Gold pauses to see which the wind blows

• Published: 11:06 November 30, 2010

Gold was steady on Tuesday, aided by physical buying, while investors continued to watch the progress in euro zone’s debt problem and tensions in the Korean peninsula for trading cues. Uncertainties about how the euro zone would stabilise its fiscal conditions continued to bother investors, even after an agreement over the weekend on a $115-billion bailout package for debt laden Ireland. Gold might benefit from safe-haven buying, if situations in Europe and Korea peninsula deteriorated. But a stronger dollar, another beneficiary of political and economic uncertainties, could weigh on gold prices.

Euro

The euro won some respite in Asian trade on Tuesday but few traders think the worst is over for the single currency after a rescue package for Ireland failed to help restore investor confidence in euro zone debt. Markets expect more selling in the euro after Italian and Spanish 10-year bond yields jumped by more than 20 basis points on Monday, their biggest daily rise in more than a decade — highlighting the lack of confidence in the 85-billion-euro deal to help contain Ireland’s debt crisis. The euro has managed to scrape small gains for now, however, helped by short-term oversold technical signs. The euro ticked up to $1.3140 up just 0.1 per cent from late US levels, but about 0.6 per cent above a 10-week low of $1.3064 hit on Monday. It was dangling around the crucial 200-day moving average at $1.3128.

US dollar

US dollar dipped against the yen on month-end selling by Japanese exporters. It fell 0.1 per cent to 84.12 yen but remained in sight of a two-month high of 84.41 hit on Monday, having risen nearly 5 0 per cent from a 15-year low of 80.21 yen set on Nov. 1. The Australian dollar climbed 0.3 per cent to $0.9651 after data showing exports from Australia were less of a drag on growth last quarter than many feared. Still, the currency was down some 5 per cent from a 28-year peak of around $1.0182 set early in the month. The US dollar remained solid, with its index against a basket of major currencies staying near Monday’s two-month high of 81.142. Now at 80.70, the index could target its 200-day moving average of 81.78.

Rupee

Indian shares and rupee trimmed losses while the benchmark 10-year bond yield rose marginally after data on Tuesday showed the economy expanded at a faster-than-expected 8.9 per cent in the September quarter. The median forecast was for an annual rise of 8.3 per cent. The main stock market index trimmed losses to be down 0.2 percent, from 0.6 per cent earlier.

Sterling

Sterling hit a two-month high against a broadly weak euro on Monday as investors looked beyond a debt rescue plan for Ireland and dumped the single currency on concerns that other euro zone nations may also require help. However, GBP was unable to capitalise on a widely expected rise in the growth forecast held by the UK’s fiscal watchdog, as it cut is growth forecast for 2011 and nudged up its expectations for public sector borrowing in the mid-term. Signs the UK economic recovery will be subdued are also expected to limit any big upside in sterling for the moment. The Office for Budget Responsibility on Monday raised its growth forecast to 1.8 per cent from 1.2 percent forecast in June, but it cut its 2011 forecast from 2.1 per cent from 2.3 per cent in its earlier estimate. Signs the housing market continues to struggle may also dent the pound. Data on Monday showed the number of mortgage approvals in Britain fell to its lowest in eight months in October.

Source: Richcomm Global Services DMCC, Dubai
 

Price Update
GOLD	1365.5
SILVER	27.06
EURO	1.3105
GBP	1.5549
YEN	84.06
RUPEE	46.01
AED / INR	12.529
AUD	0.9624
CHF	0.9994
CAD	1.02
OIL – WTI)	85.45
Date	November 30, 2010
Time	10:47:22 AM

 

Are Precious Metals About to Collapse?

 

Are Precious Metals About to Collapse?

Nov 29 2010 1:57PM

From mid-August to early November the markets have operated based on the “Bernanke put”: the idea that our esteemed Fed Chairman will do everything in his power to keep stock levels up. Indeed, with QE lite going in full force and QE2 on the horizon, the markets became dominated by the “inflation trade” in which the US Dollar fell and every other asset (specifically stocks and commodities) rallied on a near tick-for-tick basis. However, once the Fed finally DID announced QE 2 in early November stocks began to sell off. Part of this was “selling the fact,” but most of it had to do with a seismic shift occurring in the geo-political/ financial arena. With several major countries now raising interest rates (Australia and China) or planning to halt their own QE/ Bailout efforts in the near future (the UK and EU), the Fed’s QE 2 program signaled that going forward, the Fed would be on its own regarding its re-flation efforts. This, combined with increasing political pressure hitting the Fed at home and abroad (China has made it clear it will not tolerate US Dollar debasement), has resulted in a seismic shift taking place in the markets. It’s almost as though investors finally figured out that the Fed’s “free lunch” liquidity schemes will eventually come at a cost, whether it be a US Dollar collapse, trade wars with China, or more. As a result of this, stocks began a sell off almost to the day that QE 2 was announced. They’ve since begun to trade in a wide range between 1,200 and 1,180 on the S&P 500.   As I write this, the market hasn’t been able to break below support at 1,180 convincingly, largely due to the fact that the Fed is juicing the market almost every day via QE lite and QE 2. On top of this, the majority of traders remain convinced that the Fed can prop this thing up no matter what. By the same token, stocks can’t seem to break above 1,200 on the S&P 500 because the whole world knows that QE 2 is the equivalent of a “Hail Mary” pass and that the odds are high it will be end very badly (inflation, trade war with China, US Dollar collapse, etc). Consequently, traders are not able to rally enough enthusiasm to push the market higher even during the extremely light volume of Thanksgiving week. One thing that COULD potentially override the “Bernanke Put” would be a major US Dollar rally. On that note I want to alert you to the fact the US Dollar looks to have broken out of its 6-month downward trading channel. This move is of HUGE import as it could very easily kick the “inflation trade” off a cliff. As I’ve noted in previously essays, the US Dollar has been the carry trade of choice for many traders since the June ’10 top. And with US Dollar bearishness at record highs, ANY upward momentum in the greenback could accelerate rapidly as the shorts are forced to cover. Can a US Dollar rally overcome the Bernanke put? We’ll find out this week. We have a total of six POMOs this week (two today and one every other day). So the Fed will literally be juicing the market by $6-9 billion EVERY day this week. If stocks can’t remain afloat in the environment and the US Dollar strength continues, then the markets are heading into some VERY DARK times in the near future. The BIG question for those of us forecasting inflation in the near future is: how will this move affect the precious metals sector? To be clear, I am extremely bullish on precious metals in the long-term. However, in the short-term, both Silver and Gold have been on an absolute tear in the last three months, rallying 48% and 13% respectively. Now, no investment ever goes straight up or straight down. With that in mind I want to point out that Silver looks to have just put in a potential double top: As you can see, the precious metal has met up against major resistance at $27.50 twice in the last month. Silver needs to make a quick turn around and break above this level soon, otherwise a correction to $25.50 is highly probable. However, far more worrisome for the Silver bulls is the fact that it’s coming up against its multi-month trend-line. As you can see, Silver has obeyed this line for most of this recent leg up. A break below this line here would signal a sizable correction, most likely to the $24-25 area. But what about Gold? Gold looks to be forming a clear Head and Shoulders pattern. In order for this pattern to be confirmed, we need to see the precious metal break below its neckline at $1325 per ounce. A breakdown there would forecast a correction to $1250 per ounce. This would fit in well with Gold’s current bull market as $1250 represents its most recent peak prior to this latest rally. Does any of this indicate that the bull markets in Silver or Gold are over? Absolutely not. However, both precious metals have been on a tear and need to cool/ consolidate. No investment goes straight up or straight down. And right now, both Gold and Silver are primed for a pull-back. I***

Debt Crisis New Phase Striking Now! Despite Bailouts!

Interest-Rates / Global Debt Crisis
Nov 30, 2010 -

Sadly, though, even while most Americans were enjoying the holiday or hitting the malls, much of Europe was sinking deeper into a new, more severe phase of its sovereign debt crisis.

This crisis is unfolding despite Herculean rescues by the European Union, the International Monetary Fund and the U.S. Federal Reserve.

It’s striking right now.

And it’s threatening to spread to all of the world’s big debtor nations, including the biggest of all — the United States.

Hard Evidence from Global Markets

This conclusion is not merely my analysis or forecast.

It’s the collective opinion of global investors who, at this very moment, are scrambling to buy insurance against bond defaults by major governments.

Think of it like life insurance:

When the premiums are cheap, it’s because the country has a clean bill of health.
When the premiums start rising, it means there’s growing evidence of fiscal disease.
And when premiums skyrocket to obscenely high levels, you can be darn certain the country’s Treasury is on its death bed, threatening to take down the government … sabotage its economy … and, inevitably, impoverish its people.
That’s precisely the situation the Irish find themselves in today. Their economy is sinking fast. Their two largest banks — the equivalent of our Bank of America and Citigroup — have just gone under. The Prime Minister is resigning. Millions of citizens are sinking into poverty. And yesterday’s final agreement on a $113 billion European rescue package will not change that reality.

Moreover, their crisis is a stark warning for all U.S. investors. So you’d better understand exactly what’s happening and why …

The Real Trauma of The Irish Debt Crisis

Default insurance is the telltale indicator.

And right now, the cost of insuring €10 million of 5-year Irish government bonds against default has skyrocketed — to an extremely high €600,000.

That’s 55 percent more than it cost for the same insurance in the aftermath of the Lehman Brothers failure — a time when it seemed the entire world was on the brink of collapse.

It’s 50 percent more than the cost of insuring equivalent Greek debt at the peak of Greece’s first round of financial difficulties earlier this year.

