Gold Jumps After India Reveals Import Surge

Gold prices jumped overnight on initial rumors and again in the last hour as Indian officials note that March Gold imports surged to 125 tons (more than double last March's 60 tons). As Reuters reports, Gold imports in the fiscal year 2014/15 ended March 31 jumped to 900 tonnes,up 36% from a year ago.

Gold prices jumped as the news broke overnight... (and BBG headlines hit this morning)

BullionStar's Koos Jansen had recently noted the lifting of 'capital controls' on Gold and despite the increasing efforts of the government to enable 'monetization' of gold...

Because of a “current account deficit” the Indian government decided in March 2012 to raise to import duty on gold from 2 % to 4 %, in June 2013 from 4 % to 8% and in August 2013 from 8 % to 10 %. Additionally, in August 2013 the 80/20 rule was implemented, which was eventually withdrawn in December 2014.

The restrictions the Indian Government implemented on gold trade spawned new life to smuggling cartels with all due consequences. Official Import fell drastically, wiping out any revenues the government collected from the import of the yellow metal. In May 2013 Indian gross gold import accounted for 168 tonnes, by September 2013 a multi year low was reached at 15 tonnes. Premiums in India, over London spot prices, skyrocketed to a staggering 25 %.

For a close look at recent import data let’s start with January; India officially gross imported a meager 39 tonnes, though up 9 % year on year. In February gross import accounted for 50 tonnes, up 57 % y/y. Then, the real surprise came this month; as said previously preliminary data (derived from daily numbers at Infodrive)suggests gross import accounts for 130 tonnes (March 2 – 21). When India’s Directorate General of Commercial Intelligence & Statistics will publish official data somewhere around April 13, we know the exact imported tonnage for March.

Perhaps surging import is caused by a falling price since the beginning of the year combined with the relaxation of import restrictions. Remarkably, premiums are staying close to 12 % (including the 10 % import duty), sourcing the metal is no problem.

From daily trade data we can see a lot of gold from Ghana going directly to India. Could it be there is some conflict gold coming from Ghana?

Monetizing Gold

A new scheme the India government is looking at to obstruct gold import is throughmonetizing gold, comparable to the Turkish system (read this post for the Turkish Reserve Option Mechanism). The World Gold Council’s managing director in India, Somasundaram PR,stated:

Will they allow banks to hold a part of their reserves in gold because of this deposit monetization? It is one of the recommendations. You need to give huge incentives to the banks to operate this deposit monetization.

In short, the Indian people would be able to make a gold deposit at a commercial bank, which technically is always a loan to the bank. Subsequently this bank can use the gold to meet its reserve requirements at the central bank – in this case the Reserve Bank Of India (RBI). The deposits would accrue interest (in Turkey denominated in gold), however, like every bank deposit, the gold can vanish if the bank becomes insolvent. The universal rule is; no risk, no return.

Furthermore, if the gold deposit scheme will be implemented, to the likes of the World Gold Council, I wonder how the RBI will treat the gold held as reserve requirement. The Turkish central bank (CBRT) counts these reserves as official gold reserves, which is double counting.

Increases in Turkish official gold reserves are not caused by CBRT purchases on the open market, but a reflection of the amount of gold held as reserve requirement by banks at the CBRT.

The World Gold Council has released two reports on gold monetization, (i) Why India Needs A Gold Policy, (ii) Turkey: gold in action. Both reports combined count nearly 90 pages, but not once are the risks of lending gold to a bank disclosed. Whereas most people own gold to explicitly avoid these banking risks.

Another plan from the Indian Government to prevent the circulation of “black money” is to require people doing gold purchases above 100,000 rupees, to show a so-called permanent account number (PAN), which is used to prevent tax evasion. This would be disastrous for the Indian jewelry industry as 80 % of the industry’s business comes from rural customers, who don’t have a PAN. Hence,Indian jewelers have threatened to go on strike against this plan.

