It’s a zero sum game, except the guy who’s losing can’t pay. Then of course they whole system comes crashing down because everyone worries about counter-parties...."
- Eric Sprott via King World News:
Monday, July 8, 2013
The Whole System Comes Crashing Down
"When you have a notional (one) quadrillion dollars of derivatives and they change by 1% on one quadrillion, that’s 10 trillion dollars right there. It’s just incredible. It would wipe out the (entire) banking system.
It’s a zero sum game, except the guy who’s losing can’t pay. Then of course they whole system comes crashing down because everyone worries about counter-parties...."
It’s a zero sum game, except the guy who’s losing can’t pay. Then of course they whole system comes crashing down because everyone worries about counter-parties...."
Saturday, July 6, 2013
Indians To Buy More Silver
As they (Indians) can’t buy gold, they are going to buy silver. If you tell the Indian population they can’t buy gold, they want to buy something real. They don’t want fiat paper. They are going to buy silver. And maybe in June or July, which we don’t have data on, when the restrictions and costs have shot up here (in India to buy gold), maybe they will buy even more (silver).
- Eric Sprott via a recent King World News interview, read the full interview here:
Thursday, July 4, 2013
Total Insanity Amongst Central Planners
"I just think we are going to be many times higher than we are today. It’s going to be a long-run, we are going to have this bull market go on for another 5 to 7 years. I just don't know how high the price is going to be (for silver). There is total insanity going on amongst the central planners right now. You tell me how desperate central banks are going to be and I can tell you how high the price is going to go.”
- Eric Sprott via a recent King World News interview, read the full interview here:
Tuesday, July 2, 2013
Eric Sprott - Have We Lost Control Yet?
By Eric Sprott & Etienne Bordeleau
Recent comments by the Federal Reserve Chairman Ben Bernanke have shocked the world financial markets. It all started on May 22nd, 2013, at a Testimony to the US Congress Joint Economic Committee, where he first hinted at tapering the Fed’s quantitative easing (QE) program. Then, on Wednesday, June 19th, during the press conference following the FOMC meeting, the Chairman outlined the Fed’s exit strategy from QE.
Since the first allusion to tapering, volatility has been on the rise across the board (stocks, currencies and bonds) (Figure 1A). Moreover, the yield starved, hot money that had flown to emerging markets has been rushing for the exits, triggering significant declines in emerging market (EM) equity and bond markets (Figure 1B). Finally, the prospect of the end of monetary accommodation has triggered rapid and significant decreases (increases) in the price (yield) of longer dated Treasury bonds (also Figure 1B).
FIGURE 1A: VOLATILITY INCREASING FIGURE 1B: ASSET PRICES DECLINING
It has been clear to us for some time that the Fed was uncomfortable with the relative certainty (i.e. Bernanke Put) that has prevailed in the markets since the introduction of QE-infinity last fall. Officials definitely wanted the market to start thinking about a future without non-conventional monetary policy. However, we seriously doubt that the resulting chaos is what they had anticipated. This was evident in the Chairman’s response to a journalist’s question about the rapid rise in rates, saying the FOMC was “a little puzzled by that”.1 The genie is really out of the bottle now.
Indeed, we believe that the recent “market appeasement rhetoric” by James Bullard and Narayana Kocherlakota (Presidents of the St. Louis and Minneapolis Federal Reserve, respectively)2,3 are further proof that the Federal Reserve has realized it went too far and that it is now in damage control mode. (Update: William Dudley, President of the New York Fed mentioned in a June 27th speech that “asset purchases would continue at a higher pace for longer” if the economy was to grow slower than the FOMC’s estimate)4.
However, as the Bank for International Settlements (BIS) so elegantly put it in its most recent annual report, “[…] central banks continue to borrow time for others to act. But the cost-benefit balance is inexorably becoming less and less favourable.” To this they add: “expectation that monetary policy can solve these problems [deleveraging, financial stability] is a recipe forfailure”.5 Clearly, the Federal Reserve knows this and wants to exit their QE program. But can they really?
