Weekend Update November 7

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.

 

ABSTRACT: The midterm elections in the U.S. this Tuesday saw a sweeping victory for the GOP, as the Republican Party recaptured control of the Senate and padded its comfortable majority in the House of Representatives. Coupled with last Friday’s surprise announcement that the Bank of Japan was implementing more monetary stimulus, the GOP landslide has pro-business sentiment (and thus the stock markets) riding high while precious metals slide below support levels.

 

GOVERNMENT & POLICY

Big Banks Set Aside “Fraud Funds” While GOP Win Lifts Sentiment

Election Day came and went in the States, as American voters made their displeasure with the Democrats (read: President Obama) manifest in the legislatures. Business sentiment was up in response to the Republican victory, which encompassed both chambers of Congress. The president’s somber post-election speech, although a begrudging admission of having to finally cooperate with conservatives, was not a measurable divergence from his previous agenda.

Regardless of which party is in power, or which agenda is followed, there are many things that remain constant in Washington D.C. Among these is the system of “tolls”–they call them fines–that regulatory authorities command from the country’s TBTF banks. This is the cost of entry, the toll you pay to play the game. Everyone knows it, and everyone adheres to it.

Both JPMorgan Chase and CitiGroup announced plans this week to set aside billions of dollars as a preemptive fund for paying litigation costs and fines stemming from these banks’ admission of guilt in rigging the Forex (or, at least, explicitly breaking the rules of the exchange). Bank of America, which was also implicated in improper currency trading, even suffered a third-quarter loss of $400 million because of the need to allocate money toward expected fines and legal fees.

Big banks are now essentially setting up “fraud funds,” or “fraud trusts” if you prefer. They can go right ahead and commit all of the fraud and graft they please so long as they have the bread to cover the fines that will follow. Naturally, they must hedge against the risk inherent in their own criminal activity. And, of course, the DoJ is happy to stand aside and take the money handed to it. So long as the revenue from a fraudulent practice ultimately outweighs the total amount paid in fines, the incentive of profit will not be ignored.

It doesn’t help that the Federal Reserve has overheated the markets with its near-zero interest rates; even as QE says goodbye for now, ZIRP is here to stay for a “considerable time.” The Fed really couldn’t make it much easier for their fellow banksters.

Of course, when former Fed Chair Alan Greenspan conspicuously makes statements espousing the benefits of gold, you can be sure something is up. If you weren’t sure, spot gold dropped 6.8% in trading following Greenspan’s comments.

 

MARKETS

Metals Tumble Amid Record Highs for Stocks

The tone for trading on the equities markets was set last Friday, when the Bank of Japan made the surprise announcement that it would be expanding its already unprecedented monetary stimulus program. This came just as the Federal Reserve is wrapping up its own quantitative easing measures. The BoJ has stated it wants to increase the money supply by another 10 trillion yen over the next several years. The news sent markets skyrocketing, as over the next few days the dollar grew firmer and the global stock markets rallied. The dollar was trading well above 114 yen during the week, while the Nikkei 225 crossed above 17,000 before falling back on Thursday.

The victory for the Republican Party likewise had many investors salivating at a potential breakout in stocks. Following a prolonged losing streak, U.S. stock indices have been on a tear as volatility has returned to the markets, offering investors some interesting bargains and profit-taking opportunities. The Dow Jones hit a new intraday record high on Wednesday and subsequently closed at record highs on Thursday and Friday. The S&P 500 also notched record-high closing numbers on the last two trading days of the week, while the Nasdaq has been vacillating up and down due to poor earnings by tech firms in the energy sector following the drop in crude oil prices.

WTI crude and Brent crude got a slight reprieve this week after falling to 2-and-½-year lows. On Wednesday, a pipeline in Saudi Arabia exploded, grabbing headlines and helping move oil prices back into positive territory. This came after the Saudis announced they would be lowering their prices for U.S.-bound oil, but not for European or Asian buyers. This measure is clearly intended to undercut domestic American producers. The recent slump in energy prices hasn’t helped declining commodity prices, either.