It’s at least DOUBLE the cost of insuring the debts of deeply troubled lesser nations like Romania, Lebanon, Latvia, and even Iceland.

Most shocking of all, today’s €600,000 price tag for Irish default insurance is higher than it was BEFORE the European Union and IMF first announced their intent to engineer a $113 billion rescue for Ireland just eight days ago.

Earlier this year, when Europe announced a similar bailout for Greece, traders in this kind of insurance — credit default swaps — gave Greece at least a 30-day reprieve. Now, they’ve given Ireland no more than three days.

Investors obviously don’t believe promises by politicians anymore.

Clearly, the Debt Crisis Is Accelerating. Clearly, the Bailouts Are Not Working!

The European authorities had hoped that, as soon as their massive, supposedly “definitive” Irish bailout package was announced, investors would jump for joy. Instead, investors have done precisely the opposite.

The authorities had hoped that the premiums on government bond default insurance would come down dramatically. Instead, the premiums have gone higher, as I’ve just shown you.

The authorities had hoped that Irish bond yields would come down sharply, helping to avert a disastrous, additional interest burden for the government. Instead, bond investors have dumped Irish bonds with both hands, driving their prices down and yields up.

Exactly seven days ago, on the morning after the big bailout announcement, the yield on Ireland’s benchmark 10-year government bond was near 8 percent. Now, it has surged by more than a full percentage point to 9.17 percent. That extra interest cost alone threatens to eat up a big chunk of the bailout money.

The authorities had hoped — and prayed — that their earlier bailout of Greece would have been enough to contain the cancer. Instead, it has metastasized and spread — not only to Ireland, but also to Spain and Portugal.

Right now, the cost of insuring against a default on Spanish and Portuguese bonds is at new, all-time highs, far surpassing the levels reached earlier this year when the Greek debt crisis was first exploding.

Even Greece itself, which the authorities thought was largely cured, is back in the emergency room.

But this time, all life support systems are in serious doubt. And this time, investors are in open rebellion against the spin doctors.

The facts: At the height of the last Greek debt crisis — on February 8, 2010, to be exact — the cost of insuring a €10 million 5-year Greek government bond reached a peak of €420,855.

But last week, the cost on the exact same instrument had surged above €1,000,000!

That’s like shelling out an outrageous $50,000 for a term life insurance policy that pays no more than $500,000 in death benefits.

Why so expensive? Because investors now realize that austerity, no matter how necessary, can never be a quick ticket to fiscal balance.

In fact, the more the Greek government has cut spending, the more its economy has sunk. Ditto for Ireland and other countries.

Urgent Lessons for All U.S. Investors

Even if you’ve never invested a penny in Europe — and even if you’ve never set foot outside the United States — this new phase of the debt crisis has far-reaching implications and lessons for you and your family …

Lesson #1 America Is Definitely NOT Immune to the Contagion

For 2011, the Bank for International Settlements estimates that Portugal’s and Spain’s government debts will be 99 percent and 78 percent of GDP, respectively.

But for the same year, U.S. government debts will be 91 percent of GDP.

Thus, by this measure, America’s debt burden is similar to

Portugal’s and bigger than Spain’s — two countries that are ALREADY victims of the sovereign debt crisis.

Yes, the U.S. dollar is the world’s reserve currency.

And, yes, that gives Washington the ability to print money with impunity … press other rich countries to accept its debts … and borrow huge amounts abroad to finance its deficits.

But that’s more of a curse than a blessing!

It means that, more so than any other major nation on the planet, the U.S. government is beholden to investors overseas — often the same investors who have repeatedly attacked Greece and Ireland this year.

Ultimately, that could make the U.S. even more vulnerable than Europe.

Lesson #2 Governments CANNOT End a Debt Crisis by Piling on Still MORE Debt Europe tried by announcing a Greek bailout earlier this year … and it failed miserably.

Europe tried again by expanding the Greek bailout to a $1 trillion fund for all euro-zone countries. But that effort is also failing. In fact, just one more bailout — for Spain — could wipe out the fund.

And now, even before Europe has figured out precisely how the bailout fund is to be used, there was new talk in high circles this weekend of expanding it even further — another desperate attempt to “reassure investors.”

But again, it is not working.

In fact, the more money Europe throws at the crisis, the more investors seem to recoil in horror.

Investors can now see, as plain as day, how past rescues have backfired.

They can see how the debt disasters can’t be papered over with bailouts or printed money.

And they KNOW that money printing can only gut the currency they’re investing in — be it the dollar or the euro!

In either case — bailout or no bailout — bond investors want out.

Lesson #3 Before a Government Debt Crisis Can Be Ended, It Must FIRST Get a Lot WORSE!

In order to slash deficits …

Governments must impose austerity — deep cutbacks in spending, tax hikes, or both …
The austerity inevitably drives the economy into a tailspin, and …
The economic tailspin always causes even LARGER deficits!
It’s only after years of fiscal discipline and collective belt-tightening that this vicious cycle is ended and balance is restored.

That’s why the cutbacks in Greece, Ireland, Portugal, and Spain are, in the near term, making the crisis even worse. And it’s also why a similar vicious cycle is now looming in the U.S., as the new Congress seeks to slash the deficit.

Lesson #4 The Great Debt Crisis Of 2008 Never Ended!

Politicians talk about the U.S. debt crisis of 2008 … the Detroit bankruptcy crisis of 2009 … the European sovereign debt crisis of early 2010 … the Greek debt tragedy … the Irish debt mess … the California budget debacle … the U.S. municipal bond collapse … and more.

Then, they talk about the urgent need to make a show of resolve to bail out the world — to stop the “contagion” from spreading from one sector or region to the next.

But these are not separate, isolated disasters. Nor is the contagion of fear the true source of the problem.

Instead, what we are experiencing is one, single, integral debt crisis that never ended.

It is one crisis that has spread from the U.S. to Europe and beyond … morphed from a private-sector banking crisis to a public-sector government debt crisis … grown in scope and power … and begun to drive the large debtor nations on a collision course beyond anyone’s control.

Lesson #5 The New Phase of the Debt Crisis Can Bring Surging Interest Rates

I showed you how the yields on Ireland’s 10-year notes have surged from 8 to 9.17 percent in just a few days. Yields in other European nations have shot up as well.

Meanwhile, I assume you’ve seen how, despite the Fed’s massive bond purchases, U.S. Treasury yields have also moved higher.

And you’ve seen even bigger jumps in U.S. municipal bond yields.

This is just the beginning.

And for the near future at least, rising interest rates could be a game-changer — for real estate, for the U.S. economy, and for many financial markets.

Investors aren’t dumb. When they see a new phase of the debt crisis, they rush from risk to safety.

So don’t be surprised if we get deeper corrections in those markets that rose in recent months — U.S. stocks, precious metals, key commodities, and several foreign currencies.

There will always be exceptions. But my recommendation is the same as last week’s: Take profits off the table. Build cash. Focus on safety.

Good luck and God bless!

China approves first gold fund- They are after Gold…

Reuters
Posted online: 2010-11-30 02:06:21+05:30

Shanghai-China approved the country’s first mutual fund that bets on gold prices, as inflation fears fuel demand for the precious metal.

Lion Fund Management Co said on Monday that it won approval from the China Securities Regulatory Commission to launch the Lion Global Gold Fund, which invests in gold-backed exchange traded funds (ETFs) overseas.

The fund offers a brand new way to invest in gold, giving investors access to ‘golden opportunities’ globally, the Beijing-based fund house said in a statement.

“The fund will be launched under China’s Qualified Domestic Institutional Investor (QDII) scheme, which invests Chinese money overseas,” the company said.

Chinese retail investors, who have no access to overseas gold markets, are rushing to buy gold coins, bullion and bars, as inflation fears, partly driven by loose monetary policies in the United States, are pushing up gold prices to historic highs.

Taking advantage of rising interest in gold, fund managers are racing to roll out gold funds.

E Fund Management Co, another fund house, is also waiting for regulatory approval to launch a gold fund under the QDII scheme.

A Stunning Forecast Comes True

A Stunning Forecast Comes True

In latter August I penned a forecast for my subscribers to TMTF on Silver, and below is a brief excerpt from August 31st:

I believe Silver is about to stage a pretty large advance based loosely on the Elliott Wave pattern I see unfolding after a 9 odd month consolidation. (Obviously, there are also fundamental fiat currency/debt events worldwide that give it the underlying bull chart pattern). Since the average person can’t run out and buy an ounce of Gold for $1,240 tomorrow, as the unfolding of the fiat crises continues to enter the public psyche, you will see a strong populace movement into buying silver, silver coins, etc. To wit, many silver stocks are moving up strongly of late, signally an imminent breakout of this precious and industrial metal.

The triangle pattern has taken nearly 9 months so far, and a move over $19.50 could start a multi-month run targeting $26-$29 per ounce for starters before a broad pullback.

I bring this up now, some 11 weeks later because Silver did in fact rally up from around $19 per ounce to $29 per ounce, and this was forecast well in advance using my crowd behavioral methodology and pattern recognition.  The explosion in price I predicted happened much faster than even I expected, but does show the power of the crowds as they take hold of a new trend or a perceived trend and run with it. Part of the theory to be long silver also had to do with it being “poor man’s Gold”, which I indicated in my forecast.  This is also crowd psychology in it’s finest form.  People perceive Gold to be “too expensive”, but they can buy silver for only $29 an ounce.  To wit, most investors do not really understand the difference between a stock that has 2 billion shares outstanding and one that has 20 million shares outstanding, they only care about price.  They often think if a stock is $2 it’s “cheaper” than the stock at $100, little do they realize that a $2 stock that goes to $1 is a 50% loss, but they perceive that as a small risk due to the price.  With Silver, you have the mom and pops running out and buying it because it’s “cheaper” than Gold.

