Sovereign Debt - The Implications for Currencies and Gold

Sovereign debt hangs like an albatross around the necks of too many countries. There are 17 medium-size to large countries that are close to, or are bankrupt. Many are being kept solvent by using two sets of books and by marking to model. As you know we expect these bankruptcies to take place by the end of 2011. That will be accomplished at meetings such as we saw in the 1970s at the Smithsonian, the Plaza Accord of 1985 and the Louvre Accord of 1987. There will be a realignment of currencies.

America, like many other nations is mired in an inflationary depression, and even if the economy were to return to where tax revenues accelerated, we would still have a deficit of 6% to 8% of GDP. In order to have real recovery we need a public debt to GDP ratio of 3%. The problem is government refuses to cut deficit spending. Such policies curtail investment and lasting productivity growth. An economy cannot long endure a government that represents 24% of GDP. In the late 1960s we had government spending at 20% of GDP. There was a run on our gold dollar backing and on 8/15/71 gold backing had to be abandoned. Thus, you can see how difficult today’s problems are. In fact during the depression it was only 10%. As you can see what we have today is a monstrous situation. Government is destroying our country and worse yet our debt can never possibly be repaid. A federal deficit of 10% of GDP cannot long be tolerated. Quantitative easing is supposed to end this month. If it is not foreigners will probably totally stop buying dollar denominated assets. That means more Fed secret buying, more monetization and more inflation to accompany the M3 increase of 29.5% in money and credit. Those actions surely will put pressure on America’s AAA credit rating. America has joined the ranks of nearly bankrupt or bankrupt nations. America’s finances are a giant fraud and over the next two years it will be plain for all to see.

The three best plays investment wise is to be long gold and silver related assets and to be short the general stock market, as well as bonds. Over the past two years the treasury and the Fed have spent $12.7 trillion and are liable for $23.7 trillion, so says our inspector general. Things are not getting better they are getting worse. What does government do after the stimulus and quantitative easy ends? If they do more of the same the problem will just worsen. They have no permanent solution. They are like a ship without a rudder in a stormy sea and the rocks are not far away.

Challenger says planned layoffs fell in February to the lowest level since 2006, some 42,090.

Private employers shed 20,000 in February off from 60,000 in January.

Credit card charge offs rose 112 bps to 11.37%. 60-day plus delinquencies fell for the second straight month, down 3 bps to 4.16%, as the 30-day fell 6 bps to 5.38%.

Ron Paul was on Fox with Stewart Varney where he stated a currency crisis is coming. When pressed by Varney as to what he is investing in, Paul told Varney gold. “I’ve been buying gold since 1971 at $35.00 to protect my family.”

Initial claims for state unemployment benefits dropped 29,000 to a seasonally adjusted 469,000. The economy lost 8.4 million jobs since 12/07. The 4-week moving average fell 3,500 to 470,750.

Fourth quarter non-farm productivity was up 6.9% and unit labor costs fell 5.9%.

The commercial paper market fell by $20.4 billion to $1.134 trillion.

January pending home sales fell 7.6% to 90.4 from 97.8 in December. Year-on-year it was up 12.3%.

January factory orders rose 1.7%. December’s were up 1.5%. Orders have risen for the past ten months. Transportation equipment orders rose 15%, the biggest increase since 7/09, as commercial aircraft orders soared 118.6%.

Otherwise new orders rose 0.1%; inventories rose 0.2% after falling 0.2% in December.

The monster employment Index rose 10 points m-o-m in February to 124 and y-o-y from 122.

Citigroup is suing Morgan Stanley for $245 million, alleging Morgan failed to make good on credit default swaps held by Citi. A judge will decide the outcome.

The Senate on Tuesday passed a $10 billion measure to maintain unemployment benefits for the long-term jobless and provide stopgap funding for highway programs after a holdout Republican dropped stalling tactics that had generated a Washington firestorm.

Kentucky Republican Jim Bunning had been holding up action for days but conceded after pressure intensified with Monday’s cutoff of road funding and extended unemployment benefits and health insurance subsidies for the jobless.

Bunning wanted to force Democrats to find ways to finance the bill so that it wouldn’t add to the deficit, but his move sparked a political tempest that subjected Republicans to withering media coverage and cost the party politically. Bunning’s support among Republicans was dwindling, while Democrats used to being on the defensive over health care and the deficit seemed to relish the battle.

The bill passed by a 78-19 vote. It passed the House last week and President Barack Obama is likely sign the bill into law quickly so that 2,000 furloughed Transportation Department workers can go back to work on Wednesday.

