PM End of Week Market Commentary - 8/10/2013

davefairtex
By davefairtex on Sat, Aug 10, 2013 - 4:11am

Gold finished Friday up $1.50 on light volume to 1313.50, with silver up $0.30 to 20.51 on good volume.  The gold/silver ratio dropped to 64.04, below its 50 day MA.  Gold is at its 50 day MA while silver closed above its 50 day MA for the first time since Feburary 6 2013.  Over the past week, silver has clearly outperformed gold and it closed right at the top of its trading range.

Over the week gold is up $0.70 [+0.05%] while silver is up $0.67 [+3.38%].

Assisting gold this week was the dollar, down -0.85 [-1.03%] to 81.15.  Given that gold didn't rise, and the dollar dropped, that would normally not be a very good sign.  However silver moved up and eventually it should drag gold up along with it.  This week it appeared that the taper/don't-taper thesis primarily drove futures gold prices, while silver futures seemed to be linked more closely to movements in copper and economic developments in China.

The gold/silver ratio, for me, is a good indicator of the trend in PM overall.  Here we see how the gold/silver ratio has consistently been above its 20 EMA (green line) ever since the PM downturn started back in Feb 2013.  Over the past week, gold/silver ratio crossed not only its 20 EMA but its 50 MA (blue line) as well, a dramatic move that hasn't happened for literally six months.  If it can stay below that 50 MA, it is a very significant sign of a trend change, as silver typically leads gold on the way up.

Mining shares had an eventful week - down hard early in the week, and up even more strongly on Thursday and Friday.  Silver mining shares did especially well.  Early-week downside moves in the silver miner names I watch were on relatively moderate volume, while the upside moves on Thursday and Friday had heavy volume.  Volume is the indicator I use to tell how authentic a move is, so down on moderate volume and up on heavy volume is quite bullish.  I interpret this as there being relatively few sellers left to bail out, and a whole lot of buyers (and/or shorts covering) that are coming in.  This matches up with the extremely poor sentiment in both PM and the miners.  There are few people left to sell, which is what you need at reversal points.

Medium/Long Term Fundamentals

These fundamental indicators cover what I'll call the medium to long term timeframes.  Rather than impacting futures market prices tomorrow, they are likely to affect futures market prices anywhere from 1-6 months from now.

Seasonally, June & July are weak months for gold; August, September and then November-February are stronger.  Bias should be up for the next few months.

Sentiment in gold & mining shares continues to be poor, a contrary bullish indicator.

Physical Supply Indicators

* Gold premiums in Shanghai increased $2.70, closing the week at a premium of $13.65.

* The GLD ETF lost -7.51 tons of gold this week.  Interestingly, GLD actually gained +1.8 tons of gold on Friday for the first time in months.

* The COMEX lost -3.66 tons of gold this week, percentagewise a much larger move.  It too gained a small amount of gold on Friday.

* LBMA GOFO rates dropped to a new cycle low this week, with the 1 month GOFO rate moving from -0.06% down to -0.12%.

Taken together, this paints a picture of a tight physical supply situation at current prices.

Futures Positioning

The COT report shows the Producer category (miners & bullion banks - thought of as "smart money") went long/covered 9840 contracts, moving to an almost-flat position for the first time in the history of this timeseries going back to mid-2006.  This continues to be a very bullish indicator.

Moving Average Current Trends

Gold: short term UP, medium term DOWN, long term DOWN

Silver: short term UP, medium term DOWN, long term DOWN

Silver price moved above its 50 day MA for the first time in six months.  The Gold/Silver ratio moved below its 50 day MA for the first time in 6 months.  Both of these are bullish indicators.

Conclusion

Physical supply indicators suggest demand for physical gold is still outpacing available supply at current prices, even with India imposing import taxes, and Pakistan banning gold imports.  Together with seasonal upward biases, Producers continuing to head towards a net long futures position for the first time ever, sentiment in miners and metal remains poor (a contrary indicator).  Taken all together, this suggests to me there is an upward bias in the price of PM coming from the fundamental factors.

Silver's price action vs gold this week also indicates a possible trend change, as do silver mining share prices.

While the current medium and long term trends remains down, I'm becoming more certain we have seen the lows at 1180.  The primary risk I see is that of the dollar.  If the buck moves back up towards 85, as might happen with any renewed crisis, we could see the futures markets bail out of PM very rapidly, regardless of the rest of the fundamental indicator, trends and the like.

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24 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
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Posts: 5058
silver breakout in asia

Someone decided they wanted to buy silver futures at the open in Japan, jumping right over 20.60 resistance and causing all those shorts to run for cover.  Friday's close at 20.50 was the setup for this exercise.  It was a textbook tactical manipulation - but to the upside.

Anyone want to complain about the evil "paper longs"?

Resistance is now silver's previous low at 21.25, and again at 22, with support at 20.60.  Gold has been dragged above its 50 day MA to 1330.  Silver is most definitely leading the way.  If this holds going into the NY open, miners should have a good day - although they will likely gap up at the open so it is definitely a risky time to buy.

 

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HughK
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double post - please ignore

double post  - please ignore

HughK's picture
HughK
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Thanks, Dave

Dave,

Thanks for your update this morning and for the end of week commentary on Saturday.  I really appreciate you taking the time to do this, and as I do the calculus of whether or not it makes sense to be a paying or non-paying member of PeakProsperity every three months, I count your posts as a definite plus.

If you are inclined to answer, I have a couple of questions for you or anyone else at PP reading the gold and silver group.

First, I believe that gold and silver have hit their bottom and are now on the way back up.  Now, I realize that's what a lot of us, including me, here at PP tend to believe a lot of the time, whether the price is 1200, 1400, or possibly even 1600.  But, it seems to me that silver at around $19 and gold at around $1300 (an certainly at $1200) does entail enough market distortions and contracting mine supply to constitute a lower limit, short of a major market crash.  So, my first question is, do you agree that - short of a big liquidity crunch created by a general market crash - that gold and silver have fairly hard bottoms between $1200/$1300 and around $20, respectively?  

Second, there is a lot of noise in the PM cheerleading blogs about gold and silver short squeezes, with those articles from zealllc.com being just two examples.  Do you agree that, in the event of rising prices, short covering will form a positive feedback loop of ever more rapidly rising prices?  And, do you believe that currenty the futures markets are in a rare place of a very high amount of shorts and a very low amount of long contracts?

Third, assuming there is a general market crash this fall, as Chris has warned as likely, gold and silver are very likely to fall along with everything else as people sell to meet margin calls and other types of liquidity needs.  But, since gold and silver have already fallen so much, how much further can the PMs and the PM miners fall?  Assuming I agree with Chris, then perhaps I should sell some shares of PM miners and/or ETFs and keep cash on hand for a big slide associated with an overall market crash.  I probably will not do this, because it's so difficult to time markets, and because I believe that the mid to long term (2-10+ years) fundamentals for PM are very good.  But, what I might do is to sell some of the underperforming PM miners around the beginning of September if we have a good August, and leave that as cash on hand to reinvest later this fall in the event of a market crash.  Do you have any plans to move PM investments around in the next few months that you would like to share and/or any views of when to take profits (or cut losses...) and when to hold cash?

Thanks,  Hugh

 

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Hrunner
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Posts: 256
PM Cheerleading is Sound Money Cheerleading

Dear HughK, Dave,

Hugh, your questions are important, however, we need to reframe the perspective a bit.

As far as big picture in gold/ silver, you should understand a major difference in viewpoint in the PM community.  The types of analysis that Davefairtex presents is called Technical Analysis (TA).  I, and many like me (JimH) would be considered "stackers" (explained below).  Dave and his analysis are for "traders".  Traders try to time short term movements for profit making, in, well, anything.  Gold and silver are just numbers on a screen, to be exploited for cash.  To be clear, I don't begrudge anyone using whatever tools they want to make money, but perspectives and a reality check are needed. 

