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Nothing is ever guaranteed, but the .938% libor and the $916 US gold price will likely work in our favour in our efforts to close off the $65M US financing (as highlighted in a previous post). The dramatic fall in the US $ (as most of us gold investors expected) doesn't hurt either - there is now surprise money moving away from the US dollar and looking for investments elsewhere. If the Chinese investors happen to leave us at the 11th hour, they will now have to compete with all of these billions of surprise dollars for the premium investments.
We should also not forget about the other potential LT Debt deal, at least as a contingency plan to the $65M deal or at least a partnership to secure future assets (in competition with the merger option). If they were interested in Century previously (as we are told) then the lowered libor and positive (sustained) gold price trend (and future expectations), and of course the lowered US $, should make Century even more attrative to them right now.
"The other scenario being considered by the Company’s Board of Directors is a comprehensive agreement with a group of financiers for debt and equity financing for the Lamaque project, in addition to assistance with future capital requirements of the Company."
By the way, another key indicator I like to keep my eyes on is the US $ to Indian Rupee conversion rate. It obviously has a significant impact on both jewellery buying and direct gold purchases, which ultimately is one important influence on the gold price.
Prior to the escalated crisis situation last September, the conversion rate was about 43 rupees to 1 US $. At the peak rate since then has been around 52 rupees for 1 US $. Now, with the falling US $ we have seen some change in the exchange rate, but it hasn't correct substantially as yet. Currently, it is 49.13 rupees for 1 US $.
Jewellery and gold purchases in India has picked up over the past month or so. Going forward, the greatest determining factors on the gold price from India will be the strength of the rupee, the speed of recovery of the Indian economy and the success of crops for the farmers.
With regards to the US $, the index was as low as 72 prior to the dollar recovery. I think it had reached around a peak of 88 over the past 8 months of the crisis. It has now fallen back to 82.47. With the trillions of potentially new dollars committed by the US government, the seeds have been planted for the US dollar index to eventually take out that 72 low. How quickly that will happen is anyone's guess. It all depends on which direction the economy goes. The US $ has been treated as the world reserve currency, even bypassing gold. Money managers still use the US $ for safety even though they know it's dead - currently a walking zombie. I think their logic throughout the crisis is to park their money there (foreigners have to buy it first in order to buy US treasuries) and then be the first to rush for the exit when the signs improve. That's likely why we've seen a stampede out of the US $ over the past couple of days - money managers were executing their exit strategy.
Anyway, longer term, we know that the US $ is dead due to the severe devalution, but don't be surprise if it bounces around shorter term. If the economy takes another downturn then money managers will temporarily jump back into the US dollar, in their efforts to seek what they think is safety. I think another reason they like to park their money in US $'s is due to convenience - they have larger amounts of money to move. They also figured that the US government would be the last place in the entire global system that would vanish.
All you seem to hear about is all the hype about how wonderful the economy is recovering (almost as if the last 8 months never occurred). It amazes me that no one is talking about pending corporate real estate and credit card implosions - especially credit card defaults. Life was a giant party for many Americans for most of this decade. Not only did many of them buy multiple houses that they couldn't afford, but they were supporting their good living via all the credit card offers that arrived in their mail box each week. They thought the increased market value in their home (s) made them eternally wealthy (and it would never go away). They thought home prices would be sky high forever (and continue to rise).
I kept shaking my head when looking at this stuff 5 years ago and I still shake my head today. I was shocked at the logic people were using back then.
Why the media is not talking about the pending defaults in credit cards is beyond me. Maybe they figured that the economy will recovery in time to save everyone.
That logic is flawed also. With the type of damage that's been done, reasonable recover will take a long time. Stocks might recover a bit (which it has on these recent bear market rallies), but that will not be enough to save them. The majority of household wealth is in home prices. Home prices is ages away from stabilizing, never mind getting back to a reasonable level. Also, more and more people will not be able to rely on employment income. The unemployment rate just hit a 26 year high, and is expected to get much higher in the next while.
