Happy New Year!

I wish you all a Happy New Year for a successful 2012 blogging year.

See you in 2013 and here is me playing a medley from Final Fantasy XIII-2 I just arranged for this occasion from my favorite composer Masashi Hamauzu.

J.P. Morgan: Very Large Shift from Registered to Eligible Gold

It's official, registered gold and silver is being dumped. That means that open interest is declining in the COMEX. Why this is you can find out here: http://katchum.blogspot.be/2012/12/comex-gold-stock-keeps-declining.html

With that also the manipulation will end. And look who is transferring this registered silver and gold bullion into eligible assets. Yes, J.P. Morgan.

J.P. Morgan's vault has 40% less physical gold and 16% less physical silver in just one day. Suddenly, the amount of registered gold has hit a multi month low.

Chart 1: COMEX Gold

Chart 2: COMEX Silver

COFER Q3: Rush into USD, Fleeing Euro

The total foreign exchange holdings have grown 2% quarter over quarter to 10.8 trillion. Annualized it amounts to 8% per year (which matches the MZM increase of money supply as pointed out by Michael Pento). That also means that gold should go up 8% per year at least to match foreign exchange holdings.

Table 1: COFER Q3 2012

What's interesting to note is that people have dumped the euro ($1459 billion to $1451 billion) and bought the USD ($3613 billion to $3716 billion). The USD is still managing to preserve its reserve currency status after all. The euro did show a lot of weakness in Q3 of 2012.

Chart 1: EUR/USD

I wonder what Q4 will bring as the euro went up in terms of gold while eurobonds were increasing in value against US bonds. I also wonder what will happen next year when QE3 is going to be implemented. Will they flee the USD and the Japanese yen?

Chart 2: Foreign Exchange Reserves

Gold Lease Rates in Positive Trend

It's safe to say that the worst is over in the gold market as lease rates have just made a new high since the dip in the beginning of December. The COT reports also show that the large commercial silver shorts have now been covered for a small part to the extent of the number reported on November 2012. Open interest declined with it.

Chart 1: Gold Lease Rates

I'm not sure what the status is on the silver lease rates, but that trend line should follow the gold market soon.

Gold is Transported from West to East

I came across an interesting chart on King World News and want to store it on this blog. It can come in handy later on.

As I talked about central banks accumulating gold, apparently it's mostly the Asian economies that are the ones accumulating gold and the Western economies that are selling gold (Chart 1).

Chart 1: West/East Gold Reserves

But as you can see, even the Western banks are now buyers of gold since the eruption of the 2008 crisis.

The top in March 3, 1965 is a very peculiar year. That year, president Johnson approved the Gold reserve law, repealing the backing of Federal Reserve deposits with gold. This law marks the trend to remove gold from the monetary system. In 1967, only 3 nations backed their monetary systems with real gold, now nobody does. The law was a means to expand the monetary system as gold would become less important concerning reserve requirements. And then in 1968, gold backing of Federal Reserve notes was repealed too. So nobody was interested to hold gold in their central bank.

But today, with the expansion of all this paper money and bonds, the gold standard should be reimposed and central banks know this, even Western central banks are now again buying gold as you can see on the blue trend on chart 1.

Capstone Mining Announces Share Buyback

Capstone Mining (CSFFF.PK) just announced a share buyback, let's take a quick look at the numbers.

Capstone mining had 382 million shares outstanding on September 30. Cash was at $510 million, assets were at $1.5 billion and equity was at $1.4 billion.

Market capitalization was considerably lower than equity: $874 million. So it is a very good idea of management to announce a share buyback on 27 December 2012.

In this share buyback program, Capstone Mining can buy approximately 10% of all outstanding shares or 34,014,871 shares ($80 million over a time period of 1 year). Capstone Mining has a lot of cash as compared to its equity. So I believe the company will buy back shares with its cash position. After the buyback, this will leave the cash position of the company at approximately $500 million considering its net earnings are at $15 million per quarter.