I find the main value in TA is to time major purchases in gold and silver, especiallly if you don't dollar cost average your purchases, or have a larger tranche of money you want to deploy.  That said, TA analysis, but more importantly, commercial bank Comex trading positions, say now is a very favorable time to buy.  Could you buy today and the price drop to $1100?  Yes. Do I care? No.  Please read further on.

While I very much respect Dave's effort, earnestness and contribution, and I read his posts because he has an informed perspective, I believe your question illustrates a danger of fixation on trading and shows you need to consider the key differences between the proverbial "trading" and "stacking" mindset.

Your comment about "PM cheerleading" and Dave's about "evil paper longs" merit a reply.  While I understand there may be a few funky apples that are abnormally attracted to gold and silver because they are pretty and glittery, thus the term goldbugs, if you think they make up the majority of the members of this movement, you are greatly missing the mark.

The big majority of the people you and the mainstream media and permanent gold critics called "goldbugs", with an intent to belittle and dismiss them, these people are first and foremost are cheerleading the fall of Keynesian economics.  The majority are people you call "goldbugs" are like most PPers, including Chris and Adam, who simply see our current system as unsustainable, likely to collapse / transition, with very negative and unpredicatable consequences, who hate the unfairness and immorality of our current financial setup that favors giant banks, and huge corporations who are closest to the feed trough of fiat i.e. 'fake' money printed by central banks.

In short, "goldbugs" believe that those not in the small group of those with special financial access (who by the way, contribute very little to nothing productive to society at large) are being massively and immorally exploited by the politicians and system who enable this system.   These groups (government and big banks) have been described as 'declaring war' against the majority of unknowing, hard-working citizens.  Using the metaphor of warfare, gold and silver represent a major weapon by the "little guy" in this battle. 

Rather than work slavishly to earn electronic money, put "money" in the bank to be destroyed by taxes from a recklessly spending government, inflation and money-printing by the Fed, or to be invested in a gamed and stacked-deck "market" that is the stock, bond and forex markets (well, all electronic markets), "goldbugs" are fighting back by buying physical gold and silver, taking personal possesion of these forms of wealth, and preparing for the transition that is sure to come.

So please, consider why you are buying gold and silver in the first place, and don't belittle "goldbugs" who from where I'm sitting are for the most part, the sound money good guys who are fighting back with one of the few tools they have.

With that preface, if you hold the same perspective about the instability of the current system and the intrinsic value of holding gold and silver, bottomline, I would not try to time things precisely.  Please read my earlier posts with Davefairtex about timing.  In short, the time to get right and sit tight is now.

To take a quick sidenote, if you don't believe in the value of gold and silver as protecting your family's wealth, then why are you focusing on only gold and silver to do TA trading?  Why not a more broad-based strategy to look across the spectrum to buy things that are technically oversold or sell things that are technically overbought?  If I truly believed I had a secret sauce for TA, I wouldn't limit myself to PM.  But I digress.

Make a thoughtful determination of how much gold and silver you want to own in physical possession, and then go buy it.  There are multiple metrics, 10- 70% of net worth, depending on the strength of your convictions about what's coming, a year's salary, a certain number of oz per family member.

If you don't believe in the value of holding physical gold and silver, then you may as well be playing with your money in technical trading for coffee, wheat, lumber, AAPL, or anything with electronic prices. 

Not for me, not in broken markets and at a time in history where we are dangerously close (one month? one year? five years?) to a major transition and monetary reset.  Maybe dave can explain why TA is especially well suited to gold and silver versus anything else.

Second question, I believe we are in real danger of a deflationary crash, and the real market is trying to deflate but the Fed and world CBs won't let it.  Where as you describe, everything gets sold off and everything's prices drop.  Parenthetically, one of my personal attraction to gold, is that, even though its price falls during deflation, it value seems to hold up better in deflation than other investments, and it does extremely well in inflation.  Since it is so hard to know whether inflation or deflation is coming, gold is a key asset to hold.  One larger view is that both deflation and inflation are devaluing processes, for real estate, durable goods, for labor, but gold is still, well, good as gold.

However, I believe in a deflationary environment, cash is king as they say.  I think it is a good /great idea to have up to 25% of your networth in cash, especially now that we sit on the knife-edge of natural deflation v. central bank inflation/ hyperinflation.  If we go through another bad to severe recession and attendant deflation, cash can be used to buy real assets at fire-sale prices- mainly for me: public companies that make real things (pharma, consumer goods, autos etc), real estate, and durable goods- cars, chainsaws, any great tool (or yes, plaything) that I have had my eye on.

I am personally holding 25-40% net worth in cash as part of sit tight and be right.  Because I can't tell yet who will win the inflation/ deflation war.  By the way, if get the clear sign that the central banks are getting the 2.5% inflation or greater that they want (meaning in reality 10-15% inflation), I will downsize my cash and rotate into, well gold and silver among other things.

Hope this helps explain one perspective.

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davefairtex
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Posts: 5058
market analysis

I think mine supply is a factor in silver, but not so much in gold.  Gold has perhaps 175 k tons of supply out there, and mine supply is 2.5 ktons per year.  I don't know the figures for silver, but I know there's a lot less of it relative to mine supply, which means that if you reduce mine output, it should more rapidly affect inventory and thus price.

I would never try and claim gold has a "hard bottom" at 1200.  I never expected oil to hit $30, yet it did after the 2008 crash.  If we encountered a massive deflationary/deleveraging impulse as in 2008, gold would most likely make new lows, because all the futures longs would race for the exits, and regardless of what we all think about GOFO rates and shanghai premiums, those futures longs are the dog, and the physical market is the tail, and when those futures longs race for the exits, its lookout below.  How low would depend on how much leverage remains to be wrung out and that I don't have any insight into.  It certainly "feels" like most of the selling is done but then again, we're not having any serious issues right now so its hard to know for sure.

Overall, for every long in the futures market, there must be someone short.  So "the market" isn't short or long, its always in balance.  The question is always who is short, and who is long?  Right now, the Producer group which is traditionally quite short, are now almost flat (equal shorts and longs).  This is at a historic level going back to 2006.  These guys are considered "smart money."  Its not a guarantee the market will rise, but - if the big banks are positioned this way, its worth taking notice.

The setup right now appears to be long.  If things don't change dramatically, I think the low is in for this cycle.  Stars and moons are aligned.  If a catalyst appears, PM really could do quite well.  I don't know what that catalyst will be (it sure won't be "yet more money printing" since that cow is milked dry), but those sneaky banks will no doubt announce one if they want to make money on the rebound.  I am not sure how far any rally will go, I will have to read the tea leaves and figure it out on the fly.

Will we have an equity market crash this fall?  I have no idea.  Its all dreadfully overvalued but we saw in 1998 that things could still continue higher surprising everyone.  I suppose gold & silver will react depending on why the crash happens.  We could have a crash simply because money flows out of the US somewhere else.  If so, then PM should do fine.  If it is because of bank failures in europe that requires banks to dump any/all of their positions rapidly to stay in business, the whole commodity complex will most likely get whacked and the buck will soar.

Europe will not, can not recover until that bad debt situation gets cleaned up in the bubble countries.  They're putting it off, in Spain specifically, and that's why things just get slowly worse.  Will they ever grasp the nettle?  Presumably, when the pain in Spain (!) grows so intense that no more happy prognostications will be believed by the people, and they'll demand a change of approach.  Once that happens, then we get our resolution and that's when things will get exciting for real.

All the numbers I've heard to date out of Spain are just fantasy.  Vast numbers of chickens need to come home to roost before Spain gets cleaned up - and I base this on hard numbers I found on Ireland's debt resolution experience.  Ireland's bubble was about the same magnitude as Spain, but Spain is a much larger country.  Yet, current price estimates suggest Spain's resolution will cost somehwat less than Ireland.  And early results from Spain's bad bank are really quite appalling.  Turns out unfinished homes don't sell so well after a bubble pop.  Who would have thought?  Its all just a bunch of lies to avoid apportioning the losses that have already taken place but the regulators are refusing to acknowledge.

When that resolution happens for real, then the dollar will likely soar, and we'll get some serious equity market downside action, probably commodities too.  No doubt they'll try and clean things up slowly.  We'll see how that works out.

