A must read article from Eric Sprott, David Franklin

In our May/June Markets at a Glance, "The Solution…is the Problem", we discussed how much debt the US government would need to issue in order to balance the budget for fiscal 2009. We calculated they would need to sell $2.041 trillion in new debt - or almost three times the new debt that was issued in fiscal 2008. As a thought experiment, we separated all the various US Treasury owners and asked our readers whether each group could afford to increase their 2009 treasury purchases by 200%. In the end, we surmised that most groups couldn’t, and prepared our readers for the worst.

Almost seven months later, however, nothing particularly bad has happened on the US debt front. There have been no failed auctions, no sovereign defaults, no downgrades of debt and no significant increase in rates…not so much as a hiccup in the treasury market. Knowing what we discussed this past June, we have to ask how it all went so smoothly. After all – it was pretty obvious there wasn’t enough buying power to satisfy the auctions under ‘normal’ circumstances.

In the latest Treasury Bulletin published in December 2009, ownership data reveals that the United States increased the public debt by $1.885 trillion dollars in fiscal 2009.1 So who bought all the new Treasury securities to finance the massive increase in expenditures? According to the same report, there were three distinct groups that bought more than they did in 2008. The first was "Foreign and International Buyers", who purchased $697.5 billion worth of Treasury securities in fiscal 2009 – representing about 23% more than their respective purchases in fiscal 2008. The second group was the Federal Reserve itself. According to its published balance sheet, it increased its treasury holdings by $286 billion in 2009, representing a 60% increase year-over-year.2 This increase appears to be a direct result of the Federal Reserve’s Quantitative Easing program announced this past March. Most of the other identified buyers in the Treasury Bulletin were either net sellers or small buyers in 2009. While the Q4 data is not yet available, the Q1, Q2 and Q3 data suggests that the State and Local governments and US Savings Bonds groups will be net sellers of US Treasury securities in 2009, while pension funds, insurance companies and depository institutions only increased their purchases by a negligible amount.

So who was the third large buyer? Drum roll please,... it was "Other Investors". After purchasing $90 billion in 2008, this group has purchased $510.1 billion of freshly minted treasury securities so far in the first three quarters of fiscal 2009. If you annualize this rate of purchase, they are on pace to buy $680 billion of US treasuries this year - or more than seven times what they purchased in 2008. This is undoubtedly the group that made the US deficit possible this year. But who are they? The Treasury Bulletin identifies "Other Investors" as consisting of Individuals, Government-Sponsored Enterprises (GSE), Brokers and Dealers, Bank Personal Trusts and Estates, Corporate and Non-Corporate Businesses, Individuals and Other Investors. Hmmm. Do you think anyone in that group had almost $700 billion to invest in the US Treasury market in fiscal 2009? We didn’t either. To dig further, we turned to the Federal Reserve Board of Governors Flow of Funds Data which provides a detailed breakdown of the owners of Treasury Securities to Q3 2009.3 Within this grouping, the GSE’s were small buyers of a mere $5 billion this year;4 Broker and Dealers were sellers of almost $80 billion;5 Commercial Banking were buyers of approximately $80 billion;6 Corporate and Non-corporate Businesses, grouped together, were buyers of $11.6 billion, for a grand net purchase of $16.6 billion.7 So who really picked up the tab? To our surprise, the only group to actually substantially increase their purchases in 2009 is defined in the Federal Reserve Flow of Funds Report as the "Household Sector". This category of buyers bought $15 billion worth of treasuries in 2008, but by Q3 2009 had purchased a whopping $528.7 billion worth. At the end of Q3 this Household Sector category now owns more treasuries than the Federal Reserve itself.8

So to summarize, the majority buyers of Treasury securities in 2009 were:

1.Foreign and International buyers who purchased $697.5 billion.

2.The Federal Reserve who bought $286 billion.

3.The Household Sector who bought $528 billion to Q3 – which puts them on track purchase $704 billion for fiscal ‘09.

These three buying groups represent the lion’s share of the $1.885 trillion of debt that was issued by the US in fiscal 2009.