So basically nothing significant will happen to the cash position over the next year. The buyback will reduce the amount of shares by as much as 34 million shares. The earnings per share will increase 10% as a result of the buyback and that means that the P/E ratio will drop 10%, making the valuations more interesting for investors to accumulate Capstone Mining's shares.

To read on, go here.

Sprott Physical Platinum & Palladium Trust

Since this week, you can buy the Sprott Physical Platinum & Palladium Trust on the NYSE.

The platinum-gold ratio has been rising and I believe this ratio will continue rising. So now is a good time to invest in physical platinum and palladium.

SPPP

SPPP

Copper Contango Experiment

This week, the copper contango remained high, but the copper price fell. So I still expect the copper price to go higher as we move to backwardation. The copper contango theory will not be wrong.

As I write this post, I see the copper price go up from $3.53/lb to $3.59/lb.

The next step to extend this copper contango theory is to identify the tops and the bottoms of the contango. What are the upper limits of contango and lower limits of the backwardation?

Chart 1a: Copper Contango Vs. Copper Price

If we quickly look at history, we can see that in 1988, we got a price of $1/lb copper and a backwardation of around $0.2/lb. That's 20%. If we then look at another data point in 1996, we got a price of $1.25/lb and a backwardation of around $0.1/lb. That's 8%. Similarly, in 2006 we got 7%. For contango we have 13% in 1982, 7% in 1993, 2% in 2008.

So as far as major backwardation lows, we have a range between 7% and 20% and 2% to 13% for major contango highs.

Today we are at 0.6% (0.02/3.6) (mild contango), so we are neither in a low or a high range. We are now right in the middle between contango and backwardation, with a small bias to contango. So, to be really sure we have found a bottom in the copper price, the contango to price ratio should go to at least 2%. But when we go back to backwardation like in 1988, 1995 and 2006, the copper price should spike upwards.

Chart 1b: Historical Copper contango

There is one caution however, the LME copper stock levels are surging in exchange warehouses, which will put a cap on the rise in copper price and may even bring the copper price down.

Chart 2: LME Copper Stock

Added Kyle Bass as Guru

I decided to add Kyle Bass to the list of gurus on this blog.

He seems like a smart guy, knowing a lot about debt. And he is pro-gold.

Most important is that he says Japan is going to have a bond bubble crisis as early as next year (2013). I talked about this here and it shows that revenue of Japan is quickly going down, while interest expense is just being kept low by printing yen to buy government bonds. But, the interest payments as a percentage of tax revenues is rising, even when rates are being kept low. I said there is a point where it doesn't work anymore.

That point has arrived: The problem is, if the current account goes negative, which is already happening now, the fiscal deficit can't be maintained any longer (previously, the current account surplus was higher than the fiscal deficit. Not anymore now). Meaning, the tax revenues will eventually all go to the payment of interest on debt.

Result: implosion of Japanese bond market and nominal rise of Japanese equities. Japanese pension funds will buy huge amounts of gold. (BTW, Nomura has already surged a lot, maybe it's time to cash in the profits)

Watch his 2012 seminar here:
http://www.youtube.com/watch?v=JUc8-GUC1hY

Correlation between Bonds and Gold

Just to be sure that I have this picture (and correlation) logged onto this blog, here is the famous Zero Hedge bonds Vs. gold chart.

Chart 1: Bonds Vs. Gold

And here is my updated version based on the charts GOLDAMGBD228NLBM and DGS10:

Chart 2: Bonds Vs. Gold

The decoupling of the two charts seriously went into overdrive from 2008 onwards. Guess what, that year marks the start of the QE programs to keep interest rates low. I wonder which one of the two charts will be the ultimate loser. (it won't be gold because marginal cost of production is $1500/ounce)

It is also since 2008, that central banks started buying gold.

The stock-bond correlation tells us when gold is correlated to yields.