How did I get to talking about Spain?  Ah yes right.  Crashes.

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 760
Thanks, Hrunner

Thanks for your reply, Hrunner.  I appreciate your views, and it's good to know how much cash you are holding now.  I am probably overinvested in PMs and underinvested in cash.  (I don't own property and including my retirement funds, around 70% of my savings is in physical PM and PM stocks.)  

So, I have some spare cash coming in the next few months and I will probably keep it in that form and wait for opportunities.

My investment allocations should also neutralize your concerns about my views on people who invest/save in PMs or PM stocks:  I am as big of a goldbug, or whatever else you want to call it, as many others here and I started buying PMs before I found PeakProsperity or even heard the term goldbug.  That doesn't change the fact that Zellc.com and KWN are PM cheerleading sites, as it's fairly safe to assume that they receive most of their revenue from companies that sell gold in various forms (Sprott, Egon von Greyherz, Turk&goldmoney, etc.), and that it's very rare that they have articles or podcasts predicting gold/silver's fall  - even in the short term - whereas there is a lot of energy devoted to talking about how gold or silver is on the verge of rising.  That's why I value Dave's analysis here so much:  he brings in another perspective and helps me question my own views and assumptions about PM markets and prices, as well as explains a lot of details of market behavior that I appreciate.

As far as your metaphor of a war between big banks/government and little guys, who might use PM investment as a weapon to fight immoral banks and governments, I would argue that no one reading PeakProsperity is the little guy, and that all of us here are enjoying a disproportionately wealthy and comfortable lifestyle at the expense of the real little guys, namely the world's 4 billion poorest people and future generations who will have to negotiate a world not only of high government debt, but also a collapsed fossil fuel infrastructure and destabilized climate resulting from rapid fossil fuel burning.  Now if my memory of some of your previous posts is correct, then you don't believe that climate change is a major concern, and that's ok - we each develop our own beliefs.  

But even if we leave climate out, and just look at how resources are divided around the world, I think we will see that both of us as well as JP Morgan are all beneficiaries of a system that reallocates resources from countries that don't have strong political and economic institutions, to countries that do.  In other words, the strong are taking from the weak, and that's an importat part of the reason that I am so comfortable and have so much.  JP Morgan is better at it than I am, but every time one of us fills up a car with gasoline that originated in Nigeria, Equatorial Guinea, or Iraq, or buys a bar of silver that contains ore that originated in Guatemala or even Mexico, we are inadvertently part of a political, economic, and military organization that gives us disproportionate benefit at others' expense. 

I don't feel guilty about this because I don't think guilt is helpful.  But even though my yearly gross income is in the middle double digits and have a wife who doesn't work, I don't think that I'm particularly little or good when it comes to global economic organization.  The reason I bring this up is because I very much support the idea that individuals should take action to make themselves more resilient and forward-looking on many levels, including financial, and I love the conversations and insights found at PeakProsperity.  But when I hear people here talking about immoral big banks I wonder why they don't also complain about the aspects of our global industrial civilization that are immoral but that give them outsize benefits, such as cheap imported oil and globalized supply lines that allow goods, services and capital to flow relatively freely across borders, giving us lots of cheap stuff made in developing nations, but keep Bangladeshi garment workers firmly in their place.  In other words, a system that allows capital to fly so easily across borders, but restricts the movement of labor, is in itself immoral on many levels.  A system that allows first-world consumers to buy raw materials extracted in countries that have very little political or economic sovereignty due to first-world-government meddling in the form of World Bank mandates, secret coups, and outright invasion, is even less just.  But while Democracy Now talks a lot about that kind of injustice, I rarely hear it mentioned here.

If anyone wants to get an idea of where he/she is in terms of per-capita global income, just plug your net income into the Global Rich List.  Just to give you an idea, a person who nets 50k USD per year and has a nonworking spouse, so that each person in the household is netting 25k, is in the top 1.8% of the world's richest people.  Again, I am not asking anyone to feel guilty,and I don't feel guilty either.  But I do question any narrative that identifies large banks, central banks, and OECD-rich-world governments as the bad guys, and disporportionately wealthy citizens of any country - people who have enough to save significant amounts in any form as well as consume many times what the poorest 4 billion consume - as good guys.

So, in summary, thanks for the insights regarding how much cash to keep on hand, as well as your response over all, and I agree that there is value in reframing perspectives.

Cheers,
Hugh

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davefairtex
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Joined: Sep 3 2008
Posts: 5058
the hrunner goldbug

I believe I can call myself an Hrunner goldbug.  That is, not a KWN goldbug, or a zero hedge goldbug.  But what Hrunner says makes sense to me.  I may not seem like it, but I am an hrunner goldbug.

Diversification, acknowledgement that deflation could be quite unpleasant, unsure about how things will play out in the medium (1-5 year) timeframe, holding some cash, some gold, and remaining flexible.

As for why I focus on the gold market, good questions.  Two reasons.

1) I've been fascinated by it for some time now, and so that's what I bring; if Chris wanted someone to comment on AAPL or wheat, it would be someone else because I don't track those particular instruments.  Each thing really does have its own personality.

2) I happen to like trading PM & miners because of the lottery ticket possibility that doesn't exist with, say, AAPL or wheat.  I trade around a core position.  My goal is to pick up miners cheap and sell after they've rallied to make money using trend analysis, but at all times to have a core position just in case the KWN goldbugs are finally correct and gold goes absolutely nuts.

My guess is, the KWN goldbugs will be right, someday, but in my opinion it likely won't happen during a major downtrend.

I also have cash too, in case we get that deflationary crash.

I do admit that I react poorly to people who talk about paper shorts, without talking in the same breath about the paper longs.  That's not you Hrunner (and I don't mean for it to be pointed at anyone else here for that matter), but its a common theme with a few of the other types of goldbugs.  I read a lot of stuff other places, and after a while it does get to me, mainly because I consider it to be intellectually dishonest.  (Its not that they are deliberately setting out to deceive, but - its not what I would call a clear-eyed approach to market analysis).   I'll try and stifle myself going forward, but today when I saw a "paper long" assault that looks to be the mirror image of all the "paper short" assaults, its sometimes difficult to resist commenting.  I really do strive to remain intellectually honest in my assessment of things.

The recent Ted Butler article on JPM's "corner" on the gold market (on the long side, this time) I found refreshingly unbiased.  Are we aligned with the devil this time around?  The COT report would suggest this may well be true.  Perhaps that's why I'm seeing those paper long attacks!

http://www.silverdoctors.com/ted-butler-jpm-is-cornering-the-gold-market/

 

Hrunner's picture
Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
The Little Guy, The Real Little Guy, and Liquidity

HughK, Dave,

Good responses, some thoughts about the little guy, TA and liquidity:

Dave, I want to be clear that I really value your work, I believe you are an intelligent and sincere guy.  I try not to try to come across as personally attacking, I apologize if I do.  I strive to attack and defend ideas, not people.  I do read your excellent and well-written posts, because, as I said above, I try to follow price signals to determine cost-efficient entry points, and just generally to see if things are moving ala toward a meltdown, just as Chris follows bond spreads among others.

HughK,  While I do consider myself very blessed and rich, I have worked in Haiti, the poorest country in the Western Hemisphere.  I am aquainted with the true little guy.  Ironically, I would say some of my friends in Haiti are some of the richest and happiest people I know.  They have close families, many have a deep and rich relationship with God, and have active days.  Many believe what the pastor of a Haitian church said in his last sermon I attended, "only those who are without God are poor".  That said, they and I both know there lives would be easier and better with more resources, and thousands of generous people in the U.S. try to share some of what we have with them.