Doctors faced the prospect of a 21 percent cut in Medicare payments, and federal flood insurance programs had lapsed with Monday’s expiration of an earlier stopgap bill that passed late last year.

Tuesday’s action will provide a month-long extension of the expired programs to give Congress time to pass a yearlong — and far more costly — fix that’s also pending.

Without the legislation, about 200,000 jobless people would have lost federal benefits this week alone, according to the liberal-leaning National Employment Law Project. Jobless people normally get 26 weeks of unemployment benefits and 20 more weeks in states with higher unemployment rates. The legislation extends several additional layers of benefits added since 2008 because of the stubborn recession.

The ISM non-manufacturing purchasing manager’s index indicates that the US service sector had a better-than-forecast February rising to 53.0 from 50.5 in January. The market had only expected a more moderate improvement to reach 51.0.

The US lost 20,000 jobs in February versus January’s destruction of 60,000 jobs, which was revised down from the 22,000 jobs eliminated originally reported, according to the ADP employment report.
February’s decline is the lowest since the the US economy began shedding jobs at a historic rate in February 2008.

The report also indicated that the US could turn the corner in March and see job growth for the first time in two years.

U.S mortgage rates retreated below 5 percent last week, propping demand for home loans after purchase applications sank to a nearly 13-year low the prior week, Mortgage Bankers Association data showed on Wednesday.

February’s volatile swings in housing demand comes on the heels of a steep January sales slump, blamed mainly on unusually harsh winter weather.

The industry group’s market index, which measures requests for loans to buy homes and refinance, rose by a seasonally adjusted 14.6 percent in the week ended Feb. 26 to the highest level since mid-December.

Purchase applications increased 9 percent while refinancing requests jumped 17.2 percent last week as average 30-year mortgage rates fell 0.08 percentage point to 4.95 percent.

“Mortgage applications rebounded last week, particularly refis, as rates dropped back below 5 percent,” Michael Fratantoni, vice president of research and economics at MBA, said in a statement. “Purchase activity remains subdued, with application volumes remaining within the narrow range seen in the last few months.”

Gov. Jan Brewer wants Arizonans to volunteer to provide some of the social services being reduced by the state’s budget crisis.

Brewer on Tuesday announced creation of a task force to coordinate efforts by religious groups and other nonprofits to serve the elderly and other people needing assistance.

Brewer’s office says volunteer activities where organizations could help include foster parenting, supervising child visitations, providing transportation and helping with care for the elderly and children from low-income families.

Arizona has cut social services to help reduce big budget shortfalls.

Brewer says she hopes the state “can reach out and get a lot of volunteers” and that their efforts “will change peoples’ lives.”

House Financial Services Committee Chairman Barney Frank asked Federal Reserve Chairman Ben S. Bernanke to investigate allegations of Fed involvement in the Watergate scandal and Iraqi weapons purchases in the 1970s and 1980s.

Representative Ron Paul asked questions about “inappropriate political interference” and “hidden transfers of resources” during a Feb. 24 hearing with Bernanke, and the allegations “must be fully investigated,” Frank said in a letter today to Bernanke and obtained by Bloomberg News.

Frank, 69, said the Fed must address the charges because “continued concern about political interference” with the Fed and “allegations about a lack of transparency.” Bernanke and other Fed officials are trying to fend off a measure offered by Paul, which passed the House in December, that would open the Fed to audits of interest-rate decisions.

“These specific allegations you’ve made I think are absolutely bizarre, and I have absolutely no knowledge of anything remotely like what you just described,” Bernanke told Paul, a Texas Republican who wrote the 2009 book “End the Fed,” during last week’s hearing.

Bernanke, 56, joined the Fed in 2002 as a governor and was appointed chairman in 2006. The Senate confirmed him for a second four-year term in January by a 70-30 vote.

“The Federal Reserve’s ability to manage monetary policy in an effective manner depends, in large part, on its reputation for independence and integrity,” Frank, a Massachusetts Democrat, said in the letter. “A complete investigation of these charges is necessary to maintain both.”

  California lost far more jobs last year than the state initially reported, according to a new report that provides an early glimpse into statewide employment trends. 

          “The economy was a lot worse than everybody thought,” said Howard Roth, chief economist with the state’s Department of Finance. “The job market is weaker than we figured.” 

           According to an estimate from the state Employment Development Department, California employers shed 871,000 jobs in 2009. If that estimate holds up when final revisions are released this month, 

California’s job losses would be far more grim than first believed. The agency reported as recently as Jan. 22 that California employers chopped 579,000 jobs from payrolls in 2009. That would translate into 292,000 more lost jobs.