The Marginal Cost of Gold Production

UBS recently put out a number for the cost of producing an extra ounce of gold. As you can see on chart 1, the cost has skyrocketed from 2008 onwards to today. Costs almost doubled in 2 years time.

It shows us that if the gold price were to go to $1500/ounce, nobody would go out and search for gold as it would be unprofitable.

Chart 1: All-in Cost of Gold Mining

Chart 2 gives an operating cost of $700/ounce for gold, but it's important to notice that the large bulk of the costs go to construction, maintenance, exploration and taxes. Also note that the lowest gold went in 2008 is exactly at $712/ounce in October 2008, which was 10% below marginal cost of production at that time. That low in today's terms would be $1350/ounce.

Chart 2: Replacement cost for an ounce of gold

With all of this in mind, I believe gold will never go below $1350/ounce. This will be the ultimate floor. If it does, it will quickly rebound.

And for people who are interested in the marginal cost of production in silver, it is around $30/ounce as suggested in this article. So I expect silver to rebound soon.

Max Keiser with Peter Schiff

Max Keiser is one of my favorite reporters ever since his take on Goldman Sachs which went viral on Youtube. I always follow the Keiser Report every week.

It's an exceptional occurrence to see Peter Schiff and Max Keiser together on the screen so I can't ignore to put up the video here.

LCNS net short positions Vs. Open Interest

I haven't looked at this possible correlation yet, but thanks to "goldbug" who reminded me here, I just decided to take a look at this possible correlation.

Apparently, they do correlate. When open interest skyrockets it's mostly because of the increased net short position of large commercials.

That makes life simpler, you just have to look at the open interest which is given each week on the 'GotGoldReport' site, and you will automatically know whether net short positions went up or not.

If open interest is high, you can be sure that silver will sell off.

Chart 1: Open Interest Silver

Chart 2: LCNS Net Short Positions Silver

Silver Prices Decouple Between Asia and Western World

Andrew Maguire on King World News reveals a shocking truth about the dislocation of silver prices between Asia and London. I already warned in February 2012 that prices between Asia and the Western world would diverge from each other and that manipulation of prices in the U.S. and London will end because of the emergence of Asia and their Shanghai Metals Market, which just recently started trading in silver (in April 2012).

Now, finally, the decoupling is happening and this should be an eye opener for everyone.

Apparently, silver traded at $29.61/ounce in London, while it traded at $32.50/ounce in Shanghai. That's a premium of 10% over London Spot Price. When the market closed it still traded at around 4% premium.

Of course there could be price disruptions between the two markets because of domestic spot trading. But 10% is a bit over it. Ultimately it's Shanghai that will win, because their exchange is backed by the real thing, while the COMEX is backed by nothing.

I would like to monitor this premium, but I can't find live quotes anywhere on the internet (which are free of charge). If I could monitor this premium divergence, it could be a tool to predict if the price of silver will go up or down.

Peter Schiff: Perfect Storm for Silver

Just wanted to share a video about silver with Geoffrey, the CEO of Pan American Silver and Peter Schiff. Apparently the inflation costs for mining silver has been going up as much as 100% in the past several years.

Note the exuberant enthousiasm of Peter, it's like he is asking a Christmas present from Santa Claus.

Brazil Doubles Gold Holdings in Two Months

Precious metals have been weak for the year of 2012 and investor sentiment is nearing an all time bottom, but I believe we haven't reached bubble territory yet.

When roaming the precious metals forums, I found out that Brazil doubled its gold holdings in two months time (added 17.2 tonnes in October 2012 and 14.7 tonnes in November 2012. Total holdings now 67.2 tonnes), I just wanted to see if central bank gold buying correlated with the gold price.

And surprisingly, there is a correlation (Charts 1 and 2)! If you look very carefully, you will see that the price of gold goes up when central banks buy gold. For example from 1970 till 1976 we see a net positive buying of gold by central banks. That period was also bullish for the gold price. The same can be said for 1980. Then came a period where central banks slowly got rid of their gold from 1980 till 2002 and that's a period where gold declined in price. And from 2003 onwards, central banks have slowly shifted from net sellers to net buyers again today.