When I say Little Guy, in the U.S., I mean when I buy gold and silver in the "free" market, I am lucky to scrounge up enough money to buy a few dozen gold and silver coins.  Note that I had to use real money, from real savings and real profits from real companies, not fake leverage dollars and money-printed dollars that the Big Guys use.  I am going up against commercial banks and ETF custodians who A) have billions of dollars on account to spend, B) can leverage their billions of dollars into hundreds of billions of dollars into phantom "Credit Dollars", C) can bribe (I mean "contribute to") elected officials, to put in to place laws and regulations that won't convict them of immoral practices, D) can create thousands of contracts paper gold and paper via naked shorting that, in any normal commodity market would be illegal and punishable by jail, E) is best friends with a Federal Reserve central bank that provides them with billions more fiat dollars and government cover to deploy and leverage to push the market and make profit, while at the same time generally keeping PM prices lower than "market value".  So yes, I consider myself the little guy.

With respect to "climate change" (I assume that it is still called climate change and hasn't been rebranded as something else besides global warming as I write this), I think you oversimplified my position.   I am not a climatologist, however I am a Ph.D. scientist with a B.S. in Chemistry, and I know how to critically read.  1)  I think the strong majority of evidence is that the earth is in a warming trend, perhaps a "warmer" warming trend than in the past.  I note that the earth has been in warming and cooling trends since before the industrial age.  I would like to hear more discussion and scientific investigation about the cause of pre-industrial both global warming and cooling, if for no other reason than there are more of these observation than the singular era we live in.  The fact that such research is so small amd so lacking reinforces my critique of the global warming crowd as significantly overlapping with the leftist, central planning crowd  2)  The greenhouse gas theories and limited, non-planetary scale, true experiments, support a general notion about greenhouse gases having a physiochemical property to be able to trap heat.  That said, it seems this phenomenon is only a piece of a much larger and less explored puzzle of CO2 removal by plants, chemical interactions etc.  Thus I very cautious firstly about making precise predictions about the trajectory of warming and secondly about the degree of human contribution. 

Even if all the theories based only on observations and not on true experiments are correct, I am not confident if we wiped all humansand their associated CO2 production off the earth if that would deflect the current climate trends a little, a lot or not at all.  I don't believe any honest scientist knows this either.  Further, I am quite sure if we could convince every single terrible CO2-generating, resource-consuming American to immediately cease their current life and live off of river water and berries, I am 100% confident that the world's largest CO2 producer, China, will do nothing but continue to live as they are now and probably take over the USA because we are sitting around eating berries and drinking river.  Once in control, they would then convert the USA into another China, putting even more CO2 into the atmosphere than before our river-water/ berry era.  3)  I believe there is a big overlap between global warming scientists, and statists /fans of strong central-planning government.  And statists do not have the same global perspective about individual rights and responsibilities that I do.  I have no desire to empower the left in this country any more than they already are. 

I know for certain that academics who live and die by grants and famous papers have a strong bias towards sensational conclusions and theories, because, if perchance, the truth was that we were not having as dire an effect as purported, then they would get much less to no fame and funding.  For the record, I am a big supporter of science, even government-sponsored science, and I would want the truth whatever its ability to sell newspapers and grants.  I just know human nature and how the system works, thus I am very cautious in published data and theories.  4)  My position is whether there is no AGW or lots of AGW, I believe I can align with the AGW community in that I want to "get off of" fossil fuels, because they are dirty, limited and seem to cause global wars because they are concentrated in certain geographies.  The leading candidate to replace fossil fuels right now, in my understanding, is improved nuclear (Thorium, better uranium) and a combination of PV, wind, geothermal, hydro, tidal, the last group best mainly for low wattage, local uses.  I look forward to the day we will have this type of energy, and per Chris' encouragement, plan to "invest" significant dollars in local i.e. home energy generation and energy conservation.  I think it is a great investment, perhaps better than the stock and bond market.

Finally, I think your asymmetric vilification of Americans is unfounded.  You should be against oppression everywhere, and for liberty everywhere.  While there is an element of collusion, either intended or unintended, by governments and corporations to the detriment of the people you describe, you leave out the most important factors.  The people themselves.  We have the American system ("had" perhaps) because we have two main ingredients:  1) great leaders of high character and great skill, 2) an at least plurality of citizens who shared the leadership's views and were willing to follow them and fight for those ideals.  With civil disobedience and beyond.  All other factors are secondary.  There is not a country in the world that could not achieve great prosperity and great opportunity for all its citizens if those factors are present.  You bring up Mexico.  Do you think that Mexico has great leaders and a population that highly values liberty?  I see a corrupt and inbred government and a citizenry where the many of the ambitious folks are leaving for the US rather than to stay fight for freedom.  I know about the Mexican Revolution.  Guess what, that didn't work.  Time to try again.  The current climate in Mexico and everywhere else which is self-centered and frankly of weak character, is not a recipe for national success in my experience.  Perhaps the time is coming when we will be asking the questions about Americans.

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HughK
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Apples, not Indians, at least to some extent

Hi Hrunner,

Thanks for your reply.  Just to be clear, I did not villify Americans anywhere in my post.  In fact, I did not villify anyone, including big banks or the government, and that's because I believe an us versus them dichotomy, or a moral vs. immoral mentality whether when it comes to gold buying or just about anything else, is unproductive and also inaccurate, as the world is a more complex place than some of our narratives try to paint it.  In the last paragraph of my post I deliberately said, "dispropoportionately wealthy people of any country," and I did not say that such people were bad, I said that a narrative that paints "us" as little guys, or victims and them (big banks) as bad guys, was questionable.

Second, a lot of the ideas here at Peak Prosperity and in many of the thinkers that have similarly aligned ideas - people such as Thomas Malthus, M. King Hubbert, The Club of Rome, Paul Erlich, Charles Hall, Jared Diamond and others - share the premis that our many of our social and economic paradigms overemphasize ideas and theories and underemphasize underlying resources, especially energy, and other physical conditions.  In particular, I would cite Jared Diamond's chapter "Apples, not Indians," in Guns, Germs, and Steel, in which the author makes the argument that people from the Old World (i.e. Eurasia and Africa) conquered people from the New World (the Americas) 500 years ago not because of cultural advantages but rather due to long-standing geographical and resource advantages.  As you may already know, the first half of Guns, Germs, and Steel is a history of the Agricultural Revolution, and how and why it progressed more quickly in the Old World for a number of reasons, and more slowly in the New World.  Diamond claims that the fact that the Old World got a head start in agriculture gave it a head start in complex civilization, which eventually put it in a position to dominate the peoples of the New World.

In your last paragraph, you claim that

We have the American system ("had" perhaps) because we have two main ingredients:  1) great leaders of high character and great skill, 2) an at least plurality of citizens who shared the leadership's views and were willing to follow them and fight for those ideals.  With civil disobedience and beyond.  All other factors are secondary.  There is not a country in the world that could not achieve great prosperity and great opportunity for all its citizens if those factors are present.

Well, to some extent I agree with you. The United States government was devised very progressively, by intelligent and learned men who seem to have, to a great extent, successfully applied Enlightenment theories of governance to their constitutional system. We also developed a number of other advantageous cultural traits - such as an ability to cooperate, organize, innovate, and think differently - as we came in waves from Europe and beyond and settled from the Atlantic to the Pacific. Daniel Boorstin's three volume series, The Americans, documents these cultural advantages very well.  

On the other hand, there are a number of geographical and geopolitical reasons why Americans are so wealthy.  Unlike Mexico or Peru, what is now the lower 48 was very sparsely populated, so it was much easier to transplant the highly complex agricultural-commercial British civilization in places like Virginia and Massachussets, than it was to transplant a similar (although already declining) Spanish agricultural-commercial civilization onto the more densely populated parts of Latin America.  Chile is a simple test of this:  there were very few native peoples relative to Peru and Chile is, and has been for quite a while, richer and more innovative than its northern neighbor.

Also, we were very lucky in terms of natural resources in the United States.  I don't have time to look up the statistic now, but we started with a disproportionately large share of global coal reserves and I think we had a pretty good share of oil too, although I don't know if it was more than the global average distribution of conventional oil deposits.  

