Gold Prices, Eurozone Bond Sales (commodities weaker on strong US dollar, market selloff but long term fundamentals remain strong, Italy bond rates double in just one month)

Interesting Fact: 12% of the world's gold is produced at mines dug by individuals without advanced digging equipment. A lot of those mines are in countries like Mali and Somalia.
So far in 2011 silver's popularity has gone up while gold's has decreased slightly, at least according to sales reports by the US Mint. Between January and end of November 2011 the US Mint sold 37,859,500 ounces of silver (up 15.11% from 32,890,500 oz in 2010) and 934,500 ounces of gold (down 19.5% from 1,160,500 oz in 2010). In fact on October 1st it was rumoured that upwards of 737 thousand of silver ounces were purchased from the US mint, a one day record. If true that would amount to 42% of all silver purchased during the month of December 2010 and 24% of the three million ounces sold in October. Since the US moved towards a weak dollar policy in 2002 silver has tacked on about 500% of its present value which is still about 20% under its 200 day average. 2012 update France's credit rating was lowered to AA from AAA by Standard and Poor's. That's a bad position for the country to be in considering it recorded zero gdp growth during the year and given previous statements by Sarkozy as recently as October when he said he would do everything he could to keep France from being downgraded.

Negative Forces affecting the metals
     Over the last little while, particularly the last two weeks gold, silver and other iso traded precious metals showed vulnerability even though their long term outlook remains strong. The weaker prices are due in part to a stronger US dollar (equity markets weak driven lower by the strong dollar which negatively affects foreign investment, EU sovereign debt uncertainty causes US dollar to gain). The ECB's reluctance to purchase the soveriegn debt of Italy and Spain has also been a negative factor (ECB has been under pressure from Germany to refrain from handing out blank cheques to debt laden countries citing the repercussions and how greater ECB exposure to Italy would mean more exposure for Germany, France has a different opinion and is lobbying the ECB for more support). France thinks that more ECB buying is the only way to encourage other investors to buy sovereign debt; On Friday, 10-year Italian bond yields surpassed 7% after the country's debt auctions that day showed lackluster results (Italy did sell €8B worth of 1/2 yr bonds (@ 6.5%) & another €2B in 2 year bonds (@7.8%) however the rates commanded by buyers nearly doubled from only a month ago (was 4.63% and 3.54% respectively). 7% yields in Italy puts it in the same class Greece, Ireland and Portugal were once in (though rates did get much higher for those countries before their financial collapse, the 7% rate was seen as a point of no return), this is extremely dangerous because Italy is home to the world's 3rd largest bond market after the USA and Japan (worldwide exposure to Itay is 3 times what it was to Greece) with Barclays calling Italy's situation "mathematically beyond the point of no return".
Even more disconcerting: Germany, considered the strongest of the EU economies (more manageable debt/high gdp growth) is having problems raising money in the bond market; On Wednesday Nov. 23rd Germany sold only 60% of the 10-year bonds made available. Update: With Italy's debt crisis worsening and the ECB not stepping up with more support, the IMF is reportedly preparing to loan the country $794 billion (€400-€500 billion) at an interest rate of between 4% and 5%. The loan would allow the country 1-1.5 years to reform its system and hopefully regain its solvency. It must be noted however that the IMF may be relying on a new credit facility worth just over €420 billion that was offered it in 2009 by 39 countries, to put together the money for Italy given that only two months ago the IMF only had less than €300 billion available to be loaned. (wsj:IMF Can't Rescue Europe Alone) The news pushed European Equities higher (main equities index up 3.75% on Monday). (news broke in Italy's La Stampa)

There's also bad news coming out of China - Many companies are laying off workers in the manufacturing sector and that's leading to strikes in cities like Dongguan and Shenzhen. Less import demand by Europe is causing a decline in export growth (down to 16% in October). Many of the plants use commodities like gold (1,000 people left their positions in protest recently at apple/ibm plants in Shenzhen) and silver (Foxconn makes electronic components, automotive plants - cars require catalytic converters which are the largest source of demand for platinum group metals).

Grmike's view The commodities market is entering a consolidation and deflationary period as a result of the current US debt ceiling being capped until 2013, US dollar rally, and gold and silver's post 2008 rally. The gold to silver ratio is getting very close to 60 which represents a doubling in eight months (33 in April 2011). Central banks continue not surprising since silver and gold remain fundamentally strong investments. View the lower prices as an opportunity to buy more. Poor debt sale showings in Italy, Germany and Spain mean debt may literally be insurmountable. The effect that will have on currencies will be disastrous and that will cause central banks to hoard even more gold and silver making the commodities invaluable.