Now that Silver has run to $29, my target, and then dropped back, what should expect next?  Well, we are in that “broad pullback” I mentioned back in late August that would occur once $29 was hit.  Technically speaking and looking at typical crowd behavior, I am expecting consolidation to continue for awhile under $29 per ounce.  I call this recent pattern an A B C rally, and once the C wave ends at $29 in this case, forecasting the next move is extremely difficult and can be exasperating.  The C wave ran from $19 to $29, and at the tops of those moves everyone is bullish and breathless.  Figuring out how the crowd behaves after those patterns is similar to pulling a rabbit out of a hat.  With that said, I would expect a 38-50% retracement of the $10 move to about $24 an ounce worst case, and then we should re-attack the $29 highs and likely move into the $32-$34 per ounce range within the next 60 days or so.  Silver will continue to out-perform Gold for the foreseeable future as well if I’m right.  It appears by my chart below that we already had our initial corrective low, and now we will consolidate and break out.

Consider subscribing to our free reports today by going to www.markettrendforecast.com, and there you

Global Geopolitical Dislocation and the Worldwide Financial Crisis

 

As the LEAP/E2020 team anticipated in its open letter to the G20 leaders published in the international edition of the Financial Times of 24 March 2009, on the eve of the London Summit, the question of a fundamental reform of the international monetary system is central to any attempt to solve the current crisis.

// //

But sadly, as was demonstrated again at the failure of the G20 summit in Seoul, the window of opportunity for achieving such a reform peaceably closed at the end of summer 2009 and will not open again before 2012/2013 (1). The world is indeed in the throes of the global geopolitical dislocation that we had announced as beginning at the end of 2009 and which can be seen, less than a year later, in the proliferation of movements, the economic woes, the fiscal deficits, the monetary disagreements, all setting the scene for major geopolitical shocks. With the G20 summit in Seoul, which signalled to the planet in its entirety the end of US domination of the international agenda and its replacement by a generalised mood of “every man for himself”, a new phase of the crisis has begun, prompting the LEAP/E2020 team to issue a new warning. The world is about to breach a critical threshold in this phase of global geopolitical dislocation. And as with every breach of threshold in a complex system, this will generate, as from the first quarter of 2011, a suite of non-linear phenomena: developments that do not conform to the usual rules and the traditional projections, be they economic, monetary, financial, social or political.

In this GEAB N°49, in addition to the analysis of the six main steps marking the breach of this critical threshold of the global geopolitical, our team presents numerous recommendations to help cope with the consequences of this new phase of the crisis. They address, for example the currency/interest rates/gold and precious metals group; wealth preservation and the replacement of the US dollar by another measure of net worth; the bubbles in asset classes denominated in US dollars; and the stock markets and the most vulnerable corporate categories in this phase of the crisis. The LEAP/E2020 team also presents the “three simple reflexes” to adopt to understand and anticipate better the new world taking shape. Also in this issue, our team describes the double Franco-German electoral shock in store for 2012/2013. And we also present an excerpt from the Manual of Political Anticipation, written by the president of LEAP, Marie-Hélène Caillol, and published by Anticipolis in French, English, German and Spanish.

Trade balances of the G20 countries (forecast for 2010) – Source: Spiegel, 11/2010

In this press release for the GEAB N°49, our team chose to present three of the six steps that characterise the critical threshold that the world is about to breach.

The crisis that we are experiencing is characterised by developments on a planetary scale, taking place at two levels that, while correlated, are different in nature. On the one hand, the crisis is symptomatic of the profound changes to our world’s economic, financial and geopolitical reality. It accelerates and amplifies the underlying trends that have been at work for several decades, trends that we have described regularly in the GEAB since its launch at the beginning of 2006. On the other hand it reflects the steadily increasing collective awareness of those changes. This growing awareness is in itself a phenomenon of collective psychology on a global level and it influences the way the crisis develops and triggers sharp bursts of speed in its evolution. Several times in recent years, we have anticipated “inflexion points” in the crisis, corresponding to “sudden leaps” in this collective awareness of the changes under way. And we consider that all the pre-requisites for “rupture” crystallised around the G20 summit in Seoul, enabling a crucial advance in collective awareness of the global geopolitical dislocation. It is that phenomenon that led LEAP/E2020 to identify the breach of a critical threshold and to issue a warning about the consequences of that breach as from the first quarter of 2011.

Around the date of the G20 summit in Seoul, LEAP/E2020 identified a build-up of events likely to lead to “rupture”. Let us examine the main events concerned (2) and their chaotic consequences.

 

Concluding the quantitative easing: the Fed placed under “house arrest”

The Federal Reserve’s decision to launch “QE2” (by purchasing USD 600 billion of US Treasuries from now to 2011), triggered an outcry, for the first time since 1945, amongst almost all the other global powers: Japan, Brazil, China (3), India, Germany, the ASEAN countries (4), …(5) It is not the Fed’s decision that marks a rupture: it is the fact that for the first time, America’s central bank had its ears boxed by the rest of the world (6), and in a very public and determined manner (7). This is certainly not the cosy atmosphere of Jackson Hole and the central bankers’ meetings. It seems that Ben Bernanke’s threats to his colleagues, conveyed to our readers in GEAB No. 47, did not have the effect that the Fed’s chairman had hoped. The rest of the world made it clear in November 2010 that it had no intention of letting the US central bank continue printing US dollars at will in an attempt to solve America’s problems at the expense of every other country on the globe (8). The dollar is now getting back to being what every national currency is supposed to be: the currency and thus the problem of the country that prints it. In fact, in these last weeks of 2010, we have witnessed the end of an era where the dollar was the currency of the US and the problem of the rest of the world, as John Connally put it so neatly in 1971, when the US unilaterally terminated the convertibility of the dollar into gold. Why? Simply because from now on the Fed must take into account the opinion of the outside world (9). It is not yet under guardianship, but it is under “house arrest” (10). According to LEAP/E2020, we can already anticipate that there will be no QE3 (11) regardless of the US leaders’ opinions on the subject (12); or it will take place at the end of 2011 to the tune of major geopolitical conflict and the collapse of the US dollar (13).
 

U.S. Federal Reserve’s Assets (2008-2010) – Sources: Federal Reserve of Cleveland / New York Times, 10/2010

European austerity: spread of social resistance movements; mounting populism; risk of fostering radicalism in rising generations; higher taxes

From Paris to Berlin (14), Lisbon to Dublin, Vilnius to Bucharest, London to Rome,… the protest marches and strikes are spreading. The social dimension of the global geopolitical dislocation is clearly visible in the Europe of end-2010. While these events have not yet managed to disrupt the austerity programmes planned by the European governments, they point to a significant collective development: public opinions are emerging from their torpor at the beginning of the crisis, suddenly aware of its duration and cost (social and financial) (15). So the next elections should prove costly for all the current political teams who have forgotten that without fair treatment, austerity will never win popular support (16). In the meantime, the teams in office are still applying the recipes of the pre-crisis period (i.e. neo-liberal solutions based on tax cuts for the richest households and an assortment of higher indirect taxes). But the rise in social disputes (inevitable according to LEAP/E2020) and the policy changes that will emerge in the next national elections, country by country, will lead to a questioning of those solutions; and a dramatic strengthening of the populist and extremist parties (17): Europe is going to get politically “tougher”. In parallel, in view of what looks increasingly like an unconscious desire on the part of the baby-boomers to have younger citizens shoulder their costs, we can expect to see an increase in violent reactions from the rising generations (18). According to our team, they will probably become more radical if they feel that the situation is hopeless, unless a compromise can be reached. But without an improvement in tax receipts, the only compromise credible in their eyes would be cuts in existing pensions, rather than higher education costs. Today is always a compromise between yesterday and tomorrow, particularly when it comes to taxes. And the most likely fiscal consequences of these developments are higher taxes on high earnings and capital gains, a new bank tax and a new, community-wide drive to protect the borders (19). The EU’s trade partners should take rapid note (20).

  

Selected governments’ borrowing needs (2010-2011) – Sources: FMI / Wall Street Journal, 10/2010

Japan: the latest efforts to resist China’s power

For several weeks now Tokyo and Beijing have been locked in a diplomatic dispute of rare intensity. Under various pretexts (a Chinese trawler about to enter Japanese territorial waters (21), massive Chinese purchases of Japanese assets, causing the yen to appreciate) the two powers exchanged harsh words, suspended their high-level talks and appealed to international public opinion. To the countries in the region, the international visibility of this Sino-Japanese spat is especially revealing because of a glaring absence –that of the US. While these quarrels clearly illustrate Beijing’s growing determination to be recognised as the dominant power in East and South-East Asia and Japan’s bid to oppose that regional Chinese hegemony, there is no denying that the power supposed to dominate in this region of the world since 1945, namely the US, is strangely absent from table. We can therefore assume that what we are witnessing is a real-life test on China’s part to measure its new influence on Japan; and on Japan’s part to evaluate how much scope for action the US still has in Asia, faced with China. The events of recent weeks have shown that, hampered by political paralysis and its economic and financial dependence regarding China, Washington prefers not to get involved. No doubt throughout Asia this spectacle serves to accelerate the awareness that a new milestone has been passed in terms of regional order (22); and that in Japan, mired in an endless recession (23) the economic interests linked to the Chinese market have not been strengthened by the experience.

