Cyprus: could something like that happen in Canada?

April 4, 2013 1 Comment

Marc Faber contends that at some point, everywhere will become like Cyprus.

It will happen everywhere in the world. In Western democracies, you have more people that vote for a living than work for a living. I think you have to be prepared to lose 20 to 30 percent. I think you’re lucky if you don’t lose your life … If you look at what happened in Cyprus, basically people with money will lose part of their wealth, either through expropriation or higher taxation.”

But in Canada? No way!

Well… maybe. Check out page 144 of the 2013 “Economic Action Plan” (I hate that term):

The Government proposes to implement a “bail-in” regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.

The details are not made explicit in the budget document. But remember, your deposit is the bank’s liability. When the budget talks about “certain liabilities” being converted into “regulatory capital,” it kinda sounds like Canadian government might be willing to enact a Cyprus-esque solution to a banking crisis.

Apparently, this is not what they mean. Instead, Ottawa wants banks to issue “contingent capital bonds,” something Carney has advocated. These bonds would provide an above-average return. The catch is that if the bank gets into trouble, the bond is converted into shares. The bank would then have emergency capital without a taxpayer-funded bailout.

I think this is a stupid idea. Sure, I suppose banks should be able to issue whatever kind of bonds they want. However, Ottawa claims it wants to “limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are “too big to fail.” The contingent capital bond doesn’t really do anything about that. The moral hazard still is there, because there remains an implicit assumption — which seems to permeate all Western nations at this time — that if anything bad happens to a bank that made bad investments, the entire world will explode. So the government or the central bank will have no choice but to intervene to “save the world (banks)”! We don’t even know that the government itself would not buy these bonds. Or, in a serious crisis, why they couldn’t just buy preferred bank stocks, like a Paulson plan style of bailout/bail-in.

If the implicit guarantee is still there (and why would it not be? Canada’s banks were bailed out in the financial crisis), then contingent capital bonds don’t address the moral hazard issue. Instead, they just let the moral hazard continue with a wink and a nudge, while someone gets a higher yield bond out of the deal. Meanwhile, the explicit generators of moral hazard, like the BoC, CDIC, and the CMHC, continue to exist without change.

Canada’s Big Five banks hold nearly $3 trillion in assets. Their capitalization is about 8%.  So their leverage is so great that they would not withstand even a moderate crisis on a “bail-in” of converted contingent capital bonds. A 20-30% hit on assets would crush them. The idea is a joke.

Yet, the Canadian government, for all its ineptitude, must reasonably fear that a critical Canadian bank failure is a plausible situation. Whatever their “bail-in” plan entails, you must remember that CDIC insurance covers only $100,000 of your chequing and savings deposits, and short-term GICs. It doesn’t cover your stock account or your RRSP accounts. Don’t count on the ‘geniuses’ in Ottawa to regulate the economy so effectively that all your money will be safe.

— Read more at CBC —

Filed under Banking and Finance, Central Banks, Inflation, Intervention, Investments Tagged with , , , , , , , , , ,

Is the gold price being manipulated?

April 4, 2013 Leave a comment

When oil prices rise, many economically illiterate people will say something like this:

“Speculators and oil companies are manipulating the market to drive up the price of oil.”

When there is a price change that people don’t like, it’s often blamed on “manipulation.” Did the price of gas rise in the summer? It’s those monopolistic oil companies.

Of course, no one ever blames the manipulators when the price of oil falls.

When it comes to gold and silver, people behave in a similar way. The difference is that people decry the “manipulators” and “conspiracies” when the price goes down.

I read Ed’s Gold and Silver Daily in the morning because I like the charts. I find it hard to read his commentary, because he is always blaming “da boys” for any price decline. Price declines which, he claims, are “impossible” in the free market. (For example, it’s claimed to be utterly incomprehensible that gold would fall in the post-Cyprus crisis, unless the cause of the decline is manipulation.)

Yet you will never hear Ed, or anyone like him, use manipulation to account for a price increase.

