Central banks shifting to gold

There has been much talk about central banks becoming net buyers of gold since the start of the economic crisis in 2008. I want to elaborate on that.

The world gold council (WGC) yearly reports on the amount of central bank gold sales. As of 2010, central banks have shifted from net sellers to net buyers of gold (Figure 1). And this has only happened recently! As we look at history, during the inflationary years of 1980, central banks were buying gold. Then a period of gold selling occured from 1989 till 2009 where gold went into a bear market. Central banks only shifted to buying gold since 2010. Which means we are going straight back into a bull market of gold.

Figure 1

The WGC expected growth in gold buying from central banks to continue throughout 2012. The projected growth of central bank gold buying was projected to be 336 tonnes of gold per year in 2011 (Figure 2). Their predictions were right as central banks added 450 tonnes during 2011.

Figure 2

By far, the increase in interest in gold is the highest within the sector of central banks as opposed to investment, bars, coins and ETF's (Figure 3).

Figure 3

The top among those countries that increased their gold holdings in 2011 are: Mexico, Russia, Thailand, Bolivia, Korea (Figure 4). More recently, we see activity from Mongolia and Kazachstan.

Figure 4

Conclusion: Central banks know there is something going wrong with our fiat currency system. Otherwise they wouldn't shift to buying gold, which started coincidentally after 2008: the year of the global financial crisis where money supply exploded. I suggest that we investors follow the big guys into buying gold, you don't want to be left behind.

Agriculture turning around?

At the beginning of 2012 agriculture prices are starting to turn around after the big correction that occured in 2011. Speculators have started to add net long positions in agriculture due to drought concerns in South America. Global demand is still going up.

Soy Bean prices are going up on dry weather in Brazil and Argentina.

Palm Oil prices benefit from the problems in the Soy Bean crops.

Cotton prices are improving but are still weak. Cotton prices are bottoming out though.

The rubber market is likely to continue the uptrend due to bad weather conditions. Demand for rubber is strengthened by the buying up to the Lunar New Year.

Wheat prices are still weak due to large wheat production.

Coffee prices had a surge in 2010 and were correcting in 2011. Prices will remain firm though due to supply shortages.

Sugar is in an uptrend, but speculators are turning bearish.

Corn prices are weak due to a surplus in inventory, but seem to be bottoming out.
Rice prices are turning in a downtrend as India starts exporting more rice to the world.

Overall, we can say that agriculture prices are in the process of bottoming out, but I wouldn't count on making money here because wheat, corn and cotton (the three biggest agricultural commodities) are still in oversupply.

RJA Rogers Agriculture ETN

Chinese buying copper

At the London Metal Exchange (LME) the copper stock levels keep declining as can be seen on following graph:

LME Copper warehouse level

The Chinese were importing copper at record levels during December 2011 to restock their inventory. There has been a concern that in 2012, there will be a copper deficit, which resulted into this buying frenzy.

As a result we can see that since September 2011 the copper price was going up, just at the same time that LME stock levels were going down.

Copper price

I can't blame the Chinese to buy copper, they want real assets and not some US government paper, which they are dumping by the way as can be seen on following graph:

China US treasury holdings

I think the buying frenzy is not over yet, as China is positioning itself to create competition against the London Metals Exchange in June 2012. On that date China will open the Pan Asia Gold Exchange, also known as PAGE, challenging the LME and COMEX.

I predict that gold and silver will explode on that event. Interesting times will emerge later in 2012, so prepare accordingly by buying precious metals!

Belgium Downgraded by Fitch

Today Belgium was downgraded by Fitch from AA+ to AA with negative outlook. All of this due to the Dexia fiasco. I'm from Belgium and I can say that the bailout of Dexia was the most immoral thing the government has ever done. Dexia has an enormous amount of Greek debt (US$5 billion write down)  and everyone knows Greece is going to default sooner than later. Supporting Dexia was the dumbest act ever. The only reason why Belgium government bonds are doing well is because Belgians have an enormous amount of savings and the unemployment rate is improving.

But we see the consequences already from Dexia. Several cantons lost several millions of money. Of course, we tax payers will need to pay for this.

Amount of shares in Dexia per capita

4 other countries were downgraded as well:

Italy: A => A-
Spain: AA- => A
Cyprus: BBB => BBB-
Slovenia: AA- => A

Surprisingly, the euro went up...

