Things That Make You Go Hmmm...

Thinker, Trader, Holder. Why?

August 18, 2014

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Thinker, Trader, Holder. Why?

“A desk is a dangerous place from which to view the world.”




“By repetition, each lie becomes an irreversible fact upon which other lies are constructed.”





“Look... we’re getting to be old men, and we’ve spent our lives looking for the weaknesses in one another’s systems. I can see through Eastern values just as you can see through our Western ones. Both of us, I am sure, have experienced ad nauseam the technical satisfactions of this wretched war....”

“People like you should be stopped, Mr. Woodrow,” she mused aloud, with a puzzled shake of her wise head. “You think you’re solving the world’s problems, but actually you’re the problem.”


THINGS THAT MAKE YOU GO HMMM... ....................................................3

France Rebels Against Austerity as Europe’s Recovery Collapses ..............................24

ISIS: A Portrait of the Menace That Is Sweeping My Homeland .................................26

Aye’ll Be Back ..........................................................................................27

Sichuan Plan to Spur Banks to Extend More Mortgage Loans Falls Flat .......................28

The Boomerang Effect: Sanctions on Russia Hit German Economy Hard ......................30

The Great Chinese Exodus ...........................................................................31

“Anti-Putin” Alliance Fraying ........................................................................33

Another Piece Falls into Place? ......................................................................34

Europe Risks Deeper Economic Crisis as Russia Buckles and Defaults Mount in Ukraine ...36

CHARTS THAT MAKE YOU GO HMMM... ..................................................38

WORDS THAT MAKE YOU GO HMMM... ...................................................41

AND FINALLY... .............................................................................42

Things That Make You Go Hmmm...

Sometimes, just sometimes, you need to stop for a second, take a step back, and reconsider the simplest pieces of any puzzle.


David John Moore Cornwall was a real-life spy. A spook. An agent. He worked for Britain’s MI5 and, later, MI6 intelligence services.

Whilst there, Cornwall began a little hobby that, in today’s world, would be unthinkable for a serving intelligence officer: writing novels about the secret world in which he lived and worked.

He chose a nom de plume with a certain je ne sais quoi: John le Carré. The hero of le Carré’s first two novels, Call for the Dead and A Murder of Quality, was George Smiley, a somewhat ordinary spy who grew up in a middle class family and attended an “antiquated Oxford college of no real distinction” but who, apparently, had “the cunning of Satan and the conscience of a virgin.”

Smiley was everything other spies of the time — fictional ones, at least — weren’t:


(Wikipedia): The spy novel writing of John le Carré stands in contrast to the physical action and moral certainty of the James Bond thriller established by Ian Fleming in the mid 1950s; the le Carré Cold War features unheroic political functionaries aware of the moral ambiguity of their work, and engaged in psychological more than physical drama. They experience little of the violence typically encountered in action thrillers, and have very little recourse to gadgets. Much of the conflict is internal, rather than external and visible.

Unlike the moral certainty of Fleming’s British Secret Service adventures, le Carré’s Circus spy stories are morally complex. They emphasise the fallibility of Western democracy and of the secret services protecting it, often implying the possibility of East-West moral equivalence...

In 1979, the BBC adapted what is perhaps le Carré’s most famous novel for television, casting the great Alec Guinness as Smiley in a seven-part miniseries that changed the face of television.

The series, Tinker, Tailor, Soldier, Spy, was a smash hit in a time before box sets and gratuitous action scenes; and despite its measured, almost glacial pace, millions tuned in each week to watch le Carré’s masterpiece of cross and double-cross unfold before their eyes.

The fictional Smiley operated during the very real Cold War between NATO and signatories to the Warsaw Treaty Organization of Friendship, Cooperation, and Mutual Assistance. (Those communist countries LOVED a good, long title. We in the West called it the Warsaw Pact, and it essentially included the Soviet Union, Bulgaria, Czechoslovakia, Yugoslavia, East Germany, Hungary, and Poland. You know, all the powerhouses.)

Looking back on it now, the Cold War was more Ali vs. Cooperman than Batman vs. Superman; but at the time, the world lived in fear of a cataclysmic resolution to the conflict. It seems like a lifetime ago; but those years between 1946 and 1991, when communism finally gave up the ghost, were fraught with fears over a rogue USSR.

Throughout the entire episode, the price of gold — the ultimate barometer of fear — performed as one would have expected it to — once Richard Nixon removed the shackles on August 15, 1971, of course.


Fear of conflagrations along the borders of the Soviet Union led to consistent buying of gold year after year and decade after decade. Yes, there were flare-ups, during which gold saw large spikes; but as “immediate” dangers eased, so did the price — exactly as one would expect.

To be fair, it wasn’t all about “those darn Russkies.” No. The gold price was certainly helped higher by an irritating inflation problem (as you can clearly see from the chart on the previous page). Once Nixon closed that damn window, gold wasted no time in playing catch-up and responding to inflationary pressure as well as to perceived Cold War threats; but either way, once the downward pressure of a fixed price was removed, gold exploded higher — rising 82% in the first 12 months and 419% in the space of 4 years.

There are a couple of interesting points to make about the action of the gold price during those darkest of postwar days (points I’ve made before, but will expand upon this week).

Let’s begin with Asia.

During the 1980s and 1990s, Asian central bank reserves (particularly gold reserves) were nothing to write home about. Thanks to the IMF and the World Bank, we can see exactly what they were:


As you can see, the huge run-up in the gold price during the 1970s occurred against a highly inflationary backdrop and the ongoing Cold War; but, crucially, WITHOUT THE PARTICIPATION OF ASIAN CENTRAL BANKS. (The IFC — part of the World Bank — classifies “East Asia & The Pacific” as China, Indonesia, Japan, Laos, Mongolia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, as well as the Pacific Islands).


If we switch our focus to those same countries’ total reserves, however, a completely different story emerges. From the mid-1990s onwards, total currency reserves soared from $300 billion in 1994 to $5.8 trillion by the end of 2013.

That relentless climb has given Asian nations two things they didn’t have the last time we saw gold being chased higher by the terror of surging inflation and the spectre of a large-scale conflict between opposing blocs: extraordinary purchasing power and the need to diversify their massive holdings of US dollars.

If we throw India into the picture (India is classified as part of South Asia by the IFC/World Bank, along with Bangladesh, Bhutan, the Maldives, Nepal, and Sri Lanka — countries we will leave out of this discussion for now), we can see a microcosm of that build-up in purchasing power laid out very clearly indeed:


Indian reserves doubled between 2008 and 2009, and by 2012 they had tripled to almost $300 billion.

Why is India so important on its own? Well, for one very good reason:


Yes, as anybody who follows the space knows only too well, Indians love their physical gold; and, unlike their counterparts in the West, when they have money to save, they have no hang-ups about swapping cash for hard yellow lumps of metal. Until February of this year, they were the largest buyers of gold in the world. By a long, long way. Now, however, the Chinese have overtaken them:

(WSJ): Gold’s wild ride has shaken investors. But in China, buyers just keep stepping up to the plate.

Chinese demand for gold bars, coins and jewelry soared by 32% to record levels in 2013, even as the price of gold slumped 28%.

The surge in buying saw China overtake India as the world’s top consumer of physical gold, importing 1,066 metric tons of the metal to India’s 975 metric tons in 2013, according to new data from the World Gold Council. (A metric ton is equal to 2,204.6 pounds.)

“When prices drop, there’ll always be buyers,” said Jiang Shu, senior gold analyst at Industrial Bank in Shanghai.

In India, consumption increased by 13% but further growth was curbed by import restrictions aimed at narrowing the country’s current-account deficit. The council estimates around 200 metric tons was smuggled into the country.

China’s lead over India as the world’s top importer is likely to be sustained, said Marcus Grubb, the council’s managing director of investment strategy.

“China is 10 years behind India in terms of deregulation and growth of demand,” Mr. Grubb said. “Given last year was such a strong year, it will be hard to equal that again in 2014, [but] the stock of gold in China is less than half of that in India, so we think there’s plenty more room to grow.”