Gold and oil often move together. If gold is down, see if oil is down as well. If you think manipulators are driving down oil prices, then at least you are being consistent if you claim manipulators are driving down gold also. Yet no one ever blames manipulators for driving down oil prices.

In my opinion, people should not worry themselves over gold manipulation. So short-term futures traders might cause the market to move around a bit. But every short has a long. Futures traders do not want to manipulate the price downward if prices “should” be going up with massive shorts, because if so the market will rape them when price rises. Secondly, the banks that are supposedly manipulating gold prices lend huge amounts of money to gold producers. None of the board members of mining companies that I know believe there is manipulation.

And really: if the price of gold is being manipulated to a lower-than-otherwise level, why not just buy more? If someone drives the price of a commodity below what its market price “should be”, it would be… below the price at which it should be. Good deal. If some idiot like Gordon Brown (who sold half of Britain’s gold at hilariously low prices) wants to drive the price down, good luck. They obviously can’t keep it the price down forever.

Forget the manipulators. Here is why I think the gold price is falling: the economy is slowing down. Europe, Japan, and China are in recession. I believe North America is fighting hard to avoid one, but by the end of the year there will be nowhere left to run.

A panic will cause central bankers to inflate even more, and gold will move up in response to new monetary expansion. Otherwise, slowing economies are rough on investments. People want to avoid losses and gather cash, so they sell stuff like gold and stocks. When  demand deteriorates, prices drop. This is totally normal and not at all related to “manipulation.”

Filed under Central Banks, CMR, Commodities, Inflation, Intervention, Investments, Precious Metals Tagged with , , , , , , , ,

Investing: Silver vs. Gold

March 6, 2013 1 Comment

Many people want to know about silver. They want to know how it compares to gold as an investment.

Some call silver a “poor man’s gold.” In other words, the average man on the street is more able to go to a dealer and buy a few ounces of silver than he is a few ounces of gold. Yet “poor man’s gold” is not a fair characterization, because it assumes silver and gold belong in the same category simply because they are both precious metals. The reality is that silver and gold are different in important ways.

I recommend that one’s precious metal holdings be MAXIMUM 25% silver. 15% is probably better. Gold should make up the rest.

First, I invite you to check out the Kitco charts and look at recent price behavior.

In April 2011, silver reached a high of $49. But by June 2012, it hit $27. As I write this, it is $29. Measured from the 2011 highs, this is a massive loss. Nearly 50%.

Now look at gold. In September 2011, gold hit a high of $1895. In May 2012, it bottomed at $1540. As of right now, it is $1580. Measured from the 2011 highs, this is a moderate loss. Nearly 20%.

The idea reflected here is that silver is much more volatile.

Look back to 1980. Silver fell from $50 to $3.60 in 1991. Gold, at its worst, fell from $850 in 1980 to $255 in 2001. It’s like losing your house and all your money, instead of just all your money.

So when gold sells off, silver will sell off  harder and faster. Silver bulls will argue that the potential gains are much, much higher with silver than with gold. This is plausible, if only because silver is 40% down from its all time high and gold is 17% down from its all time high, and there are strong reasons to believe that both will move upwards.

Why the volatility? The primary reason is industrial demand, which for gold is very small. It is significant for silver, however. During a panic, the price for raw materials plummets.

Gold is different. You could say it commands a premium. This is essentially because gold is regarded as a monetary metal even though it is not money. Central banks buy and sell gold. They have it in their vaults. Central banks don’t stock silver. Wealthy people want gold in a crisis, and silver is much less interesting. Indian families buy it when their daughters get hitched. Asians use it to protect against inflation.  Silver really doesn’t serve that purpose, and I do not believe it will in the near future.

Silver will probably have a bigger bull market than gold by the time Great Depression 2 hits. But if you want to buy precious metals because you are afraid of people like Bernanke and Carney, then you want gold. Silver is a higher risk trade. Gold will perform better in a panic, which is when silver will perform horribly.

In either case, your objective is to hold until the error cycle reaches its final moments before we enter a deflationary depression. Because at that point, you want to unload all your gold and silver and get currency and bonds from institutions that won’t go broke. It’s a trade that would be harder to time correctly with silver than with gold.

