Category Archives: Commodities

Gold Lending

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Gold has been lent to short sellers ever since I can remember. We had a lending operation at Banker’s Trust in the 1970, and it might go back thousands of years as well. So this is nothing new. Lending gold is nothing more than selling it for spot delivery and buying it for forward delivery. And if you hold gold lending it’s a way to make money with very little risk. You lend it to someone who gives you the cash as collateral and the price for the guy borrowing the gold and the incentive for you to lend it is the below market interest rate you have to pay on the cash. And when rates are near 0 as they are now, you get the cash collateral plus a fee to lend that gold, or you don’t do it. It’s also marked to market, so there’s little risk unless the short seller goes belly up if prices spike enough. (I’m sure the last run up to over 1,200 probably saw lots of short sellers getting forced out and scrambling to cover.)

And a lot of the short sellers are gold producers. They sell for forward delivery because they have to mine it and refine it before they can deliver it. And they don’t want to take the chance prices might fall, but would rather lock their profits in upfront. So if their cost of production is maybe $300/oz the might sell gold for 6 months forward or more for over $1,100 and be happy locking that in. And if they have bank loans financing their gold operations the lender may insist they do that.

So when buyers want their gold right away and producers won’t have it ready for 6 months, what brings those people together? It’s the holders of gold lending their gold in the spot market so buyers can get it right away, and then the lender getting the gold back 6 months later when the producers make their deliveries. Market forces organize this process and with current record world gold production it’s no surprise that lenders are very low on inventory, as only a fraction of the world’s gold is available for lending.

GATA is complaining that the US govt. has lent gold and is therefore artificially keeping the price of gold lower than it would otherwise be. There is some truth to the idea that lending keeps spot gold prices lower than otherwise, as it keeps the spreads between spot an forward prices ‘in line’ but you can just as easily say that lenders selling spot and buying forward keep the forward prices higher than otherwise.

So all that gold ‘missing’ from depositories is in the form of cash in the depositories and contracts to buy gold in the forward markets. And with gold being produced in record amounts for untold years into the future it’s hard to say for sure that there isn’t enough gold coming to market over that time to satisfy the demand.

One last thing. The fee paid to gold holders to lend their gold is a market price for that service. At some price holders of gold will take cash collateral, fully marked to market, plus a fee to lend their gold. It’s voluntary. It adds to their incomes. It more than pays for their storage charges. So if the desire to hold gold and not lend it goes up, that’s expressed in the higher fee paid to people who do lend. So if you watch that fee you can see the supply and demand for lending rising and falling.

Hope this helps!

It’s Ponzimonium in the Gold Market

By Nathan Lewis

We’ve had a string of amazing revelations recently regarding the world’s precious metals market. This is important stuff for anyone (like me) who holds gold as a means to avoid currency turmoil and counterparty risk.

This news has been actively suppressed in the mainstream media.

The Commodity Futures Trading Commission, a U.S. government regulatory agency, held hearings in Washington D.C. in late March regarding position limits in the futures market.

People involved in the markets have known/suspected for years that they have been manipulated by certain large entities, notably JP Morgan and Goldman Sachs.

Analysts like silver maven, Ted Butler, hedge fund giant, Eric Sprott, and the Gold Anti-Trust Action Committee (GATA) have been collecting evidence of this manipulation for years.

These hearings were supposed to be a non-event. However, despite the media lock-down, the word is getting out.

The CFTC, like the SEC, is a conflicted agency. Some people, notably Chairman Gary Gensler and Commissioner Bart Chilton, seem to want to clean up the sleaze, fraud and corruption.

The CFTC even invited GATA’s Bill Murphy and Adrian Douglas to make statements. Would you be surprised to learn that the cameras had a “technical malfunction” during Bill Murphy’s statement, which magically righted itself immediately after he finished?

After the hearing, according to Douglas, Murphy was contacted by several major media outlets for more interviews. Within 24 hours, all the interviews were canceled. All of them.

You can follow the links above to see the research that Butler, Sprott and GATA have done over the years. That was only one part of the emerging story.

The second part is the appearance of London metals trader and now whistleblower Andrew Maguire, who understands JP Morgan’s manipulation scheme inside and out.

