Dow Jones Industrials perched above the 11,000-level. Traders had become complacent after a year long advance, in which the Dow Industrials had risen +70% above its bear market low, while retreating only twice for minor pullbacks. Traders stopped thinking about potential dangers, and started believing the risk of another bear market had vanished. Yet simmering beneath the surface was the specter of a sovereign debt default, rivaling the size of Lehman Brothers’, and threatening the world economy with a “double-dip” recession. 

The May 6^th, 2010 “Flash Crash,” carries the distinction for the second largest point swing, 1,010-points, and the biggest one-day point decline, of 998.5-points, on an intraday basis in the 114-year history of the Dow Jones Industrial Average. Crashes can occur during bear or bull markets, and are characterized by panic selling and abrupt, dramatic price declines. Whereas the average time for a decline in the S&P-500 to reach the threshold of a bear market is about nine months, a Crash can reach bear market territory in a matter of days.

A Crash is often the result of unanticipated catastrophic events, such as fears of a meltdown of Japan’s nuclear reactors, a sudden banking crisis, or the collapse of a stretched speculative bubble. However, in many cases, the warning signals of danger that precede a stock market Crash are flashing brightly for days, weeks, or months, yet the danger signals are either ignored or incorrectly interpreted by market bulls. “A trend in motion, will stay in motion, until some major outside force, knocks the market off its upward course.”

Regulators say a large seller of E-Mini futures and a large purchase of put options on the S&P-500 Index by a hedge fund set off a chain of events that triggered the “Flash Crash.” High frequency traders sold aggressively to liquidate their positions and quickly withdrew from the markets to avoid the meltdown, once the Crash began. The combined actions of these events sent the Dow Jones Industrials plunging -7% in just 15-minutes. Yet for seven days, prior to the historic “Flash Crash,” bullish equity traders had plenty of time to exit from over-extended long positions, but didn’t, because the small and obscure credit default swap market for Greece’s debt, wasn’t even on their radar screens. 

The Greek, Irish, and Portuguese bond markets were seriously breaking down for several months preceding the May 6^th “Flash Crash” on Wall Street. Prices of government bonds of all three countries continued to fall and interest rates rose sharply, while the cost of insuring their debt from the chance of default rose even more dramatically. The credit default swap (CDS) market is a hotbed of speculation, where banks and hedge funds, can bet on the odds of a country or company defaulting on its debts, without holding the underlying bonds. 

In the weeks preceding the May 6^th “Flash Crash, the cost of insuring Greece’s debt against the possibility of default, had tripled, from around $410,000 to insure $10-million of debt, to as high as $1.2-million. The threat of a sovereign default, most immediately by Greece, but also by Ireland and Portugal, provided an opportunity for speculators to drive up the price of their CDS rates, while at the same time, profiting by short selling the Euro. 

Just a year ago, there was increasing speculation that the 11-year-old Euro currency would break apart under the pressure of a financial crisis, if Greece defaulted on its 330-billion Euros of debt. Analysts were no longer discounting the possibility that a delinquent debtor, such as Greece, could be pushed out of the monetary union. Reflecting the scope of these concerns, investors began shedding positions in Club-Med bonds, and swapped the proceeds into US Treasuries and Japanese yen, both seen as temporary safe havens. 

For five months, prior to the “Flash Crash”, the Euro’s exchange rate versus the US-dollar was tumbling from around $1.500 in November 2009, to as low as $1.3200 by late April 2010. At the same time, the cost of insuring $10-million of Greek government bonds, against the chance of a default or restructuring was steadily climbing upwards. The newly installed Greek government dropped a bombshell, when it admitted that the country’s public debt was far greater than previously reported, at 112.5% of GDP, and was projected to hit 135% by 2011. The S&P debt rating agency moved quickly to lower Greece’s rating from A- to BBB+, and warned of further reductions, if Athens, “is unable to gain sufficient political support to implement a credible medium-term fiscal consolidation program.”