But — and I’ve talked about this before — it’s the metal they want to own. Period. Not futures. Metal.

Oh... and not ETFs, either.

In 1966, the Central Fund of Canada listed the world’s first exchange-tradeable gold product (a closed-end fund) on the Toronto Stock Exchange, which amended its articles of incorporation in 1983 to allow investors to “directly” own gold and silver bullion through an ETP; but the first gold-backed ETF began trading in Australia in March, 2003. A decade on, there was an estimated $132 billion invested in gold ETPs around the globe, with notional holdings of well over 2,500 tonnes.

Again, back in the 1970s there was no market for gold proxies like ETFs. There was therefore less demand overall, because owning gold meant... well... owning gold. And physical ownership added one other important dynamic: selling gold wasn’t something you did just because the price fell a percent or two.

That behaviour has hardly applied during corrections in the recent bull market in gold:


As you can see, in 2013, outflows from the gold-backed–ETF universe were greater than the cumulative inflows from the previous three years. That simply couldn’t have happened in the last big gold bull market.

Selling gold (or something representing itself to be as good as gold), just like buying it, has become too damn easy. But if we go back to that piece from the Wall Street Journal that discusses China’s taking over the top rung on the ladder of gold-buying nations, one key sentence stands out:

“When prices drop, there’ll always be buyers,” said Jiang Shu, senior gold analyst at Industrial Bank in Shanghai.

That’s very much the view of Asian investors and analysts. The lower the price, the greater the demand; and that fact was most certainly in evidence in 2012’s rout. Their opinion is based on an understanding of gold’s place in the hearts and minds of people on this side of the globe — an understanding that is lost on many of their Western peers, who have more of a trading bias.

But here’s where things get a little hard to reconcile.

On one side of the gold ledger we have massively increased investment demand, which admittedly is somewhat flighty, as a lot of it is due to traders moving in and out of gold in order to make a buck or two. But, as the massive increase in gold held by ETFs demonstrates, such trading is most definitely an addition to the demand side of the equation. On the demand side of the ledger we also have hugely increased currency reserves at the central banks of nations with a solid disposition towards owning physical gold — nations that, when the price goes down, buy it hand over fist.

On the supply side things get even more interesting.

In its just-released “Gold Demand Trends” report for Q2 2014, the World Gold Council had the following to say about supply:

(WGC): During the second quarter, 98.2 additional tonnes of gold were supplied to the market compared with Q2 2013. This 10% increase was almost solely due to growth in mine supply; recycling was little changed. Year-to-date, supply is up 5% as the impact of fresh hedging and mine production growth outweighed an 8% decline in recycling activity.

Mine production increased by 4% for a second consecutive quarter, although 2014 is likely to be the peak. Producers have, over recent quarters, implemented a range of operational measures to manage costs and improve efficiency. This trend continued through Q2, but we expect this impact to tail off throughout the remainder of 2014 as the scope for producers to implement further measures recedes.

Mine production over the year-to-date has benefited significantly from positive base effects in the supply pipeline. A number of new operations came on stream over the past year or two, notably in Canada and the Dominican Republic. Incremental growth generated by the ramp up in production at these projects has had a considerable impact on total supply. However, as these operations mature, year-on-year growth will decelerate as the base periods drop out of the comparison, further exaggerating the slowdown in supply in the second half of the year.

So record supply, but still a miserly increase YoY of just 4%, which is expected to be the peak as the rate of increase reverts to its more customary 2.5% in the coming years and recycled gold (i.e. melted-down jewelry, etc.) continues to decline.


But there’s one more vital piece of this puzzle that we need to throw into the mix before we try to reach any conclusions. And that, of course, is the actions of our old friends the central banks.

Take a look at the chart below:


Notice anything strange?

After the London Gold Pool collapsed in March 1968 and the metal was finally allowed to find its own market price (stop sniggering at the back), central banks slowly built up their reserves again before beginning to sell.

And continuing to sell.

From the end of Q2 1974, central banks sold gold bullion into the market remorselessly as the price soared. They represented by far the biggest supply to the market during this time; and while it makes sense to steadily sell something into a rising market, in times of escalating tensions the normal response is to buy and hoard gold. Selling it? Well, that would just help depress the price, surely?

One has to wonder what price gold might have reached had the central banks not been so magnanimous as to reduce their holdings during that period.

Anyway, reduce them they did — right up until the fall of communism and the end of the Cold War.

Then once the Cold War was over they sold even harder.

With no further threat from those darn commies, central banks were finally able to sell could step up the pace at which they sold their gold. Between December 1991 and September 1999, central bank gold holdings fell 6% — or roughly 68 million ounces — that’s roughly 1,900 tonnes.

Then, on September 26, 1999, Österreichische Nationalbank (Austria), Banca d’Italia (Italy), Banque de France (duh), Banco de Portugal (easy), Schweizerische Nationalbank (Switzerland), Banque Nationale de Belgique (Belgium), Banque Centrale du Luxembourg (no clues), Deutsche Bundesbank (remember them?), Banco de España (that’d be Spain), Bank of England (...), Suomen Pankki (tough one... clue: sharks have them), De Nederlandsche Bank (Holland and the Netherlands are the same country, apparently), Central Bank of Ireland, Sveriges Riksbank (clue: flat-pack furniture), and the European Central Bank all signed the Washington Agreement on Gold.

This agreement created a cartel of central banks that controlled the majority of the gold market “limited” gold sales to 400 tonnes a year amongst the signatories and was intended (so they said) to “ease pressure” on the gold market after Gordon Brown’s ridiculously suspicious or, at best, childishly naive brilliantly conceived announcement of upcoming sales of the Bank of England’s gold, which pushed the price to generational lows.

In fairness, you have to admire the scheme:

First, get one of your number do something so stupid that most people would believe it could only be an idiotic mistake. Check.

Second, get a bunch of your number together to sign an agreement that would “limit” sales of gold so as to make it look as though you were concerned about a falling price. Check.

Third, enshrine in that document an annual limit far above the normal pace of sales. Check.

Fourth, sell hell for leather. Check.


(The above chart represents ALL reported central bank activity — not just that of the signatories to the Washington Agreements, which explains the periods where sales exceeded the agreed limit.)

Call me old-fashioned if you will, but I don’t see too many years prior to the signing of the first Washington Agreement when those kindly central banks’ “limiting” gold sales to 400 tonnes would have made a difference, do you? They sure picked up the pace once it was signed, though...

Then, in 2009, after the GFC had scared the world half to death (Remember that? When the world was going to end and equity markets halved in a matter of a few months? No? Google it.), central banks — the largest source of supply to the market — performed a graceless volte-face and began buying. En masse.

Notably, the major Western central banks didn’t take part in the buying spree, as they already had a sizeable percentage of their reserves in gold. No. The buyers were the Eastern and Middle Eastern central banks — countries like, oh, Turkey for instance, which, in December 2011 made a rather stunning announcement:

(WSJ): Turkey lifted its gold reserves by a hefty 1.328 million troy ounces, or 30%, last month as central banks around the world maintained their positions as net buyers of the precious metal.

According to data from the International Monetary Fund, the Turkish central bank increased its gold reserves to 5.758 million ounces in November, from 4.429 million ounces the month prior. This followed a rise of 697,000 ounces in October, the latest IMF figures show....

Prior to the purchases, Turkey had the 30th-largest official holding of gold in the world, at around 7% of its foreign reserves, according to the World Gold Council, an industry body. It is now likely to have the 22nd-largest official holdings following the additions.

Turkey’s 5.758 million ounces equates to about 163 tonnes.

That was December 2011.

See if you can spot something interesting in this table (which comes to you courtesy of the World Gold Council, and all numbers are as of March 2014):



Gold Holdings (tonnes)

Gold’s Share of Reserves


United States
































































Saudi Arabia




United Kingdom











Since that “hefty” 30% increase in its gold reserves waaaaay back in December 2011, Turkey has increased them again — by (what’s a good word for 10x? Hefty?) 314% — which has taken its gold reserve to a not-so-whopping 16% of total reserves.

