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Posted: 7 December 2011 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news
In another attempt to bring the Eurozone back from the brink of financial collapse, six of the world’s major central banks the FED, ECB, BOE, BOJ, BOC and SNB agreed to cut interest rate on the existing temporary USD liquidity swap arrangements by -50 bps, to the USD OIS+50 bps.
By reducing the rate of interest paid for dollar swaps, central bankers are basically increasing the quantity of dollars in circulation around the world. This will lead to a decline in the value of the greenback, an increase in the price of dollar denominated commodities and prices of precious metals will rise. Essentially what happened is that the US Fed cut the interest rate it charges the European Central Bank (ECB) to borrow dollars. These loans are known as “US dollar swap lines.” The ECB wants the dollars so it can lend them out to European banks, which have been having trouble borrowing dollars at affordable rates due to fears about their financial health. To make it easier for the central banks to access the dollar swaps, the Fed also slashed the interest rate it charges from 1% to 0.50%.
“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to household and businesses and so help foster economic activity,” said a statement issued by the six central banks involved – The Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The effects of the move were instantaneous. Germany's leading DAX index spiked by more than 5%, in France the jump was over 4%, and the Dow Jones was up by more than 400 points. Even the euro jumped in value against the dollar. Main stream media was filled with stories about rising prices of shares, yet, this latest move by the central bankers has not resolved any of the current problems of the plutocratic, debt laden global monetary system that looks even more likely to collapse than any other time in the past.
While there was a wave of exuberance in global markets, the threats of a renewed financial crisis still persist in Europe. Due to new capital regulations many institutions have reduced lending in order to increase their capital ratios. But, because many of them hold large quantities of sovereign bonds from heavily indebted Eurozone countries on their books, other banks have become wary of lending to them. US money market funds, in particular, have sharply reduced lending to Eurozone banks. While European political and financial leaders shuttle back and forth from one meeting to another, nothing has yet been done to reassure the markets that the Eurozone will be able to solve its debt problems before it is too late. Appointing new political leaders in Greece and Italy will not make the underlying problem simply disappear. Now, once again European leaders are preparing for their next gathering in Brussels on Dec. 9 where they hope to find a solution that will quickly restore investor confidence. I am not sure how many times they have met this year alone, but I think they should cut down on spending so much on meaningless travel, accommodation, food and drink. As interest rates on sovereign bonds issued by Italy and Spain hit dangerous levels, and rates on French and Belgian bonds continue to rise, many fear that the Eurozone could collapse. Last week, just before the central bank announcement, the People's Bank of China cut the reserve requirement ratio (RRR) for all depository financial institutions by -50 bps, effective December 5, 2011 as reduction in inflationary pressure has lowered the need for tightening monetary policy. This was the first cut since December 2008 and was seen as a move to free up capitals for lending to cash-strapped smaller firms. We live in economically and politically perilous times, and if the coming years are going to be anything like the past two years, you better be prepared for some major surprises.
The problems in the Eurozone are due to the mismanagement of governments that have created massive fiscal deficits. The contagion has spread rapidly over the past month from Greece to Italy and even to some of the stronger economies, including France. But, while investors focus on the Eurozone, we must not forget that the debt problems in the USA are just as bad as those of Europe. The federal government has a $1.3 trillion deficit on a cash basis, but it is closer to $5 trillion when you count the additional unfunded liabilities each year from Medicare, Social Security and other entitlement programs. While the Fed, has no problem printing money, the European Central Bank, does thanks to the influence of Germany.
