Tuesday, 28 December 2010

2011 – There May Be Trouble Ahead.

Baltic Dry Index. 1773 -22

LIR Gold Target by 2019: $30,000. Revised due to QE.

"You have to choose between trusting to the natural stability of gold and the natural stability and intelligence of the members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."

George Bernard Shaw

While London and much of the former British Empire parties on for another day of rest and recovery, and the North Eastern part of America gets reacquainted with the delight of snow, we look ahead towards the incoming year, and think it’s bunker time once again. Oil has surged back towards $91. Inflation is staring to reappear in many parts of the world. The Fed is to press on with QE2 through June 2011, and outside of Germany, Russia, China and Brazil, the global economy is on life support. To this old trader, it’s time to scale back on risk, add to gold and silver physical positions, and add a few more firms to my rare metals list. Below, why there may be trouble in 2011, and I haven’t even covered likely unrest and civil disobedience in the UK and Europe as austerity and higher taxes bite.

China Increases Rates to Counter Highest Inflation in Two Years

Dec. 26 (Bloomberg) -- China raised interest rates for the second time since mid-October to counter the fastest inflation in more than two years, and more moves may follow.

The benchmark one-year lending rate will rise by 25 basis points to 5.81 percent and the one-year deposit rate will climb by the same amount to 2.75 percent, effective today, the People’s Bank of China said in a one-sentence statement on its website late yesterday.

----- “This demonstrates how determined the government is to control inflation,” said Wang Qing, a Hong Kong-based economist with Morgan Stanley. “Interest rates on medium and long-term loans are adjusted by banks at the beginning of every year so by raising rates now, this will have a much greater tightening effect than it would have in January.”

Wang said he expects three more interest-rate adjustments of 25 basis points each in the first half of next year. Ken Peng, an economist at Citigroup Inc. in Hong Kong said yesterday he forecasts increases totaling 100 basis points next year.


Andy Xie: Either America Or China Will Crash In 2011
Andy Xie's latest sees the liquidity war getting worse in 2011.

America will continue to pump the financial system with liquidity via tax cuts and quantitative easing. China will keep the yuan cheap and avoid clamping down on inflation.

The tense equilibrium can't last for long, as either sovereign debt or inflation gets too heavy to bear. Whoever lasts longer, wins

----- The most likely candidates to trigger the next global crisis are the U.S.'s sovereign debt or China's inflation. When one goes down first, the other can prolong its economic cycle. China may have won the last race. To win the next one, China must tackle its inflation problem, which is ultimately a political and structural issue, in 2011. If China does, the U.S. will again be the cause for the next global crisis. China will suffer from declining exports but benefit from lower oil prices.
----- Xie notes that China may have the advantage here. While America has committed to a liquidity hose, Beijing still has the opportunity to crack down on inflation:

China's inflation problem stems from the country's rapid monetary growth in the past decade. That is due to the need to finance a vast property sector, which is, in turn, to generate fiscal revenues for local governments to finance their vast expenditure programs. Unless something is done to limit local government expenditure, China's inflation problem is likely to get out of control...

---- How bad is the Chinese property bubble? Check out AMAZING photos of newly constructed Chinese ghost cities >

Lehman 'prophet' fears second crisis if US interest rates are kept low

America is storing up a second financial crisis by keeping interest rates at record low levels, according to David Einhorn, the hedge fund manager who first publicly warned about the financial catastrophe facing Lehman Brothers.

By Richard Blackden, US Business Editor 6:30AM GMT 26 Dec 2010

"The crisis that required zero interest rates has passed," said Mr Einhorn, who co-founded and runs Greenlight Capital, a $6.5bn (£4.2bn) fund. By not raising rates "it increases the chance that governments will over-borrow and fall into a debt trap".

The criticism of the Federal Reserve comes as it embarks on another $600bn (£380bn) of quantitative easing – or printing money – in an effort to fire up a stronger recovery next year.

Interest rates around the western world, including in Britain, have sat at or below 1pc since the near collapse of the financial system in 2008 triggered a global recession.

"If interest rates ever do go up again, you have another crisis," Mr Einhorn told The Sunday Telegraph.

Those in favour of very low interest rates point to the support it has given the real estate market in the US and that, as in the UK, it should encourage politicians to begin to tackle the $1.3 trillion budget deficit without fear of damaging the economy.

----Greenlight, which Mr Einhorn founded in 1996 with about $1m, including an investment from his parents, has its single largest position in gold – an asset that many investors have historically turned to during periods of economic uncertainty.

The gold price, which is closing in on a tenth straight year of gains, reached a record $1,432.50 an ounce earlier this month.

Mr Einhorn admits that he is having to pay far more attention to the broader economic picture when making decisions about which companies to invest in than he has ever done.


Will Germany be pressured into a debt union in 2011? Yes says the Greek Prime Minister, ready to issue new debt to support the Greek Dolce Vita way of life, to be paid for by the hard working Lutherans between the Rhine and the Oder. Seen from London, all this ganging up against Germany is too bizarre for words. Dragging Germany into the Club Med Follies, makes Germany poorer but doesn’t solve the problems of the Euro and club Med.

Greece calls for e-bonds as budget passes
Thursday 23 December 2010 - by Nicola York

Greek Prime Minister George Papandreou has joined calls from other politicians urging the European Union to issue e-bonds as a measure of last resort if austerity measures fail to curb Greece's crippling debt.
Earlier today, Greece passed its austerity budget for 2011 meaning it will continue to receive aid from bailout funds from the International Monetary Fund and the European Union.
In recent weeks, Eurogroup chairman and Italian finance minister Giulio Tremonti and Luxembourg PM Jean-Claude Juncker have called for e-bonds to be issued to boost stability in the eurozone.
Greece's main opposition conservative leader Antonis Samaras said it was unlikely that markets would lend to Greece in the future as debt-to-GDP will remain high.
He said Greece would have to resort to using e-bonds before the end of 2012 unless the current Government changes its policy now.
Papandreou agreed with Samaras that e-bonds should be adopted by the EU, calling for support of the proposal.