          Why are job losses so much worse than first thought? The EDD’s monthly estimates depend in part on the number of employers it believes exist in California at a given time. But the recession has erased numerous companies.  “Businesses went away and no longer existed that we originally thought were there,” said Dennis Meyers, an economist with the state finance department…  [Their guesses were bogus.]

The American Thinker: Secretary Geithner’s Got Some Explaining to Do   The problem Geithner knew he had to confront, however, was that the FED was not authorized to take ownership in AIG or any other financial institution. The law authorized the FED only to loan money and take collateral. While the FED might end up with ownership after a default and foreclosure on the collateral, the Federal Reserve Act does not authorize the NY Fed to structure the debt deal with an equity piece. 

          So what did Geithner do? He took equity, but he used a fictitious “Trust” to accomplish that which he could not do legally. The AIG Credit Facility Trust has three so-called independent, non-governmental trustees owning the 77.9% of the legal interests of AIG, and the Trust agreement assigns the U.S. 

Treasury the beneficial interests in the 77.9%. The highly-touted “independence” of the trustees is quite obviously critical to save the Trust from the claim that it is merely a ruse for FED ownership and control. 

         But there is only one problem with this Trust structure: It is invalid and illegal for two important reasons, not the least of which is that its independence is nonexistent. 

        Specifically, the Trust Agreement includes a hardly-noticed section 1.03, which gives the FED absolute authority over the Trust’s existence and its terms, effectively granting the FED control over the actions of the trustees. By any legal definition, this is not a valid independent trust. This means, at the very least, that the FED is the real owner of the legal interests in 77.9% of AIG’s equity, and this is, as Geithner himself testified before the Senate Banking Committee in April 2008, not legal. 

A report warns that the country is now immersed in a “doomsday cycle” wherein banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management – and when the risks go wrong, the banks receive taxpayer bailouts from the government.  

        “Risk-taking at banks,” the report cautions, “will soon be larger than ever.”

The Institute’s chief economist, Nobel Prize-winner Joseph Stiglitz, called the report “an important point of departure for a debate on where we are on the road to regulatory reform.”

         The report blasts some of Washington’s key players. Writes Johnson, “Our government leaders have shown little capacity to fix the flaws in our market system.” Two other panelists, Simon Johnson, a professor at MIT, and Peter Boone of the Centre for Economic Performance, voiced similar criticisms.  

         Federal Reserve chairman Ben Bernanke and Treasury Secretary Tim Geithner “oversaw policy as the bubble was inflating,” write Johnson and Boone, and “these same men are now designing our ‘rescue.’”  

An average 345 companies filed per day in February   -  6,557 businesses that filed for relief from creditors in February, according to Automated Access to Court Electronic Records (AACER), a database of U.S. bankruptcy statistics. 

First, the category of “personal consumption expenditures” includes pretty much all of the $2.5 trillion healthcare spending, including the roughly half which comes via government. When Medicare writes a check for your mom’s knee replacement, that gets counted as consumer spending in the GDP stats. 

        At a time when we are wrangling over health care reform, it’s misleading to say that “consumer spending is 70% of GDP”, when what we really mean is that “consumer spending plus government health care spending is 70% of GDP.”

According to a 2008 book, “Deception and Abuse at the Fed,” by University of Texas Professor Robert D. Auerbach, then-Fed Chairman Arthur Burns tried to block lawmakers’ probes into the source of $6,300 found on the burglars of the Democratic National Committee’s offices in Washington’s Watergate complex in 1972. Burns, who served as Fed chief from 1970 to 1978, died in 1987.

Auerbach worked for Henry Gonzalez, a former chairman of the House committee who died in 2000 and investigated the sale of U.S. arms to Iraq in the 1980s, before the Gulf War. Gonzalez said the Fed and other agencies initially tried to block his probe, according to a 1992 New York Times article.

Fed bank examiners in Atlanta failed to note $5.5 billion being funneled to Iraq from a local branch of an Italian bank, Auerbach, a critic of the central bank and former congressional economist, said in his book.

“The Federal Reserve’s ability to manage monetary policy in an effective manner depends, in large part, on its reputation for independence and integrity,” Frank, a Massachusetts Democrat, said in the letter. “A complete investigation of these charges is necessary to maintain both.”