Keep reading about this analysis here.

Redemption of Paulson Advantage Funds

Zerohedge reminds us why gold has been falling the last several weeks.

Paulson's Advantage and Advantage Plus funds were said to be dumped by Morgan Stanley. And because 30% of Paulson's portfolio is in gold (GLD) and another huge percentage in gold mining stocks, this dragged down the gold market and more importantly the gold mining market. To see a recent filing go here.

I don't believe this is that significant though. Morgan Stanley clients only comprise $100 million of the combined $5.7 billion Advantage and Advantage Plus funds. That's 1.7% and not even worth mentioning. By the way, the clearing volume at the London exchange can be as much as $3.5 billion a day. So $100 million is nothing.

I wouldn't put too much thought in this. Paulson and Soros are still bullish as far as I can see.

(if I make mistakes in any numbers mentioned above, please tell me)

Correlation between Industrial Production Vs. CRB Metals Index

Thanks to Bob Garino, who commented on this article, I found out about the correlation between Industrial Production (manufacturing) and the CRB metals index.

Let's see if this correlation is correct.

I immediately see that from 1990 till 2000 the correlation doesn't fit. That period was a period where miners were in a bear market as metals prices declined and mining companies were getting worse and worse conditions for mining. Bonds were doing ok in that period.

So I'm a bit sceptical about this correlation. But I'll still add it to my list of correlations.

Chart 0: Industrial Production: Manufacturing

Chart 1: Industrial Production Index

Chart 2: CRB Metals Sub-Index

China U.S. Treasury Holdings Steady

Nothing spectacular to report in the Chinese buying of the U.S. treasury market.

In October 2012, China's holdings rose $7.9 billion.

Chart 1: China U.S. Treasury Holdings

The Correlation Between Open Interest And COMEX Stock Levels

Just a few days ago, I reported that J.P. Morgan vault had a significant amount of eligible gold taken away. I didn't know what it meant.

Today, another 175000 eligible gold was taken away, this time by HSBC and J.P. Morgan, who are seen to be the main manipulators in the precious metals market.

This is all nice to report, but I still don't know what it physically means.

But let's try to understand the CFTC market and COT data.

First off, when open interest increases in gold (Chart 2), it means that inventory needs to be replenished. Analogy: if you get increasing orders (higher open interest), you should have a higher stock level to meet demand.

So if open interest increases on Chart 2, registered bullion stock levels should go up too on Chart 1. We can see that Chart 1 and Chart 2 correlate very well. Also, Chart 3 and Chart 4 correlate very well too.


Gold:

Chart 1: Gold COMEX Stock

Chart 2: Open Interest Gold

Silver:

Chart 3: Silver COMEX Stock

Chart 4: Open Interest Silver

If for one or another reason, the open interest goes up, while the inventory doesn't go up, then we have a problem. The most likely reason is a shortage of bullion gold/silver. That's when you need to worry about physical shortages. So that's important to monitor.

So actually it's very handy to monitor the COMEX stock levels and compare it to the open interest chart of the CFTC.

Update: Copper Contango Report

For the people interested in my copper contango Vs. copper price experiment:

Yesterday we saw that the copper turned a little bit back into backwardation. This means that we will see the copper price go up in the future. As the copper contango turns back below 0 (backwardation), copper price should go up.

Let's see if this will happen, hopefully the contango theory is right. I'm still betting on a copper break out.

Chart 1: Copper contango Vs. Copper price

Japanese Equities Outperforming Japanese Bonds

As I warned everyone already in March 2012 in this article, it is finally happening. Japanese equities are indeed outperforming Japanese bonds and we can see this event starting in one of the most important equities brokers, Nomura Holdings (Chart 1). In my previous article I said that Nomura Holdings would flourish as it is the primary brokerage service in Japan.