Gold Spike?

Today there was this large gold spike to 2263.65 EUR/oz during New York Globex time. I have no idea what this phenomenon is. If somebody could point out what this is, it would be really helpful.

Maybe it's an omen of what is yet to come!

Spot gold in EUR/oz

Baltic Dry VS Copper

Commodities like copper are correlated to the Baltic Dry Index or Dry Bulk Rates.

Old post:

The last few weeks we see that the Baltic Dry Index has been dropping while copper prices surge. How can this be?

Is the economy slowing down as evidenced by the falling BDI, or is the economy growing as evidenced by the rising copper prices. Nobody really knows. My take on this is that the economy actually is growing, on phony money that is (or you can equally say the money supply is increasing).

What is happening to the BDI though, is a consequence of the massive creation of ships during the period of 2005-2008.

BDI VS Copper

While the BDI may keep falling, the copper price is steadily going up, together with the S&P. The chart below shows the high correlation between copper prices and the S&P.

S&P VS Copper

Another evidence of the improving economy can be seen in the BullandBearwise index, which measures the performance of key macro-economic metrics (capacity utilization, unemployment, CPI, PPI, yields, etc...). This index is still in an uptrend:

BullandBearWise Index

So frankly, I don't see a crash coming soon, even if the BDI keeps dropping. Because this is a disparity created by an oversupply of ships.

The Fed will never increase interest rates again

Today Ben Bernanke said he would keep the benchmark rate essentially at zero percent till 2014. Earlier he said he would keep it at zero percent till 2013.

My take on this is that they will never increase interest rates again, until the whole system collapses. Marc Faber already pointed this out in 2010.

Look at what effect it has on the silver and gold price...

To see the whole interview, see below:

USD is losing reserve currency status

It is apparent in the timeline below that the whole world is trying to back away from the "reserve currency" of today: the US Dollar. More and more political games are going to be played and this will eventually result in the Great War of our century (as Gerald Celente calls it). It all started in end 2010 but the games are accelerating. If you pay attention to the countries involved, you will see that Asia itself is trying to create an Asian reserve currency.

Here's what is happening:

• 24 November 2010: Russia and China want to back away from the USD to lessen their dependencies on the US dollar. They will try using their own currencies for settlement.

• 24 July 2011: China wants to export their goods to Iran in exchange for oil. Thereby bypassing the USD and US financial sanctions. (that is also why USA is trying to go to war with Iran, just to make it more difficult for the Chinese)

• 25 December 2011: China and Japan promote direct trading in yuan and yen to reduce costs of USD currency interchange. Japan buys Chinese government bonds (instead of US government bonds).

• 29 December 2011: India comes to play and wants to strenghthen bilateral trade with Japan. Thereby boosting the rupee. Japan will invest in Indian infrastructure projects.

• 07 January 2012: Dmitri Medvedev proposes Iran and Russia to drop the USD and buy the rial and ruble in bilateral trade. Thereby ignoring U.N. sanctions imposed on trade with Iran.

• 20 January 2012: India starts paying Iran for oil in rupees, ignoring U.N. sanctions imposed on trade with Iran. India is relying heavily on Iran's oil.

USD is losing reserve currency status

Capacity Utilization update

The Capacity Utilization rate in the US for total industry (Dec 2011) was released today at 78.1%. This means that we're still in an uptrend, which is bullish on gold and silver.

Speaking about silver: PSLV (Sprott's silver trust) today dropped almost 10% today, I'd say this is a very good price to start accumulating physical silver.

Capacity Utilization (BullandBearwise)

Historically when capacity utilization rates go to 80%, a year later we get a spike in inflation. So there is a high correlation between capacity utilization and inflation.

If you don't know what capacity utilization is, you can follow these two videos from Salman Khan on the capacity utilization - inflation correlation here:

Buying vs Renting

Recently I had a heated discussion about which one is better: buying a house or renting a house.