Then, once we became a world power, around 1900, we were able to leverage our cultural and geographical advantages with our military.  A classic example is the Spanish-American War, which started in the name of independance and self-determination for Cuba and the Philippines, and ended with neither one being free. Our neo-colonial hegemony obviously sped up after World War 2, and some may argue even more after our principle competitor declined post-1989.  But now, not only Americans, but also Canadians, Swiss, Japanese, French, Germans and others derive a huge short-term benefit from America's network of military bases and political influence over developing nations because we make these nations very docile for corporations from all of these countries.  While all of these nations get benefit from our empire, we certainly get a lot of the benefit ourselves, and that has very little to do with the merits of our political system and the citizens that stand behind it.

So, while I do agree that American political culture has many desireable aspects that I would certainly want to see no matter where I live, it's important to recognize that our initial success was also due to some geographical accidents and that our military and neo-liberal/capitalist foreign policies* have extended and magnified American prosperity over the past few decades making easier to expropriate resources from governments that were too weak, for whatever reason, to defend themselves from the latest global hegemon.

OK, Dave, sorry for the digression.  I really just meant to thank you and ask those questions about the PM markets, but I have enjoyed the discussion, Hrunner, on my first day off in a while.

Cheers,   Hugh

*No value judgement here, just a statement...

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HughK
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nice to see PMs going up

And as I was writing these posts, the U.S. markets opened and PMs are still going up.  It's been nice to have a few up days after so many down days...cheeky

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HughK
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Hrunner wrote: Further, I am
Hrunner wrote:

Further, I am quite sure if we could convince every single terrible CO2-generating, resource-consuming American to immediately cease their current life and live off of river water and berries, I am 100% confident that the world's largest CO2 producer, China, will do nothing but continue to live as they are now and probably take over the USA because we are sitting around eating berries and drinking river.  

I don't want to get into climate change here, Hrunner, but per capita, Americans use 9.5 liters of oil every day and Chinese use 1 liter every day.  We also consume way more coal per capita than Chinese.  This does not refute what you say, but since you compare China and U.S. CO2 emissions, I think it's worth acknowledging.

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Oh yeah, Liquidity

Dave, Jim, HughK, PPers,

The longer post above got me side-tracked off of my main question of the day: Liquidity.  HughK used it in his post #3 about selling gold and silver to meet margin calls and "liquidity needs".

I think it goes to many of the posts about gold and silver prices, and the inflation / deflation war.

So thinking about liquidity brought forward some questions. 

First, everyone throws the phrase around, but I would like to make sure we all define it the same way.

Investopedia.org defines it as:

1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.

2. The ability to convert an asset to cash quickly. Also known as "marketability."

There is no specific liquidity formula; however, liquidity is often calculated by using liquidity ratios.

Investopedia explains 'Liquidity'

1. It is safer to invest in liquid assets than illiquid ones because it is easier for an investor to get his/her money out of the investment.

2. Examples of assets that are easily converted into cash include blue chip and money market securities.

http://www.investopedia.com/terms/l/liquidity.asp

 

I always defined it as "money (currency, credit-money) available to spend". Perhaps too simple.  I would be happy if Dave, Chris or anyone else would expand on the definition.

We hear it used all the time interchangeable with money, and in phrases as 'liquidity crunch', 'liquidity trap' 'world is awash in liquidity' etc.  Apparently China is having a liquidity problem.  But I never find a metric or a published dataset that includes the term 'liquidity'. So we use a word a lot but we don't have a measurement for it.  Kind of interesting don't you think?

Is liquidity something we should be very focused on?   It seems to me liquidity describes two extremes of financial conditions, based on inflationary v. deflationary environs.

Condition 1:  People are running scared and selling everything because

A) the Fed is threatening to taper or is actually tapering, so they are worried that assets will deflate and they will lose money.  There seemed to be a test run for this in April 2013 (Chris alluded to this on Off the Cuff a short time ago). 

Or B) some other black swan like war, gap up in oil prices, is triggering recession and asset/ futures price drops. 

Or C) a critical mass of market movers and major investors come to their senses and realize the market has no clothes, they are not getting paid back in non-devalued dollars for their holdings and are running for the exits.  I.e. "negative animal spirits" (I think it's also called 'fear'), if such a thing exists.

=Liquidity Down environment

Condition 2:  Financial Players are pushing asset prices up higher and higher because the Fed has decided to up the ante with even more QE.  Just doubling down on the current QE paradigm, or QE for consumers (my personal prediction).  Because, you know, deflation cannot happen.

=Liquidity Up environment.

It got me to thinking about markets and leverage.  Check me if I'm wrong, but aren't markets (and therefore asset valuations) set at the margins?  If a few large players dump assets all at once, as many believed happened in the April PM price massacre, for example, doesn't that devalue and destroy wealth of all holders of the asset, even if their outstanding holdings are much, much bigger than the relatively small amount dumped into the market.  Even if the majority of holders did nothing but sat on their holdings?  Kind of like what happens to home values for the whole neighborhood, via "comps" (comparative home sale prices), if just one homeowner decides for whatever reason to sell at a below market price.

As an aside, were not the Chinese famous for 'dumping' as a strategy to at least temporarily decreasing the price of good so low that a Western competitor could not stay in busines at that price?

Seems like this is a template to ruin your competition.

Why this is relevant is because in today's world of high leverage, it seems like it wouldn't take much to devalue a competitor's holdings, either intentionally as part of a strategy, or as collateral (pun) damage from some big player just wanting to get out in a hurry (buy a deserted island, Gulfstream, scandal and indictment ala SAC, whatever).  Maybe they just want to hold cash. 

If a bank or investor has 10 dollars of an asset used as collateral, say gold, and 400 dollars of purchased assets at 40:1 leveraged off of that gold collateral, then a $1 drop in gold price means they can now only hold $360 dollars of leveraged asset.  Meaning they must now sell off $40 of Asset 2 (much more in dollar terms than the $1 drop of the primary asset).   Do I have that right?

What seems really scary in this system is that it seems that if Asset 2 is Asset 1 in another players account as primary collateral, then you have the setup for a nasty feedback loop which quickly leads to everything being sold off.

Doesn't leverage really amplify either one of these conditions? 

Is that what everyone thinks happened in April?  If yes, what stopped it- attractive prices brought in buyers?  Fed shoveled money under the table? 

Is this liquidity crisis likely again, especially if we get the correction that Chris is pointing toward, if stocks are held as primary collateral for leverage, i.e. Asset 2 in my example above?  Can anyone speak in an expert way on which assets tend to be used as primary collateral in leveraged accounts?  I would guess gold, cash/ UST, major currencies.

This would be a great topic for a "Featured Voices" or "Off the Cuff".  Either Chris or Charles opin, or bring in a Mish, Karl Denninger or someone very experienced in leverage accounts to talk about the mechanism, and any circuit breakers that exist.

Absent really good circuit breakers (I know they exist for the stock market, do they exist for bonds?, but that doesn't preclude a multi-day sell-off), my current feeling is that we will get an April-type total market sell off again in possibly Sept/Oct (if Chris is right, and I have no reason to bet against it), but we need to brace ourselves for another big drop in gold and silver prices for the liquidity reasons above.

Followed by a heroic intervention by the Fed/ Government, followed by a big rebound in asset prices.  This pattern could happen more than once.  Kind of like the harmonic oscillations that occurred in the famous Tacoma Bridge collapse, or in any under-damped oscillating system.  But we all know what happens at that last oscillation.

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Hrunner
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HughK, Per Capita v Total

HughK,

Fair point.  We should note that Americans produce more CO2 per capita, because they use more energy per capita, because they produce more per capita.  Admittedly some of what America produces is financialized nonsense, but we also produce a great many useful things.  And we innovate and do R&D, and R&D consumes energy and resources.

China is less per capita because they have more "capita".  But they are biggest total CO2 producer and climbing.

But the big picture is that both countries produce a lot of CO2.   And I want both to find ways to greatly decrease their fossil fuel burning.  One would think that a great non-fossil alternative would be attractive to both.  America for cheapness, non-CO2 emitting, and less reliance on unstable countries, China for, well, cheapness, (I'm not convinced that China authorities care at all about the environment, given their miningand air quality standards, plus an iron-fist grip on their citizens public lives including healthcare) and non-reliance on unstable countries.  Like the U.S.