Nomura, which pays a dividend that's higher than the 10 year Japanese bond yield, has skyrocketed just recently and is going to keep going upwards according to me.

Chart 1: Nomura Holdings

To find out why this is, go here to read the analysis.

Correlation: Capacity Utilization Vs. Unemployment Rate

It's fascinating how many correlations there exist in the economic world. Today I found this one: Capacity Utilization Vs. Unemployment are inversely correlated. And the best part is: the capacity utilization rate is a leading indicator for unemployment, meaning the trend in the capacity utilization rate can predict the trend in the unemployment rate.

For the U.S. the chart looks like this:

Chart 1: U.S. Unemployment Vs. Capacity Utilization

For the country I live in, Belgium, the correlation works too (one chart goes up, other chart goes down):

Chart 2: Capacity Utilization Belgium

Chart 3: Unemployment Rate Belgium

For Canada it works too:

Chart 4: Capacity Utilization Canada

Chart 5: Unemployment Rate Canada

It even works for the Euro Area:

Chart 6: Capacity Utilization Euro Area

Chart 7: Unemployment Rate Euro Area

And Japan:

Chart 8: Capacity Utilization Japan

Chart 9: Unemployment Rate Japan

Do you know what this means? If we just look at the capacity utilization (which is a leading indicator), we can predict the unemployment rate. And if we can predict the unemployment rate, we can predict the retail sales, GDP growth, current account deficit/surplus, currency ratio, etc... I could never believe capacity utilization rate could be so important and significant.

Cherish this correlation!

The Trend in Base Metals based on Capacity Utilization and China Manufacturing PMI

To forecast the trend in the price of base metals we have a lot of indicators to look at. Two of the most important indicators to look at in my perspective are capacity utilization and the China manufacturing PMI.

Previously, I noticed that capacity utilization for mining in the U.S. was improving in November 2012, with the rate growing to 91.1%. Though, the problem is that the U.S. isn't that important anymore when talking about commodities. For example, in 2012 the emerging markets account for 75% of global iron ore consumption (Chart 1), while Asia, South America and Oceania account for more than 70% of global iron ore production (Chart 2). The same trend can be found in gold and silver production/consumption.

Chart 1: Iron Ore Consumption by Continent

Chart 2: Iron Ore Production by Continent

It would be wrong to only look at the capacity utilization of the U.S. to draw any conclusions on the prospects in the commodity market. It's essential to include China, South America and Australia/Canada into the equation.

To read the analysis, go here.

Why the Euro will outperform the U.S. Dollar

The last few months, we noticed that the euro had significantly outperformed the U.S. dollar since August 2012, right when QE3 was going to be announced (Chart 1). I see conditions in the Eurozone improving and soon the markets will focus on problems in the U.S. instead of the Eurozone. Therefore, I believe the uptrend in the euro will continue and I'll explain why.

(click to enlarge)

Chart 1: EUR/USD

As I pointed out earlier in this article, strong currencies are likely to have strong bond markets. So, if we see a strengthening bond market for a certain country, we can be almost sure that the currency of that country will appreciate in value against other currencies.

There are other indicators like PMI, central bank balance sheets that influence the currency of the country.

Go here to read the analysis.

Sprott Physical Platinum and Palladium Trust IPO

The long awaited Sprott Physical Platinum and Palladium Trust IPO (SPPP) has finally come to exist, since we heard about it in February 2012. You can now subscribe to the 35 million units priced at $10/unit tradeable soon on the NYSE and TSX.

The physical Platinum/Palladium will be stored at the Royal Canadian Mint. You can bet that I will put some money in this trust if I have some spare money left as platinum is still very cheap as compared to gold.

More info at: http://www.sprottplatinumpalladium.com/

Chart 1: Platinum to Gold Ratio

Capacity Utilization Continues to Improve in November 2012

We have good news, capacity utilization for the total industry improved in November 2012, from 77.7% the previous month to 78.4% this month.