Maguire understands the process so well that he was able to describe it to the CFTC’s Bart Chilton on the phone in real time. As in: “in a few minutes, they are going to do this, and then they will do that.”

Listen to an extended interview with Maguire and GATA’s Adrian Douglas on King World News here.

Maguire has taken some personal risks to tell all this in public. In fact, almost immediately after his initial statements, he was run over by a car while walking down the street. The driver sped away, nearly running over some other pedestrians in his haste to escape. Fortunately, Maguire survived the hit-and-run “accident” with minor injuries. What a coincidence.

The third item was during the question-and-answer session at the CFTC hearings. GATA’s Adrian Douglas.

For many years, people assumed that the London Bullion Market Association (LBMA), the world’s largest gold market, was a simple bullion market. Cash for gold. However, just in the past few months, more people are realizing that there is actually very little gold within the LBMA system.

Even long-time gold specialists like Maguire have been amazed to learn that there is no gold corresponding to the vast “gold deposits” at the major LBMA banks.

During the CFTC hearings, Jeffrey Christian of CPM Group apparently informed us that the LBMA banks actually have about a hundred times more gold deposits than actual gold bullion.

(GATA on CFTC hearing revelations, including video clips.
ZeroHedge on the LBMA “paper gold ponzi”)

This means that there are thousands of clients — Asian and Middle Eastern governments and sovereign wealth funds among them — who think they own hundreds of billions and perhaps trillions of dollars of gold bullion, and are being charged storage fees on that fantasy bullion, but they really own unsecured gold loans to the banks at a negative interest rate.

There is nothing new about this. Morgan Stanley paid several million dollars in 2007 to settle claims that it had charged 22,000 clients for storage fees on silver bullion that didn’t exist.

Imagine now that you are one of these people who think they own billions of dollars of gold in an LBMA bank depository. Now you find out that this gold doesn’t really exist.

You would ask for delivery of your gold immediately. It would be a “run on the bank.”

What about things like ETFs linked to gold? Most of them also claim, as assets, these “deposits” at the LBMA banks.

The entire gold market is complete “ponzimonium,” a word popularized by the CFTC’s Bart Chilton.

This does not even take into account the tungsten gold bar counterfeit issue, which has emerged over the past year or so.

Imagine that you are an LBMA gold bank — like JP Morgan, Goldman Sachs or HSBC. Your clients start asking for their gold, which you have been telling them is safely stored in your super-safe depository, but the gold doesn’t actually exist. It’s not so easy to buy it either, because none of the other LBMA members actually have any gold. Can you see the incentive to deliver a phony tungsten counterfeit instead? You might even ask your buddies in the U.S. government whether there is any gold left in Fort Knox that they could use — this being an issue of National Security and all.

Four 400 oz. LBMA standard bars were discovered to be tungsten counterfeits in Hong Kong. This set off a wave of investigations, turning up more such phony bars worldwide.

These were very high quality counterfeits. According to some investigators, it appears that the original source and creator of these counterfeits was the U.S. government itself. Some people put the possible number of counterfeit bars out there in the hundreds of thousands!

Let’s say you are an Asian or Middle Eastern sovereign wealth fund taking delivery on a few billion dollars’ worth of gold bullion. You find out that you were given a bunch of phony tungsten by an LBMA bank, whose original source was the U.S. government itself.

Heck, I’d be pissed. I might even want to do something about it.

(Saturday Night Live approximates the Chinese reaction to U.S. government scams and lies.)

There is an easy way to sidestep all the scams, frauds, and phony nonsense. Take delivery on your bullion, whether a 1 oz. Kruggerand or a truckload of 400 oz. institutional bars. Put it in an independent, insured depository that is not affiliated with any bank. Assay all the holdings for tungsten counterfeits. Then audit it periodically, for exact serial numbers and specified weights.

When will the music stop on this merry-go-round of lies and corruption? Who knows. But you can take your seat now, while they are still easy to come by. I suspect those who do not act in advance will eventually find that they are victims of the Ponzimonium.

What if you don’t have any gold, and have no interest in owning any? This could affect you too.

Ultimately, a lot of these “gold suppression” schemes amount to dollar-support schemes. Many of the same games were played in the late 1960s, the days of the London Gold Pool.

The London Gold Pool was an agreement among world central banks to stabilize the gold market at $35/oz. This was really an attempt to stabilize the dollar, which tended to decline in value due to the Keynesian “easy money” policies popular in those days (and today as well).

