The Ministry of Silly Talks vs. I'm Yellen "Bubble!"


By Jon Nadler

Apr 17 2009 4:28PM


Good Afternoon,

Gold prices underwent a fourth weekly decline, making this their longest losing streak since August of 2008.  The global rally in equities has bitten into the enthusiasm with which takers were willing to...take during the crisis-infused gloomdays of January and February. The clincher may still have been the failure to launch exhibited by bullion in the wake of the historic March 18 announcement of debt buybacks by US authorities. Gold was earlier seen reaching lows near $863 per ounce, as it still appears to remain on course for a visit to the $845 area - a neighborhood which stood as a beacon for a very long time after the previous mega-bull cycle of the late 70's/early 80's.

Goldessential's ETF Monitor shows that "The largest absolute [negative] movement was seen in the world’s largest bullion-backed ETF, the SPDR Gold Trust, representing an outflow of 265,312 ounces or 8.25 tonnes (-0.73 pct). The decline was the heaviest since the week to October 24th last year, when holdings declined 2.44 pct. More importantly, " It marked the first week-on-week decline in 2009." Canada's CEF, meanwhile, added 3.94 tonnes on the week ending today. Aggregate ETF gold holdings have been exhibiting a rounding/topping line since they first surpassed 1,500 tonnes circa one month ago.

Concurrent with the 8% drop in bullion values over the past 30 days, green (or should we say golden) shoots of hope emerged from India. At least, as regards gold imports. Suddenly, but not surprisingly, the country's denizens turned India from a net exporter recently, to a 10 tonne net buyer for the month of April thus far. Coming ten days prior to one of the year's two most important gold-buying days, the price break was as welcome as the sun following a heavy monsoon. As we have always said, do not ignore the patterns seen in the world's largest gold-consuming country. You do so at your own risk - that is, if you obsess about price tags on your stash - present and future. Indians can proudly wear the lapel button that says "I am a value-conscious shopper." Not just as regards gold only, mind you.

New York spot market dealings continued to show losses this afternoon, and were off by $7.80 an ounce -looking set to close out the week's final session at near $866.50 per ounce. This, as participants apparently wrung hands not about the global crisis anymore, but about better-than-expected earnings among financial firms. Citi surprised analysts with a $1.6 billion net for Q1 of this year. Stocks are closing out a sixth week of gains in the neighborhood of 8200 on the Dow. Also on the minds of metals speculators, a little watch-item we have been drumming about, oh, since at least early 2008 let's say: deflation across the board. Silver continued to disappoint, losing another 34 cents this day, and was quoted at $11.88 per ounce at last check. Platinum rose $4 to $1207 while palladium fell $1 to $231 an ounce.

The dollar took a significant leap higher, rising to very near 86 on the index, while oil remained stuck in the gooey zone around $50 per barrel. It will still be crude's biggest weekly drop in two months, when the tally is completed. Reasons? Several - but slack demand, loss of inflation-hedge status (sound familiar?) and a strong dollar are the most identifiable ones. The greenback packed on the gains as the euro headed in the general direction of Tunisia, following a messy display of discord among ECB Council members (Greece versus Germany: not a soccer match, this.). And so it went, on this mid-April Friday. A mixed bag of not very fresh nuts...ummm news.

Speaking of nuts, audiences globally went same over the apparent conflict of substance in two separate Indian Ministry of Finance statements made to reporters on the subject of the IMF's gold. This morning's Financial Chronicle piece on the Indo-Chinese proposal to liquidate the entire IMF gold tonnage was challenged and/or denied by an also unnamed finance ministry official in India, quoted by Dow Jones Newswires. Great. We now have the battle of the unnamed officials giving quotes to the media, at the diametrically opposed ends of the subject at hand. Make up your minds, fellows? The MOF is fast losing traction with the media, eh? 

This afternoon's version, MoF 2.0:

"India hasn't asked the International Monetary Fund to sell its gold reserves to raise money for funding poor nations, a senior finance ministry official said Thursday. The Financial Chronicle newspaper earlier reported India and China want the international aid agency to sell off its entire gold reserves worth about $100 billion.