OK... so same table, different way of looking at it:




Gold Holdings

Gold’s Share
of Reserves


Gold Holdings

Gold’s Share
of Reserves

United States

















































Eastern central banks have been rapidly accumulating gold in order to diversify their reserves away from the US dollar (and, for that matter, the euro); and while we’ve already seen India’s hunger for the yellow metal, amongst that group nobody has been a more consistent buyer than everybody’s favourite nemesis — Russia:


Since 2006, the Central Bank of Russia has made net monthly sales of gold on only four occasions and has stood pat on 12 others. Every other month has seen an increase in their gold holdings.

Who said Russians were unpredictable and inconsistent?

Away from the East, another juggernaut has been making some moves of its own in the gold market the last couple of years, as this story from back in early 2013 demonstrates:

( The Central Bank of Brazil added 14.7 tonnes of gold to its reserves in November, the latest in a series of purchases that has seen its gold holdings increase by 90% since September.

It now possesses 67.2 tonnes of gold, according to the latest World Gold Council (WGC) figures, an increase of 31.9 tonnes in the three-month period. At today’s London am fix that equates to $1.7 billion worth of additional gold.

Gold now comprises 1% of Brazil’s international reserves. The purchases over the last three months represent the central bank’s first significant gold trades in a decade. Brazil’s holdings have remained steady since it shed over three quarters of its gold between 1999 and 2001.


Interesting chart. I think it’s safe to file that one under “policy change,” don’t you?

Somebody asked the WGC what they thought about Brazil’s sudden splurge in the gold market:

( Marcus Grubb, the managing director of Investment at the WGC, attributes the purchase to the central bank diversifying away from its dollar holdings.

“I was surprised with the timing of the purchase, but not the logic behind the move. I think it mirrors what some of the other central banks in countries with surpluses and large reserves have been doing,” he said.

“The issue with those countries — in Asia and Latin America — they all now find themselves over-dependent on the dollar and the euro, and assets denominated in those currencies. They want to diversify their reserve assets away from them.”

Hmmm... then somebody asked the Brazilian Central Bank for their take on things:

A Central Bank of Brazil spokesperson was unwilling to comment on the motivation behind the gold purchases.

Of course.

Now here’s the kicker: that huge increase takes Brazil’s gold as a percentage of their total foreign reserves to (drumroll, please)... 0.8%.

So, we see some strong buying of gold on the part of Brazil, Russia, and India; but, of course, in the end any discussion on central bank gold buying has to come back to China.


As you can see, the BRIC countries have all significantly increased gold as a percentage of their reserves in recent years — with Russia’s being the most consistent of the four — but after almost five years of deafening silence we can only hazard a guess at what the PBoC is doing.

Why only guess? Well, because the Chinese don’t want us to know what they’re doing; and handily for them, the rest of the world is willing to play along, as an expert recently pointed out in the International Business Times:

(IBT): “There’s a concerted effort to diversify to some extent away from the U.S. bond market, U.S. dollars, and buy hard assets like gold, China being the leader,” [Scott] Carter [CEO of LearCapital] told IBTimes.

So far, so good, Mr. Carter...

“With China, they want to obtain enough gold to back their currency,” he continued.

I’m with you, buddy. All the way...

In a decade, China could have 6,000 to 8,000 tons of gold backing the Chinese yuan, which could be a “game-changer” in global markets in terms of reserve and dominant currencies, he said.

Ah... and you were doing SO well.

Mr. Carter kind of half got the point, in that China’s having 6,000 to 8,000 tonnes and backing its currency with it would be a gamechanger; but, like so many others, he bases his assumptions on playing along with the Chinese reluctance to disclose the true amount of gold held in the vaults of the PBoC.

If you really want to understand what the reality might very well be, then from time to time you need to take a little leap of imagination when considering the activities of the Chinese Central Bank and open your mind to possibilities that the mainstream just refuses to entertain.

Nobody — and I mean nobody — does that better than my friend Koos Jansen.

Koos watches gold data more closely than just about anybody else in the world (Nick Laird, if you’re reading this, you’ve still got Southern Hemisphere bragging rights, my friend); and, crucially, he is one of the few who is happy to ignore what he’s told by officials and do the math himself.

Now, when it comes to gold and China, that takes an incredible amount of hard work. However, when he does that work, the numbers Koos comes up with are quite extraordinary and — for my money — likely to be far more accurate than anything coming out of the PBoC.

In a post that ANYBODY who has even a passing interest in gold should read, Koos diligently established that the Chinese had probably been a net importer since the 1990s. From there, he painstakingly joined the dots:

(Koos Jansen): [W]e don’t know how much of the gold China domestically mined prior to [the 1990s] has been exported, but after, lets say, 1995 all domestic mining did not leave the mainland. My best estimate of how much gold was being held among the Chinese population in 1995 is 2500 tonnes, according to Albert Cheng from the World Gold Council (page 55). Starting from that year I will try to make a conservative estimate on how much gold the Chinese have been accumulating.

According to the PBOC their official reserves in 1995 accounted for 394 tonnes, Chinese mines produced 108 tonnes that year; our starting point is 3002 tonnes (2500 + 394 + 108) in 1995. Subsequently I added yearly domestic mining, cumulative, as the Chinese didn’t net export any gold since that year. In 2001 The PBOC announced their official reserves had increased to 500 tonnes and in 2003 they announced having 600 tonnes. Because the gold market wasn’t fully liberalized in those years, I have subtracted these gains from cumulative domestic mining. Just to be on the conservative side, also because I have zero trade data from 1995-2001.

The official subsequent update to 1054 tonnes by the PBOC was in 2009, when the gold market was fully liberalized. This gain I didn’t subtract from cumulative domestic mining, as I believe this was imported monetary gold. The increase in PBOC holdings from here on is pure guessing, though I feel comfortable raising their holdings to 3500 tonnes in 2013.

Import I have calculated using Hong Kong net exports to the mainland (my data begins in 2001), net gold imports numbers disclosed by Chinese gold reports (2007-2011) and analysing SGE withdrawals (2007-2013), using the equation:

mine + scrap + import = SGE withdrawals

import = SGE withdrawals — scrap — mine

The end result is [the chart below].

The chart ... I think is conservative as it excludes hidden demand on which I have no hard numbers (yet):

- Mainland tourist buying jewelry in Hong Kong and storing it locally or bringing it home.

- Potential gold smuggling via tunnels from Hong Kong into the mainland.

- Undeclared gold import by affluent Chinese circumventing all authorities (customs, SGE).

Taking this into account, it’s safe to say there is now more than 14,000 metric tonnes of gold in China mainland. Divided by 1.3 billion people that’s 10.7 grams of gold per capita.


(Please note that I have updated this chart to include Koos’ latest numbers, as the original ones in the article didn’t yet include the numbers for 2014.)

If you care about gold and you’re not following Koos, then you should be. You can do so at his website by clicking HERE or on Twitter by clicking @KoosJansen.

Now, stop for a second and just imagine what would happen if the world-at-large didn’t wait to have numbers like Koos’ officially confirmed but instead made the kinds of thoroughly vetted assumptions that Koos does after sifting diligently through the data.

Back in the day, it used to be called research.

If the PBoC’s holding “6,000 to 8,000 tonnes would be a gamechanger,” what effect does would their holding nearly 15,000 tonnes have, I wonder?

I wonder.

Before we finish this week’s somewhat lengthy missive (though, in fairness, there has been a lot of real estate devoted to charts), there are a couple more points worth pondering.

Firstly, we need to take a look at what the central banks as a group have done in the face of panic in recent years. When we do, we see that they may not always have things quite as securely “under control” as their minutes and press conferences — littered with explanations of how everything is “meeting expectations” — would have you believe.