These Keynesian “easy money” policies have consequences. You can’t “easy money” your way to prosperity. Prosperity is built on “hard money” — money that is unchanging in value.

The London Gold Pool eventually blew up, of course, and the dollar fell to about 1/24th of its original value, hitting $850/oz. in 1980. This dollar decline produced a horrible decade of inflation, during the 1970s. We spent most of the 1980s and 1990s just recovering from that disaster.

Click below for a graph of U.S. Treasury interest rates from 1955 to 2005

View image

Thus, when the “New London Gold Pool” blows up, we might find that the dollar decline that has been going on since 2001 could accelerate dramatically.

You would be surprised how little most big hedge funds know about gold. But they do know the scent of blood in the water. And they learn quick.

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OPEC March Crude Output Down 30,000 Bbl/Day to 29.205 Mln

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With supply following demand, as with any monopolistic arena, it looks like the world crude oil balance remains very much neutral leaving the Saudis in full control as swing producer where they set prices and let quantity adjust to market demand.

Stable crude prices with 0 interest rates, high excess capacity and low aggregate demand should keep inflation at bay indefinitely, with productivity increases making deflation the greater risk.

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Saudi Oil Minister Sees No Need to Alter OPEC Production Now

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The Saudis continue to set price and let quantity adjust, and output levels are ‘comfortable’ with substantial room to go higher or lower to support their target price. If they do leave it ‘in the 70-80 range’ there should be no inflation in the US and most other nations. The US has never had a serious ‘inflation problem’ that wasn’t oil driven.

Saudi’s Naimi Sees No Need to Alter OPEC Production

By Ayesha Daya and Grant Smith

March 16 (Bloomberg) — Saudi Arabia, the biggest and most influential member of the Organization of Petroleum Exporting Countries, said oil prices are in the right range and there’s no need to change production policy.

“We are extremely happy with the market, the economy is doing well, it will do better down the road, so I don’t see any reason to disturb this happy situation,” Saudi Oil Minister Ali Al-Naimi said late yesterday in Vienna, where OPEC meets tomorrow. “The price has stayed very well in the range of $70 to $80. It is in a very happy situation.”

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Iran

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Not a good idea to get short crude with this kind of tail risk….

Final destination Iran?

By Rob Edwards

Published on 14 Mar 2010

Hundreds of powerful US “bunker-buster” bombs are being shipped from California to the British island of Diego Garcia in the Indian Ocean in preparation for a possible attack on Iran.

The Sunday Herald can reveal that the US government signed a contract in January to transport 10 ammunition containers to the island. According to a cargo manifest from the US navy, this included 387 “Blu” bombs used for blasting hardened or underground structures.

Experts say that they are being put in place for an assault on Iran’s controversial nuclear facilities. There has long been speculation that the US military is preparing for such an attack, should diplomacy fail to persuade Iran not to make nuclear weapons.

Although Diego Garcia is part of the British Indian Ocean Territory, it is used by the US as a military base under an agreement made in 1971. The agreement led to 2,000 native islanders being forcibly evicted to the Seychelles and Mauritius.

The Sunday Herald reported in 2007 that stealth bomber hangers on the island were being equipped to take bunker-buster bombs.

Although the story was not confirmed at the time, the new evidence suggests that it was accurate.

Contract details for the shipment to Diego Garcia were posted on an international tenders’ website by the US navy.

A shipping company based in Florida, Superior Maritime Services, will be paid $699,500 to carry many thousands of military items from Concord, California, to Diego Garcia.

Crucially, the cargo includes 195 smart, guided, Blu-110 bombs and 192 massive 2000lb Blu-117 bombs.

“They are gearing up totally for the destruction of Iran,” said Dan Plesch, director of the Centre for International Studies and Diplomacy at the University of London, co-author of a recent study on US preparations for an attack on Iran. “US bombers are ready today to destroy 10,000 targets in Iran in a few hours,” he added.

The preparations were being made by the US military, but it would be up to President Obama to make the final decision. He may decide that it would be better for the US to act instead of Israel, Plesch argued.

“The US is not publicising the scale of these preparations to deter Iran, tending to make confrontation more likely,” he added. “The US … is using its forces as part of an overall strategy of shaping Iran’s actions.”

