Some charts on how great the Economy is doing. We are once again reaching oversold levels in equities, and we should expect some kind of bounce soon, as the dumb money is getting rather bearish again (more on that later). Below some important charts of the Economy. Short summary; Philly Fed came in so low, almost hard to believe. Univ of Michigan Sentiment is indicating GDP much lower, and the Jobs market is “revisiting” levels prior to 2008 crisis. Welcome to recession once again.

Charts; Macro Story

So, to sum up:

• It is common practice for most Central Banks to hold part of their gold reserves overseas in ‘gold trading centres’ (read London and New York )

• One of those Central Banks – that of Venezuela – wants its gold back

• That means that a group of banks (mainly in the UK and the USA ) who are supposed to have that gold in their vaults need to GIVE it back…

• …which in turn could potentially trigger a race to repatriate national gold holdings

• Neither Fort Knox nor the Federal Reserve (the world’s two biggest gold depositories) have been independently audited in recent times

• The status of the gold held in the Bundesbank (home to the world’s third-largest hoard) is somewhat unclear

• The practice of leasing gold by Central Banks has been going on so long that it even predates the time when Alan Greenspan advocated sound money.

• The gold ‘physical market’ is approximately 100 times the size of the amount of actual underlying metal by which it is purportedly backed

• The top four bullion banks, or ‘commercials’ on the COMEX continue to run what we shall politely call ‘significant’ short positions (chart above)

In the three trading sessions since Chavez made his announcement on August 17th, gold has added almost $100, coming within a whisker of $1,900 before settling back at another record weekly close.

Market weakness? Maybe. Fear of further problems in Europe ? Quite possibly. Continuing disgust with the world’s fiat currencies? Highly likely.

The beginning of a race amongst the world’s Central Banks to grab physical gold? Now THAT would be something to see…

Full report, Hmmm August 20 2011

De Gaulle talking about Fiat Money back in the days….

Guest Post by Macro Story;

In hindsight one would say shorts make a “killing” during the 2008 meltdown or the 87 crash, etc. The reality is many were not in the trade or if they were stayed too long only to turn a profit into a loss. I read about the 87 crash where after closing out a position the Friday before and witnessing the carnage on Monday the trader doubled down on a new short on Tuesday making the worst trade of his life.

Earlier I posted the following chart of September 2008. Lehman Brothers fails yet two days later the market is higher. Fast forward to September 29, 2008 where markets are now in oversold territory and due for a technical bounce. They in fact rally for two sessions at which point I imagine longs opened positions and shorts covered.

Big mistake!  Over the next seven trading days the SPX lost 300 points. Now that is why I say markets reward conviction.

Would you lend money to Spain, Italy and the US at these ridiculously low levels? The answer is no. The World has during the past years experienced an explosion of sovereign Debt, but yields have been coming off, as a result of Central Bankers buying crap and therefore creating artificially low rates, which basically is pricing risk at totally “false” levels.

During the past weeks, people have been shocked by the equities collapse, but should they be surprised? No.

During the past year Mr Bernanke has bought close to 1 700 billion USD of Government Bonds and a 1000 billion USD of Mortgage Bonds, by expanding the balance sheet and postponing the problems the US Economy faces long term. So, would you lend your money to the US at these rates, and don’t forget the US is not AAA rated. Below chart shows who is holding what in the US,

So, what would happen if these rates resume the historic trend, and revert to some kind of mean? Problems for the US would be significant, as payments for interest rates would be huge.

So much for the US, what is going on in Europe? Inspired by Bernanke, the ECB has been loading up on peripheral country Debt, ie crap nobody wants at these prices, thus creating another round of artificially low rates for countries most people wouldn’t dare lending a single penny at these levels. During this week we have heard of countries implementing the Old rules of Short Bans, and we start hearing populist arguments of speculators driving markets lower, but that is a total fallacy. Politicians dare not dealing with structural problems of the Economy, and therefore focus on buying up Debt, and therefore create an artificially low interest rate level.

By flooding the system with cheap funding, people are “forced” into taking stupid decisions and many have been buying assets in a panic fashion, driven by fear of missing out on the rally. You know, the argument of money on the sidelines, is a fallacy as well. Only money on the sidelines, are happy to exit their longs, if we get an uptick again.

With QE 3 around the corner, many will soon again argue for buying crap at wrong prices, and we will ultimately create the mother of all bubbles.