The chart below is a close-up of the period from January 2009 to July 2014:


Seems to me that, when 2008 came out of the clear blue sky and blindsided every central banker in the world (the situation was “contained,” I believe they said...), they panicked just like everybody else; and when they did, where did they run? Yup. To gold.

When QE1 ended and equity markets fell out of bed once again, guess what? Yup. Another sudden panicky-looking dash into the ultimate safe-haven asset — our old friend gold.

In fairness to this group of geniuses, they at least got the joke after that and bought steadily for almost three years, though, as we’ve seen, some of them bought harder than others.

Now we stand on the brink of another possible war between NATO and Russia as tensions over Ukraine ratchet ever higher.

We’ve already seen the effect the last threat had on gold, so how do things stack up this time around?

Well, funnily enough, for once this time really is different; and the New Cold War is, as you can see from the chart below, apparently not even remotely troubling. In fact, gold is trading below where it was when the Russians first dipped their toes in Ukraine to test the water:



So when it comes to gold, there are the thinkers, like Koos; there are the traders, like the millions day-trading GLD for a penny here and there; and then there are the holders.

The question for all of them is the same: why?

Traders of gold don’t want anything to do with physical gold. They are happy trading pieces of paper — scrapping amongst each other for pennies (and in some cases making a lot of them), but the “gold” they buy and sell could just as easily be Microsoft shares or an ETF that tracks lumber. It’s all about the price — not the ownership.

Many investors who claim to “own” gold as an insurance policy do so through the ownership of ETFs such as GLD. That’s just not the same as owning metal, I’m afraid. Doing that, you’re simply one of the traders. You’re NOT a holder.

Individuals (and institutions) who buy physical gold and hold it, unencumbered, outside the banking system are true holders. They aren’t about to alter their position in any meaningful way just because the price moves a few percent against them (or, for that matter, for them). They own gold as an insurance policy, and until the reason for owning it is proven wrong, they hold onto it.

That just leaves the central banks.

One could make the case that, given their consistent selling over a 40-year period, they are anything but holders. One could also say that, given the sudden about-face they made in 2009, they are nothing but traders (though trading far bigger trendlines than most).

But the simple truth is that, just like the investing public, they too are split — though not into traders and holders but rather, it would seem, into holders and buyers.

Ask yourself these four questions:

The last time the world faced a meaningful threat of a large-scale conflict between East and West, the gold price soared. This time it hasn’t moved. Why?

With gold consistently pouring into Eastern Central Bank vaults in exchange for dollars, what happens if there is another sudden panic of some sort and investors (including central banks) suddenly decide to stampede into gold en masse like they did in 2009?

Why are the most rapacious buyers of physical gold a group of countries that last time we saw an exponential rise in the gold price had no meaningful currency reserves but that now amongst them own a staggering 46% of total global reserves?

If you had the power to create money out of thin air as, for example, the PBoC can, can you think of a reason why you might want to convert as much of it into gold as you possibly could?

Just like George Smiley, if you can come up with plausible answers to these questions, you might just be able to figure out the ending to a tale of intrigue that has captivated millions around the globe.

I know how I think the story ends.


A reader recently sent me an email asking if I’d been “muzzled,” as I hadn’t written about gold in a long, long time. My answer was that, far from being muzzled, I had found so many other interesting things to write about and that gold had been rather boring of late.

However, I have a feeling that things are about to get very interesting again in that little corner of the investing world.

This week is bookended by Ambrose Evans-Pritchard, who takes on the disastrous growth numbers in Europe as well as the French rebellion against austerity and the stand-off over Ukraine.

Between his words of wisdom, we travel to the Middle East to take a look at the nightmare that is ISIS, to Scotland to try to assess the landscape AFTER the upcoming referendum, and to China, where plans to increase mortgage lending have come unstuck.

Russian sanctions are starting to bite — and bite hard — in Germany as the anti-Putin alliance begins to fray; China’s leaders are watching the millions leaving their shores with great interest; and my great friend David Hay of Evergreen in Seattle conjures up his usual elegant prose to describe another piece that may have just fallen into place in a troubling puzzle.

Charts of the currency war, consumer sentiment, and stock buybacks set us up nicely for interviews with Jim Rickards (who talks to Peter Schiff about this week’s subject matter — gold), the wonderful Bill Fleckenstein (who waxes lyrical on a range of subjects including the bond market and gold) and Passport Capital’s John Burbank (who explains why he’s bullish, extremely cautious — and thinking about 1987).

Finally, if you want a glimpse into the future, check out the video on page 42. I wonder if there’s a robot out there just waiting to render me obsolete?

Answer on a postcard, please.

Until Next Time...


France rebels against austerity as Europe’s recovery collapses

Eurozone strategy is in tatters after economic recovery ground to a halt across the region and France demanded a radical shift in policy, warning that austerity overkill is driving Europe into a depression.

Growth slumped to zero in the second quarter, with Germany contracting by 0.2pc and France once again stuck at zero. Italy is already in a triple-dip recession.

Yields on 10-year German Bunds fell below 1pc for the first time in history, beneath levels seen during the most extreme episodes of deflation in the 19th century. French yields also touch record lows. Much of the eurozone is replicating the pattern seen in Japan as it slid into a deflation trap in the late 1990s.

It is unclear whether tumbling yields are primarily a warning signal of stagnation ahead or a bet by investors that the European Central Bank will soon be forced to launch quantitative easing, buying government bonds across the board.

Michel Sapin, France’s finance minister, sent tremors through European capitals with a defiant warning that his country would no longer try to meet its deficit targets and would not inflict further damage on its economy by tightening into the downturn. “I refuse to raise taxes to close any budget gaps,” he said.

“What is absolutely necessary is to adjust the pace of deficit reduction to the exceptional situation we are in today. Growth is too weak in Europe and inflation is too low. We must therefore stop reinforcing the causes of this depression,” he told RTL television.

“We must face the figures in front of us with realism. The truth is that, contrary to the forecasts of the International Monetary Fund and the [European] Commission, growth has broken down, both in France and in Europe.”


He halved his French growth forecast to 0.5pc this year and to little more than 1pc next year, too weak to stop unemployment hitting fresh highs. The IMF has already warned that there will be no job growth until 2016.

Germany has so far refused to yield any ground on austerity policies but is increasingly vulnerable. Revised data show that the economy has been far weaker than thought over the past two years, falling into a significant double-dip recession last year. Professor Paul De Grauwe, from the London School of Economics, said: “They are victims of their own folly. Germany needs massive investment in its energy sector and it should be doing it now while it can borrow for almost nothing.”

Mr De Grauwe said EMU elites have misdiagnosed the cause of Europe’s intractable slump, blaming it on lack of reform when it is in reality a “demand crisis” made worse by a debt purge since the financial crisis. “They are doing everything they can to stop recovery taking off, so they should not be surprised if there is, in fact, no take-off,” he said.

“It is balanced-budget fundamentalism and it has become religious. We know from the 1930s that if everybody is trying to pay off debt and the government then deleverages at the same time, the result is a downward spiral. The rigidities in the European economy have absolutely nothing to do with the problem we face today.”

Many German economists said one-off factors explained the “sudden stop” in the second quarter but Berlin’s Institute for Economic Research (DIW) warned that deeper forces may be at work, with a risk of recession as Germany suffers the blowback effects from sanctions against Russia. “The economy may shrink again in the third quarter,” it said....

*** Ambrose Evans-Pritchard / link

Isis: a portrait of the menace that is sweeping my homeland

Abu al-Mutasim, 18, from a Syrian border town in the province of Deir Ezzor, joined the rebellion against the regime of President Bashar al-Assad in early 2012. He left his family home in Bahrain, where his parents worked, and fought for the Free Syrian Army for a few months before joining the hardline group Ahrar al-Sham. Around the end of the year, disillusioned, he went to visit his family. His parents banned him from travelling back to Syria. But last summer he returned to join the Islamic State in Iraq and Syria (Isis), now renamed the Islamic State.