In the currency markets, the Euro began to slide, as yields on Greek, Irish, Portuguese, and Spanish bonds began to climb sharply higher. Attracted to the highly indebted Greek bond market like vultures to a decaying corpse, the CDS traders at major banks and hedge funds moved in for the kill. “Too big to fail” banks were able to return to the gambling tables fully aware that their losses would be covered in future by taxpayers, despite their involvement in the most hazardous forms of speculation. But there were also legitimate hedging activities in the CDS market, since French banks held $75-billion worth of Greek debt, Swiss banks with $64-billion, and German banks with $43.2 billion.

The US-stock market’s rally from the March 2009 lows was perhaps, the most non-believed rally in history. But the bears got a sense of vindication by the “Flash Crash,” which at the time, was interpreted in many circles as a watershed event, signaling the end of the cyclical bull market that began 14-months earlier. This time, the culprit was a spike in Greece’s bond yields, and its soaring credit default swap rates, and heightened worries that Athens might default on more than $300-billion of debt. The overall amount of insurance on Greece’s debt hit $85-billion in February 2010. One year earlier, the same figure stood at $38-billion.

On April 27^th, 2010, the S&P rating agency pushed Greece to the brink of the financial abyss and downgraded Portugal’s debt to A-, fueling fears of a continent-wide debt meltdown in Europe. Stocks around the world tanked when Greek bonds were lowered to junk status, at BB+. Greece’s financial contagion began spreading to Portugal and Ireland. European stock exchanges fell 2.5%, and the Dow Jones Industrial fell more than 200-points. Greek and Portuguese stock indexes were especially hard hit, falling -6.7% and -5.4%, respectively. The Euro continued to spiral lower, briefly skidding below $1.200 in June 2010, until China’s political leaders signaled their support for the common bloc currency. 

Two-weeks before the “Flash Crash” unfolded, Germany’s finance minister Wolfgang Schauble warned that a failure to rescue Athens would risk a financial meltdown. “We cannot allow the bankruptcy of a Euro member state like Greece to turn into a second Lehman Brothers,” he told Der Spiegel. “Greece’s debts are all in Euros, but it isn’t clear who holds how much of those debts. The consequences of a national bankruptcy would be incalculable. Greece is just as systemically important as a major bank,” he warned. However, traders on Wall Street weren’t fazed by Schauble’s warnings, reckoning that at the end of the day, the wealthy Euro-zone nations would be opt for a bailout, of their delinquent neighbors. 

Yet the fallout from the “Flash Crash” would lead to a -14% correction for the Dow Industrials, the only meaningful setback during its cyclical Bull rally. It seemed as if, the old adage, “Sell in May, and go Away” was still a valid tidbit of advice. When the Dow Industrials slumped to below the psychological 10,000-level, there were renewed fears over what bad debts lurked on the balance sheets of Europe’s banks, that could paralyze lending and trigger a “double-dip” recession in the Euro-zone. Stock market bulls lost their swagger, even after EU finance ministers agreed to fund a €750-billion ($1-trillion) bailout fund for delinquents, and to prevent the Euro currency from tearing apart and derailing the global economic recovery.

Yet stock market corrections trigger by previous debt crises in Argentina, Brazil, Mexico, and Russia, proved to be short-lived, were eventually recouped within a short period of time. In the case of Greece, the EU’s “Shock and Awe” bailout fund quelled the rebellion of the bond vigilantes for five months. By October 2010, the 2-year Greek CDS rate had fallen to as low as $680,000. Meanwhile, the Fed was telegraphing its intention to unleash a second tidal wave of liquidity - “Quantitative Easing” (QE-2), aimed at inflating the value of the US-stock market, in a determined effort to boost household wealth and confidence, and persuade companies to resume hiring workers and increasing capital spending. 

Yet the Greek debt crisis was never extinguished. While emergency loans enabled Athens to stave off bankruptcy for a couple of years, Greece’s debt has continued to grow to 340-billion Euros. Greece is suffering from a 15.1% jobless rate and its economy is still in recession, contracting at a -4% annual rate. Its citizens can’t live under the yoke of EU imposed austerity and financial slavery, simply to pay off debts to Europe’s banking Oligarchs.

