Bloomberg: Gold-Price Indicator Fading as ETPs Tumble by $71 Billion

Gold-backed funds that heralded record prices in 2011 and last year’s biggest sell-off in three decades are becoming less useful as market predictors.

After a decade of changing mostly in tandem, gold prices and holdings in exchange-traded products backed by bullion have the most-negative correlation since 2004. Investment in ETPs are headed for a fifth straight week of moving in the opposite direction of New York futures, data compiled by Bloomberg show. That would be the longest stretch since 2012, before investors began dumping gold.

Global ETPs that accumulated more bullion than France’s central bank in 2012 saw their influence wane as equities surged and the Federal Reserve took steps to ease economic stimulus, signaling higher interest rates that erode the appeal of gold as an alternative asset. As investors exited the funds, erasing about $71 billion of value, unrest from Ukraine to Gaza this year revived demand for the precious metal as a haven, boosting prices that Goldman Sachs Group Inc. says aren’t sustainable.

“There is a disconnect” because “a lot of money has left,” said Mark Luschini, the chief investment strategist at Janney Montgomery Scott LLC. in Pittsburgh that oversees $65 billion. “For gold, this year has been all about the Federal Reserve and political tension, and at the moment, the rate-increase worries are overshadowing the safe-haven buying.”

The bloom is off the golden rose. That doesn’t make gold ETP’s a “sell”. It just means the actions of retail investors in equity markets is far less relevant to the price of gold now.

Business Insider (via Yahoo Finance): This Illustration Posted By Eric Schmidt Shows How Google Thinks About Innovation

Google is one of the largest, most influential technology companies in the world. But it didn’t start out that way, and it’s not easy to maintain that status. Google Executive Chairman and former CEO Eric Schmidt has shared some insight as to how Google views innovation and the competition.

Schmidt and Google’s former SVP of Products Jonathan Rosenberg are publishing a book next month called “How Google Works.” The book dives into what Schmidt and Rosenberg learned as they helped build Google into what it is today.

Schmidt has been teasing the book by posting excerpts of illustrations and various tips from the book to his Google+ and Twitter page. His latest post emphasizes that tackling the market with different angles rather than simply trying to be better than your rival is crucial for success.

“It’s important to understand what’s going on around you, but the best way to stay ahead is a laser focus on building great products that people need,” Schmidt posted to Google+ along with the illustration.

I am selling Silver Wheaton (SLW) from my 401(k) account today. I originally bought it in anticipation of a pop in the price of silver when the “London Silver Fix” (aka “bankers rigging the commodities market”) ended this month. So far, no pop has occurred. When the condition passes for which you bought a stock, you sell the stock.

I will post an update when the sale goes through.

UPDATE: The order went through at $25.66 (including trading fees). The final line:

SLW: -0.45 this month, +3.46 overall to $25.66 (-1.72% this month, +15.59% overall, +15.98% overall with dividend)–bought at $22.20 on 5/30/2014

There isn’t much news today, aside from quadruple witching (options expiration) today.

Bloomberg: Gold Options Signal More Gains as Yellen Shakes Up Market

Janet Yellen is breathing life back into the gold market.

Trading in bullion options show the biggest rally in nine months has more to run after some contracts betting on higher prices surged by the most since 2012 [Wednesday]. Fed Chair Yellen’s outlook for low U.S. interest rates is bringing investors back to gold after a measure of volatility sank to the lowest since 2010 earlier this week.

This could explain the 6.14% rise in Silver Wheaton (SLW) yesterday.

Although I still believe in the silver play for August, I jumped on it too soon. With ProShares Ultra Silver (AGQ) dropping below it’s best support level, silver may drop a lot more before August. Therefore, I decided to eat my losses on AGQ, and I sold it at $58.32 today.

Here is the final line on it:

AGQ: -0.26 today, -5.23 overall to $58.32 (-0.44% today, -8.23% overall)–bought at $63.55

Regarding my 401(k) position in Silver Wheaton (SLW), I am going to keep that until August at least. I may double it if it drops far enough.

An important press release from the London Silver Market Fixing Ltd., otherwise known as “large banks that manipulate the price of silver for their own benefit”:

The London Silver Market Fixing Limited (the ‘Company’) announces that it will cease to administer the London Silver Fixing with effect from close of business on 14 August 2014.

In the past few decades, silver hasn’t moved much, aside from it’s recent run up into the $40’s. Now that the big banks will be stepping aside, we should see some serious movement in the silver market.

On top of this, the price of silver is already near it’s bottom, around the $19 area, but currently trading at $19.56. The technicals show silver with a multiple bottom, which is a bullish sign. In addition, both the MACD and the PPO show silver with bullish momentum, while the RSI is neutral (not overbought or oversold).