A large portion of the current economic growth depends on housing. However, mortgage rates are closely tied to long-term treasury rates. While housing affordability is still relatively good because of low house prices, significantly higher mortgage rates might slow the housing market. Furthermore, banks are still very cautious about lending and most borrowers have difficulty accessing credit. While gentle increases in yields are good for banks (who lend long and borrow short), meteoric increases in yields (as in Figure 1B) are damaging because they are hard to hedge and create large losses on the banks securities portfolios (mostly composed of government bonds and mortgage-backed securities) as well as mark-to-market losses on their derivatives portfolios. So, the large and rapid increases in rates the talk of tapering has engendered will damage the economic growth the Fed has been working so hard to engineer, potentially requiring even more stimulus down the line.
The US government itself would also suffer from increases in yields. In its Annual Report, the BIS shows that even a small increase in interest rates would have a large impact on the projected government debt-to-GDP ratio. As shown in Figure 2, under the CBO’s base case scenario (bottom line), the US debt-to- GDP ratio would hover around 110%, whereas a 1% increase in rates would take it to 118% in 10 years (middle line). According to the Chairman’s comments, the fiscal drag that has been partly to blame for the lackluster performance of the economy should subside going forward. But, larger debt servicing costs (because of higher rates) will put more pressure on government finances, forcing it to spend an ever increasing portion of its budget on interest payments. This will have the effect of increasing the fiscal drag, going against the hopes of the Fed.
FIGURE 2: U.S. GENERAL GOVERNMENT DEBT PROJECTIONS UNDER ALTERNATIVE SCENARIOS - AS A PERCENTAGE OF GDP
Sources: IMF; OECD; US Congressional Budget Office; BIS calculations.
To add to all this uncertainty, the situation in the Euro Zone’s periphery is far from stabilized. Following the surprise Cyprus bail-in, international bank regulators have made a push for a democratization of this alternative to outright government bail-outs of banks. This idea is quickly gaining traction amongst central planners. We recently discussed the shortcomings of the BIS’s “Template For Recapitalising Too-Big-To- Fail Banks”.6 The BIS, again in its annual report, reiterated that “we need resolution regimes to make it possible for large, complex institutions to fail in an orderly way.” As uninsured depositors and bank bond holders realize that they do not benefit from government guarantee anymore, bank funding costs will rise and funding might dry up for peripheral European banks.
Conclusion: at the last FOMC meeting, by prematurely announcing the timeline and the specifics of an exit from QE, Bernanke might have lost control of rates and volatility. The current US economic growth is still feeble and hinges on housing, which would be slowed down by raising rates. Banks, while better capitalized than pre-crisis, are still not lending to most borrowers and would be dearly affected by too fast increases in rates. Moreover, European woes still threaten the stability of the international financial system and the recent rush to the exit might further exacerbate funding pressures for weak European banks. Finally, the US government (amongst others) debt load, while already unsustainable, would keep on climbing if rates were to increase only by 100bps.
The chaotic reaction by market participants and the corresponding increase in yields now risks destabilizing this very fragile equilibrium. It is yet unclear whether or not the damage control from the other Fed Presidents will put a lid on yields and market volatility, or if the damage to the Fed’s (poorly executed) exit strategy is permanent.
- Source, Sprott Global:
http://sprottglobal.com/markets-at-a-glance/maag-article/?id=7997
Recent comments by the Federal Reserve Chairman Ben Bernanke have shocked the world financial markets. It all started on May 22nd, 2013, at a Testimony to the US Congress Joint Economic Committee, where he first hinted at tapering the Fed’s quantitative easing (QE) program. Then, on Wednesday, June 19th, during the press conference following the FOMC meeting, the Chairman outlined the Fed’s exit strategy from QE.