According to Ian Davis, director of the new independent thinktank, Nato Watch, the shipment to Diego Garcia is a major concern. “We would urge the US to clarify its intentions for these weapons, and the Foreign Office to clarify its attitude to the use of Diego Garcia for an attack on Iran,” he said.

For Alan Mackinnon, chair of Scottish CND, the revelation was “extremely worrying”. He stated: “It is clear that the US government continues to beat the drums of war over Iran, most recently in the statements of Secretary of State, Hillary Clinton.

“It is depressingly similar to the rhetoric we heard prior to the war in Iraq in 2003.”

The British Ministry of Defence has said in the past that the US government would need permission to use Diego Garcia for offensive action. It has already been used for strikes against Iraq during the 1991 and 2003 Gulf wars.

About 50 British military staff are stationed on the island, with more than 3,200 US personnel. Part of the Chagos Archipelago, it lies about 1,000 miles from the southern coasts of India and Sri Lanka, well placed for missions to Iran.

The US Department of Defence did not respond to a request for a comment.

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ISM

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Karim writes:

Details mixed…orders and production down; employment and backlogs up…

Anecdotals also mixed

WHAT RESPONDENTS ARE SAYING …

  • “Depends on division, plant and market served.” (Transportation Equipment)
  • “Current economy has killed new capital sales.” (Machinery)
  • “Commodities are firming again.” (Food, Beverage & Tobacco Products)
  • “First quarter orders up compared to prior two years!” (Fabricated Metal Products)
  • “…lead times for electronic parts are pushing out to 8 to 24 weeks.” (Computer & Electronic Products)


Feb Jan
PMI 56.5 58.4
New Orders 59.5 65.9
Production 58.4 66.2
Employment 56.1 53.3
Supplier Delvs 61.1 60.1
Inventories 47.3 46.5
Prices 67.0 70.0
Backlog Ords 61.0 56.0
Exports 56.5 58.5
Imports 56.0 56.5

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giving up on the Fed

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We’re getting closer to the point discussed a few weeks ago about markets giving up on the Fed.

At the time the 10 year was maybe 3.75-3.80, gold had gone about 1,200, the dollar was near the lows, crude was back over 80, stocks were up, all based on the belief the Fed had the power to ‘reflate’ and was ‘printing money’ through trillions of ‘quantitative easing’ which was, sooner or later, hyper inflationary, along with 0 interest rates and ‘record deficits’ which would drive up interest rates, risk default and a sudden breakdown of the $US, all contributing to the same inflationary collapse.

Now that the bets have been placed, and none of that is happening, it’s all starting to erode. Crude is back below 75 (the Saudis’ actual target/range?), gold is selling off, the dollar is edging higher, the 10 year just traded at 3.57, stocks are selling off, etc.

The next step is for first markets and then policy makers to realize the Fed has no tools to inflate. That 0 rates and qe don’t cut it. Nor are deficits large enough to reflate. Bernanke was asked by Time magazine late last year if he had any tools left. He said yes. When asked what they were, he had no specific answer. Well, if he does have more tools, with 10% unemployment and weak prices and a dual mandate for full employment and price stability, what’s he waiting for?

Should market psychology turn to the notion that the Fed has no tools to inflate, and we have a Congress dead set against larger deficits, it can all get very ugly very quickly in the race to the exit from the inflation plays (including steepeners) currently on the books.


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China inflation

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At some point the FDI isn’t enough to hold up the currency and it depreciates as costs of production for exports rise.

Time to cage inflation tiger, say experts

China Regulator Pledges to Control Illegal Inflows

China Property Sales Rise 75.5% to 4.4 Trillion Yuan

China Reserve Ratio Increase Not a Tightening Sign, Xinhua Says

Time to cage inflation tiger, say experts

By Wang Xiaotian and Xin Zhiming

Jan. 19 (China Daily) — Economy chugs along at good pace, but some red lights ahead

Even as China is set to achieve its targeted goal of 8 percent growth in gross domestic product (GDP) for 2009, economists have stressed that tackling high inflation should be the top priority for policymakers this year.

Inflation is likely to accelerate to more than 5 percent before the middle of this year and reach 8 percent in the second half, Erwin Sanft, head of mainland and Hong Kong equities research at BNP Paribas, was quoted by Bloomberg as saying yesterday.