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HughK
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I agree, Hrunner

Hrunner,

I definitely agree that non-fossil fuel enegy is a great investment and a way to grapple with the inevitable fossil fuel depletion issue sooner rather than later.

I am currently in the process of joining a solar power cooperative here in the Chablais region of Switzerland where I live.  I haven't searched PP for solar power cooperatives yet, but I need to b/c I'd like to compare notes and find out what works and what doesn't.  If I owned my own place, I'd do solar power hot water heating, but I don't, so I can't.  However, the owners of the school where I work have equipped several of their buildings with solar hot water heating simply to save money.

Dave, apologies again for deviating from PM commentary on this thread, but it's a good place to have other conversations on such an exhuberant day for the PM markets.  I'm very grateful for your daily commentaries and I'll continue to read them and try not to hijack your threads.

Cheers,

Hugh

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davefairtex
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liquidity and gold

Liquidity, as I understand it, is the ability to meet one's short term debt obligations with the cash on hand. 

A liquidity crisis happens because various lenders wake up to how bad your situation really is, and decide one day not to lend.  Depositors can withdraw their deposits.  Of course, debt repayment is still required.  If you can't get the cash to meet your debt repayments, liquidity crisis turns into bankruptcy and then you find yourself testifying on the Hill to a bunch of annoyed Congressmen.

Ah but if you're a bank, The Fed has your back.  The Fed exists to provide liquidity to institutions with banking charters under those circumstances.  Rather than panic-sell good asssets in the middle of a crisis for peanuts (presumably treasury bonds, or MBS rated AAA, let's not quibble on how junky they really were, we're talking theory here), banks give the Fed the asset, and get cash in return.  Fed applies a haircut, and the bank's liquidity problems are solved.  They can now meet their debt repayments with the cash they got from the Fed.  Once the credit situation normalizes, the bank can borrow its 30-day repos again and retrieve its assets from the Fed.  And all is well.

Another thing a regulator can do is tell its member banks that leverage must be reduced.  That just means that some amount of thin-air money created by banks goes away (i.e. gets repaid).  That's deflationary.  So when the ECB tells its member banks it is time to reduce leverage...usually a brisk downdraft follows, as the banks start selling stuff off in order to meet their regulators limits.  That's not a liquidity crisis per se, but the reduction in leverage results in money being sucked out of ... wherever it was injected in the first place - mortgages, commercial real estate, equities, etc.

I'm pretty sure I read that ECB told its banks to reduce leverage last year.  If you look at a eurozone-wide chart of total outstanding loans, you can see that loans have dropped since mid-2012 at a pretty steady rate.  Total loans were 18.7T euros June 2012, and are now 17.5T euros now.  The data has a reporting lag of 30 days.  I wish I could post the chart but I'm out of disk space!

I don't believe that particular deleveraging was the proximate cause of the gold crash, however.  It was just a contributing factor.  If the eurozone deleveraging is complete, that might be supportive of gold prices - all commodity prices actually.   We'll only know that when it shows up in the charts, however.

I believe the proximate cause of the gold crash were GLD holders and long futures holders who decided that hyperinflation wasn't happening, and gradually pulled out.  Then the big banks jumped on the downtrend, convincing more of those futures longs to bail, and then hammered the price below support and cleaned up all the way down.  No position size limits allowed them to do this.  It might be a good idea to fix this going forward.

And yes I think leverage provides some serious negative feedback loops.  The margin call at one shop ends up causing selling there, which causes margin calls at another shop, producing more selling.  That's the old 1929 story.  At some point, margin debt is mostly erased, and the selling stops.  In addition, after making absurd amounts of money, the shorts cover - they are the only ones brave enough to buy at the bottom.

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davefairtex
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SSRI, a miner gone nuts

Silver Standard Resources, a miner with a boatload of cash and some mines in unfortunate places like Argentina, is up +13% today acting like one of those junior miners on a good day.  Why is this?

Three days ago when they reported earnings, they had a very bad quarter; they wrote down a big chunk of their book value because of a lower silver price, and they lost money on their mining activity: 19 cents for the quarter at a company selling for $6.50/share.  Ouch!  However, there was one bright light.  I believe it was this bullet point:

Lowered 2013 cash cost guidance: Reduced 2013 cash cost guidance by 18% to between $14.00 and  $15.00 per payable ounce of silver sold and reported second quarter cash costs at Pirquitas of $13.03 per payable ounce of silver sold.

http://finance.yahoo.com/news/silver-standard-reports-second-quarter-002100305.html

In the past 3 days since that report, SSRI has jumped 36%.

The entire mining industry has been beset with constantly escalating costs of production.  It appears that any miner who successfully reins in costs will be...substantially rewarded by the market.  You can bet this lesson isn't lost on managements at other mining companies.

This I would say is one of the more interesting possible catalysts going forward in mining shares overall.

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Hrunner
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Posts: 256
Moral Ambiguity

HughK,

Thanks for your post, I enjoyed reading your response.

Since we seemed to have partially or completely hijacked the PM thread, I'll keep it short and if we want to pursue it further, we can consider opening a new thread.  I really do come to PP to focus on financial issues but I also value the wide-ranging discussion.

Hugh said:

" In fact, I did not villify anyone, including big banks or the government, and that's because I believe an us versus them dichotomy, or a moral vs. immoral mentality whether when it comes to gold buying or just about anything else, is unproductive and also inaccurate, as the world is a more complex place than some of our narratives try to paint it.  In the last paragraph of my post I deliberately said, "dispropoportionately wealthy people of any country," and I did not say that such people were bad, I said that a narrative that paints "us" as little guys, or victims and them (big banks) as bad guys, was questionable."

I guess I either not as morally conflicted/ uncertain as you about this area (and possibly Chris, as he mentioned in his last Off the Cuff he was not sure about the banking cartel's being immoral) and perhaps I have focused on the simple aspects of the situation. 

To say it this way, if you and I play a game of basketball, and you make more shots than I do, without shoving me i.e. fouling me, without traveling or going out of bounds, in other words, without breaking the agreed upon rules, then that is fair and not immoral.  You just have more ability than me in basketball, and you "deserve" to win.

If a commodity market is set up such that producers can offer up certain amounts of commodities for delivery in the future, and sell the futures contract to actual goods on an open and competive market, and there is a separate set of participants who create fake futures contracts, i.e. naked shorting for commodities that they don't produce and don't ever intend to produce, and are sold in the same market and represented as the same as the futures for real goods, then that is simply cheating and it is immoral.  Maybe someone will chime in and tell me the Comex rules allow that through some contorted or back-door route.  If Comex rules technically allow that, then the system is immoral and codifies cheating.  Cheating is wrong.  It is the same as lying.  Cheating and lying to make profit off of participants that are not cheating and lying is wrong.  Profiting from cheating and lying is wrong.  I am not conflicted about this.  This is not complicated to me, but perhaps I am simple.

So if there is a group of market participants that knowingly cheat and profiteer, and a group that is in good faith abiding by the rules, then yes, this fosters an us v. them mentality.

Do you think Chris wants his subscribers to pay for their access with promised payment that they never intend to fulfill?  Do you or Chris have some moral theory or "complexity" where that general behavior is acceptable?  Is there room for judgement and discernment in individual cases?  Yes.  Is that different from a garden-variety cheater?  Yes.  That type of moral ambiguity doesn't seem to be good for society and I am certain will lead to some fairly painful outcomes.
 

Hugh said:

"In other words, the strong are taking from the weak, and that's an importat part of the reason that I am so comfortable and have so much.  JP Morgan is better at it than I am, but every time one of us fills up a car with gasoline that originated in Nigeria, Equatorial Guinea, or Iraq, or buys a bar of silver that contains ore that originated in Guatemala or even Mexico, we are inadvertently part of a political, economic, and military organization that gives us disproportionate benefit at others' expense."

