Forex Pips – Guide To Profitable Forex Spread Betting Rotating Header Image

Continues

The Central Bank Gold “Shell Game” Continues

Jul 9th, 2010
by admin.
No comments yet

We recently reported the Bank for International Settlements (BIS) has been accepting gold like a “pawn shop” for central banks, but the BIS has since changed its tune. It emailed The Wall Street Journal to say the 346 tonnes of gold it has added to its vaults belong to commercial banks and not to central banks. Sure, anything’s possible… yet this version of events seems unlikely, and we’ll explain why below.

For reference, the gold holdings-related content in question comes from page 171 of the June 2010 BIS Annual Report:

“Included in ‘Gold bars held at central banks’ is SDR 8,160.1 million (346 tonnes) (2009: nil) of gold, which the Bank held in connection with gold swap operations, under which the Bank exchanges currencies for physical gold. The Bank has an obligation to return the gold at the end of the contract.”

This was initially interpreted by The Wall Street Journal as reflecting an increase in gold swaps from central banks looking for cash. However, the WSJ has since corrected itself to say it reflects only gold loaned to the BIS by commercial banks, and not central banks.

Today, an interesting potential explanation for the updated phrasing was offered up by gold forecaster Julian Phillips. From GoldSeek.com:

“The Wall Street Journal informs us that the B.I.S. did these swaps with commercial banks. We know of no commercial bank that has 382 tonnes of gold on their books. It is likely then that should these commercial banks have been in the deal, they would have been acting for a central bank [or several over time] who wished to remain anonymous.”

Phillips provides one of the more palatable explanations for the BIS’ language update. Commercial banks are largely dependent on income-generating assets and securities, and it doesn’t make much sense for them to hold actual physical gold. Further, it does seem logical that a central bank “pawning” its gold would want to make the chain of custody as murky as possible, and involving a commercial bank is a sensible enough way of achieving that end.

If it is true — that central banks are still behind this “biggest gold swap in history” — what’s the significance of the transaction?

Here’s Phillips’ take:

“What is significant about this or these transactions is that gold is being used in international settlements after so many decades of being sidelined in the monetary system! The transaction itself confirms that gold is being used in international settlements, which is a dynamic confirmation of gold’s return to the monetary system.

“A ‘Swap’ might be the first desperate step in such a transaction with the swapping bank hoping to repay the foreign exchange, but should it fail, the B.I.S. would have to decide either to keep the gold on its books or to sell it. Again, keeping it on its books is part confirmation that gold is active again on the monetary system, a big boost by itself! Gold is back and alive in the monetary system!”

Phillips sees this use of gold in international transactions as being even more important than recent increases in gold net purchasing by central banks. Not only are central banks adding to their stores of the yellow metal, but they are also putting the asset to work as a financial instrument.

This story is bound to develop further, and we’ll be here to report back as to exactly which shell this golden “pea” crawled out from under.

You can also read more details in GoldSeek.com coverage of why gold is back as money.

Best,

Rocky Vega,
The Daily Reckoning

The Central Bank Gold “Shell Game” Continues originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
gold

Commercial Real Estate Continues its Drag on the Economy

Jul 6th, 2010
by admin.
No comments yet

In April 2007, we issued a report headlined The Second Wave of the Housing Tsunami: 2007-2011 in which we suggested commercial real estate was likely to be the second shoe to drop in what was already an unnerving collapse in the residential housing market.

Some of the more speculative plays we issued in the report panned out well for those inclined to follow them. A Countrywide put closed at a 417% gain. Another put on the “financial select” SPDR closed up 172%. And a third put on Lowe’s home improvement closed at 93%.

Today, we take another look at commercial real estate (CRE) because, despite headline-grabbing debt crises in Dubai, Greece, California and Illinois, CRE has continued to get worse.

(An aside: During the run-up in housing and commercial real estate, The New York Times Magazine called us “doom enthusiasts” because we saw the bubble brewing and recommended people steer clear and buy gold. It’s getting harder to remain enthusiastic when the doom pervades even the gold market…)

Office vacancy rates hit a near 17-year high in the second quarter, CRE research firm Reis announced today. 17.4% of all American office units for rent are now empty, a 1.4 percentage point rise from this time last year – around the time this supposed “recovery” began.