Those are likely the 3 primary sources of funds for Americans. I don't see how they are going to suddenly get huge amounts of cash to pay off huge credit card debts. Whatever cash they find will go towards buying necessities (i.e. food) and making minimum payments on their mortages - to have a place to live in.
Credit card defaults are lagging. People have to lose their cash sources first (i.e. job) and then their rainy day savings (if any). Then the credit card default occurs. However, that still wouldn't hit companies Income Statements right away. The defaults have to go through the various collection buckets first, which requires time. Only after the dafault payment reaches the "Bad Debt" stage does the write-off occur in the Income Statements of companies.
Given everything I just described above, it would be quite mind boggling if we didn't see a massive impact from credit card defaults at some point in the future, especially with the escalating jobless rate. Credit card amounts are huge and massive number of consumers have no way of paying off those balances - with unprecedented rates of housing foreclosures, many of those people (now) are even struggling to find a place to live.
Enjoy the rally while it lasts - but expect to take a sucker punch
Our delicious spring rally is nearing the limits. The 40pc rise on global bourses since March assumes that central banks have conjured away the debt overhang by slashing rates to zero and printing money. Nothing of the sort has occurred. Two thirds of the world economy will be in deflation by July.
By Ambrose Evans-Pritchard Last Updated: 8:58AM BST 10 May 2009
Bear market rallies can be explosive. Japan had four violent spikes during its Lost Decade (33pc, 55pc, 44pc, and 79pc). Wall Street had seven during the Great Depression, lasting 40 days on average. The spring of 1931 was a corker.
James Montier at Société Générale said that even hard-bitten bears are starting to throw in the towel, suspecting that we really are on the cusp of new boom. That is a tell-tale sign.
"Prolonged suckers' rallies tend to be especially vicious as they force everyone back into the market before cruelly dashing them on the rocks of despair yet again," he said. Genuine bottoms tend to be "quiet affairs", carved slowly in a fog of investor gloom.
Another sign of fakery – apart from the implausible 'V' shape – is the "dash for trash" in this rally. The mostly heavily shorted stocks are up 70pc: the least shorted are up 21pc. Stocks with bad fundamentals in SocGen's model (Anheuser-Busch, Cairn Energy, Ericsson) are up 60pc: the best are up 30pc.
Teun Draaisma, Morgan Stanley's stock guru, expects another shake-out. "We think the bear market rally will end sooner rather than later. None of our signposts of the next bull market has flashed green yet. We're not convinced the banking system has been fully fixed," he said
Mr Draaisma said US housing busts typically last nearly about 42 months. We are just 26 months into this one. The overhang of unsold properties on the US market is still near a record 11 months. He expects the new bull market to kick off later this year – perhaps in October – anticipating real recovery in 2010.
Keep an eye on the upward creep in yields on the 10-year US Treasury, the benchmark price of world credit. This alone threatens to short-circuit the rally. The yield reached 3.3pc last week, up over 1pc since January and above the level in March when the US Federal Reserve first launched its buying blitz to pull rates down. Bond vigilantes are taunting the Bank of England in much the same way, driving the 10-year gilt yield to 3.73pc.
The happy view is that this tightening of the bond markets is proof of recovery fever, but there is a dark side.
Governments need to raise $6 trillion (£4 trillion) this year to fund bail-outs and deficits, led by this abject isle with needs of 13.8pc of GDP (EU figures). China fired a warning shot last week, saying the West risks setting off "inflation for the whole world" by printing money. It hinted at a bond crisis.
Yes, the glass is half full. China's PMI optimism gauge has jumped back above the recession line. The global PMI has been rising for seven months. But this usually happens after a crash as companies rebuild battered inventories for a quarter or two.
Note that container volumes in Shanghai fell 17pc in January, 22pc in February, and 9pc in March. Rail freight volumes in the US were down 32pc in April on a year earlier.
The Economic Cycle Research Institute (ECRI) says the US recession will be over by summer, insisting that its leading indicators have never been wrong – except once, in the Great Depression. Quite.
SocGen's other bear, Albert Edwards, says the new element in this slump is that GDP is contracting in "nominal" terms, not just real terms. Money incomes are flat. It is a crucial difference.
