Jim,

Gold is holding up just beautifully. The dollar can’t rally, the Chinese government is encouraging people to buy gold in the press, and miners are short covering.

Tony Danaher
www.GuildInvestment.com

Hedging loses its lustre for gold
By Javier Blas in London
Published: September 13 2009 19:26 | Last updated: September 13 2009 19:26

The gold industry’s legacy of forward sales is set to all but disappear by next year following the decision by the largest gold miner to buy back its hedges.

The size of the industry’s hedge book is set to drop to a residual of less than 200 tonnes by the end of 2010, the lowest in almost 25 years, according to industry estimates.

The reduction is a 95 per cent drop from 3,000 tonnes a decade ago.

The mining hedge book is important for gold prices. Bullion rose above $1,000 a troy ounce last week as investors sought refuge from dollar weakness.

When miners sell forward their production, they help push down prices. In 1999, their hedge book blew up to more than a year of mine output, flooding the market. Buying back the hedges since then has contributed to higher gold prices. As miners complete the buying back by late 2010, the hedge book will be a neutral force.

Miners sold forward their production to ensure a floor price, secure a stable cash flow and raise finance. But as gold prices have steadily increased from $250 in 1999 to more than $1,000 an ounce last week, the incentive has gone.

More… ^[1]

 

Jim Sinclair’s Commentary

Here is a report from the trenches. This is real business, not the paper pushers of Wall Street or reports from the Department of Skewed Statistics.

Dear Mr. Sinclair,

This afternoon I spoke candidly with two salesmen in the hardware store that represent two different companies (one sells tapes and the other screws and fasteners). I learned that a relatively large outfit (in terms of a local business) in one of the five boroughs recently filed for chapter 11 bankruptcy. The salesman’s company which is owed money was told by the bank that they may be able to recoup roughly 1/10th of what they are owed. I am aware of 3 other stores which have recently been closed in and around the area and the other salesman informed me that another large company specializing in lumber and building materials is on a COD only basis with his company. Apparently they are attempting to sell assets such as vehicles and other items in order to raise capital.

We have a number of customers on the construction end who generally have a multitude of jobs to bid on that have stated the competition is so intense due to the lack of work that bidding has in some cases become a waste of time as certain parties are willing to work at cost or less.

We have found that there has been a bit of an up-tick in local business (refurbishments, painting, etc.) but it is basically just an improvement over what was relatively non-existent cash business late last year into early 2009.  Commercial business however remains weak across the board as companies continue to spend less and shop less.  Some stores are posting comps down 30-40% year over year and the economy here is still somewhat better than many other parts of the country.

This is all just an FYI to keep you updated of what we are experiencing locally.

Best Regards,
CIGA Marc

 

Dear Jim,

It looks like the beginnings of a trade war! Tires, derivatives and now auto products and chickens… I thought if you want to do business with someone, it helps not to upset them!

Was it the protectionist policies of the Smoot-Hawley act that sealed the economic fate of the world in the 30′s? Is this present trade war akin to that act today?

Thanks for the insight.

Best,
CIGA BT

Dear BT,

Your answer is yes, Smoot-Hawley was the nail in the coffin of world economics in the 1930s.

Hopefully there will not be a re-enactment.

Did you hear MOPE today saying on F-TV that China was responsible for this trade initiative when it was the US that fired the first shot?

Regards,
Jim

 

Jim Sinclair’s Commentary

Note what Volcker says about rating agencies when considering the recent dirty tricks.

Dear Jim,

As you well know and have repeatedly stated, this is extremely significant for the future of the American and European banking systems. It is frightening that Paul Volcker, the man who fixed the system before, is relegated to speaking abroad about the problem. If you want to read something obscene read about the ex Lehman people in the NY Times Sunday. They deny any culpability for wrongdoing.