What's even better news is that capacity utilization for the mining industry went up to 91.1%, the highest for several years and above the historic average.

Utilities and manufacturing capacity utilization rates both went up significantly.

This information can be very important as it points to inflation.

For more information you can read my previous article on capacity utilization.

JP Morgan: Large drop in Eligible Gold

I don't know what it means, but yesterday we saw the largest drop in total and eligible gold in about a year time. 322000 troy ounces of gold were taken away. That's 11,4% of all JP Morgan gold stock.

Chart 1: COMEX gold

How Japan is a premonition of what's to come to the U.S.

The media has always compared the U.S. to Japan because of its debt burden. Many analysts claim that Japan cannot be compared to the U.S. because Japan has a current account surplus as opposed to the U.S. (Chart 1 and Chart 2) and most of its government debt is held domestically. Still, there are a lot of similarities between the two countries. I will discuss several of them and present chart evidence on interest payments, budget deficits, outlay spending, current account, currency and bond yields.

It's difficult to see the big picture here, but it all comes down to this. People have started to back away from the dollar as the Federal Reserve runs out of bullets. Bond yields are now kept low by the Federal Reserve by buying bonds directly in the market and this is highly inflationary to the U.S. dollar. Even though the Federal Reserve tries keeping U.S. bond yields low, U.S. bond prices (TLT) have stopped gaining value just recently. From the case of Japan we can see that there is a point where debt is so high that interest payments will go up no matter how low yields on government bonds are. A good sign of people backing away from the U.S. dollar can be seen in the decoupling theory of which I talked here. The Hang Seng Index has been making new highs while the Dow Jones is trending down. Investors should prepare to get out of the U.S. dollar soon and go for emerging market securities like the iShares MSCI Emerging Markets Index (EEM) or precious metals (GLD) (SLV).

To read more about my analysis on the market outlook in the U.S. go here.

Copper Contango still widening

As I pointed out earlier, copper is going to brace itself for a big move upwards. This week's contango report still confirms the uptrend.

I still think this is the case because the copper contango is still widening with a rising copper price. If the copper contango turns to backwardation, we should see the copper price spike upwards.

Chart 1: Copper Contango Vs. Copper Price

Copper Bullish Move Confirmed

Dan Norcini from KWN Metals Wrap has confirmed my bullish prediction on the copper price:

"The copper market is in an uptrend. The copper market looks like it is going to break higher due to an improving economy in China and the improving housing market in the U.S. If copper is going to make a run higher, silver is going to go higher and the bears are going to have to cover."

Let's see what the coming months will bring. If Dan and I are right about a break out to the upside in the copper market, this could spark a run in the commodities and stock markets.

Chart 1 indicates that a huge move is about to come, as we are nearing the end of a wedge pattern.

Chart 1: Copper Price

The Current Status on Precious Metals

Let's do a quick analysis on precious metals here.

First off, I said yesterday that China lost interest in gold during the past months in this article.

Second, we were expecting a drop in net shorters for silver when we saw a drop in the silver price, but this didn't happen.

LCNS went back up, so that means there are still a lot of people with interest to get the silver price down.

Chart 1: LCNS Silver Net Short Positions

Third, the declining lease rates are also indicating that weaker prices are still to come.

Chart 2: Silver Lease Rates

Fourth, the silver stock at the COMEX has been rising, which indicates to me a further decline in prices is probable.

Chart 3: COMEX silver stock

Another indicator at the Sprott PSLV says that premiums have been dropping. This drop also indicates a disinterest in silver.

Chart 4: Sprott PSLV premium

And finally, we saw that since September 2012, the gold and silver miners have been greatly underperforming the gold and silver price, which indicates further weakness in precious metals to come.

Chart 5: Gold Miners Vs. Gold Price

I have to say, I'm not that bullish on precious metals at this moment when I see all these indicators going downwards.