I kept saying that renting a house was cheaper than buying a house and here's why:

- The government will not keep subsidizing your loan

- Housing prices will not forever keep going up faster than the rise of wages

- Gold will increase much faster than real estate due to inflation

- Taxes on property are high and will keep increasing

- Maintenance on property needs to be paid by the owner of the house 

- Mortgages will rise in interest rate and will collapse the price of houses

I found a nice site that calculates the expenses: Renting VS Buying

If we make following assumptions:

- The average rent of an appartment in Belgium: 715 euro/month (2010) (house rent)

- The average price of an appartment in Belgium: 215000 euro (2010) (house price)

- Inflation rate: 3.5%
- Mortgage interest rate 5.5%

- 30% down payment

- Rent inflation 3.5%

- Interest on investment in gold: 5%/year (gold will at least triple in price in 30 years)

- 30 year mortgage

- Maintenance 1000 euro/year

- 6450 euro closing costs 

- 2300 euro tax/year

- Depreciation of house: 1% a year (your appartment will lose value year over year due to style that gets old and due to the fact that people will pay less for a house that has been lived in for 30 years)

Conclusion:
Buying does not become better than renting during the first 30 years.

Here's how much you're out under each scenario:
 $480,804 to buy the house.
 $189,411 from renting if you invest the difference.
 $575,490 from renting if you don't invest.
If you rent and religiously invest the difference between what you would have paid for a house and what you're paying in rent, you can earn a return of $386,078 (after taxes). This helps make renting a better deal.

Buying	Renting
$674,112	$575,490	Cash spent
-$206,746		Home value
$13,439		Closing costs on resale
$480,804	$575,490	Net spent (if not investing) (lower number wins)
	-$386,078	Less return on investment
$480,804	$189,411	Net spent (lower number wins)

M1 and M2 still rising

M1 is the total currency in the banks + checking accounts.

M2 = M1 + savings accounts, funds

Money supply measures the amount of currency in circulation in the economy and is, as a consequence, a measure of future inflation. If you would think that the government isn't still printing money, I need to dissapoint you. M1 and M2 are still rising at an exceptionally fast pace. Which is very inflationary in the future.

M1 is at 2.23 Trillion USD

M2 is at 9.75 trillion USD

Baltic Dry drops

The Baltic Dry Index is an index of dry shipping lease rates. It reflects how much it costs to rent a freighter for hauling non-liquid raw materials. There is a high correlation between BDI and the Chinese economy. If the BDI drops, the commodity trade drops, together with the Chinese economy.

The last few weeks the Baltic dry Index dropped quite a bit, which indicates a slowdown in the Chinese economy with its commodity trade. Even the Panamax and Supramax (for smaller ships) is dropping, which confirms the slowdown in every sector of the freight transport economy.

This will be bad for industrial commodities going forward. I wouldn't rule out silver correcting downwards, if this trend continues.

A possible reason for this drop could be the drop in prices of Chinese properties as can be seen on the Shanghai Property index:

Belgium housing bubble

The Economist has a nice interactive tool to monitor the house prices from 1975 till 2012: http://www.economist.com/node/21009954

A few interesting observations can be made:

Belgium, where I'm living, is still in an upward trend in housing prices (Chart 1), while this can't be sustainable if we look at house prices against average income (Chart 2). Historically housing prices can only go up when wages go up, because you can't buy a house when you don't earn enough money to buy it/pay it off. I am expecting a similar drop in housing prices in Belgium like what has happened in the US in 2008.

In the United States, we see the collapse starting in 2007 and bottoming out in 2009.

In Japan, we see that house prices are becoming really cheap for Japanese people to buy, which is actually a good thing.

In Hong Kong we also seem to have a housing bubble forming.

Chart 1: House prices in real terms

Chart 2: House prices against average income

Katchum's Economic Intermezzo

Welcome!


If you are reading this article, you will be one of a few privileged people, able to prepare for the tsunami that's coming to us. We live in one of the most exhilarating times of the past few centuries and that's because the future, starting from 2012, will never be the same as before. We are faced with the limits of our existence concerning debt, money supply, commodities, exponential growth, population, energy and war.


If you haven't seen this curve of base money yet, it's time to take notice of it (Chart 1). This chart shows the amount of base money (billion USD) that has been printed by the federal reserve. It was relatively flat in the beginning of the century and started to move upwards in the 1970's when the gold standard was abandoned. But it really started to explode in 2008, during the financial crisis that we all have experienced ourselves. This is the first sign of coming inflation. Our money will diminish more and more in value because money is being printed increasingly by governments around the world.