We must admit that we were surprised to discover that "Households" had bought so many Treasuries in 2009. They bought 35 times more government debt than they did in 2008. Given the financial condition of the average household in 2009, this makes little sense to us. With unemployment and foreclosures skyrocketing, who could afford to increase treasury investments to such a large degree? For our more discerning readers, this enormous "Household" investment was made outside of Money Market Funds, Mutual Funds, ETF’s, Life Insurance Companies, Pension and Retirement funds and Closed-End Funds, which are all separate reporting categories.9 This leaves a very important question - who makes up this Household Sector?

Amazingly, we discovered that the Household Sector is actually just a catch-all category. It represents the buyers left over who can’t be slotted into the other group headings. For most categories of financial assets and liabilities, the values for the Household Sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the Household Sector. To quote directly from the Flow of Funds Guide, "For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government and the balance is assigned to the household sector." (Emphasis ours)10 So to answer the question - who is the Household Sector? They are a PHANTOM. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.

Our concern now is that this is all starting to resemble one giant Ponzi scheme. We all know that the Fed has been active in the market for T-bills. As you can see from Table A, under the auspices of Quantitative Easing, they bought almost 50% of the new Treasury issues in Q2 and almost 30% in Q3. It serves to remember that the whole point of selling new US Treasury bonds is to attract outside capital to finance deficits or to pay off existing debts that are maturing. We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury’s ability to attract outside capital. If our research proves anything, it’s that the regular buyers of US debt are no longer buying, and it amazes us that the US can successfully issue a record number Treasuries in this environment without the slightest hiccup in the market.

Perhaps the most striking example of the new demand dynamics for US Treasuries comes from Bill Gross, who is co-chief investment officer at PIMCO and arguably one of the world’s most powerful bond investors. Mr. Gross recently revealed that his bond fund has cut holdings of US government debt and boosted cash to the highest levels since 2008.11 Earlier this year he referred to the US as a "ponzi style economy" and recomended that investors front run Uncle Sam and other world governments into government debt instruments of all forms.12 The fact that he is now selling US treasuries is a foreboding sign.

Foreign holders are also expressing concern over new Treasury purchases. In a recent discussion on the global role of the US dollar, Zhu Min, deputy governor of the People’s Bank of China, told an academic audience that "The world does not have so much money to buy more US Treasuries." He went on to say, "The United States cannot force foreign governments to increase their holdings of Treasuries… Double the holdings? It is definitely impossible."13 Judging from these statements, it seems clear that the US cannot expect foreigners to continue to support their debt growth in this new economic environment. As US consumers buy fewer foreign goods, there are less US dollars available for foreigners to purchase future Treasury securities. Foreigners are the largest source of external capital that can be clearly identified in US Treasury data. If their support wanes in 2010, the US will require significant domestic support to fund future debt issuances. Mr. Gross’s recent comments suggest that their domestic support may already be weakening.

As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.

http://www.zerohedge.com/sites/default/files/Sprott%20December.pdf

The limit on their constitutionally entrenched right to "religious freedom" concerns the limitation on the architectural design to construct "Minarets". There is no limitation whatsoever on establishing "Mosques" all over Switzerland.

Also with church bells, in most places these are no longer allowed to be rung so as not to impose noise pollution on people that are not concerned.

In France Burka's and veiled dress are not allowed in public places as this is considered discriminatory towards women. Many other examples exist. In a laic state, the laic values take precedence.

Stephen Jen from the hedge fund Blue Gold Capital has a warning for those who think that gold has risen far too high, is necessarily in a speculative bubble, and must soon come clattering back down.

Mr Jen is an expert on sovereign wealth funds from his days at Morgan Stanley. The gold story — essentially — is that the rising economic powers of Asia, the Middle East, and the commodity bloc are rejecting Western fiat currencies. China, India, and Russia have all been buying gold on a large scale over recent months.

Why should that stop when the AAA club of sovereign debtors is pushing towards the danger threshold of 100pc of GDP?