"Nothing of that sort I know of," the official, with direct knowledge of India's dealings with multilateral agencies, said on the report. "I don't think it is being considered," the official told Dow Jones Newswires. A recent meeting of the Group of 20 nations had decided IMF will sell a small portion of its gold stock to fund its administrative expenses and also finance economically weaker countries, the official, who asked not to be named, said.

The earlier version, MoF 1.0:

"India and China may press for the sale of the entire gold reserves of the International Monetary Fund (IMF) to raise money for the least developed countries. The IMF holds 103.4 million ounces (3,217 tonnes) of gold that, if sold, can fetch about $100 billion. A draft paper exchanged between New Delhi and Beijing proposes that the gold be sold in bullion markets over a period of two to three years. The money thus raised must be used in tackling poverty in the poorest nations.

“We have been discussing with China a common position on the subject,” a senior finance ministry official told Financial Chronicle. Both prime minister Manmohan Singh and Chinese president Hu Jintao will have to clear the proposal before the representatives of the two countries can take it up at the IMF spring meeting in June in Washington.

The G20 heads of state meeting in London earlier this month agreed to sell a part of the IMF gold to raise $6 billion for poor countries during 2009-11. This was a component of a $1.1 trillion package worked out by G20. The World Bank has estimated that over 90 million people may be pushed into poverty in the global economic turmoil.

“We are working on a more ambitious proposal of selling the entire gold off, as it is an idle asset with the IMF,” said the official. India and China are looking at three ways of using the money so raised. 1) The $100 billion be invested to improve IMF’s liquidity. 2) The money be committed to improving incomes of the poorest countries. 3) A mix of the first two options be considered.

How the sale will affect the bullion market, with attendant problems for currencies, has not been assessed. A large part of the gold may find its way into central banks and private players. Since most of its will be out of reach for retail markets, gold prices may not get hammered. Globally gold prices now are in the $870 - $950 per ounce range. India and Turkey, traditionally big buyers of gold, have not bought much lately because of low domestic demand. During January to March, India bought a paltry 1.2 tonnes. (Normally, India imports about 700 tonnes a year.) Turkey bought just 40 kg last month.

K Shivram, vice- president of the World Gold Council, said, “Whether the gold will be sold or not is an open question.” If the sale did take place it would be staggered, he said. There could be a temporary correction in gold prices but the market would bounce back. He added that when G20 announced the limited sale of gold, the prices that had been ruling around $950, dropped to $875. “But they are again moving up.”

In India, gold now quotes at Rs 14,500 to 15,000 per 10 gm. Karvy Comtrade, a commodity brokerage, expected the price to drift to Rs 13,000 [$775] by the end of June. He did see an impact of IMF gold sales in the short- to- medium term. Vibhu Ratandhara, assistant vice- president of Bonanza Commodity, said much depended on the US, which had 17 per cent equity in gold at the IMF.

The gold, if sold, would go mostly to central banks. He said there could be some impact on retail prices which might drop by Rs 400 per 10 gm. The IMF has built its gold reserves over 40 years. The historical value of the gold, as declared in its balance sheet, is $9.3 billion. Four major sources helped build the reserves. One, member- countries paid in gold their 25 per cent initial quota subscriptions. Two, interest charges on credit given by it were collected in gold from many countries. Three, member-countries can sell gold to it to fight a temporary liquidity crisis. And four, they can make loan repayments in gold."

Got that? It looks something like this - in an illustration:


Judging by the amount of detail offered up in  v 1.0, we wonder why 2.0 did not debunk the previous statement, point by bloody point. Oh well, let's just wait until June. Suspense never hurt anyone. Much. Maybe their psyche. A lot.