Since early 2008, when vacancy rates began falling, the total rented office space in the US dropped by 133 million square feet. That’s 4.7 square miles of nationwide empty offices…enough to cover Central Park more than three times over.

To make matters worse: Effective rents (what tenants pay for office space) fell 0.9% from the first quarter and a whole 5.7% from the year earlier.

To the best of our knowledge, rising supply and plummeting prices are signs of a market in trouble…especially considering this great “recovery” we’re in. While stock markets may have rebounded, commercial real estate prices are up only 4.7% from their bottom, says Moody’s. And their nationwide average is still down a stunning 41% from the 2007 top.

Most estimates suggest that US commercial real estate owners are facing over trillion in maturing debt – the kind that will demand refinancing – over the next five years.

One guess which city is not sharing in the depressed commercial market: Washington DC, of course. Only 10% of office space is vacant there, the lowest of the 82 US cities Reis tracks.

Ha.

Addison Wiggin
for The Daily Reckoning

Commercial Real Estate Continues its Drag on the Economy originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
gold

Mortgage Market Mayhem Continues in the Economic Downturn

Jun 15th, 2010
by admin.
No comments yet

Flip ’em on the way up…
Flop ’em on the way down…

Subsidize ’em on the way up…
Subsidize the subsidizer on the way down…

Bloomberg News:

Banks Face Short-Sale Fraud as Home ‘Flopping’ Rises

June 10 (Bloomberg) – Two Connecticut real estate agents found a way to profit in the U.S. housing bust: Buy low, sell fast. Their tactic was also illegal.

Sergio Natera and Anna McElaney are scheduled to be sentenced in Hartford’s federal court in August after pleading guilty to fraud. Their crime involved persuading lenders to approve the sale of homes for less than the balance owed – known as a short sale – without disclosing that there were better offers. They then flipped the houses for a profit.

There is always a way to make money. When prices were rising, unscrupulous speculators made money by pretending houses were worth more than they really were. Now they make money by pretending they’re worth less than they really are.

Trouble is, no one knows exactly what things are worth. They know even less what they’ll be worth tomorrow or the next day.

The theories about economics and markets developed in the last 100 years are almost all nonsense. Markets are not perfect. They do not reflect the actual value of things. There’s no way of knowing what the actual value is. Instead, markets are always discovering value – in fits and starts – imperfectly. They reflect reality and fantasy…the future and the past…math and muddle.

When the feds pushed down interest rates following the ’01 mini recession, homeowners realized that they could own more home with the same monthly payments. Houses suddenly became more valuable. This pushed up prices and led homeowners to conclude that houses were a good investment as well as a good place to hang your hat. And because the value of their collateral had increased, it enticed the mortgage industry to lend more aggressively…and ultimately, recklessly.

Prices moved up even more. Happy days were here.

And then, the market discovered that houses weren’t really worth so much after all. Because the mortgage industry had canoodled with Wall Street and Washington to inflate house prices far beyond what people could afford to pay. The average homeowner could no longer come close to buying the average house. Fannie and Freddie, for example, backed every crackerjack mortgage scheme that came along. And then, wouldn’t you know it, people had mortgage payments they couldn’t meet.

Prices fell. Bummer.

And now comes news that Fannie and Freddie need a bigger bailout:

“Fannie Freddie Fix at 0 billion, trillion worst case…”

Up, down…down, up. Flip ’em…flop ’em. Subsidize them…then rescue the subsidizer.

Even when markets are allowed to operate freely, they can never make up their minds. But at least it’s an honest confusion. Imagine what happens when the feds deliberately distort prices by raising the money supply, holding down interest rates, and subsidizing borrowers.

This week, Sheila Blair, chairwoman of the Federal Deposit Insurance Corporation, admitted that the US government was instrumental in causing the blow up in the housing market. The New York Times:

Deep in a speech she delivered Monday before the Housing Association of Nonprofit Developers – a speech that got surprisingly little attention – Ms. Bair listed her three main recommendations to “put the mortgage industry on a sounder footing.” The first two were the usual suspects: better consumer education and protection, and a reformed securitization market. Her third proposal, however, was a shocker, taking dead aim at one of the most sacrosanct tenets of American politics: the lofty goal of homeownership.