Since the first allusion to tapering, volatility has been on the rise across the board (stocks, currencies and bonds) (Figure 1A). Moreover, the yield starved, hot money that had flown to emerging markets has been rushing for the exits, triggering significant declines in emerging market (EM) equity and bond markets (Figure 1B). Finally, the prospect of the end of monetary accommodation has triggered rapid and significant decreases (increases) in the price (yield) of longer dated Treasury bonds (also Figure 1B).
FIGURE 1A: VOLATILITY INCREASING FIGURE 1B: ASSET PRICES DECLINING
It has been clear to us for some time that the Fed was uncomfortable with the relative certainty (i.e. Bernanke Put) that has prevailed in the markets since the introduction of QE-infinity last fall. Officials definitely wanted the market to start thinking about a future without non-conventional monetary policy. However, we seriously doubt that the resulting chaos is what they had anticipated. This was evident in the Chairman’s response to a journalist’s question about the rapid rise in rates, saying the FOMC was “a little puzzled by that”.1 The genie is really out of the bottle now.
Indeed, we believe that the recent “market appeasement rhetoric” by James Bullard and Narayana Kocherlakota (Presidents of the St. Louis and Minneapolis Federal Reserve, respectively)2,3 are further proof that the Federal Reserve has realized it went too far and that it is now in damage control mode. (Update: William Dudley, President of the New York Fed mentioned in a June 27th speech that “asset purchases would continue at a higher pace for longer” if the economy was to grow slower than the FOMC’s estimate)4.
However, as the Bank for International Settlements (BIS) so elegantly put it in its most recent annual report, “[…] central banks continue to borrow time for others to act. But the cost-benefit balance is inexorably becoming less and less favourable.” To this they add: “expectation that monetary policy can solve these problems [deleveraging, financial stability] is a recipe forfailure”.5 Clearly, the Federal Reserve knows this and wants to exit their QE program. But can they really?
A large portion of the current economic growth depends on housing. However, mortgage rates are closely tied to long-term treasury rates. While housing affordability is still relatively good because of low house prices, significantly higher mortgage rates might slow the housing market. Furthermore, banks are still very cautious about lending and most borrowers have difficulty accessing credit. While gentle increases in yields are good for banks (who lend long and borrow short), meteoric increases in yields (as in Figure 1B) are damaging because they are hard to hedge and create large losses on the banks securities portfolios (mostly composed of government bonds and mortgage-backed securities) as well as mark-to-market losses on their derivatives portfolios. So, the large and rapid increases in rates the talk of tapering has engendered will damage the economic growth the Fed has been working so hard to engineer, potentially requiring even more stimulus down the line.
The US government itself would also suffer from increases in yields. In its Annual Report, the BIS shows that even a small increase in interest rates would have a large impact on the projected government debt-to-GDP ratio. As shown in Figure 2, under the CBO’s base case scenario (bottom line), the US debt-to- GDP ratio would hover around 110%, whereas a 1% increase in rates would take it to 118% in 10 years (middle line). According to the Chairman’s comments, the fiscal drag that has been partly to blame for the lackluster performance of the economy should subside going forward. But, larger debt servicing costs (because of higher rates) will put more pressure on government finances, forcing it to spend an ever increasing portion of its budget on interest payments. This will have the effect of increasing the fiscal drag, going against the hopes of the Fed.
FIGURE 2: U.S. GENERAL GOVERNMENT DEBT PROJECTIONS UNDER ALTERNATIVE SCENARIOS - AS A PERCENTAGE OF GDP
Sources: IMF; OECD; US Congressional Budget Office; BIS calculations.
To add to all this uncertainty, the situation in the Euro Zone’s periphery is far from stabilized. Following the surprise Cyprus bail-in, international bank regulators have made a push for a democratization of this alternative to outright government bail-outs of banks. This idea is quickly gaining traction amongst central planners. We recently discussed the shortcomings of the BIS’s “Template For Recapitalising Too-Big-To- Fail Banks”.6 The BIS, again in its annual report, reiterated that “we need resolution regimes to make it possible for large, complex institutions to fail in an orderly way.” As uninsured depositors and bank bond holders realize that they do not benefit from government guarantee anymore, bank funding costs will rise and funding might dry up for peripheral European banks.