I asked him what he would do if his father were a member of Jabhat al-Nusra, al-Qaida’s official franchise in Syria, and the two met in a battle. “I would kill him,” he replied firmly. “Abu Ubaida [a prophet’s companion] killed his father in battle.” What drives people such as al-Mutasim? I faced this question directly recently, as I saw Deir Ezzor, the province where I too come from, overrun by Isis, and as the group carried out some of the Syrian conflict’s grisliest atrocities.

Isis, a Salafi jihadist force, evolved out of a group founded by Abu Musab al-Zarqawi, a Jordanian militant who moved to Iraq after the US invasion of Afghanistan in 2002. He later launched al-Qaida in Iraq, responsible for the bombing of the Askari mosque in Samarra that triggered Iraq’s 2006-07 civil war. Renamed the Islamic State in Iraq after its leader was killed in a US raid in 2006, it was weakened in 2007 after US forces aligned with Sunni Iraqi tribes to fight the group.

The Syrian conflict revived Isis, which provided support to one of its members, Abu Mohammed al-Jaulani, to form a group in Syria after the 2011 uprising. In April 2013 the group’s current leader, Abu Bakr al-Baghdadi, announced a merger between his group and Jabhat al-Nusra, under the name of Islamic State in Iraq and Syria. The merger was rejected by Jabhat al-Nusra and most of its foreign jihadists then defected to Isis. Since then Isis has been at war with Syrian rebels to impose itself as a state that accepts no other group acting in rebel-held areas unless they pledge allegiance to it. On 29 June, on the first day of Ramadan, Isis announced that al-Baghdadi was “elected” by the Shura Council as a caliph for all Muslims, and changed its name to the Islamic State.

Deir Ezzor is the fifth province in Iraq and Syria so far to experience the group’s model of governance, a strategy so extreme that al-Qaida formally disavowed the group in February. Isis’s first wave of sweeping victories was in the Sunni provinces of Nineveh and Salaheddin in June. It then benefited from the massive stockpiles of weapons it captured, as well as the momentum it gained in morale and fear, to conquer new areas in Syria, often with little resistance. After taking over Deir Ezzor, the group is now advancing northwards in the Aleppo countryside.

From a military perspective, Isis thrived on the disunity of the Syrian rebels and the inconsistencies of their backers. When al-Baghdadi announced the merger between his group in Iraq and Jabhat al-Nusra, the group started to act as a state in rebel-held areas. Despite its low numbers, Isis established a reign of terror in many areas across Syria. It alienated most of the rebel groups by creating smothering checkpoints, confiscating weapons and imposing its ideology on the local population, something Jabhat al-Nusra had avoided.

By the end of last year, all rebel groups declared war against Isis and drove it out of Idlib, most of Aleppo and Deir Ezzor. But the war cost the rebels a lot: around 7,000 people were killed in the battles against Isis and the main rebel coalitions started to disintegrate as a result of the fighting. The Islamic Front, once the most powerful rebel coalition, is now a shell of its former self. Jabhat al-Nusra, once the most effective rebel group, is struggling to halt the drifting of its fighters or sympathisers to Isis, especially after it lost its stronghold in Deir Ezzor.

The disintegration of these groups was accelerated by the fact that many of their rank and file, as well as commanders, either sympathised with Isis or were reluctant to direct their guns to any party other than the Syrian regime. After all, groups such as Ahrar al-Sham had links to al-Qaida and held similar views to Isis, even if their leaders disputed with Isis over territories....

*** uk guardian / link

Aye’ll be back

David Cameron reckons people should think jolly hard before they vote in Scotland’s upcoming referendum on independence. As he and other unionist leaders often argue, the result on September 18th will be irreversible and binding. Should Scots leave the United Kingdom and then change their minds, they will just have to lump it. Such entreaties seem to be working: the “no” to independence campaign has a comfortable poll lead.


A second warning lurks between the lines: if they vote “no”, Scots had better accept that outcome, too. There should be no “neverendum”; the term applied to Quebec’s decades-long deliberations over breaking from Canada. Whether or not this message will go heeded is less certain. The reason can be found in the comparison between the “yes” and “no” campaigns.

In Bathgate, a commuter town in West Lothian, a huddle in a windswept car park exemplifies Better Together, the official pro-union outfit. These activists are motivated not by grand ideals but a grudging acceptance that the referendum campaign needs to be fought and won (the secessionist Scottish National Party (SNP) called the vote after winning an unexpected majority in the Scottish Parliament in 2011).

“Yes” inspires the heart, “no” the head, argues Harry Cartmill, counting out leaflets. Like many, he is also active in the unionist Labour Party. The drill here is as in election years: canvass swing voters by phone or in person, constantly refine the database and hit targets set by headquarters. They may not be terribly impassioned, but unionists are disciplined, dutiful and experienced.

If the “no” campaign is a machine, “yes” is a carnival. Though closest to the SNP, it extends farther beyond party politics than Better Together. Yes Scotland, the official campaign, provides local groups with materials but otherwise lets them do what they want. Many canvass, but others prefer street stalls, film screenings and pop-up “independence cafes” (see chart). Campaigners have used crowdfunding websites to raise money for yet bolder projects. In Dundee they converted an old fire engine into a battle bus, the “Spirit of Independence”. This is understandable: most Scots say they do not support independence; Yes Scotland has to win people over, not just induce them to vote.

Several larger nationalist initiatives have developed lives of their own. National Collective, a gathering of creative types, has toured Scotland putting on pro-independence arts and music festivals collectively known as “Yestival”. Other bodies, like Common Weal and Radical Independence, are marshalling idealistic ideas for an independent Scotland and connecting the “yes” campaign to other causes, like nuclear disarmament. From August 18th a group of these sub-campaigns will hold daily press conferences.

A pro-independence gig in a muggy Edinburgh basement typifies this colourful scene. Sporting political badges and bags marked “Another Scotland is Possible”, the crowd roars with laughter as a series of lefty comedians lampoon the “no” camp. “Better Together”, deadpans Keir McAllister, “even sounds creepy: the sort of thing your psycho ex would say once they’d locked you up in a dungeon with gaffer tape around your mouth.”...

*** the economist / link

Sichuan Plan to Spur Banks to Extend More Mortgage Loans Falls Flat

The Sichuan government’s plan to encourage mortgage loans by subsidizing banks has fallen flat because bankers say they do not meet the application requirements.

The Finance Department of the southwestern province’s government promised to give banks a one-off subsidy equivalent to 3 percent of the mortgage loans they made from July 1 to the end of the year, a June 24 document shows.

The announcement was removed from the government’s website this month following discussion over whether it went too far trying to shore up a flagging property market. Critics also questioned giving taxpayer money to banks.

So far, however, no banks in the province have accepted the offer....

The subsidies apply only to banks that lend to first-time homebuyers at an interest rate of no more than the central bank’s benchmark interest rate, which is 6.55 percent, the policy document shows.

“But the reality is that mortgage loan interest rates in Sichuan average 5 to 10 percent higher than the benchmark interest rate,” a local banker said. At the current subsidy terms, banks have little incentive to cut their lending rates, he said.

The policy did not solve the fundamental problem that discouraged banks from extending mortgage loans because they take up too much credit and do not generate as much profit, another banker with a city commercial bank said.

Some bankers also noted that defaults on mortgage loans in Chengdu, the capital of the province, were rising and, according to one of the bankers, even more than in coastal regions, where properties are more expensive.

A number of other provincial and city governments have also urged bankers to extend more mortgage loans, but none has said it would subsidize banks for doing so.

Meanwhile, banks should watch for risks associated with properties for commercial use, such as office buildings and shopping complexes, the banking regulator’s unit in Sichuan recently said.

Its data shows that the outstanding amount of loans owed by 447 commercial property projects in the province has reached 49 billion yuan as of June 30, up 34.66 percent from the same date last year. The growth rate exceeded the provincial average by more than 25 percentage points.

The supply of commercial properties has exceeded demand, the regulator said.