My recommendation: buy silver. For conservative investors, I recommend ETFS Physical Silver Shares (SIVR), an etf backed up with physical silver. For companies, I still would recommend Silver Wheaton (SLW), although their price can also be impacted by gold since they have started moving into that market too. For more daring players, there is ProShares Ultra Silver (AGQ), which is a double-leveraged etf.

Later, I will be adding SLW to my 401(k), and AGQ to my IRA. While silver can drop a little, I feel safe that the bottom is in.

UPDATE: I added AGQ to my IRA at $63.55.
UPDATE: I added SLW to my 401k at $22.20.

(hat tip to Feline Underground for the pic)

Time for another U.S. Monthly Employment Report today at 8:30 am EST. Here is what to expect, according to Bloomberg:

Nonfarm Payrolls – M/M change: Last month +113,000, Consensus +150,000, Consensus Range +80,000 to +203,000
Unemployment Rate – Level: Last month 6.6%, Consensus 6.6%, Consensus Range 6.4% to 6.7%

Bloomberg: Zombies Spreading Shows Chaori Default Just Start

More reason to worry about China:

The number of Chinese companies with debt double equity has surged since the global financial crisis, suggesting the first onshore bond default won’t be the last.

Publicly traded non-financial companies with debt-to-equity ratios exceeding 200 percent have jumped 57 percent to 256 from 163 in 2007, according to data compiled by Bloomberg on 4,111 corporates. The yield on five-year AA- notes leapt 13 basis points in two days to 7.82 percent on March 6, the most in almost four months, after Shanghai Chaori Solar Energy Science & Technology Co. (002506) said it won’t be able to fully pay an 89.8 million yuan ($14.7 million) coupon due today on its March 2017 bonds. Chaori Vice President Liu Tielong said in an interview today the company still can’t make the payment.

Bloomberg: Gold Defying Goldman Sachs With Coffee Percolating

Here is a commodities market update:

From drought in Brazil to the arctic blast that swept across North America, extreme weather drove coffee, sugar and natural gas into bull markets just as escalating political tension in Ukraine created supply risks for energy and grains. The rally for raw materials was a surprise to banks from Citigroup Inc. to Goldman Sachs Group Inc. that had forecast 2014 would mark a continuation of last year’s slump.

Commodity funds recorded inflows of $1.57 billion last month, the first increase since September, after withdrawals last year reached a record $43.3 billion, according to researcher EPFR Global. Investors who shunned gold as the metal slumped into a bear market in 2013 increased holdings through exchange-traded funds in February for the first time since 2012. Dryness in Brazil erased the prospect of a record coffee crop as prices jumped, after the longest slide in two decades.

“It’s a series of mostly unrelated factors that are catching commodities at a time when they’ve already been heavily sold,” said Paul Christopher, the St. Louis-based chief international strategist at Wells Fargo Advisors, which manages $1.4 trillion. “A lot of these factors are weather related and will fade. I don’t think this is a viable opportunity for a long-term investor. It’s more of a trading opportunity.”

Reuters (via Yahoo Finance): Big cut in U.S. fourth-quarter GDP growth looms

The U.S. government is set to slash its estimate of fourth-quarter growth as exports and restocking by businesses were less robust than previously thought, leaving the economy on a more familiar path of modest expansion.

Gross domestic product growth will probably be lowered to a 2.5 percent annual rate, according to a Reuters poll of economists. That would be down sharply from the 3.2 percent pace reported last month and the 4.1 percent logged in the third quarter.

“The revision to the GDP number will better reflect the underlying economic trend because the increases in inventories and exports that massively lifted growth in the second half of the year were simply not sustainable,” said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.

The Commerce Department will release its fresh estimate of fourth-quarter GDP at 8:30 a.m. (1330 GMT) on Friday.

I won’t try and predict what the new number will be, but I will say there is potential for a major market drop today. If the GDP number is revised significantly lower, say below 2%, the markets could have a very bad reaction to this, especially in light of the Federal Reserve’s tapering intention.

Bloomberg: Republicans Opposed to Yellen Flee Paul in Search of Rules

Republican lawmakers are seizing on a monetary-policy debate that’s older than the Federal Reserve itself as a means of hemming in the central bank as it enters its second century.

Led by House Financial Services Committee Chairman Jeb Hensarling of Texas, they’ve accused the Fed of following a haphazard, discretionary policy that investors have found hard to fathom and that has done little to help the economy, even as it recovers slowly from the worst crisis since the 1930s. As an alternative, they want Fed Chair Janet Yellen and her colleagues to adopt a rules-based approach that they say would be more understandable and reliable.

“We are into an improvisation phase where an incredible amount of discretionary power has been imparted upon the unelected and relatively unaccountable,” Hensarling said in an interview. “I don’t think that is good for promoting long-term economic growth.”