Global changes under way – massive growth in world port traffic, benefiting Asia (1994-2009) – Sources : Transport Trackers / Clusterstock, 10/2010

In conclusion, this accumulation of events, centred round a G20 summit that was patently incapable of resolving the sources of economic, financial and monetary tension between its principal members, contributed to a decisive advance in the world’s collective awareness of the process of global geographic dislocation under way. And in its turn, this increased awareness will, as from the beginning of 2011, accelerate and amplify the changes affecting the international system and our various societies, generating non-linear, chaotic phenomena such as those described in this issue of GEAB and previous issues. As we emphasised in September 2010, we focus on the fact that chief among those phenomena will be the entry of the US into an austerity phase, beginning in spring 2011. But we also bear in mind that one of the surprises of the next eighteen months could simply be the announcement that the Chinese economy had overtaken the US economy as from 2012 as the Wall Street Journal of 10/11/2010 indicates in its report of the Conference Board’s analysis (24).

Notes:

(1) These dates correspond particularly to the period when most of the leaders of the major G20 countries are renewed. This is a necessary condition (though clearly not sufficient, since nothing is guaranteed, even after 2012/2013: it will simply be a new window of opportunity) if there is to be any hope of achieving a concerted approach and commitment to reforming the global monetary system. In the meantime, according to LEAP/E2020, we shall see nothing more than failed attempts and/or tests of unrealistic ideas prior to this virtually total overhaul of the world’s leadership. And amongst the ideas that will never get off the ground is a proposal to regulate exporting countries’ surpluses. It comes from a country in dire commercial straits, or more precisely, in a position of weakness, and so without any chance of being heard. Its relevance (highly doubtful, as the Asia Times of 27/10/2010 emphasises) is apparently not the point. Concerning the 2012/2013 window of opportunity, see the previous GEABs and the anticipations and scenarios outlined in Franck Biancheri’s « World crisis, the path to the world afterwards » for more on this theme. Source: Anticipolis.

(2) GEAB subscribers had already anticipated these for several months.

(3) With inflation officially rising to 4.4% (setting a two-year record), Beijing is not going to sit back and accept the inflation risks exported by the Fed. Sources: China Daily, 27/10/2010; China Daily, 11/11/2010

(4) Even the Philippines, a former US colony controlled direct from Washington, have made their displeasure clear. President Begnino Aquino went as far as to say that along with the Philippines, even Singapore and Thailand were suffering the negative effects of the Fed’s decision. Source: BusinessInquirer, 05/11/201

(5) The other European partners remained eloquently silent faced with this flood of criticism. Indeed, that is another lesson to be learned from the sharp reaction to the Fed’s decision: even America’s traditional allies reacted negatively, and some of them, such as Germany and the ASEAN countries, were actually amongst the most aggressive. As a result, even the editorial staff on the UK’s Telegraph, a paper very attached to its “big American brother”, now allow themselves to speak out about their doubts concerning the wisdom of the Fed’s decisions and are predicting the end of the dollar era. Sources: Telegraph, 04/11/2010; Telegraph, 05/11/2020

(6) Like many economies in danger of overheating, Australia continues to raise its interest rates to combat the “Fed effect” of strengthening the Australian dollar against its US counterpart. Similarly to the Canadian dollar and the Swiss franc, the Australian currency has breached parity with a US currency in freefall. India echoed Australia’s approach. Sources: Telegraph, 02/11/2010; Wall Street Journal, 02/11/2010

(7) This is a perfect illustration of Michael Hudson’s fine article in CounterPunch dated 11/10/2010 entitled “Why the US has Launched a New Financial World War – and How the Rest of the World Will Fight Back”.

(8) As Doug Noland wrote on 05/11/2010 in his consistently excellent Credit Bubble Bulletin, “Global decision-makers must now be fed up”. And they are. This is far more than the simple Sino-American face-off suggested by this amusing rap clip on the theme of the dollar-renminbi dispute. Source: NMA World Edition, 10/11/2010.

(9) And one must also mention the increasing number of people (including within the Fed) voicing their concern about the US central bank’s deteriorating balance sheet. The chart below shows that its “assets” are more than a little worrying: mortgages issued by Fannie Mae and Freddie Mac, as well as shares in their stock; plus AIG and Bear Stearns shares. These are “phantom assets”, worth virtually nothing. For the rest, if the Fed used simply to ask the advice of its primary dealer when deciding the volume of its Treasury purchases, now it will have to learn to consult the other central banks. Source: Bloomberg, 28/10/2011

(10) As Liam Halligan said so rightly, in the Telegraph of 06/11/2010, using an image that the GEAB wouldn’t have sniffed at: the US is going through its own “Economic Suez”. He is referring of course to events in 1956, when two time-honoured colonial powers, the United Kingdom and France, mounted a military coup to try to prevent nationalisation of the Suez Canal by Colonel Nasser … and had to stop short when America and the USSR, brandishing their new status of world leaders, signalled that they were opposed to the initiative. “Suez” marked the widespread realisation that the colonial era was over and that the powers of the past would not be those of the future. The parallel that Liam Halligan draws with our times is very pertinent.

(11) And they are far from being unanimously in agreement with Ben Bernanke. The chairman of the Federal Reserve of Dallas has said straight out that he finds the Fed’s current policy a mistake. Source: 24/7 WallStreet, 08/11/2010

(12) And Goldman Sachs estimates that USD 4,000 billion of quantitative easing would be needed to compensate for the weaknesses in the US economy. The price of the austerity and the external constraints is going to be huge. Source: ZeroHedge, 24/10/2010

(13) Even within the US, worries are being voiced about the highly dangerous nature of the Fed’s policy, even going as far as asking whether the Fed might not set off a new War of Succession. Source: BlogsTimeMagazine, 19/10/2010

(14) So even in Germany, which is less affected than others by the consequences of the crisis. Source: Reuters, 13/11/2010

(15) This is also the case for the local communities, which, like France with its departments, are starting to find themselves in impossible financial straits. Source: L’Express, 20/10/2010

(16) Our team launched this recommendation in spring.

(17) This GEAB N°49 provides more information in the chapter on the double Franco-German electoral shock of 2012/2013.

(18) Sources: Spiegel, 26/10/2010; MarketWatch, 12/11/2010; RiaNovosti, 10/11/2010; IrishTimes, 11/11/2010; NewropMag, 18/11/2010

(19) Europe will see its score on border protection surge in the very informative ranking based on measures affecting global trade, compiled by Global Trade Alert.

(20) Source: Le Figaro, 11/11/2010

(21) This is the incident that took place near the Senkaku/Diaoyutai islands. Source: Global Research, 06/10/2010

(22) A variety of other symbolic incidents have occurred, going beyond the regional level. For example, China’s recent ranking as no.1 in supercomputers, a position snatched from the US, who had held it from the time of the first computers, after the second world war. Source: Le Monde, 28/10/2010

(23) In October 2010, new-car sales were the worst in 42 years. Source: Asahi Shimbun, 03/11/2010

(24) Based on the purchasing power parity, this analysis concurs with the analyses conducted by the LEAP/E2020 team and stating in GEAB N°47 that US GDP is now overestimated by around 30%.

Global Europe Anticipation Bulletin

Gold Analyst Who Puts the Bull in Bullish

 

Commodities / Gold and Silver 2010 Nov 20, 2010 – 04:44 AM

 

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“Gold bullion is in a long-term bull market. And that’s going to go on for a number of years,” Martin predicted during a recent presentation at the first annual Forbes & Manhattan Resource Summit in West Palm Beach, Florida. His remark was included as one of a handful of reasons to be bullish about gold and commodities.

Global Fiscal and Monetary Reflation

Martin noted that economists have known for some time that the retirement of baby boomers would create fiscal “stresses” unlike the world had ever seen. It would have been ideal, he said, if the world’s developed economies had entered that period with budget surpluses but the onset of the global recession in 2008 made that notion impossible.

“Because of the ‘Great Recession’ we’re going into the baby boom-retirement phase with some of the greatest deficits in peacetime history,” Martin said.

Compounding that is something he called “convergence,” a phenomenon whereby financial markets are giving poorer European Union countries like Greece and Ireland the same lending terms that such wealthy EU countries as Germany and France receive, sometimes as low as 3%.

He asked rhetorically, “What does a pathological borrower do when interest rates drop from 15% to 3%?”

But before you could dismiss those issues as faraway problems in faraway places, Martin took aim at North American fiscal policy.

He used two charts to aid his point. The first was from the U.S. Congressional Budget Office, the second from the Canadian Parliamentary Budget Officer Office. The message of both charts was identical—that, with current trends, the debt-to-GDP ratio would exceed 200% in both countries by the mid-21st century. A third chart outlining the debt-to-GDP ratio in Greece showed a similar growth curve.

“Debts blow up,” he said.

The impact of the great recession was further illustrated by another slide that showed the U.S., Canada, Japan, Germany, France, Italy, UK, Greece, Portugal, Spain, OECD (Organization for Economic Cooperation and Development), China and India had all posted budget deficits in 2009.

Most of these deficits, Martin said, were related to stimulus measures designed to limit unemployment, as high unemployment is bad for “political health.”

Yet another slide charted the growth in the U.S. monetary base from 1915 until now. The line was akin to a cobra slithering through the grass, and then rising sharply to strike on Sept. 15, 2008, the day Lehman Brothers went out of business.

According to Martin’s chart, from that point until now—about two years—the U.S. monetary base has grown from about $900 billion to about $2 trillion, its steepest rise ever. But, he said, the U.S. Federal Reserve had little choice.