It also said investments in Chengdu’s commercial properties averaged 1.15 billion yuan per project. New Century Global Center, a large and well-decorated multifunctional recreation center with office buildings, cost nearly 10 billion yuan.

Deng Hong, the billionaire behind the project, has been arrested for ties to Li Chuncheng. Li was a former mayor of Chengdu and deputy Communist Party chief of Sichuan who has been stripped of his party membership and removed from his posts amid an investigation into former Politburo Standing Committee member Zhou Yongkang.

*** caixin / link

The Boomerang Effect: Sanctions on Russia Hit German Economy Hard

It wasn’t that long ago that Kremlin officials could hardly avoid laughing when asked about the economic sanctions imposed on Russia by the West. As long as every NATO member state jealously sought to protect its own business interests, things “weren’t all that bad,” they gloated.

But since last week, their moods have darkened. For months, the European Union in particular had been reluctant to enact effective penalties against Moscow. Last Wednesday, though, the 28 EU heads of state and government cleared a psychological hurdle: For the first time, they opted go beyond sanctions targeting individual political leaders in Moscow, adding prohibitions against doing business with specific Russian companies that contribute to the destabilization of the situation in Ukraine. A concrete list is to be presented by the end of the month. European development banks have also been banned from providing loans to Russian companies.


The US, for its part, penalized a dozen leading Russian conglomerates, including oil giant Rosneft, natural gas producer Novatek, Gazprombank and the weapons manufacturer Kalashnikov. From now on, they are forbidden from borrowing money from American monetary institutions and from issuing medium- and long-term debt to investors with ties to the US.

For the companies involved, the penalties are a significant blow. It has become difficult to acquire capital in Russia itself, with both domestic and foreign investors withdrawing their money from the country in recent months. It is hardly surprising, then, that Russian Prime Minister Dmitry Medvedev spoke of a return to the Cold War and President Vladimir Putin warned that sanctions “usually have a boomerang effect.”

Even prior to the sanctions, the Russian economy had been struggling. Now, though, the Ukraine crisis is beginning to make itself felt in Germany as well. German industry’s Committee on Eastern European Economic Relations believes that the crisis could endanger up to 25,000 jobs in Germany. Were a broad recession to befall Russia, German growth could sink by 0.5 percent, according to a Deutsche Bank study.

The most recent US sanctions, warns Eckhard Cordes, head of the Committee on Eastern European Economic Relations, have placed an additional strain “on the general investment climate.” Particularly, he adds, because European companies have to conform to the American penalties.

By last Thursday, just a day after the US sanctions were announced, the German-Russian Foreign Trade Office in Moscow was besieged by phone calls from concerned German companies who do business with both the US and Russia. The German Chambers of Commerce and Industry estimate that up to a quarter of German companies that do business abroad could be affected. And the risks are significant, with large fines threatening those who violate the American sanctions, whether knowingly or not.

Stefan Fittkau, who heads the Moscow office of EagleBurgmann, the Bavaria-based industrial sealing specialists, says company sales have already plunged by 30 percent. “Orders have been cancelled or delayed -- or we simply don’t receive them anymore,” he says. Novatek, Russia’s second largest natural gas company, for example, had hired EagleBurgmann to take care of seals at a vast liquefied natural gas facility on the Yamal Peninsula in Siberia. Now, though, doing business with Novatek is no longer allowed.

The inclusion of Rosneft on the list also affects more than a dozen German companies: The construction firm Bilfinger maintains facilities for Rosneft, for example, while Siemens received a €90 million contract to supply turbines and generators. “In the end, both sides, the Russians and the Europeans, will lose,” says Frank Schauff, head of the Association of European Businesses in Moscow.

Already, the uneasiness can be seen in the Ifo Business Climate Index. One in three of the companies surveyed at the end of June said it expected adverse effects. “Russian customers have begun looking for suppliers outside of Europe,” says Ulrich Ackermann, a foreign trade expert with the German engineering association VDMA. “They are concerned that European companies, because of the threat of increased sanctions, won’t be able to deliver.”...

*** der spiegel / LINK

The Great Chinese Exodus

Even when the emperors did their utmost to keep them at home, the Chinese ventured overseas in search of knowledge, fortune and adventure. Manchu Qing rulers thought those who left must be criminals or conspirators and once forced the entire coastal population of southern China to move at least 10 miles inland.

But even that didn’t put an end to wanderlust. Sailing junks ferried merchants to Manila on monsoon winds to trade silk and porcelain for silver. And in the 19th century, steamships carried armies of “coolies” (as they were then called) to the mines and plantations of the European empires.

Today, China’s borders are wide open. Almost anybody who wants a passport can get one. And Chinese nationals are leaving in vast waves: Last year, more than 100 million outbound travelers crossed the frontiers.

Most are tourists who come home. But rapidly growing numbers are college students and the wealthy, and many of them stay away for good. A survey by the Shanghai research firm Hurun Report shows that 64% of China’s rich—defined as those with assets of more than $1.6 million—are either emigrating or planning to.

To be sure, the departure of China’s brightest and best for study and work isn’t a fresh phenomenon. China’s communist revolution was led, after all, by intellectuals schooled in Europe. What’s new is that they are planning to leave the country in its ascendancy. More and more talented Chinese are looking at the upward trajectory of this emerging superpower and deciding, nevertheless, that they’re better off elsewhere.

The decision to go is often a mix of push and pull. The elite are discovering that they can buy a comfortable lifestyle at surprisingly affordable prices in places such as California and the Australian Gold Coast, while no amount of money can purchase an escape in China from the immense problems afflicting its urban society: pollution, food safety, a broken education system. The new political era of President Xi Jinping, meanwhile, has created as much anxiety as hope.

Another aspect of this massive population outflow hasn’t yet drawn much attention. Whatever their motives and wherever they go, those who depart will be shadowed by the organs of the Leninist state they’ve left behind. A sprawling bureaucracy—the Overseas Chinese Affairs Office of the State Council—exists to ensure that distance from the motherland doesn’t dull their patriotism. Its goal is to safeguard loyalty to the Communist Party.

This often sets up an awkward dynamic between Chinese arrivals and the societies that take them in. While the newcomers try to fit in, Beijing makes every effort to use them in its campaign to project its political values, enhance its global image, harass its opponents and promote the use of standard Mandarin Chinese over the dialects spoken in Taiwan and Hong Kong.

Politics, though, isn’t the most important issue on the mind of Ms. Sun, a 34-year-old Beijing resident who’s bailing out. (She requested anonymity because she doesn’t want publicity to spoil her plans.) The main reason she’s planning to pack up: Her 6-year-old daughter is asthmatic, and Beijing’s chronic pollution irritates the girl’s lungs. “Breathing freely is a basic requirement,” she says. The girl also has a talent for music, art and storytelling that Ms. Sun fears China’s test-driven schools won’t nurture.

Recently, Ms. Sun flew to San Francisco to shop for a school for her daughter, browse for property and handle the paperwork for permanent U.S. residency. She insists that she’s not leaving China forever—a sentiment expressed by many on their way out who see a foreign passport as an insurance policy in case things go badly wrong in China.

“I’m just giving my family another option,” she says....

*** WSJ / link

“Anti-Putin” Alliance Fraying: Germany, Slovakia, Greece, Czech Republic Urge End to Russian Sanctions

Last week Germany reported that in the second quarter, its GDP declined by 0.2%, worse than Wall Street consensus. This happened a few shorts days after Italy reported a second consecutive decline in its own GDP, becoming the first Europen country to enter a triple-dip recession. What’s worse, Europe’s slowdown took place before the brunt of Russian sanctions hit. Surely in the third quarter the GDP of Germany, a nation whose exports accounts for 41% of GDP, will be even worse, with whisper numbers of -1% being thrown casually around, but one thing is certain: Europe is about to enter its third recession since the Lehman collapse just as we forecast at the end of 2013, a “triple-dip” which may become an outright depression unless Draghi injects a few trillion in credit money (which will do nothing but delay the inevitable and make it that much worse once the can can no longer be kicked), and unless normal trade ties with Russia are restored.

