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The Long and Short of IT

By Jon Nadler       Printer Friendly Version Bookmark and Share
Jun 29 2009 8:58AM

Good Morning,

Gold's longest winning streak in a month continued with small gains in the early morning on Monday, after the metal first started on the negative side in last night's trade. Primary focus remains on US dollar movements, but volatility could also come this week from the cyclical process of quarter-end book-squaring processes. The US dollar was showing no change, trading at 79.85 on the trade-weighted index, following soothing words from Bank of China's Governor Zhou Xiaochuan.

Mr. Xiaochuan tried to calm down freshly flared speculation against the greenback in recent days, by saying on Sunday that his country's foreign exchange reserve policy " is always quite stable." Which, is a lot more than we can say about the country's officials' jawboning on occasion. Anyway, mellow words seemed to lift the dollar, which was also being helped by a generalized rise in risk aversion.

Currency speculators are warily eyeing certain key economic data and events this week. First on the list is the June U.S. non-farm payrolls number, which is expected to show a decline similar to the 345,000 fall registered in May. Then, we can also worry about little items such as Japan's latest Tankan survey, China's latest PMI, the start of the earnings season and a European Central Bank meeting.

The Monday session in gold started on a mildly positive note, with the yellow metal gaining $2.90 per ounce, and being quoted at $ 941.90 on the bid side. Black gold prices continued to trade under $70 a barrel, and the IEA cut its estimates of global demand by another 3.7% in order to adequately reflect the state of the planetary economy. The commodity rose slightly anyway, as pesky Nigerian rebels were reported to be busy with yet another pipeline sabotage effort.

High gold prices in in May and part of June sabotaged India's traditional gold consumption once again, it was learned this morning. The Hindu reports that:

" India's gold import may fell by about 44 per cent to 10 tonnes in June over the previous month due to high prices and low demand for the precious metal in the domestic markets, experts have said. Gold import stood at 18 tonnes in May, according to the data provided by the Bombay Bullion Association.

"Gold imports in June will be about 10 tonnes as the demand has slowed down following high prices. Unless the prices come down, there will be no improvement in imports," Bombay Bullion Association Director Suresh Hundia told PTI. Gold prices ruled over Rs 14,600 per 10 grams level in both spot and futures markets last week. In the international markets gold prices were at 938.55 an ounce (28.34 grams).

The import of gold has been sluggish so far this year and is estimated at around 50 tonnes during the January-June period against 139 tonnes of gold shipments into the country in the corresponding period of 2008. There were no imports in February and March owing to absence of demand in the domestic market following high gold prices, which ruled over Rs 15,000 per 10 grams level. In April, India imported 20 tonnes of gold due to rise in demand for 'Akshaya Tritiya' -- a festival which is considered auspicious to buy the precious metal."

Silver was lower by two pennies at the open, quoted at $14.05 per ounce. Platinum fell $6 to $1191.00 and palladium advanced $1 to $245 per ounce. Mostly quiet on the automotive front, save for VW's potential de-listing from the DAX following the acquisition of a stake in the firm by Qatar's sovereign wealth fund. Also in the news, stories about Porsche complaining that VW had given it an 'ultimatum' and that such pre-nuptials smelled like 'extortion' and not like a symbiotic would-be arrangement.

Our busy friends at supplied the latest in COT data for the gold market overnight, and these are their distilled observations, as regards the state of the longs and short in this little niche:

"The weekly CFTC Commitment of Traders report showed that open interest in gold futures (excluding options) dropped 1,650 contracts in the week to Tuesday June 23. Over the reported period, net speculative length dropped 5.27 pct or 9,249 contracts (28.8 tonnes), the consequence of 7,033 longs being liquidated and 2,216 fresh shorts being set-up on behalf of speculators.

Speculative net length as such was at 166,294 contracts (517.2 tonnes). Over the same period, the price fell around $10, with the widest price spread at $30.8, measured from the highest ($944) to the lowest ($913.20) point in the benchmark August delivery COMEX Gold futures contract over the monitored interval , confirming the expectations that long-liquidation had taken place.

Comparing this to the same week one year ago, it is clear that open interest is markedly lower at -7.7 pct where speculative net long positioning rose 8.3 pct year-on-year. The price of gold has risen by 4 pct year-on-year.

As such, analyzing the year-on-year movements, prices have risen on the back of a decline in general participation (open interest), but rather as the long to short ratio kept extending. In our view, this remains a worrisome development, and opens for deeper bouts of corrective momentum as this market remains overly long."

The gold market (esp. the current price) thus continues to be narrowly defined by whatever investment flows can be seen in this early summer period. ETF inflows are stalled, fabrication demand ditto. No fresh news from the official sector, and scrap flows threatening to swell if prices do the same. The remaining swing factor is one of fear. Whatever headline might engender additional fear, that is. Geopolitics are a bit muted as we start the week. They are not an absent factor from the equation, but are less visible than over the past two weeks.

Meanwhile, the backlash from the era of wild excesses and spectacular financial crimes continues to unfold with a fury. Today is sentencing day for Bernie Madoff. The only remaining question is whether or not his lifespan might be long enough to meet his eventual release date from the Big House. Estimates regarding his upcoming "permanent vacation" range from 12 to 150 years. They involve no allowances for parties on yachts and/or trips to Tiffany's for little diamond-encrusted presents for secretaries or family members. Metallic bracelets of another kind, for sure.