“For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers,” Ms. Bair said. She mentioned some of the many subsidies home buyers get, including the home mortgage interest deduction and the ability to deduct property taxes.

She tossed in Fannie Mae and Freddie Mac, the two “G.S.E.’s” (government-sponsored entities) whose role as a guarantor and securitizer of mortgages greatly expanded the ability of mortgage originators to make loans to home buyers – and which are now, of course, in federal conservatorship, with taxpayers holding the bag for their gargantuan losses.

She also pointed out that during the bubble, when anyone with a pulse could get a mortgage, the percentage of Americans owning homes rose to an unprecedented 69 percent, a number that was greeted with bipartisan hurrahs, but which turned out to be “unsustainable,” Ms. Bair said.

She concluded: “Sustainable homeownership is a worthy national goal. But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may not be the right answer.” Like, you know, renting.

We had no doubt about it. Anyone can make a mistake. But if you want to make a real mess of things, you need taxpayer support.

Bill Bonner
for The Daily Reckoning

Mortgage Market Mayhem Continues in the Economic Downturn originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
gold

Gold Price Hits New High Even as Gold Tax Talk Continues

Jun 8th, 2010
by admin.
No comments yet

Another day, another all-time high:

Record High Gold Price

Chalk up yet another record for gold today, having just eked by its previous record of ,249 an ounce. You know the story by now: The EU debt crisis of today, the US debt crisis of tomorrow and an uncertain stock market… All good for good old gold.

But is it too late to buy some more?

“My short answer is no,” wrote Chris Mayer in yesterday’s Daily Reckoning.

“Gold isn’t is always a good investment… If you bought gold in the 1980s and 1990s, your return was abysmal. So as with all assets, there are times when gold is a really good buy and there are times when it is not. Sounds obvious, but many people seem to want to think that gold is an exception to the order of things. It isn’t…

“But frankly, the gold market is set up perfectly these days. You couldn’t design it better. Bad stuff is happening — see the crisis in Europe. And you can surely bet more bad stuff will happen, given all the debt and leverage that still remains in the system. Even if you don’t know exactly what will happen or when it will happen, you know a monetary crisis is good for gold.

“As an added bonus, gold has a track record, which will attract fans soon enough. And when it does, it can’t really accommodate many buyers, because the market is small. This means the chances of the gold price spiking upward are pretty good. It’s like being in the lifeboat business on the Titanic. No price will seem too high!”

Right on cue – as the value of gold comes back into the spotlight – rumors abound that global governments are mulling some sort of tax on gold profits.

“A special tax on private gold owners’ gains may soon appeal pretty much everywhere,” friend of Agora Adrian Ash wrote recently. “Longtime holders were early and right in spotting the financial crisis ahead – and nobody likes a smart arse, remember. Even more recent buyers are also showing notable gains, and most notably against the fast-sickening euro, too… German and Greek politicians must now be wondering why Europe’s central bank gold sales ended without having a gold tax ready and waiting to keep milking the metal.”

And this, from Alen Mattich of The Wall Street Journal:

“Any assets that can be valued relatively easily and any income flows, whatever their source, that governments can get their hands on will be a temptation for the taxman.

“Is, say, a levy on gold – everybody’s favorite safe haven – impossible?”

Nope.

No official word on all this yet, and of course, this won’t happen without a big fight. But our government has done worse to gold owners before…

Addison Wiggin
for The Daily Reckoning

Gold Price Hits New High Even as Gold Tax Talk Continues originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
gold

Beyond President’s Control the Huge Leak Continues

May 28th, 2010
by admin.
No comments yet

Plugging an oil leak in the Gulf of Mexico 18,000 feet below sea level may be outside of President Obama’s core skill set. The national debt, on the other hand, is at least situated on dry land. 

Perhaps some new clogging strategies practiced on Deepwater Horizon may have additional uses… for the nation’s deeply-underwater deficit spending.

This post came to our attention via Jesse Felder’s post on a massive debt spill.

Beyond President’s Control the Huge Leak Continues originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
gold