Hmmm...

THINGS THAT MAKE YOU GO
A walk around the fringes of finance

By Grant Williams

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20 January 2014

That Was The Weak That Worked: Part 3

"It was probably a mistake to allow gold to rise so high." – Paul Volcker

© Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page.

Hmmm...
THINGS THAT MAKE YOU GO

Contents
THINGS THAT MAKE YOU GO HMMM... ....................................................3
Wealthy Foreigners Buy Up Swaths of UK Farmland and Country Estates ....................24 Manipulation of Gold by Central Banks Cannot Continue in 2014 ..............................26 EU Elections May Be "Tense" as Extremism Grows, Barroso Warns .............................28 British Exit from EU May Scare Off Foreign Investors, Admits Vince Cable ...................29 A Worrying Wobble ....................................................................................30 Greek Prosecutors Focus on Corruption at the Top ...............................................32 Rich Chinese Continue to Flee China ...............................................................33 Crisis Management: Europe Eyes Anglo-Saxon Model with Envy ................................34 Can Sino Iron Dig Out of Its Investment Hole? ....................................................35

CHARTS THAT MAKE YOU GO HMMM... ..................................................38 WORDS THAT MAKE YOU GO HMMM... ...................................................41 AND FINALLY... .............................................................................42

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Things That Make You Go Hmmm...
"What a year this has been for gold. "The price of the yellow metal fell almost 30% from its peak at the end of August a year earlier, to bombed-out lows amidst a wall of selling which included several very sharp and somewhat counterintuitive selloffs, including violent plunges in both the April-May time frame and again into year-end. "Throughout the year, the spectre of manipulation was never far from the minds of all those involved in the gold market, whether they were crying 'foul' or asserting that, of course, there was no manipulation whatsoever and that those who suggested there might be were nothing more than conspiracy theorists, kooks, and whackos. "The main suspects at the heart of the conspiracy theories were, naturally, the bullion banks and the central banks. "The bullion banks, of course, have the eternal motive: profit; but what possible reason could central banks have for suppressing the price? None whatsoever, of course. The gold market is too small and too inconsequential for them to take an interest. "And yet, rumours abounded that the bullion banks were in dire trouble and that a rising gold price could send one or more of them over the edge and into insolvency as a scramble for physical metal exposed massive short positions that had grown out of a fractional-reserve-based lending system backed (if not explicitly, then certainly complicitly) by central banks..." Now THAT, you may well have thought, was the heart-racking, pulse-pounding introduction to my year-end look at the gold market. No preamble, no carefully constructed narrative to entice you into my latest little web, just BOOM! Straight into it. And every word of the above makes sense based upon what we've seen happen in the past twelve months in the topsy-turvy world of element 79, which holds down the spot in the periodic table just after platinum and just before mercury.

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But of course, nothing is what it seems when we are discussing gold. That quotation at the top is the intro to the year-end review of gold that I would have written in 1999 ... had I been doing such things back then. 2013 was, in many ways, a case of been there, done that; and to understand what is happening today, it is extremely instructive to go back to 1999 and reexamine some very strange goingson at the UK Treasury, AIG, Rothschild, Goldman Sachs, and Number 11 Downing Street. (Cue dreamy harp music.) The chart of the gold price between February 1996 and August 1999 will look eerily familiar to anybody who follows the gold market closely; and for those who don't, just stick around and I'll show you what you've been missing.
Gold Price (COMEX) In US$
420

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1996 - 1999

370

320

270

220 1996 1997 1998 1999

Source: Bloomberg

After a run-up to a spike-high of $415.50 on February 2, 1996, gold began to fall. It fell fairly quickly at first, losing 3% in six trading sessions; and then the decline steadied for a while but remained consistent — until, around the end of the calendar year, gold suddenly and inexplicably spiked straight down. By the end of 1996, it had lost 11% of its value. As 1996 turned into 1997 the price continued to fall; and the new year saw several inexplicable downdrafts of considerable size and alarming speed which, by the time the dust had settled at midnight on December 31st, 1997, had cut the value of an ounce of gold by almost a quarter.