I won't get into a long discussion about leftist views of America.  I think I can speak from experience since I went to a fairly well-known and respected liberal arts university, and I also took numerous university courses in Sociology, Cultural anthropology and others.  I enjoy the life of the mind and want to hear well-reasoned views even if they don't agree with mine.  However, I have found that most of these so-called investigations and academic studies, like a lot of our news media, start with a bias or an agenda that starts from an anti-capitalism, pro-statist mindset, and simply pull together some facts to support their agenda. 

I did see Mr. Diamonds work via a documentary and you summarize it well.  Your view above, and Mr. Diamond's, and the majority of the leftist academic circles comes from a Marxist view of the world that capitalism in general and America in specific has exploited the masses around the world.    Thus the copious uses of words such as "lucky" to describe the American experiment.  Since they 'fundamentally' seek to disprove the concept that one set of values is better than another.  This process happens for whatever reason and despite the track record of one set of values leading to more prosperity and opportunity.  They reject these values, and therefore they must be diminished, possibly destroyed, and replaced with, well, different values.  Leading to world led by a different group of smart elite people who agree with Mr. Diamond and will make everything right, once everyone is collectivized, and all means of production are "controlled" and all social organizations are monitored and 'guided' to think the 'right way'.  Now this may not be Mr. Diamond's overt thesis, but it is the thesis that underpins the left in this country.

While I think Mr. Diamond and others raise some interesting points of history, the flaw is that he focuses on what I believe are less important details and misses the proverbial forest for the trees.  The native American population had thousands of years of non-Western involvement in the same resource-rich environment, yet did not build trans-atlantic ships, develop the printing press, advance medical knowledge, explore the solar system and develop calculus and algebra.  I am not saying they were of lesser value.  I am not saying it was okay to exploit them.  I am saying the culture and value systems of a group have a primary, not a secondary or passing importance as Mr. Diamond proposes, in the successes and advancements of a society.

I think of a football quote about a coach who always seemed to end up with a winning team, which goes to approach, i.e. culture and value system.  It goes "he was such a good coach, he was so good he could take his'uns and beat your'uns, or he would take your'uns and beat his'uns"

Successful cultures that bring widespread opportunity to their members generally thrive whether they are in the desert (Israel) or the Alps (Switzerland).  It may seem unfair and not the way Mr. Diamond wishes it were, but it is repeating pattern.

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Hrunner
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Posts: 256
Dave, Great Answer- Metric for Leverage

Dave,

Great answer.  Very clear explanation of liquidity crisis and the role of the Fed.

I would note that you, Investopedia, and my post all gave different answers to the definition of liquidity-

Hrunner:  Available money (credit, currency) to spend

Investopedia:  Ability to sell an asset without changing its price

Dave:  Amount of cash on hand relative to debt

Maybe these are related, but still look different to my eye.  See what I mean about discussing a concept that has a variable definition, and no agreed metric to measure it?  This makes me nervous since I value clarity and precision.   Perhaps I ask for too much.

I would make a second request of Chris to bring in a guest to talk about leverage and liquidity.

Questions would be about-  Definition of liquidity, are there any measures of liquidity or is this just too loose a term, like "animal spirits"?  Is there a metric we should follow to now when we are in a liquidity crisis?

Leverage.  How is it commonly deployed?  What assets underpin it, serving as collateral?  What levels exist?  Is there a way for investors to track it from a public source?  What are the banking regulations around it?  What is the number where we should get worried?  What are the usual margin requirements for different types of assets (I know the ones for Comex gold and silver trading are public rules, and interestingly are subject to somewhat unpredictable changes) and when do those margins get called?

Maybe someone could point to a blog or expert that specializes in leverage analysis. 

 

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HughK
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S&P vs. HUI/XAU in 2008/2009 and new thread, perhaps

Hrunner,

I was trying to post some screen shots, converted to jpeg format, of charts of the XAU, HUI, and S&P 500 between 01 Jan 2008 and 01 June 2009, in order to ask you, Dave, and the rest of the community for your thoughts, but I always have trouble with posting images here, and currently it's not working right, so that will have to wait.

As far as your post titled "moral ambiguity," I will just limit myself to three replies, and then propose a new thread if I have time/energy to respond more.

My first point would be that leftism and statism don't always go together.  In the 60's it was the far left that prostested against Johnson and Nixon's war in Vietnam, which to me seems anti-statist.  It was also the left that opposed Nixon's imperial presidency, and it was the right that supported Nixon for far too long.  No one could be more anti-statist than the 9/11 truth movement, and you find a lot of people from the far right (Alex Jones) and far left (Gore Vidal) who raise concerns about that event.  Democracy Now, which is clearly far left, spends more journalistic energy on wiretapping, NSA encroachment, and other expansions of state power than almost any other news outlet.  So, I just don't see why leftism and statism go together.  They can go together, but so can rightism and statism.  In fact, you can find different ways in which rightism and statism are seen together in Plato, Hobbes, Edmund Burke, Otto von Bismark, Leon Strauss, Francisco Franco, Benito Mussolini, Augusto Pinochet, Henry Kissenger, Vladimir Putin and Dick Cheney.

Second, you claim that Jared Diamond's thesis in Guns, Germs, and Steel comes from a Marxist view of the world.  Well, I don't know the early history of Diamond's education, but it seems to me, after reading both Guns, Germs, and Steel and Collapse, that Diamond's approach is to use natural experiments to analyze societies and civilizations past and present.  His work brings a great amount of scientific evidence to the social sciences and the thesis above that you criticize is much more science-based than a belief that success is primarily attributed to cultural differences.  It seems to me to be inductive and faulty reasoning that causes you to assert that Diamond's work is based on Marxist philosophy:  university anthropology departments are Marxist and Diamond is an anthropologist, and therefore Diamond's ideas are Marxist. Actually, he has a Ph.D. in physiology from UCLA med school, so that also complicates your argument.

Third, if we go back to the point of labeling people as good and bad, which I don't think is very productive, where does your position that the U.S. has a superior culture put you as far as PM purchases?  You say that it's not okay to exploit people, which means I assume you think it's wrong.  But when we buy PM we indirectly exploit.  Not historically, but right now.  I have a friend in Ecuador who runs a river conservation organization there.  He challenged my idea that it's a good idea to buy gold.  When I quoted Chris, that a good time to sell gold is when one ounce is worth an acre of productive land (far from the current price, obviously), he turned my statement on me and asked how many acres of productive land must be destroyed to produce an ounce of gold.  I'm sure you know as well as I do that PM mining creates a lot of negative externalities - i.e. environmental damage - and much of the cost of that damage is imposed on the local people where the mine is located, who rarely own any gold at all.  Also, the mining industry has a long history of violent treatment of workers and activisits.  The most recent example that I can think of is Tahoe Resources complicity in the murdering of indigenous activists in Guatemala.   Also, weren't several mine workers just killed in South Africa a few months ago? I don't own Tahoe, but it's safe to assume that some of the PM miners I own are just about as rough and irresponsible with respect to the local environment and people where they operate.  Capitalism and negative externalities have gone together in real life, even if they don't go together in some ideal form of capitalism.  So, if you don't like moral ambiguity, then how do you separate your own actions as a consumer and PM buyer from the negative externalities and sometimes the violence associated with mining companies?

I am not a complete relativist, but I still challenge what seems to be your rather black-and-white dualism with respect to right and wrong.

Cheers, and some historical chart questions to come.

Hugh

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5058
more liquidity, capital ratios, risk weighting

Liquidity is all of that.  An asset is liquid if you can sell it rapidly without taking a hit.  Liquidity in a marketplace is the depth of the bid/ask - can you buy and sell without moving the market too much.  Sufficient liquidity for a company means they have enough assets that they can if necessary dump in order to cover short term liabilities.  Liquidity crisis means, not having enough liquid assets handy to cover that short term debt coming due.

The thinly traded junior miners can be quite illiquid; not so much of a problem for you and me, but if one wanted to grab 5000 shares of PVG, you'd likely move the price if you wanted to do it all at once (its volume is 250k-500k...that's per day).  Bid/ask depth is shallow, thus the stock is considered relatively illiquid.  A big guy trying to bail out of 500k shares would take a long time to do so, or else he'd severely depress the price.