In a another sign that the 'good old days' are getting farther behind us, try opening an account in Switzerland these days - if you are an American subject. Might as well do so at your neighborhood branch of BofA. There will be no difference in reporting terms. There never really was, but the allure of 'safe havens' was too strong for many. And now, the results. Americans are actively being shunned by the banks over there following the big tax mess that surfaced at UBS over the past year. Bloomberg reports that:

"Swiss banks are shutting the accounts of Americans as the U.S. Internal Revenue Service accelerates the hunt for tax dodgers. UBS AG and Credit Suisse Group AG, the country’s biggest banks, have told Americans to move their money into specially created units registered in the U.S., or lose their accounts. Smaller private banks such as Geneva-based Mirabaud & Cie. are closing all accounts held by U.S. taxpayers.

While the banks declined to say how many people are affected, more than 5 million Americans live abroad, including about 30,000 in Switzerland, according to estimates from American Citizens Abroad in Geneva. Swiss banks must register with the Securities and Exchange Commission to provide services for those customers.

“My bank doesn’t want to do that, so we wouldn’t accept an investment account for a U.S. person,? said Pierre Mirabaud, chairman of Mirabaud & Cie. and the Swiss Bankers Association, during a lunch at the American International Club of Geneva. SEC registration means clients don’t enjoy the protection of Swiss banking secrecy laws, which make it a crime for money managers to disclose the names of clients without their consent. Switzerland said in March it would cooperate with international tax evasion probes after Zurich-based UBS admitted helping U.S. clients avoid taxes.

The IRS has since increased pressure on Americans to disclose offshore accounts as it seeks to recoup an estimated $50 billion in unpaid taxes. The agency set a deadline of Sept. 23 for taxpayers to declare all foreign accounts or face possible criminal prosecution that could result in as much as 10 years in prison and $500,000 in penalties. The U.S. has also proposed increasing reporting and oversight requirements for so-called qualified intermediaries -- foreign banks that withhold taxes on behalf of the IRS. That may increase the cost of compliance and the risk of violating U.S. laws, said Charles C. Adams, managing partner at the law firm Hogan & Hartson LLP in Geneva.

“American citizens are starting to feel like they’re Typhoid Mary,? said Adams who hosted a 2008 fundraiser for Barack Obama that featured actor George Clooney. “The Swiss simply don’t want American customers because it requires so much infrastructure and hassle that they don’t make any money.?

Sandra Dysli, an American who has lived in Geneva for 40 years, said Bank Zweiplus AG, the Zurich-based joint venture of Basel-based Bank Sarasin & Cie. and AIG Private Bank, and a Geneva branch of Raiffeisen International Bank-Holding AG refused to open investment accounts for her. “I was told that I cannot legally be a client because I’m an American,? said Dysli, who retired from the United Nations in 2001. “I couldn’t get an investment account and had everything in cash.? UBS said last July it planned to stop all offshore banking and investment services for people subject to U.S. taxes, except through U.S.-registered units.

The company notified U.S. clients in a March 27 letter that it would close accounts within 45 days. Customers were asked to transfer assets to entities registered with the SEC, and asked to consult an adviser about the U.S. tax consequences, according to a copy of the seven-page letter seen by Bloomberg News. “UBS will no longer be able to continue to provide services to you through your current account,? the letter said. A spokesman for UBS, Dominique Gerster, declined to comment on how much progress the bank had made in moving U.S. clients or closing their accounts.

“We offer domestic and international wealth management services in compliance with all applicable laws, regulations, and policies,? said Jan Vonder Muehll, a Zurich-based spokesman for Credit Suisse. Mirabaud is closing the “few remaining? accounts held by Americans, a company spokesman said, without providing additional details. “We have to be prudent,? Pierre Mirabaud said during last month’s lunch at the American International Club. “There is absolutely no problem for U.S. persons to open an account in Switzerland as long as they are prepared? to sign a form that gives the bank the details it needs to report to the IRS.

Bank Sarasin offers U.S. expatriates investment and asset management advice only through its SEC-registered unit in London. “It’s up to individual banks to work out which citizens it wants to do business with,? said James Nason, a spokesman for the Basel-based Swiss Bankers Association. “The reporting obligations certainly aren’t going to go down as the IRS is considering extending the QI, exporting its tax laws and trying to turn Swiss banks into agents of the IRS.?

Two members of the U.S. Congress, Carolyn Maloney and Joe Wilson, wrote a May 27 letter to Treasury Secretary Timothy Geithner saying that if the QI requirements are extended to cash or deposit accounts, “taxpaying Americans living abroad will have no place to bank.?

“If neither foreign nor American banks will take American customers, how will the millions of citizens living abroad bank?? wrote Maloney, a New York Democrat, and Wilson, a South Carolina Republican, who are co-chairmen of the Americans Abroad Caucus. There is “massive? failure by U.S. citizens and green card holders overseas to make filings with the IRS, said Matthew Ledvina, an international tax lawyer in Zurich, adding that Americans have become “pariahs because they’re risky.?

U.S. citizens must file tax returns, report offshore accounts that contain more than $10,000 and pay tax on any income earned, no matter where they live. To take advantage of the amnesty program, taxpayers must file six years of returns, plus pay back taxes and a penalty, according to the IRS.

“The presumption is that you’re a bad person avoiding taxes if you live overseas,? according to Andy Sundberg, who founded Geneva-based American Citizens Abroad in 1978. “The IRS rhetoric is alienating and vindictive.? The deadline and the UBS case have been the catalyst for a stream of Swiss banking clients who are seeking help to ensure they comply with U.S. tax rules, said Milan Patel, a former IRS litigator turned tax lawyer at Geneva-based Withers LLP. That includes “accidental Americans,? such as green card holders who live outside the U.S., he said.

“People come in asking, ‘How much am I going to have to pay?’? Patel said. “The real goal for voluntary disclosure isn’t about how much is it going to cost, but avoiding going to jail. The only legal option is voluntary disclosure.?

Swiss banks as agents of the IRS?  What next? Depends on your definition of 'cash' and of 'offshore.'

Until later.



Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.