While political and financial leaders wine and dine as they fumble and flounder around trying to "fix" problems while making things worse, one thing for sure, ultimately, individuals will suffer when they see the value of their wealth slowing erode. Only this weekend, Italian Prime Minister and Finance Minister Monti unveiled an ambitious EUR 30 billion austerity package over the weekend to eliminate the budget deficit by 2013. The package includes measures to cut costs of the government and combat tax evasion. There would be sharp cuts to regional governments, a reintroduction of a property tax, no cash transactions above EUR 1000 and an increase of VAT by 2 pts. to 23%. Here is a copy of an article that appeared the UK Telegraph, entitled: Portugal raids pension funds to meet deficit targets, Portugal has raided €5.6bn (£4.8bn) of pension fund assets in a controversial scramble to meet its deficit targets. “The cabinet agreed to transfer the assets from four of Portugal’s biggest banks to the state balance sheet. The assets will be used to bridge a gap needed to meet the fiscal deficit target of 5.9% of GDP set by the terms of the country’s €78bn bail-out from around 10% in 2010. "This measure is more than sufficient to meet the budget deficit goal in 2011," said Helder Rosalino, secretary of state for central administration, on Friday. Portugal said it had informed the EU and IMF and assured them it would be a “one-off”. However the 2010 budget was met by shifting three pension plans from Portugal Telecom on to the public social security system. The liabilities don’t count, yet. There have been no complaints from Eurostat but Raoul Ruperal from Open Europe said: “This can’t be seen as a future revenue stream in any way.” A “one-off,” who are they kidding? This is only the beginning. The fact is you cannot trust the government to look after your interests. You must take control and act in your own interest. You need to protect your hard earned money before it is too late. Increased taxes as well as newly invented taxes are coming. More controls are on the way so governments can stick their grubby hands in your till.
Owning gold and silver are necessary steps you need to take in order to protect your wealth.
While gold prices remain in a mostly neutral direction, the price of the yellow metal is building support above $1700/oz. I still believe that we will soon see prices break to the upside.
The price of silver has been in a correction since September this year. Yet, the bullish fundamentals behind this metal have not changed and it remains one of the few commodities that is still trading at a massive discount to its peak in 1980. Very few items cost less now than they did 31 years ago.
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There is no question the price of silver today at $32/oz. is cheap based on historical measures. Sure the nominal price of silver almost hit the 1980 highs of $50 back in April of this year. But when we’re comparing data from 30 years ago, we need to adjust for inflation to make sure we compare apples to apples. If we use the inflation-adjusted price of Silver from 1980 up and until now and if we use the Consumer Price Index (CPI)the price for silver adjusted for inflation should be around $140 an ounce and $114 if using the Producer Price Index (PPI). Now when we compare Silver with more popular metrics like stocks, it is also relatively inexpensive. In 1980, the Dow to Silver ratio got as low as 18:1. In other words, one share of the Dow Jones Industrial Average bought you 18 ounces of Silver. Today, one share of the Dow buys as much 365 ounces. (Silver $33 & DJIA 12045). If you compare it to a much broader index like the S&P 500, we see similar results. In 1980, one share of the S&P500 bought as little as 2.3 ounces of Silver. Today one share of the S&P500 buys us 33 ounces of Silver (SP 1246). Although these may seem like big numbers on the surface, silver has been outperforming stocks for 11 years. This is nothing new. For prudent investors, the trend in place for the last decade has been: Precious metals over equities and bonds. Right now there is a lot of negative sentiment regarding silver, mainly due to the lack-lustre performance of the white metal over the last few months. But one good indicator for me is reports from major financial institutions. Usually they are so off the mark it is incredible. For example, recently HSBC raised its silver price targets in light of a “slight upward bias” it now sees for gold’s sister precious metal. HSBC increased its 2012 silver estimate to $34.00 from $32.00 per ounce, and its 2013 target to $32.00 from $30.00 per ounce. The firm also introduced a 2014 silver estimate of $28.00 and reiterated its five-year forecast of $25.00 per ounce. AS I have had mentioned in the past, we are all entitled to our own opinions but when you consider that the price of silver can jump more than 6% in one session, I find these price projections to be ridiculous. Silver is an extremely volatile metal and with the current financial crisis around the world prudent investors are looking to accumulate physical precious metals, in particular gold and silver. And, as I don’t see any solution any time soon, I maintain that investor demand for silver in 2012 will exceed investment demand of 2011, and this alone will push prices back above $40 an ounce. While the near-term picture for silver remains uncertain the long-term drivers of silver's up trend is still in place. Enormous and growing Asian economies like China and India are getting richer... and they have deep cultural affinities for precious metals. Plus, the Western world has lived way beyond its means for a long time... the debts and liabilities it has taken on can only be paid back with devalued, debased money. This is bullish for "real money" assets like gold and silver. With sentiment so negative toward silver (and just beginning to turn back up), it's a great time to take a position in this long-term bull market.
David Levenstein

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