The next big thing will be the unregulated derivatives market blowing up. Not many understand the Implications of Exotic products in the World, and there is no oversight of the asset class. The Trader has been arguing that the pricing of Risk and therefore volatility has been “wrong” for way too long. Remember when VIX was proclaimed dead by CNBC. We are now witnessing how risk is repriced overnight. This process is a direct function of cheap money having flooded the system, and created a belief of stability in the World, while Risk actually has been too cheap for many years. Below this year’s best report on volatility.

artemis volreport

Cheap money has given us some prosperous years, with Bernanke ramping up asset prices. The Bernanke Put has worked well for years, and the buying of bonds at “wrong” prices has created a monster. Let’s see if they are willing to save the markets, once again, and keep inflating the Bubble, by taking stupid decisions.

So what is going on in the markets? We had Fukushima, but that was all good for the economy, because we had to rebuild Japan (with printing money).Then those guys in MENA wanted freedom (and lower food prices). NATO started Operation bomb Libya to stone age, but that was all good, that needs rebuilding too. Greece suddenly discovered it had no money left. Ireland joined, and Spain, Italy etc are still knocking on the same door. But we will save those guys too, just bail them out, or? The Germans taxpayer is getting rather tired of the bailing out the rest of Europe, but what will happen IF Germany gets downgraded, or is that impossible in this world, where we get Black Swans every two days? Then we got the downgrade of the US credit rating, and everybody living in total denial was suddenly shocked. Obama says the US will always be AAA, irrespective of rating agencies… During the past week, some renewed fears from Soc Gen being leveraged by 50 times, to Philly Fed plunging well into recession levels, have pushed the markets lower. The HFT Machines are the only ones trading the broken market, while the short gamma bankers desperately try hedging the “unhedgable”. We still have not heard of any Derivatives blowing up, but that should be on the agenda shortly.

Despite all these “fundamental” reasons for the market falling, there are 3 important charts to understand. Firstly Goldman’s fresh GDP cut, yes the Economy is falling, second chart shows many markets are in Bear territory, meaning the bull is gone despite pundits claiming the bull is intact, and lastly, Long’s chart of what actually is happening and the ultimate end result, a currency crisis. Welcome to Irrational Exuberance 2.0 and yes watch for QE3 soon, so we can get the last to join the long trade. Don’t forget WHO sold the TOP, again.

and the Fiat Money chart explaining the order of things;

We have heard of many “trades of the Year” such as Paulson’s subprime bets. The problem is these guys make a killing or two, and then get caught up in Sino Forest, Dell etc. The World’s absolutely best Trader, is the mighty US. The best and biggest trade is still working, year after year. Some insight  from Sprott;

Full report, click here.

From Gold Core,

All major currencies have fallen sharply against gold and silver again today with gold reaching new record nominal highs in Canadian and New Zealand dollars, in sterling, in euros and of course in dollars as turmoil continues in global markets.

In volatile trade, gold is down 1% from new record highs and is trading at USD 1,860.10, EUR 1,300.40, GBP 1,126.40, CHF 1,470.90, and JPY 142,414 per ounce and has risen some 2% in all currencies. Silver has surged by nearly 3% in all major currencies.

The London AM fix was a third consecutive record nominal high in US dollars. Gold’s London AM fix this morning was USD 1,862, EUR 1,299.28, GBP 1,126.91 per ounce (from yesterday’s USD 1,794.50, EUR 1,246.44, GBP 1,087.12 per ounce).

Markets continue to assess the ramifications of Venezuela deciding to repatriate their large gold reserves from London to Caracas. Their reserves are large in gold tonnage terms but small in dollar terms.

Venezuela’s central bank is the world’s 15th largest holder of gold, with 365.8 tonnes, of which some 211 tonnes, worth $12.3bn are held in London with the Bank of England and JP Morgan, Barclays, and Bank Of Nova Scotia.

Many analysts and the Gold Anti-Trust Action Committee (GATA) have long contended that much of the central bank gold reserves have been leased out by bullion banks and that in the event of central banks choosing to repatriate their bullion, significant supply issues could develop which would lead to a short squeeze and a parabolic increases in prices. 

The concern is that other central banks concerned about dollar and currency debasement and expropriation of their gold reserves by embattled large debtor sovereign nations may follow suit.

A short squeeze is quite likely given the scale of global investor and central bank demand.

GOLD SPOT $/OZ

Already, there is a small degree of backwardation developing in the gold market with certain near term futures contracts now trading at higher prices than longer term contracts. The near term August ’11 contract was trading at $1,871.40/oz while June ’12 contract is trading at $1,870/oz (12:16 GMT). The spread between spot and longer term contracts has fallen suggesting that gold may soon join silver in backwardation. 

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With Stoxx down some 8% from the Top (few hours ago), we are reaching the negative trend channel again. Make or break here? Some interesting formations today, as we have recouped some of the earlier losses. Maybe we are up for another leg up, just to get the last momos aboard.