Mass Whale Beaching Re-Ignites Quake Fears Among Japanese

Submitted by Tyler Durden on 04/11/2015 19:45 -0400

• Japan
 
• New Zealand
 
• SONAR
 
• Twitter
 
• Twitter

inShare5

 

Six days prior to Japan's devastating 2011 undersea earthquake that killed over 18,000 people, around 50 melon-headed whales - a species that is a member of the dolphin family - beached themselves on Japan’s beaches.Now, 4 years later, and despite a lack of scientific evidence linking the two events, many Japanese took to social media in fear as the mass beaching of over 150 melon-headed whales on Japan’s shores has fueled fears of a repeat of the monster quake, which unleashed a towering tsunami and triggered a nuclear disaster.

As Japan Times reports,

The mass beaching of over 150 melon-headed whales on Japan’s shores has fueled fears of a repeat of a seemingly unrelated event in the country — the devastating 2011 undersea earthquake that killed over 18,000 people.

Despite a lack of scientific evidence linking the two events, a flurry of online commentators have pointed to the appearance of around 50 melon-headed whales — a species that is a member of the dolphin family — on Japan’s beaches six days prior to the monster quake, which unleashed a towering tsunami and triggered a nuclear disaster.

The 2011 Japan earthquake is not the only instance of beached whales closely preceding a massive tremor.

More than 100 pilot whales died in a mass stranding on a remote New Zealand beach on Feb. 20, 2011, two days before a large quake struck the country’s second-largest city, Christchurch.

Local officials said a total of 149 dolphins were found stranded on the beach in Hokota in Ibaraki prefecture, according to RT. Some of the dolphins, mostly melon-headed whales or blackfish, were found alive but were extremely weak.

Videos from the scene showed rescuers trying to release the dolphins back into the ocean, but the tide washed the weak animals back onto the beach.

City authorities, the coastguard and a local aquarium were working to rescue the dolphins, measuring between two to three metres (78 to 118 inches) long. They will be transported off-shore and released to sea.

Scientists were on Saturday dissecting the bodies of the whales, 156 of which were found on two beaches on Japan’s Pacific coast a day earlier, but could not say what caused the beachings.

Scientists are meanwhile unclear as to why the marine animals strand themselves in large groups, with some speculating healthy whales beach themselves while trying to help sick or disorientated family members that are stranded. Others believe the topography of certain places somehow scrambles the whales’ sonar navigation, causing them to beach.

“We don’t see any immediate signs of diseases on their bodies, such as cancer. We want to figure out what killed these animals,” Tadasu Yamada, a senior researcher at the National Museum of Nature and Science, told public broadcaster NHK.

Despite the lack of any clear link between the beachings and earthquakes — and comments from local officials downplaying such a connection — many took to social media to point to the link.

??????????????????? ????????????????… ????pic.twitter.com/LOyGPwHWAp

— ????(????) (@Reinatyamaaaa) April 9, 2015

????????????????(>.<)??????????!!pic.twitter.com/DrmXdGdWqc

— taka-yasu (@921Takano) April 10, 2015

“Is the next one coming? Be ready for a quake,” wrote Twitter user maoeos40d.

Another Twitter user wrote simply, “We might have a big one on the 12th (of April).”

Japanese officials have nevertheless tried to calm fears, and have insisted there is no scientific data to prove the link.

*  *  *

VIX Closes At 5-Month Lows, BofA Warns Volatility Term Structure Is A "Significant Concern"

Submitted by Tyler Durden on 04/10/2015 17:50 -0400

• Volatility

inShare17

 

At 12.58, VIX closed today at its lowest level since December 4th 2014 (which makes perfect sense, given the forward-looking volatility implied by each and every macro data item and earnings release in the next month). However, as BofA notes, the VIX term structure (VXV / VIX) suggests "significant concern" about this advance in stocks being sustained.

VIX at 5 month lows...

Today's close above 1.2 in the VXV/VIX ratio is significant concern.

Historically, the market has struggled to hold its gains when this ratio closes above 1.2.