Read the entire article. I think the Republicans are correct here, mainly because of the economy’s recent booms and busts, which have been brought on by subjective Fed policy. They are guessing at what they should do, and they are too often wrong.

Bloomberg: U.S. Retail Chains See First Profit Decline Since Recession

With results in from 62 of 122 retail chains, the industry has posted its first profit quarterly drop since the economic contraction that ended in 2009, according to Retail Metrics Inc. Revenue also rose at the lowest rate since that year, the research firm found.

The results paint a grim picture of an industry hit hard by the sluggish job recovery and slow wage growth, which have turned U.S. consumers into a nation of penny pinchers. Earnings are expected to drop 6.1 percent on average during the holiday quarter, according to Retail Metrics data. The broader pool of Standard & Poor’s 500 Index companies, meanwhile, are estimated to see profit rise 8.5 percent.

This is an especially bad sign when you consider the added costs people will be paying for Obamacare this year. Unless the sector gets extremely undervalued, I would avoid retail.

Bloomberg: Gold Fix Study Shows Signs of Decade of Bank Manipulation

Speaking of things to avoid:

The London gold fix, the benchmark used by miners, jewelers and central banks to value the metal, may have been manipulated for a decade by the banks setting it, researchers say.

Unusual trading patterns around 3 p.m. in London, when the so-called afternoon fix is set on a private conference call between five of the biggest gold dealers, are a sign of collusive behavior and should be investigated, New York University’s Stern School of Business Professor Rosa Abrantes-Metz and Albert Metz, a managing director at Moody’s Investors Service, wrote in a draft research paper.

“The structure of the benchmark is certainly conducive to collusion and manipulation, and the empirical data are consistent with price artificiality,” they say in the report, which hasn’t yet been submitted for publication. “It is likely that co-operation between participants may be occurring.”

The paper is the first to raise the possibility that the five banks overseeing the century-old rate — Barclays Plc (BARC), Deutsche Bank AG (DBK), Bank of Nova Scotia, HSBC Holdings Plc (HSBA) and Societe Generale SA (GLE) — may have been actively working together to manipulate the benchmark. It also adds to pressure on the firms to overhaul the way the rate is calculated. Authorities around the world, already investigating the manipulation of benchmarks from interest rates to foreign exchange, are examining the $20 trillion gold market for signs of wrongdoing.

Gold price movements last year proved to me that it was rigged. When the price dropped significantly last Spring, and demand for gold went through the roof in Asia, the price should have bounced, but didn’t. That tells me the “supply-demand” equation isn’t working, which can only lead to one conclusion.

That said, I don’t expect any government investigations will reveal much, because governments have a vested interest in keeping gold prices down, in order to keep their currency values up. If currency values drop too far, especially against the gold price, people might realize that gold is more valuable than the worthless pieces of paper they are using.

Bloomberg: Fed Said to Release Plan to Limit Banks’ Commodities Activities

This is long overdue:

The Federal Reserve is poised to take a preliminary step toward limiting banks’ activities with commodities amid congressional scrutiny, according to three people briefed on the discussions.

The Federal Reserve is planning to release a notice seeking information on ways to curb banks’ ownership and trading of some commodities as it tries to cut risk for deposit-taking banks, said the people, who requested anonymity because the talks are private. Regulators and lawmakers have said raw-materials assets could lead to catastrophic losses, collapses and public bailouts.

A Senate Banking subcommittee has set a hearing on the issue for tomorrow, the second such hearing on the topic. Senator Sherrod Brown, an Ohio Democrat, has raised concerns that banks may have a conflict of interest when they own and trade both physical commodities and instruments tied to them.

Ya think? Of course they do! If you want to know why precious metal prices have been dropping in the face of overwhelming world demand, look no further than this.

The Weekly Standard: Bailing Out Health Insurers and Helping Obamacare

Robert Laszewski—a prominent consultant to health insurance companies—recently wrote in a remarkably candid blog post that, while Obamacare is almost certain to cause insurance costs to skyrocket even higher than it already has, “insurers won’t be losing a lot of sleep over it.” How can this be? Because insurance companies won’t bear the cost of their own losses—at least not more than about a quarter of them. The other three-quarters will be borne by American taxpayers.

For some reason, President Obama hasn’t talked about this particular feature of his signature legislation. Indeed, it’s bad enough that Obamacare is projected by the Congressional Budget Office to funnel $1,071,000,000,000.00 (that’s $1.071 trillion) over the next decade (2014 to 2023) from American taxpayers, through Washington, to health insurance companies. It’s even worse that Obamacare is trying to coerce Americans into buying those same insurers’ product (although there are escape routes). It’s almost unbelievable that it will also subsidize those same insurers’ losses.