Gold and Silver

Last week in the pits at the Comex buyers showed a net preference for silver over gold. Mining shares were steady as they led gold and silver upward. The pros are still significantly short the dollar, gold and silver and the shares. Currency debasement continues apace as all currencies continue to fade versus gold. The long-term trends for a lower dollar and higher gold and silver prices are still firmly in place.

GLD lost 0.61 tons of gold to be net long 1,106 tons worth $39.4 billion. The big increase in holdings came prior to March 2009, when gold traded below $950. It has been a push since then. The five gold ETFs collectively fell 1.68 tons to 1,293.44 worth $46.1 billion. Over the past year inflow has been static, probably a reflection of some public opinion that GLD does not have the physical gold it says it has. Physical availability for off take has not existed in the markets over the past year and we believe they have been using derivatives and futures and have been lending gold to the government and speculators. Another salient fact is that long-term holders are not sellers. GLD, mostly for professionals, is a hedge and we believe those who view GLD as a substitute for a gold backed currency are dead wrong.

The silver ETF SLV increased by 30.51 tons to 9,476.91 tons worth $4.9 billion. The size of SLV has not changed much over the past four years. That can be in part attributed to the strangle hold the giant shorts. JP Morgan Chase and HSBC have had on the metal and the lack of regulation by the CFTC. Their futures and derivative participation are a large reason as well. Due to both these factors many have taken physical delivery and some have bought silver shares. Irrespective from an historical viewpoint gold and silver, as we have often said, are the only safe places to keep your wealth in today’s climate of un-backed fiat currencies. As time goes on this trend will accelerate as sovereign debt problems persist and currencies fall in value versus both these metals.

Commercial traders reduced their silver shorts by 475 contracts to be net short 41,395, as OI fell 1,158 contracts. That is a net short of 71.9% almost all held by Morgan and HSBC.

In gold, the COT commercials report we see net shorts were increased by 18,166 to 219,878, to 238,044, or up 8.3%. Since then gold has rallied up to $1,145.00, which puts them thus far on the wrong side of the trade. In that process OI increased by 63 contracts that some of the shorts may have covered and gone long. The net short position rose from 47.1% to 51%.

In silver collective net shorts increased 1,544 contracts, or 4% from 38,226 to 39,770, as OI fell 2,790 to 117,376. That was almost an exact reversal of the previous week. The net short rose from 31.8% to 33.9%. 

On Wednesday, spot gold rose $5.80 to $1,142.70, as April rose $2.00. For several days spot prices have finished higher than the outside month, which means physical sales are very strong and efforts by government to suppress prices with futures and derivatives is not being successful. Spot silver rose $0.26 to $17.31 and April rose $0.15. Gold open interest rose 9,950 contracts to 482,786 and silver OI rose 175. The XAU rose 2.32 to 170.28 and the HUI gained 6.73 to 428.36. Indian gold imports in February were 34 tons, up from 7.9 tons y-o-y and down from 37 tons in January.

Russia may buy the IMF gold that is being offered. Russia holds 582 tons or 5% of foreign reserves. Generally banks hold 10% of reserves in gold if they have backing at all. In three years their holdings are up 57% and 22% y-o-y.

Again the ECB sold no gold for the 4th week in a row. This is a new record for non-selling.

You have all seen the German TV film from Argor Heraeus gold refinery in Germany, which was sent to them for refining. We took a lot of flack for months for sticking by Rob Kirby’s story that tungsten filled gold bars, that the Chinese received, were just that. Now an un-intimidated German refiner outside Frankfurt has broken the conspiracy of silence by central banks. I know the city well; I have been there often in the past.

The question now is how many of these bars exist and who created them? Those holding bars have to be very nervous. We see new testing procedures in the future. We do not see this being a problem for coins. They are too easy to spot.

Silver production hardly will grow in 2010 and silver should break out from its previous high of $20.78. The four banks, which have been manipulating the silver market will soon lose their grip on the price as bullion and coin purchases rise. JP Morgan Chase and HSBC will bite the dust this year.

Over the past ten years silver has only risen 219% whereas gold is up 295%. It is important to know that over the last 110 years 94% of above ground supplies have been used up. The net supply of above ground stocks fell 14% in 2008, and sales had fallen 27% in 2008.

Physical demand continues to climb and rumor has it that SLV is short 200 million ounces. If true, that factor could drive prices higher as owners call for delivery. Higher inflation is on the way, which will be followed by the deflation of the sovereign debt crisis. Thos events should provide some very positive upside action.