Charts: Bloomberg

The Real Value Of Cash :

The Real Value Of Cash

Earlier this week I discussed the recent interview with Mohamed El-Erian and his valuation call and holding of cash in his portfolio.

Not surprisingly, that topic recent a good bit of push back due to the current "zero" rate of return and the impact of inflation over time. I understand that argument and do not disagree. However, as I stated, there is a huge difference between the loss of future purchasing power and the destruction of investment capital.

I have written previously that historically it is relatively unimportant that the markets are making new highs. The reality is that new highs represent about 5% of the markets action while the other 95% of the advance was making up previous losses. "Getting back to even" is not a long-term investing strategy.

In regards to El-Erian, his comments were a valuation call on the financial markets suggesting that currently having capital invested was likely to yield substantially lower or negative return in the future. This is an extremely important concept in understanding the "real value of cash."

The chart below shows the inflation adjusted return of $100 invested in the S&P 500 (using data provided by Dr. Robert Shiller). The chart also shows Dr. Shiller's CAPE ratio. However, I have capped the CAPE ratio at 23x earnings which has historically been the peak of secular bull markets in the past. Lastly, I calculated a simple cash/stock switching model which buys stocks at a CAPE ratio of 6x or less and moves to cash at a ratio of 23x.

I have adjusted the value of holding cash for the annual inflation rate which is why during the sharp rise in inflation in the 1970's there is a downward slope in the value of cash. However, while the value of cash is adjusted for purchasing power in terms of acquiring goods or services in the future, the impact of inflation on cash as an asset with respect to reinvestment may be different since asset prices are negatively impacted by spiking inflation. In such an event, cash gains purchasing power parity in the future if assets prices fall more than inflation rises.

While no individual could effectively manage money this way, the importance of "cash" as an asset class is revealed. While the cash did lose relative purchasing power, due to inflation, the benefits of having capital to invest at low valuations produced substantial outperformance over waiting for previously destroyed investment capital to recover.

While we can debate over methodologies, allocations, etc., the point here is that "time frames" are crucial in the discussion of cash as an asset class. If an individual is"literally" burying cash in their backyard, then the discussion of loss of purchasing power is appropriate. However, if the holding of cash is a "tactical" holding to avoid short-term destruction of capital, then the protection afforded outweighs the loss of purchasing power in the distant future. 

Of course, since Wall Street does not make fees on investors holding cash, maybe there is another reason they are so adamant that you remain invested all the time.  

 

Markets Might Be Over Valued

Continuing a bit further with El-Erian's valuation call, my new friends at 720 Global just released a very interesting research report on market valuations. 

I have discussed a variety of valuations in the past from market capitalization to GDP, CAPE ratios and Tobin's Q in relation to their current levels as compared to previous secular bull market peaks. (See here for latest update)

However, in the report authored by Michael Lebowitz, he takes a different angle showing where the S&P 500 is currently priced versus where these valuation measures suggest it should be priced. To wit:

"Corporate earnings and thus stock prices are driven by the economy. Despite the state of the economy and economic concerns we harbor, investors are investing hand over fist in assets whose valuations are predicated on strong economic growth in the future. As a result, most major U.S. stock indices are currently at or near all-time highs.

A sizeable percentage of the gains are a result of an expansion in the price/earnings multiple.In other words, investors are willing to pay more today, than they did yesterday, for the same amount of historic earnings and or forecasted earnings. The graph below shows five popular gauges of valuation, including those used by the Federal Reserve and investing icon Warren Buffett. The colored circles show where the S&P 500 would be if investors valued earnings today as they did historically.

Based on these five measures the S&P 500 is adding a 20% to 50% premium over what decades of history suggest is fair. These readings range from the 80th percentile to the 100th percentile in each case. Not unlike the rhetoric of the late 1990’s or mid-2000’s, there is no shortage of rationalizations for why such extraordinary valuations are reasonable and justifiable. The fact remains firmly in place, stocks are expensive."