These new players account for almost all the accumulation of foreign currency reserves worldwide over the last five years, so what they do matters enormously.

After crunching the numbers, Mr Jen found that the share of gold in their reserves is just 2.2pc compared to 38pc for the Old World (perhaps we should just call them the deadbeats from now on). They would have to buy $115bn of gold at current prices to raise their bullion to just 5pc of total reserves, and $700bn to reach just half western levels.

The killer-term here is at current prices since any such move in the tiny global market for gold would send prices into the stratosphere.

Mr Jen says that you know where you are in the currency markets — more or less — because there are concepts of “fair value” used by experts. Ditto for the equity markets, where you have P/E ratios (warts and all I might add, since the actual reported P/E of the S&P 500 was a record 141 in September before the agency stopped publishing the figure — a far cry from the forward earnings in vogue).

How on earth do we determine what fair value should be for gold? “We have no such concept,” he said. Actually, that is not quite true. You can use the dollar monetary base as a proxy.

Mr Jen said China alone accumulated $150bn in reserves in the third quarter, pushing the total to $2.3 trillion. These are colossal sums. China is amassing almost as much each month as the United States ($63bn) has built up in the entire history of the country. True, the US understates the value of its gold, but you get the picture. Something big is going on.

So far, China has just 1.7pc of its reserves in gold, or 34m troy ounces. I was told by a top Chinese official that they are buying on the dips so as not to crowd out the market, which means of course that gold cannot “crash” unless you think China itself is going to crash — or stop building reserves (which is possible: Albert Edwards from SocGen says China may be in current account deficit next year, leading to a yuan move — down, not up).

The gold proportions are: Hong Kong (0), Singapore (0), Korea (0.2), Brazil (0.6), India (4.8) after its shock purchase of IMF gold, and Russia (5.5). Yes, the West still has a lot in percentage terms — US (86), France (78), Italy (72), Switzerland (33), Germany (25) — but they don’t count for so much any more.

It is true that the Old World could meet demand for a while (a short while actually) by selling some of their gold. But will they do so? They did not use up their quota for the last year under the Washington accord. My own guess is that they too are wondering whether it makes any sense to keep selling metal in order to buy the fiat paper of the bankrupt peers (note that the Bank of England’s own pension fund has got rid of almost all its Gilts, buying inflation protection instead). Britain may become a net buyer of gold under the Tories, Who knows?

Bottom line: “The scope for EM central banks to buy more gold is substantial, if they choose to do so,” he wrote cautiously in a note to clients.

Will they choose to do so? “I suspect they will,” he told me.

Personally, I have been feeling vertigo with gold near $1180. All my contrarian instincts cause me to dislike momentum stories — but there again, maybe this is not momentum. Perhaps it is a civilization shift. Can’t make up my mind.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100002252/china-gold-and-the-civilization-shift/

Note:

If and when the central banks sell their gold, there will be lots of buyers. Thus, we will at last discover the answer to the toothpaste’s long-unanswered prediction: "You’ll wonder where the yellow went." It went to Asia.

Further to Ed Steer's Link:

The German gold, second only to the U.S. reserves held by the "Custodian" is most likely also leased or swapped into oblivion "auf niemals wiedersehen" together with the U.S. gold reserves.

The German Card, Die Deutsche Karte: Gerd Helmut Komossa.

BERLIN IS WASHINGTON'S VASSAL UNTIL 2099?

Ex-head of MAD Military Counter Intelligence reveals shocking details of the 1949 US-German secret treaty

Gerd-Helmut Komossa reveals the uncomfortable truth about the post-war conditions, dictated by the US and its allies. The state treaty, dated May 21, 1949 and classified by BND as top secret, suggests restrictions of state sovereignty of the Federal Republic of Germany, introduced for a period until 2099. These restrictions include the provision that the winning coalition exercise complete control over Germany's mass media and communications; that every Federal Chancellor is to sign the so-called Chancellor Act; that the gold reserve of Germany is kept under arrest.