“I’m in full agreement with what the Fed did. The one thing that I have come to know after years of reading and writing about economics is that depressions really get going when you have a totally bankrupt banking system,” Martin explained. “If all the banks had failed then, we would be having quite a different conference.”

But these borrowing policies have left governments with few ways out. They can renege on promises, cut services, raise taxes or print more money, Martin said.

And what are the implications for gold?

“Money is what drives gold,” he said. “We print money and gold goes up.”

“Deflation is very bad for gold,” he said, adding, “the fact that we have low inflation is not good for gold. The fact that we’re trying to pump economies up and put money into the system and avoid the problem is good for gold.”

Global Imbalances

Martin pointed to America’s trade deficit as a growing problem.

A chart showed that the U.S. trade deficit declined while the economy was in a recession in 2008 and 2009 and that the deficit is growing again as the country’s economy posts modest growth numbers. That led Martin to a remarkable conclusion. . .

“The way for the U.S. to fix its current account deficit is to continue to have a recession,” Martin said in jest. He noted two ways the U.S. could find its way out of a trade deficit: 1) Buy fewer goods from the foreign sector; and 2) Get the foreign sector to buy more from you.

Martin revealed that the U.S. trade deficit with China is pushing $300 billion. He then provided a brief history lesson on the relationship between the greenback and the renminbi (RMB). In 1986, it took a little more than RMB$3 to buy one U.S. dollar. Today, it takes about RMB$6.8 to buy a buck.

“In the 1980s and 1990s, China specifically devalued its currency to become the most competitively priced country,” Martin said. “Now, it’s time to give some of that back.” He said the U.S. must pressure China to revalue the RMB.

The last time America took a stand on foreign currency values was in August 1971. At the time, President Richard Nixon established a 10% across-the-board tariff in an attempt to drive up Japan’s yen and Germany’s deutschemark (now the euro) after those two countries refused to revalue their currencies.

“It was messy, but it got done,” Martin said.

Martin then took issue with China’s stockpile of foreign reserves, which total almost US$2.7 trillion.

“In my humble opinion, this is criminal. This is so far beyond what a country needs as reserves that it has become a massively destabilizing force in the world economy,” Martin explained.

He didn’t let the U.S. off the hook, either. He pointed to America’s roughly $300-billion energy deficit—basically, the amount of crude oil the U.S. imports versus what it exports—with the rest of the world and dubbed it a “disaster.”

Martin called for changes to U.S. energy policy and recommended incremental increases in the price of oil until it reaches $200 per barrel. He said only then would America use less gas.

“That has to happen,” Martin said. “Oil is far too important in chemical feed stocks to be burned up in a car.” He used Japan to illustrate his point.

In 1975, OPEC demands sent oil prices through the roof and Japan, which imports virtually all its oil, was hit with a nearly tenfold increase in its energy costs. That, in turn, devalued the yen and forced Japan to become far more energy efficient. Today, Martin says, Japan is a leader in building hybrid cars and uses less energy per dollar of output than any other economy.

He says America’s energy trade deficit ultimately pumps hundreds of millions into the foreign exchange market.

“I pay attention to that when I look at gold because dollars in the foreign exchange market can end up invested in gold,” Martin said.

Excessive Global Reserves

Global foreign exchange reserves grew by $7.2 trillion between 2002 and 2009, according to Martin, and most of that money found its way into the international capital markets.

“This money has made a hell of a mess of housing markets around the world,” he explained. “This was far too much money that got recycled. It should never have happened. And the IMF was asleep at the switch.”

As of August 2010, China had foreign exchange reserves of $2.6 trillion; Japan, $1.01 trillion; Russia, $436 billion; Saudi Arabia, $422 billion; Taiwan, $372 billion; Korea, $281 billion; Hong Kong, $260 billion; India, $256 billion; and Brazil, $254 billion.

And what do central banks do with these reserves? Some are choosing mining investments.

“China has all these damn reserves and it has to get rid of them and, of course, it’s decided that the best way to get rid of its reserves is to buy resources for the future,” he said. “It can’t go into the gold market. If China put $2.6 trillion into the gold market, I wouldn’t be standing here. Gold would be what? $15,000–$20,000 an ounce? And I would be a very happy economist.”

But some of China’s reserves are finding their way into the gold market, albeit slowly. China has 1,054 tons of gold, up from 600 tons just a few years ago. India’s central bank recently bought 200 tons of gold from the IMF, as did central banks in Bangladesh and Mauritius.

The central banks in the West, meanwhile, have largely liquidated their gold assets.

“The Indian subcontinent governments have made a statement that they are happy buying gold for anywhere from $1,050–$1,250 an ounce,” Martin said. “The new guys on the block are very interested [in gold] for a simple reason: Gold is not the liability of another central bank. That is potentially earth shattering. It’s certainly a structural change in the gold market.”

Gold in a Bubble?

In real dollar terms, Martin argued, gold is nowhere near its 1980 high of $850, which translates to $2,385/oz. in inflation-adjusted terms today.

Martin went on to compare oil prices with gold. Gold has traditionally traded at 15 times the price of a barrel of oil, and it’s close to that mark now. Oil also peaked in 1980 at about 34 barrels of oil to one ounce of gold. Murenbeeld basically dismissed any notion of gold being in a bubble with the yellow metal trading at around $1,350 an ounce.

Investment Demand

“Think of gold today as actually going back to its roots. Central bankers are more interested in the metal. And you and I are wanting to hold at least some gold for precautionary reasons,” Martin explained, adding, “hold some gold and hope it doesn’t go up. That’s my investment view.”

Discussing gold’s standard investment-demand arguments like currency debasement and “safe haven” status, Martin then took those ideas a step further and proclaimed that gold is “morphing” into an asset class in much the same way the real estate market did through real estate investment trusts (REITs) in the 1990s.

He said that in 2008 global financial assets totaled $117 trillion, with $33 trillion of that in equities (equities declined about 45% that year), $51 trillion in private debt and $32 trillion in government debt. Of that $117 trillion, some $40 trillion was vested in managed assets like hedge funds and mutual funds.

In mid-2010, managed commodities were only $300 billion.

“If you think like I do, that resources and gold are morphing into an asset class, then you say what portion of your portfolio should you invest in an asset class? And I say at least 3%. In fact, I would say 5% but I don’t want to overstate my case,” he added. “At under 5%, it’s just an interesting investment. It doesn’t really change the characteristics of a portfolio.”

Martin did the math, though, and if 3% of the world’s managed assets went into managed commodities, the value would quickly climb to $1.2 trillion.

He said there are new gold products out there to lure investors including Dundee subsidiary Dynamic Fund’s Dynamic Strategic Gold Class (TSX:DYN2300).

David Keating, Mackie Research Capital Corp.’s managing director of equity markets, who was also at the conference, sees growing institutional demand for gold as well.

“Look at the rise of the gold ETFs. The market is definitely moving toward getting hard assets. You recently saw Sprott raise $550 million on its Sprott Physical Silver Trust (NYSE.A:PSLV). You’ve seen that being done on the gold side with all sorts of other structured product entities replicating owning physical gold. There are certainly dollars on the retail and institutional side being allocated to those kinds of funds,” Keating said.

Keating says Mackie, too, is playing to the institutional audience.

“We play in this small- to mid-cap part of the market focusing on small-cap growth oriented stories. The institutional accounts and retail investors are looking to get access to the next gold story,” Keating said. “One of the companies that we’re involved with is Sandspring Resources Ltd. (TSX.V:SSP),” Keating said. “We got in early on that. We think that on an enterprise value to ounces-in-the-ground basis, it’s very cheap.”

He noted, “It just recently raised about $50 million. That money is going to be used for step-out drilling and expanding the resource to get a sense of how big the (Toroparu) deposit really is.”

Mackie recently hosted a conference in Toronto where several junior companies pitched their stories to institutional and retail investors. Keating thought Geologix Explorations Inc. (TSX:GIX) made a case for its Tepal copper/gold porphyry deposit in Mexico.

“It recently put out a very positive feasibility study. And it’s a story that based on enterprise value to ounces in the ground is still cheap,” Keating said. “It’s got dollars to continue to drill the resource and we believe the resource is going to expand.”

Paolo Lostritto, an analyst with Toronto-based Wellington West Capital Markets, looks at companies a little higher in the food chain. His companies are generally producing or are near-term producers. He has a $1.20 target on Avion Gold Corp. (TSX.V:AVR; OTCQX:AVGCF), one of the companies in the F&M portfolio.

“It’s a company that bought a suite of assets that were technically challenged, and has executed a plan to unlock that value,” Lostritto explained. “The company has an excellent exploration team that has been adding ounces through the drill bit. But the reason people buy this story is because of cash flow.”

Avion’s operations in Mali produced slightly more than 51,000 ounces of gold in 2009. It will produce about 78,000 ounces this year, and the production guidance for 2011 is about 118,000 at cash costs of roughly $630 per ounce. The costs are higher than the industry average due to a high stripping ratio, which means a lot of superfluous material must be removed to extract the gold.

“There is quite a bit of strip associated with production (the ore), and the cash costs are elevated because of that. They’ve typically been around $650. You should see cash costs average around $550 for the next couple of quarters,” Lostritto said. “My estimate is that the company has 12 months of open-pit mining and 7–10 years of underground. And if it can make the underground work, there is potential for the underground mine life to grow as Avion drills at depth.”