…As Laszewski explains, Obamacare contains a “Reinsurance Program that caps big claim costs for insurers (individual plans only).” He writes that “in 2014, 80% of individual costs between $45,000 and $250,000 are paid by the government [read: by taxpayers], for example.”

In other words, insurance purchased through Obamacare’s government-run exchanges isn’t even full-fledged private insurance; rather, it’s a sort of private-public hybrid. Private insurance companies pay for costs below $45,000, then taxpayers generously pick up the tab—a tab that their president hasn’t ever bothered to tell them he has opened up on their behalf—for four-fifths of the next $200,000-plus worth of costs.

Mind you, this doesn’t mean you should run out and buy health insurance company stocks. Capped losses don’t mean they can’t have losses…

Reuters: Youth participation low in early Obamacare enrollment

The new private health plans available under Obamacare drew in fewer young and healthy Americans than needed for the administration to make healthcare reform a market success in the first wave of enrollment, an official report showed on Monday.

Twenty-four percent of the 2.2 million people who signed up for private coverage between October 1 and December 28 belonged to a target audience of 18- to 34-year-olds, according to the first administration report to provide a demographic breakdown on enrollment in the new plans offered under President Barack Obama’s healthcare law.

That compares with a target of closer to 38 percent set before the program’s botched October 1 rollout, when administration officials believed that about 2.7 million of a forecast 7 million enrollees for 2014 would be between 18 and 35.

Younger enrollees tend to be healthy and are needed to help offset the cost of covering older, sicker consumers, because Obamacare prohibits insurers from charging sick people higher rates and limits the cost premium they can assign to older policyholders.

Admittedly, Obamacare has until the end of March to get these young people enrolled. If that doesn’t happen, this could create a vicious cycle, whereby insurance companies will have to raise their rates next year to make up for the adverse risk they are taking this year. Higher rates will NOT encourage young healthy people to get insurance next year, and may even discourage some of the young people who did get insurance through Obamacare. Eventually, you end up with a health insurance system with only the oldest and sickest people getting health insurance.

Fox News: Almost 80 million with employer health care plans could have coverage canceled, experts predict

Almost 80 million people with employer health plans could find their coverage canceled because they are not compliant with ObamaCare, several experts predicted.

Their losses would be in addition to the millions who found their individual coverage cancelled for the same reason.

Stan Veuger of the American Enterprise Institute said that in addition to the individual cancellations, “at least half the people on employer plans would by 2014 start losing plans as well.” There are approximately 157 million employer health care policy holders.

Avik Roy of the Manhattan Institute added, “the administration estimated that approximately 78 million Americans with employer sponsored insurance would lose their existing coverage due to the Affordable Care Act.”

Last week, an analysis by the American Enterprise Institute, a conservative think tank, showed the administration anticipates half to two-thirds of small businesses would have policies canceled or be compelled to send workers onto the ObamaCare exchanges. They predicted up to 100 million small and large business policies could be canceled next year.

According to projections the administration itself issued back in July 2010, it was clear officials knew the impact of ObamaCare three years ago.

What will be truly interesting is if those cancellations go out before next year’s mid-term election.

Bloomberg: Gold Fix Drawing Scrutiny Amid Knowledge Tied to Eruption

This is the very definition of “insider trading”:

Every business day in London, five banks meet to set the price of gold in a ritual that dates back to 1919. Now, dealers and economists say knowledge gleaned on those calls could give some traders an unfair advantage when buying and selling the precious metal.

The U.K. Financial Conduct Authority is scrutinizing how prices are set in the $20 trillion gold market, according to a person with knowledge of the review who asked not to be identified because the matter isn’t public. The London fix, the benchmark rate used by mining companies, jewelers and central banks to buy, sell and value the metal, is published twice daily after a telephone call involving Barclays Plc (BARC), Deutsche Bank AG (DBK), Bank of Nova Scotia, HSBC Holdings Plc (HSBA) and Societe Generale SA. (GLE)

The process, during which gold is bought and sold, can take from a few minutes to more than an hour. The participants also can trade the metal and its derivatives on the spot market and exchanges during the calls. Just after the fixing begins, trading erupts in gold derivatives, according to research published in September. Four traders interviewed by Bloomberg News said that’s because dealers and their clients are using information from the talks to bet on the outcome.

“Traders involved in this price-determining process have knowledge which, even for a short time, is superior to other people’s knowledge,” said Thorsten Polleit, chief economist at Frankfurt-based precious-metals broker Degussa Goldhandel GmbH and a former economist at Barclays. “That is the great flaw of the London gold-fixing.”

We will see whether the British government actually does anything about this, but I’m not holding my breath…

I added 25% to my iShares Gold Trust (IAU) position at $12.45, lowering my dollar cost average to $12.96. It has been awhile since I added to it, and this felt like the right time to do it. I may add more later.