Which means one thing: for Europe to resume the status quo, it needs to break away from the “western” alliance and the sanctions imposed upon the Kremlin which solely benefit the populist agenda of Washington, and certainly not Europe proper, which it is now quite clear, is far more reliant on Russia than vice versa. it is also something Putin apparently was aware of from the very beginning.

And now, that realization is starting to spread to Europe’s own countries, which — while the new cold war was only one of rhetoric were perfectly happy to go for the ride — but now that trade war has finally broken out, suddenly increasingly more want out.

As we reported previously, it all started with the Greeks, a nation of heavy food exports into Russia, who were the first to announce their displeasure with the “Stop Putin” coalition:

[T]he moment Russia retaliated, the grand alliance started to crack. Enter Greece which has hundreds of millions in food exports to Russia, and which was the first country to hint that it may splinter from the western “pro-sanctions” alliance. According to Bloomberg, earlier today the Greek foreign minister and former PM said that “we are in continuous deliberations in order to have the smallest possible consequences, and if possible no significant impact whatsoever.”

And making it very clear that this will be a major political issue was a statement by the main opposition party Syriza which today said that the Greek government’s “blind obedience to the Cold War strategies of Brussels and Washington will be disastrous for country’s agriculture.” In a moment of surprising clarity, Syriza asked govt to immediately lift all sanctions to Russia, as they don’t contribute to a solution of the Ukrainian crisis, and “instead fuel an economic and trade war, in which Greece has unfortunately become involved.” Syriza concluded that the government hasn’t weighted Greece’s special interests and bilateral relations with Russia.

Then it was Slovakia whose premier Robert Fico criticized Ukraine for preparing sanctions against Russian persons and companies, and he has called on Ukraine not to approve them, expressing concerns that the legislation could result in a halt to natural gas supplies.

If the conflict between Ukraine and Russia escalates, the legal norm could cause interruption of natural gas supplies to Slovakia (and to Western Europe) via Ukraine from Russia, he said.

Slovakia depends on supplies of Russian gas. However, if gas supplies via Ukraine were interrupted, Slovakia would get gas through backflow from the West.

“It is strange that a country that has signed an association agreement with the EU and which we are trying to help is taking one-sided steps that endanger the individual economic interests of EU member countries, instead of coordinating its approach with the EU,” Fico said.

“We do not want to be a hostage in the Russian-Ukrainian problem. We expect Ukraine not to adopt formal steps that, if implemented, can endanger our interests. A country that has signed the association agreement should not behave like that,” Fico declared.

Poland too complained last week, however for now it finds the fault not with the “alliance” but with Russia for daring to retaliate to western sanctions....

*** zerohedge / LINK

Another piece falls into place?

Among my lengthy collection of favorite sayings is this gem: “You are entitled to your own opinions — but not your own facts!” One application of this aphorism these days pertains to whether or not the stock market is in the middle innings of a long-term (aka, secular) bull market or if it’s in the penultimate inning when, appropriately enough, most teams go to their bull pens.

Evergreen was fortunate last week to host GaveKal Research’s brainy young expert on monetary and economy trends, Will Denyer. Will stayed at our home, giving me ample type to quiz him on some of my most nagging concerns. Much of our discussions took place as we cruised gorgeous Lake Washington in the kind of sublime summer weather only the coastal side of the Pacific Northwest can offer.

One of the topics I repeatedly broached with Will is toward the top of my worry list: The possibility that much of the “wealth creation” we’ve seen over the past 30 years was due to an unprecedented debt splurge — one that is impossible to recreate (barring massive and painful debt liquidation, that would set the stage for the next leveraging-up cycle).

Frankly, this is a topic that I don’t think either Evergreen or GaveKal Research have spent enough time analyzing, even though I’ve raised it a few times in prior EVAs. (It was particularly apt to ponder as we slowly motored by hundreds of multi-million dollar homes along the lake, including one listed for a cool $32 million.)

Knowing Will’s intellectual curiosity, he will reflect deeply on whether we’ve hit the debt wall in the weeks ahead, and produce a thorough and thoughtful reply. From his perspective, one of his most pressing questions was whether the US economy and stock market is in a 2004 or a 2007 phase.

If it is the former, this would mean that both the economy and stocks have several more years of good times ahead. If it’s 2007 déjà vu, then investors should be battening down the hatches as if they were on sail boats off the coast of Hawaii last week with twin hurricanes hurling toward them.

As I’ve repeatedly relayed, the co-founder of GaveKal Research, Anatole Kaletsky, firmly believes we are in a 2004 situation. Will, however, as indicated above, is simply in analytical mode, attempting to objectively weigh the data.

I’m sure it will come as a surprise to precisely zero EVA readers that I made the case for it being much more like 2007 than 2004. Whether it’s the hyperventilating condition of a wide range of asset classes—collector art, fine wine, rare books, luxury real estate, the riskiest stocks and bonds — or the similarly overheated action in new-issues and “M&A” (mergers and acquisitions), the message is the same. This type of activity occurs much later than halfway through the ball game.

Very recently, though, another piece of the puzzle of where we are in the market and economic cycles has fallen into place. This involves the exceedingly vital element of credit spreads. For those who are perplexed whenever they read this term in the financial media, or hear it bandied about on CNBC, it’s actually a most simple metric. It is merely the difference between the yield on US treasury bonds and non-government debt of the same maturity.


Up until the end of July, credit spreads were continuing to tighten as they have done persistently since March of 2009, with a few hiccups along the way. There is little doubt this tremendous spread compression has played a crucial role in levitating stock prices and many other risk-assets as well.

As I’ve conceded before, I really haven’t given the devil his due in this regard. While I’ve repeatedly carped that the Fed’s serial QEs have failed to achieve their main goal of lowering mortgage rates, I’ve failed to emphasize how successfully our central bank has crushed credit spreads. This process has been a prime catalyst in forcing investors to venture into areas they would normally avoid, like the gamiest stocks and bonds, in search of higher returns.

*** david hay / EMAIL FOR FULL ARTICLE

Europe risks deeper economic crisis as Russia buckles and defaults mount in Ukraine

German bond yields plummeted to record lows and stock markets sold off across the world after Ukraine and Russia came to the brink of war, threatening to set off a financial shock and push Europe into deep recession.

Flight to safety sent yields on German 10-year Bunds tumbling to 0.97pc after Ukraine said its artillery had destroyed a “significant” part of a Russian armoured column that crossed the border into the Donbass. Yields on two-year notes turned sharply negative, implying that large investors are willing to pay the German state to look after their money.

NATO chief Anders Fogh Rasmussen said the crisis had reached danger point, but stopped short of calling it an invasion. “I can confirm that last night we saw a Russian incursion, crossing of the Ukrainian border,” he said.

European foreign ministers warned that they would tighten the sanctions noose yet further unless Russia draws back. “Any unilateral military actions on the part of the Russian Federation in Ukraine under any pretext, including humanitarian, will be considered by the European Union as a blatant violation of international law,” it said.

The DAX index of equities in Frankfurt buckled in the last minutes before the market closed, ending the day down 1.4pc, and down 10pc since early July. The VIX volatility index surged 11pc. Yields on 10-year US Treasuries dropped to a fourteen-month low of 2.33pc, while the DOW was off 114 points in early trading, with heavy falls for Russian stocks listed in New York.

The dramatic actions by Russia came as the Ukrainian armed forces surrounded Donetsk and Luhansk, and appeared close to a final assault on rebel strongholds. The Russian foreign ministry accused Ukraine of trying to block the entry of a humanitarian relief convoy, calling it a “provocation”.

Just hours earlier Russian president Vladimir Putin had given a conciliatory speech and seemed to be searching for a way out. “The country has plunged into a bloody chaos, a fratricidal conflict, a humanitarian catastrophe has hit south-eastern Ukraine. We will do all we can to stop this conflict as soon as possible and end bloodshed in Ukraine,” he said. Veteran Kremlin watchers noted that the speech was not broadcast live in Russia.