What about emerging market debt? The debt crisis is making the buying of debt associated with developed nations increasingly unpopular particularly amongst international investors. So where are they going? Well, a viable alternative for the long term that's attracting interest are emerging market bonds that is, emerging market debt denominated in their local currency (debt sales in the developing world traditionally happen this way). Even a year ago when the debt crisis wasn't as widespread, US pension funds forecast their participation at over $100 billion before 2015. The only limiting factor is that in many countries including the big players China, Brazil and India the system is designed to limit foreign capital investment so not all foreign investment is allowed and when it is some countries like Brazil impose a special tax. Though still in its early stages, restrictions on them are gradually being removed and that's leading to more investment.

Last Monday's 2.5% dip in gold put the spot price below its $1,700/oz 100 day moving average, possibly an important breach considering that level had been supported for over a month (December futures contract on Comex down to $1,685.7/oz). In the week of Nov 21-26 gold fell 2.3% after falling 3.5% the prevous week. So far for November, silver declined in price by nearly 10% meaning that on the year silver hasn't gained anything. Out of all the metals with an iso trading code palladium lost the most on the week, dropping 5.9% to close at $572/oz.

Positive forces on the metals:
Gold ETF's continue hoarding, with the total weight of all gold held by ETF's recently reaching a new high of 69.978 million ounces led by the world's largest, SPDR Gold Trust.

August 8, 2011: Stocks Fall Hard, Dow Records Its Second Largest Loss Since 2008, In Just Two Days; Credit Swap Prices Rise By Record Amount (insurance, banks)

On Friday, August 5, 2011 the Dow Jones recorded its largest single day loss since the 2008 recessionary period, just following that the S&P downgraded its credit rating to AA+ from AAA (even though other debt-laden countries such as France were allowed to keep their AAA rating) and another record breaking day ensued on Monday, August 8 when the Dow fell twice as much, 635 points (5.55%). All three American indices fell by a significant amount (S&P 500 6.66%, Nasdaq 6.90%), that compares to drops of 3.77% in Shanghai, 2.18% in Japan, 2.17% in Hong Kong, 3.39% in the UK and 4.04% in Toronto.

Investor confidence is also at a low point evidenced by the rising popularity of Credit Default Swaps (CDS, if a government default occurs, holders of the bond are able to exchange it with the seller of the CDS for its face value less value of defaulted debt, if there's no default, the seller earns an annual rate of interest, 1bp = 1 basis point = $1000 annually on contract protecting $10 million worth of debt). Overall, the average credit swap for the 6 biggest banks by assets was 32.3% higher to 210.9 bp (highest since May 2009). Bank of America default swaps rose 42.2% (to 295 bp) at the same time AIG was suing it for $10 billion in losses claimed on mortgage bond investments, Morgan Stanley swaps up 40.1% to 280.1. Swaps on the biggest insurers was up to its highest level since July 2010. (SFGate: Bank of America Leads Surge in Credit Swaps on Downgrade Concern) There was concern also that S&P might lower its ratings of major US banks but it shot down that rumour saying that none of the banks have a higher rating than the AA+ US rating. Though risky, on the year, bonds have had the second highest rate of return second only to gold (price of gold up 43.93% or $527.70 (August 9, 2010 - August 9, 2011).

The market volatility, inflation and overall economic tightening are errily reminiscent of the 2008 recession, the big problem now though is that the US government has used up most of its arsenal (quantitative easing, stimulus) leaving it highly vulnerable. Grmike's advice: Don't take cheap energy for granted! It's the best remedy for an economy on life support. Per kWh of energy production: coal 4 cents, natural gas 9 cents, renewables 23 cents.

As big as the US news was, the potential for a financial armageddon came from Europe where the world's 8th and 12th largest economies (Italy and Spain) are also facing possible defaults down the road as high borrowing rates make it harder to borrow and borrowing is something the countries cannot do without (interest on debt is already very high). The European Central Bank (ECB) risked its own downgrade by buying up Italian and Spanish bonds in a bid to lower interest rates enough to keep those economies afloat. The fix is short term only, it doesn't change the long term outlook for either economy but does have long term negative ramifications for the European Central Bank which has now committed itself to buying €2.5 billion worth of Spanish and Italian bonds, daily; That's a significant increase from the €80 billion worth of debt in total that the ECB invested in Greece, Ireland and Portugal. The move lowered Italy 10 year bond yields (interest rate) by 0.7 to 5.3% and Spain bond yields by 0.9 to 5.14%. The European Reserve Fund has put together a $1.5 trillion rescue package for Italy and Spain, France which is in its own fiscal quagmire will be responsible for a couple hundred billion of that. Can the euro withstand the European debt crisis? Will the bond between EU countries become stronger or weaker? What is an appropriate level of debt? those are just a few of the many questions that have investors frustrated.On August 11, 2011 Italy and France joined Greece, South Korea and a growing list of other countries in banning short selling (borrowing stocks/securities/assets from a broker, selling them to another group with the intent of returning them to the broker some time later) after it was rumoured that short sellers were trying to exploit a French downgrade. A Europe-wide ban is unlikely given the Europe's lack of authority to impose it.