"This is like drinking hemlock. The US is gradually slipping further towards outright deflation, just as Japan did," he said. As companies retrench en masse they risk tipping the whole economy into Irving Fisher's "debt deflation trap".
If we are spared – still a big if – we can thank a handful of central bank governors and policy-makers who tore up the rule book, defied tabloid opinion, and took revolutionary action in the nick of time.
We owe much to the Fed's Ben Bernanke (leaving aside past sins as Greenspan's cheerleader), to Britain's Mervyn King, and the Canadian, Japanese and Swiss governors. Hats off, too, to the Greek speakers at the European Central Bank who have just carried out a monetary putsch, outflanking German tank-traps on the Rhine. The hero is Athanasios Orphanides, the Cypriot governor who drafted the Fed's anti-deflation strategy during his 17-year stint in Washington.
The ECB's belated embrace of QE is a watershed moment, even if only a token purchase of €60bn of covered bonds. What poisoned the early 1930s was beggar-thy-neighbour monetary policies. Any country that tried to reflate alone was punished by currency flight (gold loss), yet the mediocrities in charge lacked the imagination to reflate together.
We can now test the Friedman-Bernanke hypothesis that the Fed could have halted the Depression by letting rip with bond purchases. Japan was not a proper test. It eked out a recovery of sorts earlier this decade by embracing QE, but only in the context of a global boom and a yen crash.
There is at least one more boil to lance before we put this debt debacle behind us. The IMF says eurozone banks have so far written down a fifth of likely losses ($750bn) compared to half for US banks. They must raise $375bn in fresh capital. Good luck.
Germany's BaFin regulator goes further, warning of $1.1 trillion of toxic assets on German bank books. Landesbanken are a calamity. If the IMF and BaFin are right, Europe has not yet had its crisis. When it does, we will see a second stress pulse through Eastern Europe and Club Med.
The echoes of 1931 are ominous. That year began with green shoots, until Austria's Credit-Anstalt buckled in the summer and took Central Europe with it. Continentals who still thought it was an American crisis learned otherwise. Plus ça change.
4 comments:
Nothing is ever guaranteed, but the .938% libor and the $916 US gold price will likely work in our favour in our efforts to close off the $65M US financing (as highlighted in a previous post). The dramatic fall in the US $ (as most of us gold investors expected) doesn't hurt either - there is now surprise money moving away from the US dollar and looking for investments elsewhere. If the Chinese investors happen to leave us at the 11th hour, they will now have to compete with all of these billions of surprise dollars for the premium investments.
We should also not forget about the other potential LT Debt deal, at least as a contingency plan to the $65M deal or at least a partnership to secure future assets (in competition with the merger option). If they were interested in Century previously (as we are told) then the lowered libor and positive (sustained) gold price trend (and future expectations), and of course the lowered US $, should make Century even more attrative to them right now.
"The other scenario being considered by the Company’s Board of Directors is a comprehensive agreement with a group of financiers for debt and equity financing for the Lamaque project, in addition to assistance with future capital requirements of the Company."
By the way, another key indicator I like to keep my eyes on is the US $ to Indian Rupee conversion rate. It obviously has a significant impact on both jewellery buying and direct gold purchases, which ultimately is one important influence on the gold price.
Prior to the escalated crisis situation last September, the conversion rate was about 43 rupees to 1 US $. At the peak rate since then has been around 52 rupees for 1 US $. Now, with the falling US $ we have seen some change in the exchange rate, but it hasn't correct substantially as yet. Currently, it is 49.13 rupees for 1 US $.
Jewellery and gold purchases in India has picked up over the past month or so. Going forward, the greatest determining factors on the gold price from India will be the strength of the rupee, the speed of recovery of the Indian economy and the success of crops for the farmers.