In other largely unreported news likely to have a big impact next year, Russia published its grain production figures for 2010, while China recently surprised everyone by announcing the size of their need to import corn next year. The good news, based on contracted shipping, China’s corn imports should drop next month before rising again later in the spring. Food price inflation is going to be around for awhile. Make that commodity inflation. Are we about to repeat the Carter years?

Russia Grain Crop Fell 37% to 60.9 Million Tons, SovEcon Says

Dec. 27 (Bloomberg) -- Russia’s grain harvest fell 37 percent this year to 60.9 million metric, SovEcon said today, citing preliminary data from the state statistics agency.

The figure is given after drying and cleaning the grain, SovEcon said. Wheat output fell about 33 percent to 41.5 million tons while the barley harvest plunged about 54 percent to 8.3 million tons, the Moscow-based researcher said, citing the Rosstat data.


China Corn Imports May Rise to Record, Group Says

Dec. 16 (Bloomberg) -- China may boost corn imports to a record next year as the U.S., the world’s biggest grain exporter, potentially faces increased competition from rival supplier Argentina, the U.S. Grains Council said.

Corn purchases may grow fivefold from 1.5 million metric tons this year “to upward of” 7.4 million tons in the 2011 calendar year, Thomas Dorr, president of the industry group, said in an interview in Beijing. The group in July forecast imports of 5.8 million tons.

The world’s biggest grain user may overtake Japan as the largest corn importer within five years, buying as much as 25 million tons by 2015, driving prices higher as rising incomes fuel demand for pork and chicken, Rabobank Groep NV said last week. Chinese officials are “aggressively” trying to add Argentina to their alternative suppliers as domestic reserves dwindle, boosting competition for U.S. exporters, Dorr said.


Soybeans at 28-Month High on Concern Dry Weather to Curb Crops

Dec. 28 (Bloomberg) -- Soybeans advanced to a 28-month high on concern that dry weather in Argentina will spread to parts of Brazil, hurting crops in the biggest exporters after the U.S.

March-delivery soybeans gained as much as 0.8 percent to $13.95 a bushel, the highest price for the most-active contract since August 2008. It traded at $13.8975 a bushel on the Chicago Board of Trade at 2:33 p.m. Manila time.

“Heat and dryness is expected to expand out of Argentina and into Rio Grande Do Sul this week,” depleting soil moisture and increasing stress to crops in the area, Telvent DTN Inc. said in a forecast yesterday.

“The market is worried about downgrades for yields,” Tetsu Emori, a commodity fund manager at Astmax Co. Ltd., said by phone from Tokyo today. “The market is getting tighter after the harvest in the U.S. and people will rely on supply from South America.”

Soybean acreage in Argentina may be 18.5 million hectares this season, 200,000 hectares smaller than earlier estimated because of dry conditions, the Buenos Aires Cereals Exchange said Dec. 23. Yields in Brazil’s southern Rio Grande do Sul state may be cut by as much as 20 percent as the La Nina weather pattern produces hot, dry weather into next year, Somar Meteorologia said Dec. 20.


Copper Tops Record in New York on Currency Alternative, Demand

Dec. 28 (Bloomberg) -- Copper gained to a record in New York for a second day as investors sought alternatives to depreciating currencies and on expectation demand will outpace supply as consumption improves.

Metal for March-delivery on Comex climbed as much as 0.6 percent to $4.3075 a pound, surpassing the previous peak for a most-active contract of $4.2985 reached yesterday. It traded at $4.3030 a pound by 1:25 p.m. Singapore time, up 29 percent this year, poised for a second annual increase.

“It’s weaker currencies, inflationary concerns and the outlook for a shortfall next year that’s been driving prices,” Wen Jinghai, an analyst at Bohai Futures Co., said from Dalian.

----- Stockpiles of copper in Shanghai Futures Exchange warehouses fell 7,410 tons last week to 120,426 tons, the largest tonnage decrease since the week ending Sept. 9, bolstering the demand outlook in China, the world’s largest user. The International Copper Study Group is expecting a 435,000-ton deficit in the refined metal next year.


"Gold is not less but more rational than paper money. Money holds value so long as it is in limited supply; gold will always be in limited supply, and would require real resources to produce even from the sea; paper and printing ink are not in limited supply. The gold system is much closer to a modern automatic scientific control system than the crude and relatively unstable system of paper."

William Rees-Mogg

At the Comex silver depositories Thursday, final figures were: Registered 46.39 Moz, Eligible 58.72 Moz, Total 105.11 Moz. Yesterday’s figures were not released due to snow.


Crooks and Scoundrels Corner.

The bent, the seriously bent, and the totally doubled over.

The Crooks section will resume in the new year.

"Start buying gold now, regardless of the price. By acting now, you will not have to react when it's too late. Too late will be when the majority of the public finally figures out what is happening to paper money and frantically tries to get aboard. Remember, if you're one of the ones holding paper in the end, you will have given away your products and services for nothing."

Robert Ringer

The monthly Coppock Indicators finished November:

DJIA: +178 Down. NASDAQ: +247 Down. SP500: +167 Down.

The bull market (or bear market rally) that commenced on Nasdaq on 30/4/09 at 1717 has ended. (30/5/09 SP 500 at 919, 30/5/09 DJIA 8500.) While the indicators can flip flop at market turns, this action is rare on the slow monthly indicators. November is the sixth down month in a row.

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