Some other things to take note of

Italy is home to the third largest bond market in the world (valued at about US$ 2 trillion) meaning a bond crisis would have an even more devastating effect on the country. Italy is also the world's 7th leading export nation (US$ 458 billion in 2010).

French banks hold a lot of France's debt, which credit agencies are beginning to take a closer look at. Holding French debt is getting more expensive and that is taking a toll on them, on August 10, 2011 Societe Generale lost around 14% of its market value (down to $24.11 billion), Credit Agricole 11.8% (to $14.59 billion), BNP Paribas 11% (down to $68.12 billion); In Italy, Intesa Sanpaolo lost 15.4% (to $29.45 billion); In Spain, Banco Santander 9.48% (to $70.14 billion) and Banco Bilbao 10.42% ($37.55 billion). BNP Paribas Credit Agricole and Societe Generale rank 2nd, 10th and 18th among all companies in terms of assets ($2.7 trillion, $2.2 trillion and $1.5 trillion (Forbes: March 2011 The Global 2000 List) but their combined market value has fallen to $74 billion about the same as the Royal Bank of Canada (August 10, 2011 at the close of the market) making them severely undervalued (considering Societe Generale earned about the same amount of net income as Royal Bank of Canada ($5.3 versus $5.6 billion), had more than twice as many assets but only half the market capitalization. Further complicating things for France is the 0% 2nd quarter gdp growth announced on August 12, 2011, which follows 0.9% growth in the first three months (business stocks increased which didn't happen in the second quarter, consumer spending ended with the 2010 fiscal year). Only if France's gdp grows by at least 2% in 2011, will it be able to lower deficit to 5.7% of gdp which is important since that could determine whether credit rating agencies downgrade the country's debt.

The Canadian dollar was the only major currency to lose ground against the greenback (August 8, 2011). Possible reasons for that include 0.78% drop in the price of oil (down to US$ 80.45 or about 20% off what it was a couple months ago); even more concerning for Canada is that heavier oil (crude) was down 5.15% to $103.74 a barrel, government policies designed to keep the exchange rate from being too high as to encourage exports (60% of exports go to the USA) and Canada having one of the lowest bank rate/interest rates in the world (was as much as 4X lower than Australian rates). Gains by Canada's gold companies have helped to buffer against losses in other sectors (on August 10th, gains by Canada's gold miners pared losses suffered by oil and technology companies). When oil companies begin to release their second quarter results (Crescent Point Energy, Canada's 12th biggest oil company with $11B in market cap, experienced 158% increase in 2011 2Q earnings, up to C$184.9M or 59% of revenue compared to a loss of C$102M in the previous qtr), they should begin to prop up Toronto's Stock Exchange.
Of concern in Canada is a widening trade deficit; in June it was up to $1.6 billion or $5.2 billion with countries other than the United States making it even harder for the country to lessen its reliance on trade with the USA (in the USA, the trade deficit was $53.1 billion in June, the highest since October 2008). For Canada, both imports and exports fell but exports fell by a wider margin.

Greece defaulting on debt would raise EU interest rates magnifying the effects on those indirectly involved

The Bank of Canada is a debtee of financial institutions owed money by Greece and so there's concern that a ripple effect would have wider than anticipated involvement. Canadian financial institutions only have $8 billion in debt owed to them by Greece, Portugal, Spain and Ireland

that compares to $298 billion for UK, $111 billion for USA, $254 billion for France and $370 billion for Germany (Canadian institutions hold a lot of those countries debt though, for example Canadian banks own $94 billion worth of UK debt, $24 billion of French debt and $20 billion from Germany ($138B those three combined). That compares to $521B in American debt held by Canadian banks.(Globeandmail:Canada's Exposure)

Low EU interest rates have in part been a result of the assumption made that it would bailout nations within the union facing fiscal crises (the sheer size of the EU gave the impression that it was more than capable). If Greece proves to be too much to handle how then does it gain back the confidence of investors when it has yet to deal with Spain and Italy? Higher long term interest rates would be inevitable and that alone would have broad, global consequences which would make cheap credit a thing of the past.