Conclusion: at the last FOMC meeting, by prematurely announcing the timeline and the specifics of an exit from QE, Bernanke might have lost control of rates and volatility. The current US economic growth is still feeble and hinges on housing, which would be slowed down by raising rates. Banks, while better capitalized than pre-crisis, are still not lending to most borrowers and would be dearly affected by too fast increases in rates. Moreover, European woes still threaten the stability of the international financial system and the recent rush to the exit might further exacerbate funding pressures for weak European banks. Finally, the US government (amongst others) debt load, while already unsustainable, would keep on climbing if rates were to increase only by 100bps.
The chaotic reaction by market participants and the corresponding increase in yields now risks destabilizing this very fragile equilibrium. It is yet unclear whether or not the damage control from the other Fed Presidents will put a lid on yields and market volatility, or if the damage to the Fed’s (poorly executed) exit strategy is permanent.
- Source, Sprott Global:
http://sprottglobal.com/markets-at-a-glance/maag-article/?id=7997
Sunday, June 30, 2013
I Think Gold is Going Higher
“Let’s face it. Gold’s gone from $250 to let’s say, $1350. I mean, we have had a 4-500% rise here while the stocks have really not accomplished that much in the last 13 years so it’s been a great ride already. Now, in terms of where are we going from here? Some people obviously think it’s lower. I happen to think it’s going higher. I think we will see gold at substantially higher prices.”
- Eric Sprott
Friday, June 28, 2013
Nothing But Financial Chaos
"There’s just nothing but financial chaos happening 24/7. The central planners are always trying to deal with the next issue that they already know about, but they haven’t told us about.
I would suspect that we have bank runs going on in the periphery in Europe. How anybody could leave money in a weak country’s banks is beyond me. We saw what happened in Cyprus. It was a disaster for the depositors. I would imagine most people say, ‘It didn’t happen to me.’ Well, you know what, IBM, Microsoft, GE and multi-national companies, they operate in every country. They saw what happened in Cyprus and you can imagine the CFO’s of those companies saying, ‘Oh my goodness. Who’s next here?’
We all know who’s on the list of potentially who’s next. You know they’ve got to be taking their money out of the banks. That’s why we have that emergency G-7 meeting three weeks ago. That’s why we are talking about a ‘banking resolution.’
Every time you hear the word ‘banking resolution’ just read the words ‘bail-in.’ That’s what they are talking about here because they have that template. And I suspect it’s going to happen again. I think when we get one more ‘bail-in,’ people are going to realize that having money in a bank is risky."
I would suspect that we have bank runs going on in the periphery in Europe. How anybody could leave money in a weak country’s banks is beyond me. We saw what happened in Cyprus. It was a disaster for the depositors. I would imagine most people say, ‘It didn’t happen to me.’ Well, you know what, IBM, Microsoft, GE and multi-national companies, they operate in every country. They saw what happened in Cyprus and you can imagine the CFO’s of those companies saying, ‘Oh my goodness. Who’s next here?’
We all know who’s on the list of potentially who’s next. You know they’ve got to be taking their money out of the banks. That’s why we have that emergency G-7 meeting three weeks ago. That’s why we are talking about a ‘banking resolution.’
Every time you hear the word ‘banking resolution’ just read the words ‘bail-in.’ That’s what they are talking about here because they have that template. And I suspect it’s going to happen again. I think when we get one more ‘bail-in,’ people are going to realize that having money in a bank is risky."