Silver stockpiles continue to be depleted. If so much silver is lying around why are contracts being settled for cash at a premium? Why the long delays for delivery? Silver lease rates remain in negative configuration. Why are we looking at silver and gold prices continually in backwardation? (the spot month selling higher than the outside contract month) Why has it taken a year for the CFTC to tell us the major commercials, banks, are rigging the prices?

The Dow closed up 9 to 10,397; S&P rose 4 and Nasdaq fell 1 Dow point. The yen rose .0034 to $.8834; the euro rose .0100 to $1.3700; the pound rose $0.0145 to $1.5093; the Swiss franc rose .0071 to $1.0678; the Canadian dollar rose .0045 to $.9698 and the USDX fell .53 to 79.98. The 10-year T-note was 3.62%.

Oil rose $1.27 to $80.95; gas rose $0.05 to $2.25 and natural gas roses $0.06 to $4.77. Copper rose $0.02 to $3.41; platinum rose $3.50 to $1,579.50 and palladium rose $8.80 to $452.25. The CRB Index rose 2.58 to 277.71.

In euros gold hit a record high of 836.72 euros an ounce, up from 823.66 on Monday. Gold priced in British pounds hit a record of 759.86 pounds an ounce, up from 744.85.this will tell you why you need to be in gold and silver related assets and not in currencies.

Let’s look at gold’s performance versus some major currencies since 2008. In 2008, gold lost 1% versus the dollar; in 2009, it lost 24.7% and y-t-d in 2010, gold has risen 24.3%. Versus the euro the losses were 5.7%, 21.8% and 16.9%. Versus the pound it was 37.8%, 11.9% and 8.9%, and versus the Canadian dollar it was 25.7%, 7.3% and 7.8%. Even versus the Chinese renminbi, gold fell 5.4% in 2008, but in 2009 gold gained 24.6% and y-t-d it is up 24.3%. Again, anyone investing in assets in dollars is foolish. The only place to be is in gold and silver coins and shares. 

On Thursday spot gold fell $10.10 to $1,132.60, as April fell $11.00. Spot silver fell $0.15 to $17.16, as April fell $0.07. Last night gold fell $7.00 as our government did its magic again. The effort could have been to help Friday’s employment report. Gold open interest rose 14,260 to 497,046, as the banks put on more shorts. Silver OI jumped 3,302 to 111,050.

The Dow rose 46 to 10,443; S&P rose 36 and Nasdaq 71 Dow points. The yen fell .0094 to $.8909; the euro fell .0125 to $1.3575; the pound fell .0067 to $1.5026; the Swiss franc fell .0084 to $1.0774; the Canadian dollar fell .0005 to $.9693 and the USDX rose .60 to 80.57.

Oil rose $0.47 to $80.40; gas fell $0.01 to $2.24 and natural gas fell $0.18 to $4.58. Copper fell $0.06 to $3.35; platinum fell $2.50 to $1,581.00 and palladium rose $12.25 to $461.75. The CRB fell 2.91 to 274.80.

Venezuela’s central bank will boost its gold reserves this year and will buy more than half the estimated 20 metric tons of domestic production, bank director Jose Khan said today at an event in Caracas.

The central bank, which has about $16 billion of its $30.6 billion of reserves in gold, purchased 1.08 tons of gold from domestic mines in the first two months of this year after buying just 2 tons in all of 2009, said Khan, one of five directors at the country’s monetary authority.

“We’re going to increase our gold reserves and buy more local production,” Khan said today. “Our objective is to increase reserves and help develop the local gold industry.”

Venezuela’s central bank is planning to provide $250 million of financing for gold production this year in an attempt to boost non-oil exports. The bank, along with the Mining Ministry, plans to build a gold refinery, bank President Nelson Merentes told reporters March 3, without providing details.

Record demand drove the US Mint’s silver coin sales 40.2 percent higher in the first two months of the year to 5.643-million ounces from 4.025 million ounces, the mint’s website showed. Silver sales in January hit 3.59 million ounces, a record in the history of the Mint’s bullion program, surpassing the 3.13 million ounces in March of 2009, a U.S. Mint spokesman said.

Friday was a good day for spot gold as it rose $2.20 to $1,134.80. April closed up $1.30. Spot silver rose $0.20 to $17.36 and April rose $0.19.  Gold traded as low as $1,126. Among the knowledgeable in Europe we find a great foreboding, and a race to accumulate as much gold and silver related assets as possible. The shorts were active again as gold open interest rose 7,202 contracts to 494,835, as silver OI rose 780 to 110,698. The HUI gained 7.37 to 428.79 and the XAU rose 2.78 to 170.81.