Respectfully yours,
Monty Guild

Volcker says banks should not own hedge, equity funds-report
Thu Sep 10, 2009 2:06am EDT

MILAN, Italy (Reuters)—Banks should not be allowed to own hedge funds or equity funds and their trading activity should be limited, former Federal Reserve Chairman Paul Volcker said in an interview with Il Sole 24 Ore on Thursday [Sept. 10].

"A bank that generates the major part of its income from trading should not be allowed to have a banking license," Mr. Volcker, an economic adviser to the Obama administration, said.

Asked about introducing caps for bankers’ pay, Mr. Volcker said bankers would find a way around that.

"We’re seeing it already; it’s obscene what they’re earning," he said.

One year after the Lehman Brothers collapse, Mr. Volcker said he feared Wall Street would return to its old ways and "we will miss the train for reform."

He said he did not think inflation was an immediate threat given the high unemployment and weak global economic growth.

Asked about the high U.S. deficit, Mr. Volcker said it was not a problem for the time being. To tackle the crisis the Federal Reserve had injected an enormous amount of liquidity into the system, he said.

More… ^[2]

Dear Jim,

You say the BIS proposal is a request for central banks to assume the risk of the huge mountain of OTC derivatives. You seem to make a large jump from this request to your position.

Please explain.

Respectfully,
The Green Hornet

Dear Green Hornet,

You ask a very important question.

I owned a first clearing house, James Sinclair Global Clearing. There would be no difference between the risk of a first derivative (futures) clearinghouse and an OTC derivative clearing house, though the OTC derivative clearinghouse is a fraud – a name for something it is not.

The line of risk is the parties to the transaction, the second risk is to the clearinghouse to the entirety of its capital and in a partnership to the entirety of the General Partner’s capital. It is like the first two signatures on the on a debt.

The BIS is saying that central banks should put up the capital for past and present OTC derivatives. Therefore the central banks underwrite all the derivatives being cleared because this mountain of paper is a mountain of floating financial corpses and impossible to perform specific performance contracts called OTC derivatives that will eat capital like a condor.

I am totally correct in the above. I have lived this risk and know it well.

Your friend,
Jim

Dear Jim,

Thanks for your answer on what a clearinghouse does, and what that means to the creation of money.

With respect, the article in question was vague on the BIS call for emergency funds access to clear OTC derivative as to if they were referring to all or just new.

What is the implication of the call for access to emergency funds by the BIS to be used to capitalize a clearinghouse on new Credit Default Derivatives CDS?

Your friend,
The Green Hornet

Dear Green Hornet,

Excellent, readers with real interest should certainly ask this question. The answers are as follows, assuming the BIS is referring only to recent CDS (credit default OTC derivatives).

CDS can only be considered safe even with a clearinghouse from normal day to normal day. If the company in question was to enter bankruptcy quickly then there is no way that margin requirements, whatever they are determined to be, could be met even with emergency funding in numbers as high or higher than those so far expended required on the growing size of that arena of disaster.

Since today greed is a religion and a curse, people do not want simply to make money, but rather to carry the corpse out at zero (options as an example). There is another risk inherent. That risk is you cannot bail out the company because the open interest in the winning side of the CDS would in all probability be larger as the value goes lower, only then to bankrupt the long of CDS position still held due to the instant action of bonds in a rescue. That is a given as the rescue profile so far has been screw the shareholder and make the debtors whole. Think in terms of an operating company, not a financial entity where this is concerned.

The most important message here is that the private sector, no matter what MOPE you hear, does not want nor can they handle the risk of a clearinghouse on any of these financial weapons of mass destruction. That is both telling and downright scary when you recognize the size of the OTC derivative market is wholly unchanged. All that has changed is the new cartoon means of valuing them which instantly dropped the nominal value by 60%.

Finally the income a clearinghouse garners versus the money made in the manufacturing of an OTC derivatives is pitiful.

So why should the private sector take the risk of a clearinghouse? It simply does not pay to do it.

The manufacturers and distributors of the OTC derivative are not going to part with a dime of their ill gotten gains nor accept the risk of the paper they know has no way of performing under any degree of market pressure.

Sincerely,
Jim