All this being said, there is one other important advantage gold has over silver: your wife or girlfriend will like gold jewelry more than silver jewelry.

Filed under Banking and Finance, Central Banks, Commodities, Gold, Inflation, Investments, Precious Metals Tagged with , , , , , , , ,

What is up with the gold price?

March 4, 2013 1 Comment

The first two months of 2013 have erased gold’s price gains from 2012.

So what? The gold market is a bumpy ride. Are you sure you are man enough to own gold until Great Depression 2?

If you’ve been buying gold coins throughout the last decade, you probably don’t even care much about the current situation. You might even welcome a bit of weakness in the market as a chance to get more value.

I’ve been telling people to buy and hold gold coins for ten years. I still recommend doing so. The latest developments in the gold price don’t upset me much. I barely think about it.

Late-comers to the gold scene are the ones who are stressed out. You might be upset if you purchased your first gold coin last year, or bought into some gold ETF at the mid-2012 lows. You’ve heard bullish predictions for $2000 gold, $2500 gold, $3000 gold, but you’ve seen the price action over the last 12 months. You hear all the news stories reporting bearish sentiment on gold, and you worry. Your “Get Rich Quick” scheme has failed.

People get frightened when their holdings fall 5%, 10%, and 20%. I consider price changes, even big price changes, to be normal. But then again, most of my trades are in highly speculative stocks that frequently rise or fall 20% in one day. So price volatility upsets me less than most.

I would not be surprised if gold fell another 20% from its current point. Actually, I predict this will occur within a year. Recession will drive down asset prices. Asia is in recession. Europe is in recession. The US is going into recession. As the US goes, so goes Canada.

Also critical is Federal Reserve policy. Much has been made of the Federal Reserve minutes from February 21, where it was suggested the economy was improving and the size of their bond purchases may need to be “adjusted” — which was interpreted to mean “lowered.” I don’t think this holds much meaning. It’s just talk. The Federal Reserve has no “exit plan” prepared.

Instead, it is highly significant that the Federal Reserve did not inflate last year. In terms of gross open market operations, the Fed was busy. But on net, the balance sheet did not increase. This puts downward pressure on gold’s price. QE3 is now underway, but gold’s price already jumped last year in anticipation of the inflation that would create.

Other central banks are inflating and buying gold — mainly Asian central banks, and Russia. The trend indicates these purchases will continue — but in the grand scheme of the gold market, these deals are small. Japan’s central bank has gone into “suicide mode” and seems eager to ruin the yen.

Bernanke recently testified in Congress that interest rates had risen and that indicated improvement in the economy. Let us assume that is true — what interest rates have risen? Two-year to 30-year rates have been falling. Only the shortest-term rates have risen, and not significantly. 90-Day went up five-hundredths of a percent in February, and nobody cares.

The economy is getting worse, not better. Central banks’ money printing will become more frenzied.

Don’t worry about short-term fluctuations in the gold price. If you believe that there will be long-term worldwide mass inflation, then you should continue to accumulate  gold coins until it comprises a significant (25% to 40%) of your net worth.

Filed under Central Banks, CMR, Commodities, Gold, Precious Metals Tagged with

WHOA — here comes QE3

February 4, 2013 Leave a comment

There’s been a lot of talk on QE3 and not a lot of action. At least not in what was reflected in the net expansion of the monetary base.

That has changed quite dramatically. Check out the short-term monetary base at the Fed now:

Fed AMB feb 2013

That is a very notable change, because last year the Fed’s policy was actually deflationary. For the first time since the end of QE2, we are seeing Bernanke and the gang really firing up the presses, without a corresponding sell-off in other assets.

The Fed is expected to add about $1 trillion dollars to the economy this year. It is unlikely to cause a surge in monetary prices. It will help bolster the price of US debt and mortgage-backed securities. But as with previous QE’s, I expect commercial banks to stockpile this newly created money in their excess reserves.

This will not help the economy — it will merely sustain the grossly distorted world economic system a little bit longer.

Filed under Banking and Finance, Central Banks, Inflation Tagged with , , , , ,

Newer posts →