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Global Inflation Watch as Gold and Silver Hit Good Support, QE2 Aimed at Breaking Stocks Higher

 

 

Stock-Markets / Financial Markets 2010 Nov 21, 2010 – 09:18 AM

 

“Pure truth, like pure gold, has been found unfit for circulation because men have discovered that it is far more convenient to adulterate the truth than to refine themselves.” – Charles Caleb Colton

There is so much going on out there that it’s difficult to pick a starting point. China, Ireland, quantitative easing and even Greece pop in and out of the news like a cork bobbing around on rough seas. One day everybody is selling everything due to deflationary fears and the very next day they are buying everything because of the threat of inflation. Then the next day deflation back on the tip of everybody’s tongue…

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The press is neurotically trying to attribute every minor fluctuation in share price to something that just happened somewhere, and it is annoying to say the least. If you know anything about the markets, you know that 99% of the time they are reacting to something that will occur five or six months out into the future. Of course if the folks on Bloomberg had to make some intelligent comments on what could possibly be coming six months down the road, the air waves would be filled with a lot of silence.

The financial news networks’ devoted most of the week debating whether or not the Irish will agree to a bailout and as of the close of business on Friday no decision had been reached. The Irish want the money but without the pain, and why not. We had a whole decade of free money with little or no regard as to whether it was being used for productive purposes. The EU wants the Irish to take the money along with all the Draconian strings attached to it, and the Irish are balking. Meanwhile the Greeks took money but failed to implement all the changes they had previously agreed to. Then we have the Portuguese, Spanish and Italians all heading down the same road and they are watching carefully to see just how bad it will be. I would love to have a ring side seat when the EU tries to implement change in Italy. I’ve lived in Italy for a number of years and change is about as welcome as a blow to the head from a baseball bat!

Then we have the curious case of China. They are concerned about inflation and rightly so. The Chinese spend a much larger percentage of their income on food and clothing than westerners do and the prices of corn, wheat, soybeans, sugar and cotton have jumped considerably over the last six months, and that tends to create unrest among the lower classes. The Chinese have raised reserve requirements on five separate occasions with the last announcement on Friday, and they are implementing price controls. Price controls carry with them the seeds of their own failure as anyone from Latin America or the Nixon Administration can tell you. The following chart gives you a very good idea of the inflationary pressures facing countries like Brazil, India and China:

I’ll have to admit that I was quite surprised to see Greece’s placement between Brazil and China on this chart. I would have imagined that that would have been down at the other end of the scale. China of course will refrain from buying and draw down on their food stocks but that will only work for so long. Once they go back into the market, prices will move higher again.

The problem is liquidity and the culprit is the United States and their propensity to print. They stuck a fancy name on it, quantitative easing, and then reduced it to a pair of initials. Now we call it “QE” and unfortunately we have to number them since one episode wasn’t enough! Last week the Fed announced what we lovingly call “QE2” and the markets weren’t impressed, and neither were our foreign bankers. Quantitative easing floods the

world with liquidity, and like a cesspool the level is rising as you can see in the preceding chart. I suppose this would be acceptable in some possible world if quantitative easing produced positive results. When QE1 was proposed the Fed boasted that it would liquefy the banks and they would begin to loan. Unemployment would decline as companies invested and the need for workers would increase. Also, the Fed would buy bonds and force the interest rate down.

Now the Fed has dialed in QE2 because the banks loaded up with cash but never loaned, unemployment went up to 9.6% and never went back down, and interest rates are strangely on the rise! The Fed says it needs QE2 because of the real and present danger of deflation in the United States. Notice the gap down in bonds, and inversely the jump in interest rates, that came right after Bernanke’s announcement regarding QE2! The bond market is sending a clear message saying the perception of risk trumps Fed speak. The Fed has purchased almost US $100 billion in bonds over the last week and yet bond prices continue to fall and rates continue to rise. By telegraphing its intentions to buy US $600 billion in bonds and US $300 in agency debt, the world now knows when it can belly up to the table and dump its dollar denominated debt! I believe that will prove to be a grave miscalculation.

For every action there is a reaction, or so I’ve heard. The flood of fiat currency has pushed up stock prices, selected commodities prices and both gold and silver. On the other hand it’s had a detrimental effect on the US dollar. For some reason the holders of greenbacks get nervous when the Fed proposes to inundate the world with another barrage of dead presidents. Bernanke made reference to the dollar’s decline on Friday and went so far as to drag out the same old tired refrain “a declining dollar will be good for US exports”. In order to make such a claim the man must assume that everyone in the world possesses a limited IQ. As I’ve told my clients on numerous occasions the US dollar has been declining steadily since 2001, and as you can see in the following chart of the US Balance of Trade, the deficit has increased considerably since 2001:

This seems to punch a big hole in Mr. Bernanke’s argument but you’ll never get him to admit to that.

Of late the US dollar declined from 89.00 to 76.00 as it priced in a significant increase in the quantity of fiat currency coming out of Washington, DC. Then last week people began to openly question if a second round of quantitative easing was really necessary, catching the market off guard and a rally ensued. After bottoming in November 4th at 75.63, the spot US Dollar Index rallied eight days and seems to have topped out at 79.46 and solidly above the 50-dma for the first time in months. You’ll see on Friday that the Index closed out the week at 78.41 and barely above the 50-dma. The dollar is now three days off of the high and the question now is whether or not there is any more upside left. I think Bernanke’s speech put a damper on the possibility of calling off another round of quantitative easing so I doubt we’ll see a test of the neckline and strong resistance at 80.16.

The top band of the trend lines that go back to the June high were touched and now the dollar appears to have turned down. RSI and the histogram have also turned down and it looks like MACD is about to do the same so we should see a test of strong support at 77.98 before Thanksgiving. Assuming that that the Fed moves ahead with QE2, we’ll probably see a test of the next critical support level at 75.02 sometime around the end of the month. Finally, at the end of his speech Bernanke on Friday said that the Fed would promote a strong dollar policy and that sums up the contradictions that have come out of Washington over the last couple of decades. Words go one way while actions usually take you in the opposite direction! Rest assured that the dollar will be sacrificed in order to deflate away the US debt.

As I mentioned earlier the Fed’s program of quantitative easing has affected a number of markets and that includes the stock market. Fiat currency is backed by nothing and serves no long term productive purpose. It is being generated in massive quantities in order to allow the United States to continue living beyond its means. Since it has no real destination banks either park it back with the Fed earning and interest on something they got for free, or it flows from market to market looking for fast profits. For a long time it flowed into the bond market, housing and into commodities and it also flowed into stocks. The first round of massive quantitative easing, valued at more than US $2 trillion, was announced in March 2009 and it coincided with the bottom in the Dow that came after a massive sell-off causing it to lose close to 65% of its value. A rally resulted that took the Dow from a low of 6,469 all the way back up to significant resistance at 10,729. That level was reached back in January of this year as you can see below.

That’s when it was first noticed that QE1 might be running out of gas and the Dow began to trade in a range from 9,600 on the low side to 11,246 on the high side. Now the Fed wants to float QE2 in the hopes of breaking the Dow out to the upside. The chance that QE2 might not come about produced two 90% (where upside volume is 90% of up plus down volume) down days in three sessions and then we had Bernanke’s speech basically saying that it is going to happen. In my opinion the timing of that speech was no accident and now we’ll see if the Fed gets what it wants. I have my doubts! The yield in the S & P 500 is 1.94%, the lowest I can recall in my adult lifetime, while the PER is close to 18 even with all the fraudulent balance sheets floating around out there. These are both extremes and signs of a grossly overvalued market. The number of new 52-week highs has deteriorated from an average of 400 in August to less than 50 this week while the number of new 52-week lows is slowly moving higher.

The one thing the bears have in their favor is the fact that big money refuses to enter this market. They have sat on the sidelines as the Dow rallied 75% and they could not be enticed to throw their hat into the ring. Anyone who thinks they’ll jump in at this late stage of the game, with the market clearly overvalued, is relying on “wishes and hopes” rather than focusing on the realities of our present day situation. As far as the here and now is concerned the Dow closed out Friday’s session with a 22 point gain to end the week at 11,203. There is strong resistance at 11,246 and if the Dow can close above it for a second time I could see stocks running as high as 12,266 regardless of whether or not value is in the house. This would mean a 75% recuperation of the bear market decline, the same percentage of recovery that we saw in the bond market, and we’ll more than likely see a test in December. On the other hand, if stocks turn down here, and I think they stand a reasonable chance, then the Dow should be back below 10,000 by Christmas. Watch how the Dow attacks 11,245 this week and we should know the answer by the time everyone carves their turkey!

Even gold got caught up in the “to QE2 or not to QE2” debate and that gave us a welcomed reaction that took price from 1,424.00, down to good support at 1,330.00. For some perspective on the reaction, look at the entire move up from the October 2008 low and you’ll see that it doesn’t even make a blip on the chart! The secondary trend was not violated, is headed higher, and both the 50-dma as well as the 200-dma were not broken on a closing bases.

I was looking for a seven to nine day decline that would test strong support at 1,318 in the December futures contract. Instead we experienced a six day decline down to decent support at 1,330.30 followed by a bounce. It is not a coincidence that the last decline was also six days in duration although the percentage of decline was somewhat greater this time around (5.2% versus 3.9% during the previous decline). Finally, as you can see the Point % Figure chart remains with a bullish price target of 1,610.00 surpassing my forecast for a 1,447.50 top by a wide margin. I advised my clients on Friday that I was buying gold because I believe the reaction is over and gold will now make another run at the critical 1,447.50 resistance level. I also believe we’ll see that level thoroughly tested and gold will then run up to a minimum of 1,512.00. What happens after that is anybody’s guess.