In fact, all the German Chancellors, including the incumbent Chancellor Angela Merkel, pay their first foreign visit necessarily to the United States. The whole spectrum of German political parties is supervised by a special Washington-based controlling body, while local US-licensed media serve as a more sophisticated means of brainwashing than the Nazi propagandist machine. Meanwhile, Germany's territory is still occupied by US troops.

This astonishing picture is not a fancy concoction of a political leftist. It is drawn by a military man whose mind has accumulated the experience of several crucial stages of development of the European civilization and Germany in particular. Gen. (Ret.) Gerd-Helmut Komossa took part in World War II and later in the Cold War. Possessing huge amounts of information, he analyzes the existing mechanisms of global policy with strong criticism.

The attached article explains the tremendous paper Silver derivatives leverage, with the important current silver backwardation this may lead to current physical shortages to expose non-backed paper silver investments. The upside leverage in price would be enormous.

The silver basis is defined as the difference between the nearby futures price and the cash price of silver in the same location. A positive basis is called contango; a negative one backwardation i.e. a premium for immediate availability.

The Game Has Changed The Achilles Heel Exposed:Rob Kirby

http://news.goldseek.com/GoldSeek/1254425844.php

In a discussion I had earlier this week with Dr. Jim Willie, we discussed how the prices of gold and silver have been arbitrarily managed for years.In this discussion, I contended that, while the prices of gold and silver have been closely managed, the growing “off-take” of physical bullion is inflicting great damage on price managers.We can see manifestations of this reality in that price corrections [sell-offs] are much shallower and shorter lived than they were even last year.Jim asked me if I could provide any “hard data” or minutia showing the amounts of physical metal being taken off the market in recent weeks.

Unfortunately, I cannot.

The reason for this was best encapsulated in comments by GATA Secretary / Treasurer Chris Powell back in April, 2008 in Washington, D.C. when he opined:

“Indeed, the disposition of Western central bank gold reserves is a secret more closely guarded than the blueprints for the manufacture of nuclear weapons.”

With the micro details being withheld or obscured, the proof to the thesis that price managers are hemorrhaging physical bullion is more “macro” in nature. So here’s a review of the macro picture [or “known-knowns” in Rumsfeld-ian double-speak], starting with a daily chart of gold for Sept. 8, 2009:

And now here’s a chart of silver over the exact same time period:

Now, I’d like everyone to see the two charts overlaid:

The charts from Sept. 8 were not cherry picked – they typify the intra-day “rigged” relationship of gold and silver over the past number of years.The real evidence that a shortage of physical metal exists and is ongoing is as follows:

1The prices of gold and silver have tripled over the past 6 years.This in it self, given that we know prices are arbitrarily “set” - is evidence of rear-guard activity.

2The U.S. mint has suspended production of Silver and Gold American Eagles on numerous occasions

3Over the past couple of years, premiums being paid for small bars and coins [due to lack of availability] have been as much as 10 - 60 % over the ‘posted’ futures prices.

4European Central Banks have been unable or unwilling to fulfill their quotas [roughly 130 – 150 metric tonnes sold in the last year of the recently expired Washington Agreement allowing for 500 metric tonnes of sales per year].The ineffectiveness of the Washington Agreement to suppress the gold price – as it once did - is a very likely reason why the specter of I.M.F. gold sales has recently been rekindled.

5Central Banks like China and Russia are now publicly acknowledged buyers of gold bullion for reserve diversification – even 2 years ago they WERE NOT.Call this the China / Russia “put” under the price of gold. [ie:THESE ARE HUGE NEW PLAYERS ON THE BUY SIDE FOR PHYSICAL.]

6As the Russians sent representation to GATA’s Gold Rush 21 conference in Dawson City back in 2005, Chinese sovereign wealth funds have met with GATA on at least 3 occasions [lengthy conference calls] since the spring of 2008 to get the scoop on how the gold price has been suppressed – giving more credence to the notion that the Chinese are learning how the market rigging game is played, largely with fraudulent futures / derivatives.

7Flowing from [6], the Chinese have publicly stated that their State run enterprises may unilaterally walk away from losing derivatives bets with un-named banks.