On the One-year Anniversary of the historic May 6^th “Flash Crash,” the Dow Jones Industrials finds itself soaring to the 12,800-level, and far above the July 2010 low near the 9,600-area. Yet today, the odds that Greece could default on its debts, or demand a restructuring, are far higher than before the “Flash Crash”. Last week, the 2-year CDS rate for Greek government bonds soared to as high as $1.8-million, rising dramatically since April 14^th, when Germany’s finance chief Wolfgang Schaeuble, acknowledged officially for the first time that Athens may need to restructure its debt. The yield on Greece’s 2-year note spiked to 25.35% last week, the highest since it received a 110-billion Euro bailout last year.

“For me restructuring is the only road to take, for Greece to feel some relief and for creditors to contribute to the solution of the Greek problem,” said Lars Feld, one of the “five wise men” who advises the German government on economic policy, on May 1^st. Clemens Fuest, who chairs the German finance ministry’s technical advisory committee, said Greece must restructure its debt no later than April 2013. “I don’t think Greece can repay its debt. If there is no restructuring, uncertainty over the future of Greece's economy will delay its growth.” Fuest said European Union leaders had started to prepare for such an eventuality. “They do not discuss a Greek debt restructuring openly because this would cause bigger uncertainty and speculation in the markets,” he was quoted as saying.

 

“The fear is that markets will say that if Greece restructures today, tomorrow it will be Ireland, Portugal, and Spain, and so on must be seriously taken into account. The question is to contain the Greek restructuring to Greece only,” Feld added. But Greece’s finance deputy Philippos Sachinidis warned that a debt restructuring involving a 50% haircut, as is necessary, would send pension funds and banks into an abyss.“A restructuring would be short sighted and bring considerable drawbacks. In the worst case, the restructuring of a member state could overshadow the effects of the Lehman bankruptcy,” Stark warned.  Bundesbank deputy Juergen Stark raised the specter of a Lehman Brother’s style collapse to underline his opposition to restructuring Greece’s mountain of debt.

Despite these dire warnings about Greece’s debts, - (and the inevitability of a restructuring), bullish traders on Wall Street are unfazed by the upward spike in Greek CDS rates and bond yields to all-time highs, - just like a year ago, before the “Flash Crash.” Everyone has seen this movie before, and in the final scene, the Euro-zone government or the Bernanke Fed rides to the rescue, with emergency bridge loans, or torrents of liquidity injects, to prop-up the stock markets. Most traders a re betting that a restructuring of Greece debts won’t include a haircut on the principal, by instead, would be limited to an extension of the maturity of its debt, combined with a lowering of the interest rate. By delaying a haircut, Europe’s banks won’t have to recognize an immediate loss for these “non-performing” loans.

 

One-year ago, the upward spiral in Greece’s 2-year CDS rate to 1,200-bps knocked the Euro currency to as low as $1.1900. Yet today, the Euro is priced 30-US-cents higher at $1.4850, even though the odds of a restructuring of Greece’s debt has risen to new heights, reaching 1,810-bps last week. Likewise, the spike in Greece’s 2-year yield to 25.35% hasn’t stopped the Euro from climbing sharply higher. The reality is, as history indicates, is that the market obeys no fundamental rules other than herd instincts and mass psychology. 

Since February, currency traders have been fixated on the ECB’s pledge to lift its repo rate, albeit in baby steps, to 2% by year’s end, from 1.25% today. The ECB is utilizing a stronger Euro to fend off inflationary pressures from sharply higher import prices of raw materials, and it doesn’t require a sharply higher ECB repo rate to crush the US-dollar these days. The US-dollar is under assault by central banks around the world that are alarmed by the Fed’s massive monetization of the US-Treasury’s debt. There’s also the prospect of zero-percent interest rates in the US for as far as the eye can see, just like in Tokyo, where the Bank of Japan has recently injected a fresh batch of 60-trillion yen into the local money markets, in a government directed campaign to inflate the Nikkei-225 index.

One of the most notable shifts in the global marketplace since the May 6^th, “Flash Crash” has been the dramatic increase in the price of Silver, up +145% from a year ago, to around $44 /ounce today. Coined as the “poor man’s Gold” the Silver market has shocked the investment world, with its stunning advance towards $50 /ounce last week. After a parabolic increase, it’s natural for the Silver market to pause, and attract short sellers near $50 /oz, reckoning that a correction is looming on the horizon, simply due to the urge for die-hard Silver bulls to turn huge paper profits into cash and to take a few chips off the table.