Chart 1: Base money supply and Ben Bernanke (Federal Reserve)

The following chart shows the federal US external debt:


Chart 2: US federal external debt

U.S. Federal External Debt

If you look closely, the debt is accelerating at a perfectly exponential pace, which is completely unsustainable. Something has to give and ultimately we will see a first sign of hyperinflation.

We are in 2012, the time where additional debt doesn't grow the economy. Which means you need to print an eternal amount of money to grow GDP. This gives us the second sign of hyperinflation. To prove this statement I'll show you this chart 3: "Zero Hour".

Chart 3: Zero Hour

The "Zero Hour" chart shows us the amount of GDP growth (Y-axis) that you will get by adding 1 USD of debt to the government's balance sheet. For decades we could just print money and grow the economy.

In 2012 - 2014 unfortunately our luck is over. Printing money will not grow the economy anymore! That's the reason why debt is going up exponentially (see chart 2). It takes an infinite amount of debt to get us out of trouble. Which means it's over with, we've finally reached the limit.

A third sign of coming hyperinflation is shown in chart 4: "Level of deficits relative to government expenditures." This chart shows the government spending (pensions, medicare, social security) compared to foreign debt. 

=> For every 100 USD the US government spends, 40 USD is borrowed from Asia, Europe, etc...

Historically, once we reach 40%, we start a period of hyperinflation. In 2012, the USA already reached 60%...

Chart 4: Deficits relative to government expenditures (%)

Another sign of the imminent collapse of the USA is shown in Chart 5 where the government is spending too much money, while having less and less revenues.

Chart 5: US Federal Expenditures vs Revenues

A financial collapse will ultimately start happening and we can already see evidence of this in the bond markets in Europe. This is why you shouldn't place your hard earned money in the bank.

Consider that the 1 Year German government bond yields are going under zero (see Chart 6). Would you place your money in a bank with interest less than 0%?

It is amazing that people want to lend money to the German government while paying extra money (0,02% of their investment) a year from now. Thereby losing money with their investment.

I can think of only one reason for this and that is: "Your money is not safe in the bank".

Why would someone not just put their savings in a bank which pays around 1,5 % yield a year. Instead they want to lose money by buying German government bonds. Exactly because your cash is not safe in your bank. At any time your bank will go bankrupt. Germany is a safe haven, so people flee to that country. But there are far better alternatives which I will talk about next on.

Chart 6:

Completely the opposite is the 1 year Greece Government Bond Yield (see Chart 7), which is surging past a record 380 %, which basically means a default on their debt. And a collapse in Greece means a collapse in the banking industry.

Chart 7:

It amazes me that people still buy these government bonds, knowing that the bond bull market is coming to its end.

US government bond yields have run a 30+ year bull market (1980-2012). I think it's time for the market to start moving the money from government bonds to precious metals.

Which takes me to the ultimate safe haven: Gold and Silver!

During hyperinflation, the best way to protect yourself is to buy precious metals like gold and silver. There are many reasons to do so.

The first one is because of a complete depletion of commodities in about 20 years from now (see chart 8). Especially silver (Ag) will become scarce and ultimately will be depleted in about 11 years if we keep growing exponentially. Oil will double in price in about 2 years from now due to production decreases (peak oil theory).

Chart 8: Commodity depletion


In the beginning of 2012 a very interesting event happened in the silver market. The premium over spot price of a certain silver trust (PSLV) surged to 34%. Why would people buy silver at such high premiums? That's because the silver price is about to start surging upwards.

Chart 9: Silver premium/price

Silver premium (%) blue dots, Silver Price (USD) red dots

Much like silver, gold is ultimately the best store of value. If we consider the amount of money the US federal reserve has printed, gold is still very cheap historically, which is the second reason to buy gold. If we calculate the Gold Money Index as:

GMI = Central bank foreign exchange reserves (USD) / Central Bank Gold Reserves (ounces)

                                      

Then the gold price would have to go to 12000 USD. We are at 1600 USD so that's an eightfold increase!

With the problems in the Eurozone I would be very wary about staying in cash. Chart 10 tells us that Belgians would lose 23,9% of their money if they would go back to the Belgian Frank. This is the third reason to buy gold.