Precious metals have been among the worst performers this week, giving back all of gains made at the beginning of last month. In fact, just in the roughly two weeks since October 21, spot gold is down 9%. Silver has fared even worse, dropping by more than 10% over that same span to about $15.50. Not only do these price drops represent 4-and-½-year lows for the two metals, but they have plunged through important resistance levels, leading to uncertainty over what price point investors will offer renewed support. Despite the dovish sentiment in U.S. markets, demand for U.S. Treasuries has been strong on the end (for now) of the Fed’s QE and uncertainty over global growth. After the yield on 10-year Treasuries steadily rose throughout the week, it sunk by 7 basis points on Friday to 2.31%.

Solid employment data in the U.S. has also been pointing to a recovering economy, as the average weekly jobless claims fell to a 14-year low. October was the ninth consecutive month in which nonfarm payrolls rose by at least 200,000 new jobs, indicating that momentum in the labor market is picking up. Official U3 unemployment sits at 5.8%, although the actual labor participation rate is at just 62.8%, the lowest level in 36 years. It’s slightly too soon to call it a recovery, but the financial news media has been doing exactly that amid the bullish fervor that has accompanied the return of GOP control in both chambers of Congress.

 

GEOPOLITICS & WORLD EVENTS

Russia, Europe Struggle to Find Solid Footing

It seems Europe is late to the dance of the global recession. As the American economy picks up steam, pulling all dollar-denominated activity up along with it, the Eurozone is seemingly lost at sea. If the ECB were an ocean liner, it would be pretty damn close to capsizing at this point.

The SS European Central Bank docked for a meeting on Thursday, as bank governors discussed the ECB’s stimulus program and sought to provide clearer answers for how far-reaching the new round of monetary easing will be in its scope. The outcome of the meeting–other than a bump for stocks and the USD–was essentially to cast doubt on the cohesiveness of the ECB’s 24-member governing board.

Little in the way of definitive expansion of the central bank’s proposed program could be confirmed, as it has yet to even implement its initial agreement to purchase €1 trillion of asset-backed securities. These purchases to grow the bank’s balance sheet will begin in December, but ECB President Mario Draghi is already dropping hints that he is “preparing further measures if needed.”

Draghi may be confident that he can get the other governors to agree to “further measures,” such as purchasing sovereign debt, but there is considerable sentiment against the idea, especially from Germany. The tension between those who support a stimulus injection and those who would prefer austerity is becoming increasingly strained within the ECB. In a monetary union that includes both the likes of Germany and Greece, one can expect these fairly divergent motivations.

Meanwhile, Russia is moving ever-closer to free floating its currency, as the ruble is now down 29% on the year, hitting repeated record lows against other currencies. The Russian Central Bank even called an emergency meeting on Friday to formulate a plan to stop the economy from bleeding to death. In order to help buoy the ruble, the central bank has been selling its forex reserves in earnest–to the tune of $2 billion of outflows per day. A limit of $350 million per day has been put in place by the central bank in order to avoid a serious hit to its credit rating. Some analysts estimate that if the country’s foreign reserves fall below $400 billion, Russian sovereign debt would be downgraded to junk bond status. Reserves currently sit at $428.6 billion, down 20% from last year’s peak. At the same time, the Russians remain in violent conflict with their western neighbors in Ukraine.

Both situations–in Russia and the Eurozone–do not appear to be improving any time soon, so it could be a case of who can best weather the storm. Considering Russia is under the weight of Western sanctions, it’s likely at a disadvantage in any such economic battle of attrition.

Yet, this isn’t necessarily a zero-sum stand-off; neither side is ensured safety by the other’s collapse.

 

News & Notes

China is bidding to acquire three large gold mines, owned by Eldorado Gold, that are located on the mainland. The cost of acquiring the mines is projected at $1.5 billion, but the aggregate output of these mines is expected to total 300,000 oz (or over 9 tonnes) of gold annually. According to Kitco News, this week’s drop in metals prices is making it more difficult for mining companies to operate profitably, so we may see a rash of M&As in the industry if prices continue to slump.

A LOOK AHEAD: Next week’s first-time jobless claims report will come out on Thursday, as investors wait to see if slack in the labor market is finally abating. Friday promises to be a big day for U.S. markets, with October’s retail sales, import & export prices, consumer sentiment, and business inventories all to be reported. Remember that bond markets will be closed on Tuesday in observance of the Veteran’s Day holiday, so don’t forget to show your support for our troops!

 

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.

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