In conclusion, everyone is doing everything they can to sweep all of the problems under the rug. The way I see it the problems are huge and the rug is quite small. The FDIC is a perfect example. On Friday another four banks were taken over bringing the total for the year to 150 banks, and yet we never hear a word about it. What’s worse is that no one talks about the liquidation process used by the FDIC and the fact that these and many other banks grossly overvalued their assets in the first place. The FDIC comes into the failed bank and fixes a value and the assets and guarantees a large percentage of those assigned values for ten years. The institutions that take these banks over have essentially no risk and may even be at risk themselves. Aside from the closings the FDIC also has close to 425 banks operating under serious FDIC enforcement orders that called into question the banks’ solvency. Many of these 425 banks should have been taken over but the FDIC doesn’t want to draw attention to the problem. That’s our government in a nutshell!

Supposedly we have a new broom coming into Washington in the form of a new make-up in the Congress and Senate. It seems to be a human failing to pin our hopes on a “savior” to bail out the majority. We did that with Obama, it failed miserably, and it won’t be any different this time around either. Sooner or later people need to realize that progress will only become a reality when the person you see in the mirror at night is a better human being than when he got out of bed that same morning. Institutions whether they are political, educational, social or religious will all fail you because of the general lack of quality found in the average person today. That decline in quality is intentional and a result of government policies implemented over a very long period of time, and designed to produce an ignorant form of human “mule” bred to pull the cart of society for a not so benevolent master. The mule is replaceable, expendable, and his well-being matters not to the master. There is always another mule out there to take his place. That’s the world we face today and it’s my hope that there are still a reasonable number of none mules in the world that can make a difference. It will not be an easy struggle.

Fed’s Hidden Agenda of Driving U.S. Into a Second Great Depression

 

 

Economics / Great Depression II Nov 21, 2010 – 06:46 AM

By: Washingtons_Blog

 

Ben Bernanke has said that the Fed is trying to promote inflation, increase lending, reduce unemployment, and stimulate the economy. However, the Fed has arguably – to some extent – been working against all of these goals.

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For example, as I reported in March, the Fed has been paying the big banks high enough interest on the funds which they deposit at the Fed to discourage banks from making loans. Indeed, the Fed has explicitly stated that – in order to prevent inflation – it wants to ensure that the banks don’t loan out money into the economy, but instead deposit it at the Fed:

Why is M1 crashing? [the M1 money multiplier basically measures how much the money supply increases for each $1 increase in the monetary base, and it gives an indication of the "velocity" of money, i.e. how quickly money is circulating through the system]

Because the banks continue to build up their excess reserves, instead of lending out money:

These excess reserves, of course, are deposited at the Fed:

Why are banks building up their excess reserves?

As the Fed notes:

The Federal Reserve Banks pay interest on required reserve balances–balances held at Reserve Banks to satisfy reserve requirements–and on excess balances–balances held in excess of required reserve balances and contractual clearing balances.

The New York Fed itself said in a July 2009 staff report that the excess reserves are almost entirely due to Fed policy:

Since September 2008, the quantity of reserves in the U.S. banking system has grown dramatically, as shown in Figure 1.1 Prior to the onset of the financial crisis, required reserves were about $40 billion and excess reserves were roughly $1.5 billion. Excess reserves spiked to around $9 billion in August 2007, but then quickly returned to pre-crisis levels and remained there until the middle of September 2008. Following the collapse of Lehman Brothers, however, total reserves began to grow rapidly, climbing above $900 billion by January 2009. As the figure shows, almost all of the increase was in excess reserves. While required reserves rose from $44 billion to $60 billion over this period, this change was dwarfed by the large and unprecedented rise in excess reserves.

Why are banks holding so many excess reserves? What do the data in Figure 1 tell us about current economic conditions and about bank lending behavior? Some observers claim that the large increase in excess reserves implies that many of the policies introduced by the Federal Reserve in response to the financial crisis have been ineffective. Rather than promoting the flow of credit to firms and households, it is argued, the data shown in Figure 1 indicate that the money lent to banks and other intermediaries by the Federal Reserve since September 2008 is simply sitting idle in banks’ reserve accounts. Edlin and Jaffee (2009), for example, identify the high level of excess reserves as either the “problem” behind the continuing credit crunch or “if not the problem, one heckuva symptom” (p.2). Commentators have asked why banks are choosing to hold so many reserves instead of lending them out, and some claim that inducing banks to lend their excess reserves is crucial for resolving the credit crisis.

This view has lead to proposals aimed at discouraging banks from holding excess reserves, such as placing a tax on excess reserves (Sumner, 2009) or setting a cap on the amount of excess reserves each bank is allowed to hold (Dasgupta, 2009). Mankiw (2009) discusses historical concerns about people hoarding money during times of financial stress and mentions proposals that were made to tax money holdings in order to encourage lending. He relates these historical episodes to the current situation by noting that “[w]ith banks now holding substantial excess reserves, [this historical] concern about cash hoarding suddenly seems very modern.”

[In fact, however,] the total level of reserves in the banking system is determined almost entirely by the actions of the central bank and is not affected by private banks’ lending decisions.

The liquidity facilities introduced by the Federal Reserve in response to the crisis have created a large quantity of reserves. While changes in bank lending behavior may lead to small changes in the level of required reserves, the vast majority of the newly-created reserves will end up being held as excess reserves almost no matter how banks react. In other words, the quantity of excess reserves depicted in Figure 1 reflects the size of the Federal Reserve’s policy initiatives, but says little or nothing about their effects on bank lending or on the economy more broadly.

This conclusion may seem strange, at first glance, to readers familiar with textbook presentations of the money multiplier.

Why Is The Fed Locking Up Excess Reserves?

As Fed Vice Chairman Donald Kohn said in a speech on April 18, 2009:

We are paying interest on excess reserves, which we can use to help provide a floor for the federal funds rate, as it does for other central banks, even if declines in lending or open market operations are not sufficient to bring reserves down to the desired level.

Kohn said in a speech on January 3, 2010:

Because we can now pay interest on excess reserves, we can raise short-term interest rates even with an extraordinarily large volume of reserves in the banking system. Increasing the rate we offer to banks on deposits at the Federal Reserve will put upward pressure on all short-term interest rates.

As the Minneapolis Fed’s research consultant, V. V. Chari, wrote this month:

Currently, U.S. banks hold more than $1.1 trillion of reserves with the Federal Reserve System. To restrict excessive flow of reserves back into the economy, the Fed could increase the interest rate it pays on these reserves. Doing so would not only discourage banks from draining their reserve holdings, but would also exert upward pressure on broader market interest rates, since only rates higher than the overnight reserve rate would attract bank funds. In addition, paying interest on reserves is supported by economic theory as a means of reducing monetary inefficiencies, a concept referred to as “the Friedman rule.”

And the conclusion to the above-linked New York Fed article states:

We also discussed the importance of paying interest on reserves when the level of excess reserves is unusually high, as the Federal Reserve began to do in October 2008. Paying interest on reserves allows a central bank to maintain its influence over market interest rates independent of the quantity of reserves created by its liquidity facilities. The central bank can then let the size of these facilities be determined by conditions in the financial sector, while setting its target for the short-term interest rate based on macroeconomic conditions. This ability to separate monetary policy from the quantity of bank reserves is particularly important during the recovery from a financial crisis. If inflationary pressures begin to appear while the liquidity facilities are still in use, the central bank can use its interest-on-reserves policy to raise interest rates without necessarily removing all of the reserves created by the facilities.

As the NY Fed explains in more detail:

The central bank paid interest on reserves to prevent the increase in reserves from driving market interest rates below the level it deemed appropriate given macroeconomic conditions. In such a situation, the absence of a money-multiplier effect should be neither surprising nor troubling.

Is the large quantity of reserves inflationary?

Some observers have expressed concern that the large quantity of reserves will lead to an increase in the inflation rate unless the Federal Reserve acts to remove them quickly once the economy begins to recover. Meltzer (2009), for example, worries that “the enormous increase in bank reserves — caused by the Fed’s purchases of bonds and mortgages — will surely bring on severe inflation if allowed to remain.” Feldstein (2009) expresses similar concern that “when the economy begins to recover, these reserves can be converted into new loans and faster money growth” that will eventually prove inflationary. Under a traditional operational framework, where the central bank influences interest rates and the level of economic activity by changing the quantity of reserves, this concern would be well justified. Now that the Federal Reserve is paying interest on reserves, however, matters are different.

When the economy begins to recover, firms will have more profitable opportunities to invest, increasing their demands for bank loans. Consequently, banks will be presented with more lending opportunities that are profitable at the current level of interest rates. As banks lend more, new deposits will be created and the general level of economic activity will increase. Left unchecked, this growth in lending and economic activity may generate inflationary pressures. Under a traditional operating framework, where no interest is paid on reserves, the central bank must remove nearly all of the excess reserves from the banking system in order to arrest this process. Only by removing these excess reserves can the central bank limit banks’ willingness to lend to firms and households and cause short-term interest rates to rise.

Paying interest on reserves breaks this link between the quantity of reserves and banks’ willingness to lend. By raising the interest rate paid on reserves, the central bank can increase market interest rates and slow the growth of bank lending and economic activity without changing the quantity of reserves. In other words, paying interest on reserves allows the central bank to follow a path for short-term interest rates that is independent of the level of reserves. By choosing this path appropriately, the central bank can guard against inflationary pressures even if financial conditions lead it to maintain a high level of excess reserves.