"The all-important link between stock prices, economic and productivity growth, and true corporate earnings potential are being ignored. Stock prices and many other investment asset prices are indirectly supported by the actions and opinions of the central banks. Investors have become dangerously comfortable with this dubious arrangement despite the enormous market disequilibrium it is causing. History reminds us time and again that a state of disequilibrium is highly unstable and will ultimately revert to equilibrium – often violently so."

Warning Flags

Jeff Saut, Raymond James' Investment Strategist, has been a raging stock market bull for quite some time. He is also firmly of the belief that the U.S. markets have re-entered into a secular bull market that still has years left to run. However, despite his ongoing bullishness, he did pen some very interesting points on some "red flags" that currently exist in the market. To wit:

"... as I stared at a chart of the D-J Transportation Average last week, which looks like it is making what a technical analyst would term a giant broadening top. The chart pattern begins in November with a false upside breakout (to ~9310) that is followed by a decline into mid-December (to ~8581). Those high and low points set the stage for the parallel channel the Trannies have been locked in for going on six months. Interestingly, the chart formation also shows a spread quadruple bottom (four low points). Therefore, if 8580 is decisively broken to the downside, it is going to look pretty ugly in the charts. While it would not be a Dow Theory 'sell signal,' it certainly would raise a red flag, at least on a short-term basis.

Another 'uncle point,' I wrote about last Thursday is the 2060 level for the S&P 500. Hereto, a close below that level would not look good to me. Meanwhile, the MACD indicator is currently flashing the same type of warning signals it did in 1Q00 and 4Q07,not that I expect similar downside results.

Then there is what Jason Goepfert, of SentimenTrader fame, wrote about last week. To wit,

“Buying power available to investors is near an all-time low. The NYSE Available Cash figure has dropped to one of its lowest levels, and the last two times it was near this level, stocks struggled in the months ahead. According to the American Association of Individual Investors, mom-and-pop investors have their highest exposure to stocks since 2007, and nearly their lowest cushion of cash since 2000.”

Mr. Saut goes on to ignore these warning signs as he continues with his new secular bull market thesis.

What's the worse that could happen?

Average:

Greece: The next deadline approaches

Catherine Boyle | @cboylecnbc

Friday, 10 Apr 2015 | 8:53 AM ET

Greece repaid one of its key loans on Thursday, but with the country's coffers still close to empty, the government may merely have earned short-term respite.

As the holiday of the Orthodox Easter Weekend approaches, newly minted Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis are unlikely to be unwinding for the long weekend. Greece has been given six working days by the euro zone technical staff of the Euro Working Group to come up with proposals for a reform agenda—on which further financial aid is conditional—ahead of a key meeting of euro zone finance ministers on April 24 in Riga, Latvia.

The struggling Greek economy still needs financial support. It faces two redemptions of bills for a total of 2.4 billion euros as soon as April 14 and 17.

Klenger | iStock | Getty Images

"Euro area finance ministers are probably at the end of their tether, after ten weeks of the new government's foot-dragging and game-playing, and any sympathy for the Greek position has long disappeared," the economic research team at Daiwa wrote in a research note.

Tsipras is barely off the plane from a trip to Russia, which seemed on the surface to have achieved little in terms of concrete promises from Russia to assist Greece in the event of it defaulting on its debt repayments, leaving the euro or losing financial support from its creditors.

Greece holds debt sale in scramble for cash

Economists are now increasingly taking the possibility of a "Grexit", deemed incredibly unlikely by many just a couple of years ago. The risk of Greece defaulting on its debt repayments is now 50-50 percent, according to UBS, although its analysts argue that default does not necessarily mean euro zone exit.

The prospect of a negotiated exit within a month is now close to 40 percent, according to Gabriel Sterne, head of global macro research at Oxford Economics. And capital controls – limits on the amount of money that can be taken out of the country—usually a sign of severe economic distress—are just "one more turn of the financial screw away" he added.

Christine Lagarde, head of the International Monetary Fund, which together with the European Union is one of Greece's biggest creditors following a series of bailouts, told CNBC Thursday that a Greek exit from the euro zone would create a "terrible situation" for its citizens.