With regards to the US $, the index was as low as 72 prior to the dollar recovery. I think it had reached around a peak of 88 over the past 8 months of the crisis. It has now fallen back to 82.47. With the trillions of potentially new dollars committed by the US government, the seeds have been planted for the US dollar index to eventually take out that 72 low. How quickly that will happen is anyone's guess. It all depends on which direction the economy goes. The US $ has been treated as the world reserve currency, even bypassing gold. Money managers still use the US $ for safety even though they know it's dead - currently a walking zombie. I think their logic throughout the crisis is to park their money there (foreigners have to buy it first in order to buy US treasuries) and then be the first to rush for the exit when the signs improve. That's likely why we've seen a stampede out of the US $ over the past couple of days - money managers were executing their exit strategy.
Anyway, longer term, we know that the US $ is dead due to the severe devalution, but don't be surprise if it bounces around shorter term. If the economy takes another downturn then money managers will temporarily jump back into the US dollar, in their efforts to seek what they think is safety. I think another reason they like to park their money in US $'s is due to convenience - they have larger amounts of money to move. They also figured that the US government would be the last place in the entire global system that would vanish.
All you seem to hear about is all the hype about how wonderful the economy is recovering (almost as if the last 8 months never occurred). It amazes me that no one is talking about pending corporate real estate and credit card implosions - especially credit card defaults. Life was a giant party for many Americans for most of this decade. Not only did many of them buy multiple houses that they couldn't afford, but they were supporting their good living via all the credit card offers that arrived in their mail box each week. They thought the increased market value in their home (s) made them eternally wealthy (and it would never go away). They thought home prices would be sky high forever (and continue to rise).
I kept shaking my head when looking at this stuff 5 years ago and I still shake my head today. I was shocked at the logic people were using back then.
Why the media is not talking about the pending defaults in credit cards is beyond me. Maybe they figured that the economy will recovery in time to save everyone.
That logic is flawed also. With the type of damage that's been done, reasonable recover will take a long time. Stocks might recover a bit (which it has on these recent bear market rallies), but that will not be enough to save them. The majority of household wealth is in home prices. Home prices is ages away from stabilizing, never mind getting back to a reasonable level. Also, more and more people will not be able to rely on employment income. The unemployment rate just hit a 26 year high, and is expected to get much higher in the next while.
Those are likely the 3 primary sources of funds for Americans. I don't see how they are going to suddenly get huge amounts of cash to pay off huge credit card debts. Whatever cash they find will go towards buying necessities (i.e. food) and making minimum payments on their mortages - to have a place to live in.
Credit card defaults are lagging. People have to lose their cash sources first (i.e. job) and then their rainy day savings (if any). Then the credit card default occurs. However, that still wouldn't hit companies Income Statements right away. The defaults have to go through the various collection buckets first, which requires time. Only after the dafault payment reaches the "Bad Debt" stage does the write-off occur in the Income Statements of companies.
Given everything I just described above, it would be quite mind boggling if we didn't see a massive impact from credit card defaults at some point in the future, especially with the escalating jobless rate. Credit card amounts are huge and massive number of consumers have no way of paying off those balances - with unprecedented rates of housing foreclosures, many of those people (now) are even struggling to find a place to live.
Enjoy the rally while it lasts - but expect to take a sucker punch
Our delicious spring rally is nearing the limits. The 40pc rise on global bourses since March assumes that central banks have conjured away the debt overhang by slashing rates to zero and printing money. Nothing of the sort has occurred. Two thirds of the world economy will be in deflation by July.
By Ambrose Evans-Pritchard
Last Updated: 8:58AM BST 10 May 2009
Bear market rallies can be explosive. Japan had four violent spikes during its Lost Decade (33pc, 55pc, 44pc, and 79pc). Wall Street had seven during the Great Depression, lasting 40 days on average. The spring of 1931 was a corker.
James Montier at Société Générale said that even hard-bitten bears are starting to throw in the towel, suspecting that we really are on the cusp of new boom. That is a tell-tale sign.
"Prolonged suckers' rallies tend to be especially vicious as they force everyone back into the market before cruelly dashing them on the rocks of despair yet again," he said. Genuine bottoms tend to be "quiet affairs", carved slowly in a fog of investor gloom.
Another sign of fakery – apart from the implausible 'V' shape – is the "dash for trash" in this rally. The mostly heavily shorted stocks are up 70pc: the least shorted are up 21pc. Stocks with bad fundamentals in SocGen's model (Anheuser-Busch, Cairn Energy, Ericsson) are up 60pc: the best are up 30pc.