This logic applies equally well when financial conditions are normal. A central bank may choose to maintain a high level of reserve balances in normal times because doing so offers some important advantages, particularly regarding the operation of the payments system. For example, when banks hold more reserves they tend to rely less on daylight credit from the central bank for payments purposes. They also tend to send payments earlier in the day, on average, which reduces the likelihood of a significant operational disruption or of gridlock in the payments system. To capture these benefits, a central bank may choose to create a high level of reserves as a part of its normal operations, again using the interest rate it pays on reserves to influence market interest rates.

Because financial conditions are not “normal”, it appears that preventing inflation seems to be the Fed’s overriding purpose in creating conditions ensuring high levels of excess reserves.

***
As Barron’s notes:

The multiplier’s decline “corresponds so exactly to the expansion of the Fed’s balance sheet,” says Constance Hunter, economist at hedge-fund firm Galtere. “It hits at the core of the problem in a credit crisis. Until [the multiplier] expands, we can’t get sustainable growth of credit, jobs, consumption, housing. When the multiplier starts to go back up toward 1.8, then we know the psychological logjam has begun to break.”

***

It’s not just the Fed. The NY Fed report notes:

Most central banks now pay interest on reserves.

Robert D. Auerbach – an economist with the U.S. House of Representatives Financial Services Committee for eleven years, assisting with oversight of the Federal Reserve, and subsequently Professor of Public Affairs at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin – argues that the Fed should slowly reduce the interest paid on reserves so as to stimulate the economy.

Last week, Auerbach wrote:

The stimulative effects of QE2 may be small and the costs may be large. One of these costs will be the payment of billions of dollars by taxpayers to the banks which currently hold over 50 percent of the monetary base, over $1 trillion in reserves. The interest payments are an incentive for banks to hold reserves rather than make business loans. If market interest rates rise, the Federal Reserve may be required to increase these interest payments to prevent the huge amount of bank reserves from flooding the economy. They should follow a different policy that benefits taxpayers and increases the incentive of banks to make business loans as I have previously suggested.

In September, Auerbach explained:

Immediately after the recession took a dramatic dive in September 2008, the Bernanke Fed implemented a policy that continues to further damage the incentive for banks to lend to businesses. On October 6, 2008 the Fed’s Board of Governors, chaired by Ben Bernanke, announced it would begin paying interest on the reserve balances of the nation’s banks, major lenders to medium and small size businesses.

You don’t need a Ph.D. economist to know that if you pay banks ¼ percent risk free interest to hold reserves that they can obtain at near zero interest, that would be an incentive to hold the reserves. The Fed pumped out huge amounts of money, with the base of the money supply more than doubling from August 2008 to August 2010, reaching $1.99 trillion. Guess who has over half of this money parked in cold storage? The banks have $1.085 trillion on reserves drawing interest, The Fed records show they were paid $2.18 billion interest on these reserves in 2009.

A number of people spoke about the disincentive for bank lending embedded in this policy including Chairman Bernanke.

***
Jim McTague, Washington Editor of Barrons, wrote in his February 2, 2009 column, “Where’s the Stimulus:” “Increasing the supply of credit might help pump up spending, too. University of Texas Professor Robert Auerbach an economist who studied under the late Milton Friedman, thinks he has the makings of a malpractice suit against Federal Reserve Chairman Ben Bernanke, as the Fed is holding a record number of reserves: $901 billion in January as opposed to $44 billion in September, when the Fed began paying interest on money commercial banks parked at the central bank. The banks prefer the sure rate of return they get by sitting in cash, not making loans. Fed, stop paying, he says.”

Shortly after this article appeared Fed Chairman Bernanke explained: “Because banks should be unwilling to lend reserves at a rate lower than they can receive from the Fed, the interest rate the Fed pays on bank reserves should help to set a floor on the overnight interest rate.” (National Press Club, February 18, 2009) That was an admission that the Fed’s payment of interest on reserves did impair bank lending. Bernanke’s rationale for interest payments on reserves included preventing banks from lending at lower interest rates. That is illogical at a time when the Fed’s target interest rate for federal funds, the small market for interbank loans, was zero to a quarter of one percent. The banks would be unlikely to lend at negative rates of interest — paying people to take their money — even without the Fed paying the banks to hold reserves.

The next month William T. Gavin, an excellent economist at the St. Louis Federal Reserve, wrote in its March\April 2009 publication: “first, for the individual bank, the risk-free rate of ¼ percent must be the bank’s perception of its best investment opportunity.”

The Bernanke Fed’s policy was a repetition of what the Fed did in 1936 and 1937 which helped drive the country into a second depression. Why does Chairman Bernanke, who has studied the Great Depression of the 1930′s and has surely read the classic 1963 account of improper actions by the Fed on bank reserves described by Milton Friedman and Anna Schwartz, repeat the mistaken policy?

As the economy pulled out of the deep recession in 1936 the Fed Board thought the U.S. banks had too much excess reserves, so they began to raise the reserves banks were required to hold. In three steps from August 1936 to May 1937 they doubled the reserve requirements for the large banks (13 percent to 26 percent of checkable deposits) and the country banks (7 percent to 14 percent of checkable deposits).

Friedman and Schwartz ask: “why seek to immobilize reserves at that time?” The economy went back into a deep depression. The Bernanke Fed’s 2008 to 2010 policy also immobilizes the banking system’s reserves reducing the banks’ incentive to make loans.

This is a bad policy even if the banks approve. The correct policy now should be to slowly reduce the interest paid on bank reserves to zero and simultaneously maintain a moderate increase in the money supply by slowly raising the short term market interest rate targeted by the Fed. Keeping the short term target interest rate at zero causes many problems, not the least of which is allowing banks to borrow at a zero interest rate and sit on their reserves so they can receive billions in interest from the taxpayers via the Fed. Business loans from banks are vital to the nations’ recovery.

The fact that the Fed is suppressing lending and inflation at a time when it says it is trying to encourage both shows that the Fed is saying one thing and doing something else entirely.

I have previously pointed out numerous other ways in which the Fed is working against its stated goals, such as:

Reinforcing cyclical trends (when one of the Fed’s main justifications is providing a counter-cyclical balance);

Increasing unemployment (when the Fed is mandated by law to maximize employment); and

Encouraging financial companies to make even riskier gambles in the future (when it is supposed to stabilize the financial system).

Gold, Silver Set to Beat Farm Commodities in 2011, Societe Generale Says

By Chanyaporn Chanjaroen – Nov 22, 2010 10:30 AM GMT+0100 LinkedIn More
Business Exchange Buzz up! Digg Print Email Palladium, gold and silver will extend their rallies next year and investors should remain overweight in precious metals, which will outperform farm products including sugar, according to Societe Generale SA.

Gold may gain 11 percent within a year, benefitting from central banks’ stimulus packages and expected dollar weakness, Frederic Lasserre, head of commodities research, said today at a media briefing. Palladium may rise 21 percent and silver may climb 19 percent, Lasserre said in Singapore.

Gold has surged to a record this month as investors seek alternatives to declining currencies and as concerns mount about the stability of some debt-laden economies. Ireland became the latest euro country to apply for a bailout from the European Union and International Monetary Fund at the weekend.

“We might see some gold-price rally again because of the recent fears regarding sovereign debt, and also the impact it may have on the dollar-euro,” Lasserre said. Corn and wheat will gain about 1 percent over the next 12 months, while raw sugar may drop 33 percent, according to bank forecasts, which projected changes from this quarter to the final quarter of 2011.

Spot gold, which traded at record $1,424.60 an ounce Nov. 9, has advanced 24 percent this year. Palladium, trading today at as high as $714 an ounce, has soared 75 percent, while silver has risen 64 percent and was at $27.8925 an ounce.

Bond Buying

The Federal Reserve pledged this month to spend an extra $600 billion buying Treasuries, adding to trillions of dollars injected by central banks worldwide to inflate their economies out of the worst global recession since World War II.

Gold may rise to $1,500 or $1,600 an ounce if the dollar falls to about $1.50 or $1.60 per euro, Lasserre said. The U.S. currency has lost about 4 percent against the euro this year and was at $1.3744 at 9:13 a.m. in London.

Societe Generale’s backing of gold and silver is matched by calls from rival banks. Precious metals will produce the best commodity returns in the next year, Goldman Sachs Group Inc. said in a Nov. 9 report, targeting $1,650 an ounce for gold.

Deutsche Bank AG Global Head of Commodities Research Michael Lewis has said that precious metals are some of the “safest long positions” to have. Still, Lewis also favored agricultural commodities including corn, soybeans and wheat.

Supply Shocks

“In agriculture there isn’t much upside potential,” said Lasserre, who’s led the bank’s commodities research team in Paris since 1997. That lack of potential is because there’s just been a huge rally, which can be explained by supply shocks, he said. Sugar may drop toward its long-term floor, he said.

Wheat surged to $8.68 a bushel in Chicago in August after drought ravaged Russia’s crop, prompting an export ban. Corn, trading at $5.435 a bushel today, has gained 31 percent this year. Sugar rose to 33.39 cents a pound on Nov. 11, the highest since 1981, on bad weather in major growers, including Brazil.

Oil may perform better than base metals and agriculture over the five years to 2015 as demand picks up, cutting a supply overhang, Lasserre said. West Texas Intermediate crude may gain 11 percent in a year and 45 percent over five years as a fuel- supply deficit develops, Lasserre said.

The January-delivery crude contract on the New York Mercantile Exchange was at $82.82 a barrel today. The price of the most-active contract has risen 4.4 percent this year.

Copper may rise 23 percent over the next 12 months and lead may gain 18 percent, according to the bank’s forecasts. Three- month copper on the London Metal Exchange touched a record $8,966 a metric ton on Nov. 11.

To contact the reporter on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net