The escalating clash is now haunting the European economy, already on the brink of fresh recession, with a string of southern states in debt-deflation. Italy has collapsed back into a triple-dip recession, and Germany is contracting. Marcel Fratzscher, head of the German Economic Research Institute (DIW) warned of “technical recession” after manufacturing orders to the rest of the eurozone fell 10.4pc.

Gabriel Sterne from Oxford Economics warned that a full-blown conflict in the Eastern Ukraine could lop 2pc off eurozone GDP over the next two years through trade damage and financial channels, with a contraction of 0.5pc in 2015. “The markets have been far too sanguine about the whole crisis,” he said.

Mr Stern said Ukraine’s economy is likely to shrink by 8pc this year. He warned that there is now a 50pc chance of default on the country’s external debts, partly owed to Russian institutions and banks. This would send shock through the European financial system, and beyond. Franklin Templeton, the global asset group, held $7.3bn of Ukrainian bonds at the end of 2013, insisting that the country was in a “sweet spot” and would nurture good relations with Russia.

Ukraine’s hryvnia has crashed by 40pc since January, making it much harder for the government and Ukrainian companies to cover foreign currency debts of $145bn. Ukraine has secured a rescue from the International Monetary Fund of up to $18bn but this is likely to prove far too little if the crisis deepens.

The agricultural group Mriya has already missed debt payments and has requested restructuring on $650 of bonds. A several other companies are on the brink. “This is going to get worse, but it will be case by case. The IMF may have to impose a Greek-style PSI (haircut) on holders public debt in the end,” said Tim Ash from Standard Bank.

Chris Weafer from Macro Advisory in Moscow said the Russian economy is effectively frozen by sanctions. The country faces a fresh threat as oil prices drop to $102, from $115 earlier this year. “If it cracks below $100 it could fall a lot further, Russia will come under serious pressure,” he said.

*** Ambrose Evans-Pritchard / link

Charts That Make You Go Hmmm...


Today’s University of Michigan consumer sentiment report demonstrated how the current geopolitical uncertainty is impacting US consumers. The “Current Conditions” subindex is now at the highest level since the recession (beating forecasts), while the “Expectations” subindex declined sharply (worse than forecast). US consumers are feeling better about their current situation but have become increasingly jittery about the future.

While the current events in Eastern Europe and the Middle East are likely to have a smaller impact on the US than the EU, Americans have certainly become more cautious. It remains to be seen how much of this decline in sentiment will translate into weaker consumer spending. In the post-recession economic climate it doesn’t take much for US households to pull back spending.

*** soberlook / link


This past Monday, Stanley Fischer, the official who took over as Vice Chairman of the Federal Reserve in June, commented that the weak economic recovery might simply be continued fallout from the financial crisis and subsequent recession. However, “it is also possible that the underperformance reflects a more structural, longer-term shift in the global economy.”

Much ink was spilled in response.... [A]n interesting take came from Jeffrey Snider. To wit:

“That should be the one unambiguous observation for all of the monetary pieces of this grand experimentation; ‘despite historically low interest rates,’ a qualifier that disqualifies monetary policy of having the effects it both intends and expects. In his conclusions, despite all these allusions to unspecified problems and deficiencies, Fischer is both still somehow supportive of the idea QE was successful and more than sanguine about the further efficacy of related policy prescriptions, including the growing chorus turning fad of ‘macroprudential’ policies.

No theories were expended by Mr. Fischer as to what may actually be drastically altering the trajectory of investment in the US and globally, these unnamed ‘supply’ structures…The lack of actual speculation on this account is quite revealing, as it is in the course of observing it in context.”

“Since the start of QE2 in 2010, the 500 companies of the S&P 500 have repurchased an astounding $1.5 trillion in stock (through only Q1), sending the index soaring while at the very same time confounding economists as to why the productive base in the US and globally may be so eroding. That this has been done via cheap debt also indicts the monetarist impulse of ‘historically low interest rates’ as a means for economic growth that is efficient, and thus actually sustainable.”

*** Jeffrey Snider (via doug short & Lance roberts) / link


Many consider deliberate currency devaluation to be a tool that can help jump start a nation’s economy. The aim of such a practice is to increase exports while encouraging domestic purchases by making goods outside of the country relatively more expensive.

However, like any good prisoner’s dilemma, this might be the case if only one country acted in isolation. The reality is that many major countries engage in the same policy, and the end result — as the infographic details — is a race to the bottom.

So far the “winner” in the race is...

*** visual capitalist / link

Words That Make You Go Hmmm...



Jim Rickards talks with Peter Schiff about currency wars, the future of the dollar, and, of course, gold. His comments on US gold reserves (specifically their deliverability — or lack of it) and Germany’s seemingly aborted repatriation attempts are fascinating and couldn’t have been timed better, given this week’s theme.


Fleck is back (and it’s about damn time).

As always, Bill’s sanguine wisdom is a breath of fresh air as he discusses the two directions the bond market is being pulled in, the dangers of expressing your view right now, whether hyperinflation is a possibility, and — of course — gold.

No hyperbole, no crazy predictions, just smart, level-headed analysis of an always-confusing picture.




Secular or cyclical? John Burbank of Passport Capital parses the dilemma facing the Fed and picks apart the “recovery,” which he feels is anemic.

Bullish? Yes... but only in a few very select places.

John sees a series of big red flags flying in all sorts of places — nowhere more so than in the case of liquidity, and that makes him think of 1987.


and finally...



Folks, meet Baxter. Baxter is coming for you. Well... not YOU, exactly, and, come to think of it, not Baxter, exactly; but Baxter and his ilk are coming for your job, and in this fascinating video (courtesy of Mike Shedlock) we get a glimpse into the future of robotics.

What a world it will be...






Grant Williams

Grant Williams is the portfolio and strategy advisor to Vulpes Investment Management in Singapore — a hedge fund running over $280 million of largely partners’ capital across multiple strategies.

The high level of capital committed by the Vulpes partners ensures the strongest possible alignment between the firm and its investors.

Grant has 28 years of experience in finance on the Asian, Australian, European, and US markets and has held senior positions at several international investment houses.

Grant has been writing Things That Make You Go Hmmm... since 2009.

For more information on Vulpes, please visit


Follow me on Twitter: @TTMYGH

YouTube Video Channel:

PDAC 2014 Presentation: “Gold and Bad: A Tale of Two Fingers

ASFA Annual Conference 2013: “Wizened in Oz

66th Annual CFA Conference, Singapore 2013 Presentation: “Do the Math

Mines & Money, Hong Kong 2013 Presentation: “Risk: It’s Not Just a Board Game

As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from time to time, the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm... may reflect the positioning of one or all of the Vulpes funds — though I will not be making any specific recommendations in this publication.



A walk around the fringes of finance


By Grant Williams

18 August 2014


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Discuss This


We welcome your comments. Please comply with our Community Rules.


Aug. 21, 2014, 12:15 a.m.

The Gold wars chart has the dates wrong on the bottom. It shows gold spiking to $800 but it shows it doing so in 1968 instead of 1980. It was a small fraction of that in 1968.

Richard Martin

Aug. 19, 2014, 2:39 a.m.

I was having a close look at your signature and I notice you have left out the second ‘i’ in your surname. This is very worrying since all the letters in your entire name up to that point are very clear and precise. Are you dyslexic or does this perplexing omission indicate that you have something to hide behind the missing ‘i’? (Axe murderer, wife-beater, cheater at cards, money-launderer… You know the kind of thing.) Do tell…

Aug. 19, 2014, 1:50 a.m.

Please check the graph entitled Gold wars - I think it is wrong - it does not show gold getting to $800 in 1980 -only about $400 or $500.

Mihai Costache

Aug. 18, 2014, 3:45 p.m.

Yugoslavia was never part of the Warsaw Treaty. Romania was, but somehow was left out of the list at the top of this article.