One thing remains clear, never mind the silliness in the MoF. That is, that pesky topic of which we have long warned: that the line of poor, and about-to-become-poorer, nations holding their outstretched hands at the IMF's doorstep, had wrapped around the block. The institution has not been faced with this kind of global panhandling in its entire history. How, or why, the international body would consciously allow 100 million to fall into ruin around the world, is a rhetorical question not best addressed within the confines of this column. If the proposal should come to fruition, there is no way in which the sale - on, or off market, orderly or not, would not affect gold prices for a period of a few years. Think CBGA times two, per annum, for three-plus years. Think gold ETF times three-plus. And it took that puppy four years to amass 1K tonnes...

Perhaps, you are ready to posit that this is some kind of "ploy" by China and India to induce the IMF to let go of the bullion, so that they can then gobble up 3200 tonnes for their own central bank reserves at, say $600 per ounce, and that the actual scenario will be beneficial to the bullion market. Or, perhaps, you are ready to offer up the idea that sinister forces are trying to manipulate prices lower and are using two 'unwitting' countries to deliver the mission. The irony that such an idea could be hatched by these very countries deserves a separate tome, somewhere.

Back in the real world, SF Fed President Janet Yellen raised the spectre of.....MANIPULATION!!!  For real. See what you make of the following little news item...(oh, yes, it was buried all right...):

"In a speech flagging an uncertain and weak economy, Federal Reserve Bank of San Francisco President Janet Yellen called Thursday for a reappraisal of how central banks deal with asset bubbles. It's long been gospel among Fed officials that using conventional monetary policy - changes in short term interest rates - leaves the central bank poorly disposed to deal with asset bubbles. It's hard to identify if a bubble exists, and using such a blunt tool to pop a bubble can cause more damage to the broader economy than is warranted.

But over recent years the economy has suffered from successive waves of bubbles. This culminated in a housing-market bubble that, having been built on a rickety, reckless and imprudently assembled financial system, ruptured and helped create the worst recession the U.S. has endured in decades. Yellen, who was speaking at a conference in New York held by Bard College's Levy Economics Institute, outlined her evolving views.

"I can now imagine circumstances that would justify leaning against a bubble with tighter monetary policy," Yellen said. "When it comes to using monetary policy to deflate asset bubbles, we must acknowledge the difficulty of identifying bubbles, and uncertainties in the relationship between monetary policy and financial stability," the official said.

But ignoring a bubble as it grows "can have grave consequences." Yellen said "this lends more weight to arguments in favor of attempting to mitigate bubbles, especially when a credit boom is the driving factor." She also said changes in banking regulation and supervision could also aid this process, and in some circumstances, that may be the preferred path for fixing a problem.

Yellen currently is a voting member of the interest rate-setting Federal Open Market Committee. The FOMC has been extremely aggressive in seeking to turn the tide of the market and economic crisis, and Yellen sounded a supportive note. She said "the severity of these financial and economic problems creates a very strong case for government and central bank action." Her economic assessment was not pretty. "While we've seen some tentative signs of improvement in the economic data very recently, it's still impossible to know how deep the contraction will ultimately be," Yellen said.

"The global nature of the downturn raises the odds that the recession will be prolonged, since neither we nor our trade partners can look to a boost from foreign demand," she said.

Amid "severe downside risks," Yellen said, "economic activity and employment are contracting sharply, with weakness evident in every major sector aside from the federal government." The policy maker added that "financial markets and institutions remain highly stressed." In other comments, Yellen said she supports more oversight of hedge funds. The investment vehicle in question is currently unregulated. While hedge funds are not seen as key drivers of the current financial crisis, they nevertheless cause worry due to their size and a lack of information about what they are doing.

"The truth is that I don't know very much about (the hedge funds) at all," Yellen said. "We have allowed a regime where we have almost no disclosure" of hedge funds activities, and it's likely that in the future, funds that are large enough to threaten the financial system need to be treated as systemically important and should be regulated in some fashion, she said."

Guess it all comes down to how one might define a 'bubble' eh? And an 'asset' eh? A topic for another day.


Pleasant Orthodox Easter Weekend.

More eggs to hunt, for some friends.




Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal


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