The record trading volume in Silver futures contracts, and the enormous surge in share volume of the Silver iShares Trust (ticker SLV.N), is indicative of distribution, and a greater willingness of shareholders of SLV.N to sell their shares at current prices. On May 1^st, Silver had its own version of a “Flash Crash” when it opened $5 /oz lower in the Far East, - briefly falling to $42.58/ oz. The Chicago Mercantile Exchange provided the catalyst, by hiking its Silver margins for the second time in a week. For speculators, the initial margin is increased to $14,513 per each 5,000-oz contract, up from $12,825 previously. The maintenance margin has been jacked-up to $12,000 from $9,500 last week.

Is Silver’s rally towards $50 /oz a speculative bubble that’s bound to burst, or rather, are Silver’s big gains over the past eight months, sustainable over the longer-term? Unlike stocks, precious metals don’t have P/E ratios, or an income stream to gauge valuations. However, over the past decade, one of the most reliable metrics used to value precious metals is tracking the amount of money that’s printed by central banks, and the level of overnight interest rates. In today’s marketplace, the money supply in the emerging nations is growing at double digit rates, while the central banks in the developed world are pegging their interest rates near zero-percent. In other words, it’s been a perfect storm for the precious metals.

The message that behind’s Silver’s explosive rally towards $50 /oz, is that the investing public around the globe, from China to India, to Europe, and the US, is rapidly losing confidence in the purchasing power of paper money. Increasingly, Silver is being hoarded by the general public, as a viable hedge against the explosive growth of the world’s money supply. Silver is now revered as a proxy for Gold at an affordable price. In the US, there is belated recognition among the populace, that the Fed and the White House are aiming to monetize the Treasury’s debt, and that foreign central banks, stuffed with too many US-dollars, are switching their reserves into better alternatives, such as precious metals.

Since the Dow Jones Industrials bottomed out at the 6,500-level about 26-months ago, it’s nearly doubled to 12,800 today. Yet when seen through the prism of Gold, 1-share of the Dow Industrials is equal to 8.2-ounces of Gold today, an exchange rate that’s virtually unchanged from two years ago. In fact, the Dow-to-Gold Ratio is hovering at levels that prevailed in 1992. It’s true that US-corporate profits are surging to all-time highs, providing a fundamental justification for the stock market’s V-shaped recovery. Still, the Dow Industrials’ V-shaped recovery, now pointing towards it all-time high is the most disrespected rally in history, even though the Dow Transports have already hit record high territory this week. 

The greatest mistake is underestimating the power of the Fed’s printing press. It’s become increasingly clear that the Fed is in the business of rigging the stock market, at the request of the Obama White House, through its QE operations. Assuming the Fed is aiming to inflate the Dow Industrials towards its all-time highs near 14,200, and if the Dow-to-Gold ratio stays little changed at today’s 8.2, - as expected, it would imply that spot Gold can still climb higher towards $1,730 /oz in the months ahead. 

 

There is a widely held belief on Wall Street, that the Bernanke Fed will always ride the rescue of the stock market, using all tools at its disposal, including a potent dose of QE-3 if necessary, in order to prevent a meaningful downturn in the US-stock market. While the implicit guarantee of the “Bernanke Put” is really designed to encourage risky bets in the stock market, investors in Gold have also enjoyed the benefits of the “Bernanke Put,” since its trademark is massive money printing and a steady devaluation of the US-dollar. 

Yet there are always dangers lurking beneath the surface that can suddenly shock the markets, and are seized upon by hedge funds and bank traders to engineer frightening shakeouts, such as the May 6^th “Flash Crash”. Already, the speculative activities of the Wall Street Oligarchs are inflating new market bubbles, at the behest of the Fed, and laying the groundwork for future financial crises that threaten to explode at anytime. With that in mind, it wouldn’t be surprising to see the Dow-to-Gold Ratio continue to sink in the year ahead.

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