- Eric Sprott via a King World News interview, read the full interview here:
Wednesday, June 26, 2013
Gold to Go Significantly Higher
“I always look at two fundamentals: ‘Do we believe in zero interest rates?’ and ‘do we believe in printing money?’ and I haven’t found anyone who believes in it, and we all know we’re in a ponzi-type situation here where if we ever reverted to normal, the destruction of the financial system would be unbelievable. People will naturally go to gold; the demand exceeds the supply by a factor of two already, so I think the price of gold will go significantly higher.”
- Source, Commodities Wrap:
Friday, June 21, 2013
Physical Demand for Gold and Silver is Draining Supplies
Physical Demand for Gold and Silver is Draining Supplies, New Highs and More.
Eric Sprott, President and CEO of Sprott Asset Management, says extreme physical demand for gold and silver is draining supplies. Sprott predicts, "Somebody's going to fail here. All the data I look at says the Western central banks . . . that have been selling gold are running on fumes now . . . so, it's very close at hand." Join Greg Hunter as he goes One-on-One with money manager Eric Sprott.
- Source, USA Watchdog:
http://usawatchdog.com/
Tuesday, June 18, 2013
I'm Not Optimistic About the Economic Outlook Here
"My outlook for the world’s economy is not strong. We see a deep recession in Europe. We see depression in many countries in Europe. We see China slowing down, no growth in the (United) States. I'm not optimistic about the economic outlook here."
- Eric Sprott via a King World News interview, read the full interview here:
Friday, June 14, 2013
Tightness in Gold
"Whether it’s guys trying to get gold out of their Swiss banks, LBMA deliveries being extended, or people who can’t convert their COMEX contracts into physical gold, there were all sorts of things that suggested there was a tightness in gold. Including, of course, the COMEX inventories, the deliverable dealer inventories falling from 11 million ounces to 8 million ounces...."
- Eric Sprott via a King World News interview, read the full interview here:
Monday, June 10, 2013
Physical is Going to Dominate the COMEX
"I think the plan was, let’s knock the hell out of gold and let’s get people to cave on owning gold. The interesting thing was the exact opposite happened. There is not a data point on gold where we don’t see changes in demand by 100%, or even many hundreds of percent.
Whether it’s US Mint sales of gold in April, I think they went up by 1,000%, the Canadian Mint sales are up 128%, we see Chinese data where I think the number was up 300%. I think the World Gold Council said that India would import at least 100% more than they did last year (during the same period) in the second quarter.
So we see all of these numbers are in hundreds of percent change, whereas the supply of gold from the mining side will probably be down. The supply of recycled gold will be down significantly with the price having come off here. So I think that this raid totally backfired, and unleashed a torrent of buying.
And ultimately the physical is going to dominate the COMEX price as determined by a bunch of guys trading paper ... I would encourage everyone to, one, hold tight, two, if they can, increase their position.”
Whether it’s US Mint sales of gold in April, I think they went up by 1,000%, the Canadian Mint sales are up 128%, we see Chinese data where I think the number was up 300%. I think the World Gold Council said that India would import at least 100% more than they did last year (during the same period) in the second quarter.
So we see all of these numbers are in hundreds of percent change, whereas the supply of gold from the mining side will probably be down. The supply of recycled gold will be down significantly with the price having come off here. So I think that this raid totally backfired, and unleashed a torrent of buying.
And ultimately the physical is going to dominate the COMEX price as determined by a bunch of guys trading paper ... I would encourage everyone to, one, hold tight, two, if they can, increase their position.”
- Eric Sprott via a recent King World News interview, read the full interview here:
Saturday, June 8, 2013
Huge Decline in GLD
"We've seen this huge decline in GLD because it’s actually the last bastion of supply to satisfy this demand. So I don’t regard the GLD losing gold as a sign of weakness whatsoever. It’s not institutional investors getting out of GLD. It’s the (gold from) GLD being shipped over to the East and someone spinning it as a weakness, and I totally disagree with their conclusion. In fact I think it’s quite a sign of strength. I would like all of the gold out of the GLD to disappear and let’s see what happens after that.”
- Eric Sprott via a recent King World News interview, read the full interview here:
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