Teun Draaisma, Morgan Stanley's stock guru, expects another shake-out. "We think the bear market rally will end sooner rather than later. None of our signposts of the next bull market has flashed green yet. We're not convinced the banking system has been fully fixed," he said
Mr Draaisma said US housing busts typically last nearly about 42 months. We are just 26 months into this one. The overhang of unsold properties on the US market is still near a record 11 months. He expects the new bull market to kick off later this year – perhaps in October – anticipating real recovery in 2010.
Keep an eye on the upward creep in yields on the 10-year US Treasury, the benchmark price of world credit. This alone threatens to short-circuit the rally. The yield reached 3.3pc last week, up over 1pc since January and above the level in March when the US Federal Reserve first launched its buying blitz to pull rates down. Bond vigilantes are taunting the Bank of England in much the same way, driving the 10-year gilt yield to 3.73pc.
The happy view is that this tightening of the bond markets is proof of recovery fever, but there is a dark side.
Governments need to raise $6 trillion (£4 trillion) this year to fund bail-outs and deficits, led by this abject isle with needs of 13.8pc of GDP (EU figures). China fired a warning shot last week, saying the West risks setting off "inflation for the whole world" by printing money. It hinted at a bond crisis.
Yes, the glass is half full. China's PMI optimism gauge has jumped back above the recession line. The global PMI has been rising for seven months. But this usually happens after a crash as companies rebuild battered inventories for a quarter or two.
Note that container volumes in Shanghai fell 17pc in January, 22pc in February, and 9pc in March. Rail freight volumes in the US were down 32pc in April on a year earlier.
The Economic Cycle Research Institute (ECRI) says the US recession will be over by summer, insisting that its leading indicators have never been wrong – except once, in the Great Depression. Quite.
SocGen's other bear, Albert Edwards, says the new element in this slump is that GDP is contracting in "nominal" terms, not just real terms. Money incomes are flat. It is a crucial difference.
"This is like drinking hemlock. The US is gradually slipping further towards outright deflation, just as Japan did," he said. As companies retrench en masse they risk tipping the whole economy into Irving Fisher's "debt deflation trap".
If we are spared – still a big if – we can thank a handful of central bank governors and policy-makers who tore up the rule book, defied tabloid opinion, and took revolutionary action in the nick of time.
We owe much to the Fed's Ben Bernanke (leaving aside past sins as Greenspan's cheerleader), to Britain's Mervyn King, and the Canadian, Japanese and Swiss governors. Hats off, too, to the Greek speakers at the European Central Bank who have just carried out a monetary putsch, outflanking German tank-traps on the Rhine. The hero is Athanasios Orphanides, the Cypriot governor who drafted the Fed's anti-deflation strategy during his 17-year stint in Washington.
The ECB's belated embrace of QE is a watershed moment, even if only a token purchase of €60bn of covered bonds. What poisoned the early 1930s was beggar-thy-neighbour monetary policies. Any country that tried to reflate alone was punished by currency flight (gold loss), yet the mediocrities in charge lacked the imagination to reflate together.
We can now test the Friedman-Bernanke hypothesis that the Fed could have halted the Depression by letting rip with bond purchases. Japan was not a proper test. It eked out a recovery of sorts earlier this decade by embracing QE, but only in the context of a global boom and a yen crash.
There is at least one more boil to lance before we put this debt debacle behind us. The IMF says eurozone banks have so far written down a fifth of likely losses ($750bn) compared to half for US banks. They must raise $375bn in fresh capital. Good luck.
Germany's BaFin regulator goes further, warning of $1.1 trillion of toxic assets on German bank books. Landesbanken are a calamity. If the IMF and BaFin are right, Europe has not yet had its crisis. When it does, we will see a second stress pulse through Eastern Europe and Club Med.
The echoes of 1931 are ominous. That year began with green shoots, until Austria's Credit-Anstalt buckled in the summer and took Central Europe with it. Continentals who still thought it was an American crisis learned otherwise. Plus ça change.
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