China’s GDP will surpass the 8 percent year-on-year growth in 2009 and continue to surge in 2010, Yao Jingyuan, chief economist of National Bureau of Statistics, said on Sunday. That confirms the consensus forecast by economists, although none of them are willing to estimate the actual growth figures.

The statistics bureau is scheduled to release the economic data for 2009 on Thursday, but the growth trend has become entrenched since the third quarter of 2009, when GDP expanded by an impressive 8.9 percent year-on-year.

“There are no doubts about robust economic growth this year,” said Zhou Qiren, an economics professor at Peking University. Consumption and exports will continue to strengthen as the global economy gets back to near-normal growth, he said.

The country initiated a massive $586 billion stimulus package in late 2008 and launched a series of industry-friendly policies along with a loose monetary policy to pump prime the economy during the global financial crisis.

The strong surge in new bank lending, however, may have sowed seeds for inflation and other problems, such as asset bubbles. China’s new bank lending in 2009 nearly doubled to 9.59 trillion yuan ($1.40 trillion) over the previous year.

BNP Paribas said China’s inflation rate could touch 8 percent this year. That forecast exceeds most other estimates. Most Chinese economists feel that China would be able to rein in inflation to below 4 percent on average this year.

Li Yining, a senior economist at Peking University, said if inflation soars above 4 percent, the authorities would have to impose tighter measures to stem the growth. “It should be the warning line,” he said.

China’s central bank last week unexpectedly raised the proportion of deposits that commercial lenders must set aside as the country’s credit boom threatens to worsen inflation, which rose by 0.6 percent in November, the first year-on-year growth since last January.

The consumer price index (CPI), the main gauge of inflation, may rise 1.4 percent in December, according to economists surveyed by Bloomberg, intensifying worries that high inflation is coming back as the economy picks up.

Apart from raising banks’ reserve requirement ratio, the People’s Bank of China, the central bank, raised the three-month central bank bill issuing rate for the first time since August 2009 on Jan 7. Analysts see this as a prelude to a series of tightening monetary policies, including interest rate hikes.

“The central bank is likely to increase interest rates twice by 27 basis points this year after April,” said Dong Xian’an, chief macroeconomics analyst with Industrial Securities.

“Gone are the days when we can have economies with high growth rates and inflation as low as 2-3 percent,” he said. top


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Iron ore in China

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Yes, China is very large and in many ways ‘untouched’ and will most likely continue to find its own resources, rather than cause world wide shortages.

China says it may have 10bln tonnes of iron ore reserves in Hebei


Dec 26 (Reuters) — The eastern region of China’s northern Hebei Province may hold iron ore reserves of more than 10 billion tonnes according to exploration work done in the area, reported the official Xinhua news agency on Saturday.

The China Metallurgical Geology Bureau said a total of 3.44 billion tonnes of iron ore has been verified in five mines in the province.

The discovery of the deposits would ease the shortfall in China’s domestic iron ore supplies and contribute to the sustainable development of China’s steel industry, Yan Xueyi, director with the bureau, was quoted as saying.

Spot iron ore prices have recently fallen from three-month highs struck in late November, and some analysts said China, the world’s biggest iron ore consumer, may seek to put pressure on prices to win more favourable terms in annual talks with global miners.

China reported on Friday that iron ore production in November rose 3.5 percent from October even as total crude steel output dropped 8.7 percent. China’s iron ore imports in November rose 12.3 percent from October.

(Reporting by Melanie Lee)


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Iraq to increase crude production

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This would be a game changer if they do it and pump all that:

BAGHDAD
Petroleumworld.com, Dec 14, 2009

Iraq struck deals with several foreign energy giants to nearly triple its oil output in an auction that ended on Saturday, as the country bids to become one of the world’s biggest energy producers.

Major agreements were reached with Russian firm Lukoil and Anglo-Dutch company Shell over giant fields during the two-day sale, while contracts were also awarded to China’s CNPC and Malaysia’s Petronas.

“Iraq’s oil production will reach 12 million barrels per day (bpd) within the next six years,” Oil Minister Hussein al-Shahristani told reporters after the auction. “That is the highest production level of the world’s oil-producing countries.”


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