Chart 10: Fair value during breakup of Euro

And finally the last reason to buy gold: during the Great Depression everything collapsed (real estate, oil companies, stocks, bonds, cash). The only things that surged were gold and gold mining companies. A similar event happened in Iceland in 2008, the last man standing was gold.

We can already see turmoil in the whole world. USA is starting a war against Iran. China and Japan get out of the US dollar trade. Russia sells out on 70% of their US government bonds. Occupy Wall Street happens. Greece is in chaos...

Conclusion: Enjoy the beauty of life while it lasts and buy gold/silver. 

Follow me at: katchum.blogspot.com

Government Bond Yield Extremes

Today I found an interesting article on Bloomberg about 1 Year German government bond yields going under zero (see Figure 1).

It is amazing that people want to lend money to the German government while paying extra money (1% of their investment) a year from now. Thereby losing money with their investment.

I can think of only one reason for this and that is: "your money is not safe in the bank".

Why would someone not just put their savings in a bank which pays around 1,5 % yield a year. Instead they want to lose money by buying German government bonds. Exactly because your cash is not safe in your bank. At any time your bank will go bankrupt. I know Germany is a safe haven, but there are far better alternatives here like buying precious metals: gold and silver.

Figure 1:

The 1 year US government bond yield is really almost the same. Amazingly low yields with minimal return in an inflationary environment (see Figure 2).

Figure 2:

Completely the opposite is the 1 year Greece Government Bond Yield (see Figure 3), which is surging past a record 380 %, which basically means a default on their debt.

Figure 3:

It amazes me that people still buy these government bonds, knowing that the bond bull market is coming to its end.
US government bond yields have run a 30 year bull market (1980-2012). I think it's time for the market to start moving the money from government bonds to precious metals.

PSLV silver premium analysis

Today I fabricated a nice chart of the PSLV price (Right Y-axis) and the PSLV premium (Left Y-axis) from the beginning of 2011 till today.

I calculated this as follows:

I first calculated a standardization coefficient based on the premium, price of PSLV and SLV of 30 December 2011. The standardization coefficient was 2.55 (30 December 2011) and 2.5 (5 January 2012). If I had the historical premiums I could make an average standardization coefficient. The problem is that I don't have the data for historical premiums of PSLV... 

So we'll just go with this premium here to calculate Stand. coefficient (30 December 2011):

                                                   SLV price 

Stand. coefficient = --------------------------------------------------------                                     

                              (PSLV price / (1+ PSLV premium*0,01))

 = 26.94 / (13.43/(1+ 27*0.01)) = 2.55     

Based on this coefficient I calculated the PSLV premium to spot price with this formula:

PSLV Premium = ((PSLV price * Coefficient ) / SLV price) -1 

Then I plotted this PSLV price /PSLV premium chart in function of time for 2011.

PSLV premium (%) and Price (USD) in function of time (coefficient 2,5)

PSLV premium (%) and Price (USD) in function of time (coefficient 2,55)

As you can see there is a correlation between the PSLV price and the PSLV premium. When the premium goes up (blue squares), then the PSLV price follows a few days later (orange diamonds).

So the premium of PSLV is a good indication to know if the spot silver price will go up or down. When the PSLV premium goes up, then the PSLV price (and also the spot silver price) will go up a few days later and vice versa. Also note that the premium trend is going up, which is a bullish sign for silver.

Conclusion: Always watch what the premium is doing. The latest days the premium shot up to 30%, which means in the future we will see a huge price spike. Let's see if my predictions are correct. :-)

Marc Faber - Slovenia Conference (2009)

This is an old video from the 2009 Slovenia conference, but an all important one. Marc faber talks about the macro-economy in a global market. He will talk about economic cycles, commodities, bonds, real estate, emerging markets, gold and war. As debts are skyrocketing it becomes increasingly clear that gold is the only safe haven.

Abstract:

- We are in the up move of the Kondratieff cycle

- Bonds are the worst investment

- Asia has all the money

- US trade deficit will become hyperinflationary

- Emerging markets will consume more

- Gold is a safe haven

- War is coming

- Commodities will become scarce

Cash is Trash

This one is a classic Robert Kiyosaki Video from 2008 where he is preaching his famous quote:

"Cash is Trash"

And rightly so...