Getting liquid means converting hard-to-sell stuff into easy-to-sell stuff.  Converting PVG shares to a 3 month treasury bill, for instance.

You can check a company's liquidity by noting the debt due this year vs the cash (and equivalents) on hand.

Leverage is a great topic.  Our bank regulators determine what amount of leverage (capital adequacy ratio) is reasonably safe for banks.  This directly affects profits.  The safer the bank, the lower the profits - and the lower the bonuses for the executive team, naturally.  The incentive: max out leverage and hope nothing goes wrong.  Except if they guess wrong, they don't end up paying, FDIC and/or depositors pay.  Heads I win...tails you lose.

One might expect that a CAR would be simply risk assets divided by capital, but its not that simple.  Some assets are not counted in the ratio because they are deemed ultimately safe.  Here's an article where the Fed talks about leverage ratios and how the TBTFs need to keep a higher than normal ratio.

http://www.federalreserve.gov/newsevents/press/bcreg/20130709a.htm

Calculating the CAR requires understanding risk-weighting.  Assets are grouped into buckets with varying degrees of risk, indicating how much capital must be held against that asset.  In the eurozone (and possibly here too in the US), sovereign debt has a zero risk weighting, meaning no capital is required to back up purchase of a sovereign bond.  Back up the truck boys, we'll take it all.  Hope the sovereign doesn't default or we're doomed, but in the meantime, we'll get to collect a boatload of interest and collect big bonuses for a job well done.

http://en.wikipedia.org/wiki/Capital_requirement

Basel I described risk weightings:

Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of 0% (for example cash, bullion, home country debt like Treasuries), 20% (securitiations such as MBS rated AAA) 50%, 100% (for example, most corporate debt), and some assets given No Rating. Banks with an international presence are required to hold capital equal to 8% of their risk-weighted assets.

Isn't it interesting that the sovereign needs someone to buy its debt, so its regulators require no capital reserves for...sovereign debt?  It all works, right up until the sovereign defaults.  And then - presto, a sovereign debt crisis immediately turns into a banking crisis!  And who pays the tab?  Not the bank executive teams who made the decisions, nor the regulators who supposedly supervised it all.  Que surprise.

Hrunner's picture
Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
Putin and Hobbes are not Right

HughK,

I agree with many of your points.  I have been actually pointing out to my friends that the Tea Party and the Occupy movement have a lot of overlap in that they both recognize the problems with the current system is using centralized power to enforce a system that harms them and benefits the priviledged few.  The difference is that the Tea Party focuses on the excesses and corruption of government, and the Occupy group focuses on the excesses and corruption of big corporations.  The bigger picture is that the American system is a fascist system that intertwines both, and that they are both equal parts of the problem.  However, I perceive a strong leftist and anarchist strain in the Occupy movement (perhaps I am painting with a broad brush), and a strong limited but strong government and free market capitalism in the Tea Party movement.  Thus they both agree that the current system is bad, just disagree on what utopia looks like.

Either I should have been more clear about the left v. right dichotomy or you are off the mark a bit on your definition.  Your point is well taken that figures historically labeled as 'right' such as Nixon and Cheney (because they are Republicans?) are statists, and I would agree.  But I don't conflate Republican with Right, or more precisely,  Republican with constitutional conservatism.  And I agree with your excellent example of Democracy Now, and there are other 'left-wing' groups that are equally anti-spying that we could find common ground.

The main dichotomy I point to is that there are those groups that believe that the best government is a powerful, all-controlling, all-knowing state, composed of the smart elite of society, to control and tell the unwashed masses what is the correct way to live, in the name of utopia (by force, if necessary) and the American founding ideals of limiting government to the things that are absolutely required for government to do and no more, and the power and sanctity of the individual and the individual's rights and responsibilities.  Fascism, Communism, Marxism, Socialism are all strains of statism, whereas "constitutional conservatism", libertarianism (though not including the "zero government strain" of libertarianism), free market capitalism are all strains of what could be called "Americanism".  Of course clearly American founding ideals had their roots in numerous European political thinkers and philosophers, and the Bible among other sources, but at the end of the day, the founding fathers started with an instinctive fear and distrust of concentrated power, due to the natural tendency of man to end up using power in a corrupt and reckless way that harmed the general population.

By that framework, I would never put Hobbes in the category of constitutional conservative.  While he had strong ideas about individual rights and liberties, the social contract and all that, somehow he ended up in a place where a strong central government to control the masses was required (see "Leviathan").  Putin, Cheney, and Nixon are also examples of belief in a strong central government (progressivism) versus a natural instinct to downsize and prune an invasive government that the founding fathers had.

Sorry, but my analysis of Diamond is based on his actual work, specifically his multi-part documentary based on Guns Germs and Steel.  It was very clear to me that beneath the interesting and perhaps scholarly work looking at cultural forces, his thesis was that America was lucky, not good.  I can't recall one positive thing he had to say about American or European settlement of the New World (perhaps I just missed).  I don't think everything is black and white.  If a wonderful, beautiful society is built next to a super volcano that erupts and eliminates it, well yes that is bad luck and doesn't prove much.  Those rare examples are few.  The common pattern is centralized power leading to temporary success, with increasing corruption, mismanagement, misery and death for the peasants, leading to collapse.  See the Soviet Union, the Roman Empire, and now EU and USA.  I make the judgement about Diamond based on his public work, not based on his associations.  I always find it such an interesting paradox that the statists/ Marxists who claim to be so scholarly and analytical, end up thinking massive central power is a good thing now all of a sudden, considering the total sweep of history.  I guess 'this time it's different'.

I sort of understand and sort of don't understand your last point.  Let me just say I love nature and the environment, and would generally am against large-scale destruction of it.  I don't have a particular love of gold or silver (yes it is shiny and makes for good jewelry), rather my attraction to it is due to its historical value as recognized money, and thus as an insurance policy against crazy and destructive monetary policy of fascist corporations, central banks and central governments.  Gold and silver cannot be vanished with stroke of a keyboard or congressional or presidential pen, cannot be rehypothecated, is globally recognized, and represents a concentrated and portable form of wealth arising exactly from the reasons you cite- it is rare and hard to extract from lots of earth and energy inputs.  However, to your point, the idea of money is something that is a fungible and transferable "marker of wealth".  I would be happy as a clam with a sound money system (google "sound money" if this is unfamiliar) instead of a fiat money system, that used some type of environmentally friendly marker, even an electronic one if it was airtight security, trustworthy and auditable, and was representative of true wealth and not a fractionalized 'promise to pay' wealth.  I.e. a monetary system that did not involve digging up and damaging large swaths of earth and harming many innocent people.

I think we have more in common than you may realize.

H

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 760
Yes, I agree that we have a lot in common

Hi Hrunner,

I definitely agree that we probably have a lot more in common than may meet the eye at first.  Thanks for your thoughtful reply and I will now try to post those images, correctly sized, as I was not able to post them last night.

All the best,

Hugh

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5058
a love fest

We're in severe danger of a love fest.  Imagine that, people here breaking away from the standard left-right dialog that has been imprinted on us through decades of social programming by the establishment.  We need to take the show nationwide.  Its the kind of thing that happens when people talk in a civilized manner and actually listen to what each other is really saying.

Wouldn't it be interesting if, stripped of all the labels and programmed reactions, we were to realize that the vast bulk of intelligent Americans really did agree on most issues, and it was only the games played by the cartel operators and the national defense apparatus using their control over the media that had arranged for us to fight over what are in essence relatively trivial (from an economic standpoint anyway) personal issues for the last 40 years?

jgritter's picture
jgritter
Status: Gold Member (Offline)
Joined: Dec 13 2011
Posts: 273
Gentlemen, Thank You

Gentlemen, thank you, that exchange was wonderful, like walking naked through a cooling intellectual rain after another scorching day in the barren intellectual dessert that our world has become. 

John G

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