8Fed Governor Kevin Warsh – responding to a GATA FOIA request – recently acknowledged that the Fed is indeed involved in gold swaps, reversing 2001 denials that they were involved in the same.This revelation flies in the face of sworn testimony provided by [then] Fed Chairman Alan Greenspan [a perjurer?] to Rep. Ron Paul back on Feb. 24, 1999:

“Last summer on a couple of occasions here when you were talking before the committees on securities and on derivatives you mentioned something that was interesting. You said that central banks stand ready to sell gold in increasing quantities should the price rise, which I thought was rather interesting.

Then I followed up with a letter to you to ask you whether or not our central bank might not be involved in something like that, in the gold market. And you did answer me and stated that since the 1930's the Federal Reserve has had no authority to be involved with the gold markets.”….

To which Pinocchio, err….Greenspan responded,

“The issue of buying and selling gold as the price changes is indeed exactly what we used to do. We used to, at a certain thing called the gold points, which was the price of gold plus the transportation cost differentials, we, that is, the United States Treasury, stood ready to buy and sell gold at a spread, as indeed all other participants in the gold standard did. So in that regard that was exactly what was happening.

But, needless to say, since we have gone off the gold standard, and especially since 1973, there has been basically a general float of the dollar vis-à-vis gold, which means that the gold price is like another commodity's price.”

Isn’t this LYING TO CONGESS?

Gold Swaps have long been proven by GATA to be a primary means by which Central Banks nefariously mobilize sovereign gold stocks – creating stealth supply to sell into the physical market to suppress the gold price.

A note on the gold and silver derivatives game from my good friend Rhody:

“Futures contracts were introduced in gold and silver for the first time in 1974 in Winnipeg, Canada as a trial system.It worked so well, it was shipped to New York the next year and that began the paper gold, multiple selling of each ounce system.....

The BIS [Bank for International Settlements] http://www.bis.org/statistics/otcder/dt21c22a.pdf issued data on the status of silver derivatives held by member banks this year.It was 111 billion dollars.The world produces$10 billion in new silver each year, of which ALL but $1 billion is consumed by industry.That means that these $111 billion represent debt instruments backed by only $1 billion of investor held silver.That's a 100 to 1 ratio.Keep in mind that the $111 billion does not count the derivatives held outside the banking sector.

There could easily be an additional $100 billion of derivative silver debt held by hedge funds, mines, jewelers and investors.This is why I say that each ounce of real silver is sold over 100 times, and by that, I mean it could be 200 times.And the guys who sold the derivatives are not the same guys who hold the $1 billion in real silver.

You must understand that the Western centric financial system in all its parts isa complete fraud. “

These things – taken together – should reinforce to ANYONE who’s paying attention, that while the prices of gold and silver are STILL arbitrarily set by price managers, THE GAME HAS CHANGED.Access to [or a lack of] physical metal is the Achilles Heel of the price rigging gameand only real question is how quickly the price managers retreat and whether the melt-up remains orderly?

Got physical precious metal yet?

Rob Kirby

Canary in the coal mine

Excerpt: http://news.silverseek.com/SilverSeek/1213201099.php

According to one hypothesis, permanent backwardation in silver will precede that in gold. Thus silver is the "canary in the coal mine". But you have to have ears to hear the canary sing. In other words, you must be able to read the message carried by the silver basis. If deflation and depression is in store, then the case for silver is not so clear-cut, in view of silver's extensive industrial applications. It is possible that silver will be dumped by investors fearing that industrial demand is vanishing. But again, it is also possible that the rush into gold, a regular feature of depressions, will spill over as a rush into silver. Whatever happens, the silver basis will provide a reliable early warning sign. The return of contango in silver is an indication that bullion banks are dumping silver.

Continued backwardation is an indication that investors and bullion banks are still accumulating silver. Investors and traders would do well to learn all they can about the silver basis to be able to interpret events correctly as they unfold, even if they never intend to trade the silver basis.

Silver Basis Contango/backwardation

http://www.lbma.org.uk/?area=stats&page=sifo/2009sifo