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Gold market watchers were baffled at the continued weakness in their beloved metal. They bemoaned their bad fortune and pleaded with the gods above, but neither activity made any difference — the price continued to fall. (Sound familiar?) 1998 was a fairly stable year, with the price moving little from January to December (though again, during the year there were several large falls in price that were hard to account for); and as the world entered the last year of the millennium, there was an air of stability around gold that gave hope to those battered by the consistent weakness in the gold price. (To reiterate, I am talking about the late 1990s here, NOT the last couple of years — just in case there was any confusion.) On the last day of 1998, gold closed at $288.25, down from $415.50 on February 2, 1996 — a fall of over 30% in three years. You ... yes, you with the glasses at the back... (muffled question) No, there is very little similarity to the 37% decline in the gold price from the August 2011 high to the close on December 31, 2013. (muffled question) What do I MEAN? Well, obviously, any similarity is completely coincidental because there were a number of strange things happening and rumours swirling back in 1998 about bullion banks being short gold in quantities that posed a risk to them and, of course, to "the system" — whatever THAT means — so those were once in a lifetime circumstances. (muffled retort) Well, yes, I suppose, now that you mention THAT, there MAY be some purely coincidental similarities between the two periods, but when you hear what happened next, you'll realize that the time I'm talking about was nothing like today, because the following year (1999) a certain central bank did something quite bizarre that led directly to sharply lower gold prices and a dramatic increase in specula... (muffled retort) ... oh look, stop it now. Keep your Bundesbank tale under your hat and we'll discuss it when I've finished. We need to get back to the main story. If I may? Thank you.

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So, as I was saying before I was rudely interrupted by young Eric there, 1999 dawned with an awful lot of antipathy towards gold after three years of poor performance. The rumour mill was operating overtime as speculation about large shorts in physical metal moved towards a crescendo, and a group of central bankers either dismissed accusations of any involvement in price suppression or refused to discuss it at all. The first five months of 1999 looked fairly familiar to anybody who happened to keep a watchful eye on the gold market.
Gold Price (COMEX) In US$
295

January - May 1999

290

285

280

275

270 January February March April

Source: Bloomberg

After three poor years, gold was scratching around trying to find a bottom, and it looked like it was succeeding. The path of least resistance was clearly upward, and it looked for all the world as though a bounce was in the cards, since sellers had become exhausted. The gold price saw several quick spikes — all of which were followed immediately by sharp selloffs; but the net result was that on May 6, 1999, the gold price stood a fraction above where it had entered the year. It was at this point that things started to get screwy. The next day, May 7, 1999, then-Chancellor of the UK Exchequer, Gordon Brown, announced that he would sell almost 400 tons of Britain's gold reserves in a series of auctions over the subsequent three-year period. Dates of those auctions were to be set well in advance. Tense?

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No, I don't mean "Are you on the edge of your seat?" The "tense" I am questioning is that used by Brown in his announcement — it was, in this case, the future progressive. Ordinarily, when people like Brown make statements, they use a tense exclusively reserved for use by government officials and those heading up the world's major central banks: the future promissory. This tense is constructed by taking an intended possibility and removing the words we hope and pray from the beginning of the sentence and inserting the word will in the middle. Let me give you an example. When using the future promissory tense, the phrase "We hope and pray interest rates remain low until at least 2016" becomes: "Interest rates will remain low until 2016." Likewise, "We hope and pray we can unwind QE without any problems" becomes "We will unwind QE without any problems." Try it yourselves. Anyway, Brown's use of the future progressive tense was particularly bizarre, because anybody who knows anything about finance, and particularly about the purchase and sale in large quantities of a price-sensitive commodity, knows that you do NOT telegraph to the market what your intentions are, because the market will then front-run you and sell that commodity short in order to generate themselves a nice healthy profit (with every dime of that profit coming directly out of the seller's proceeds). Now, I may have been a bit naive here, but for the longest time I thought the entire set of "central bankers & treasury officials'" was a subset contained within the set of "people who understand a little about finance." Thanks to John Venn, we can express the harsh reality rather simply:

V The Zenn Of Gordon Brown Gordon Brown

People Who Understand A Little About Finance

Central Bankers & Treasury Officials

Source: Things That Make You Go Hmmm...

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Anyway, following Brown's extraordinary statement, I'm sure all those of you who reside firmly in the left-hand circle of that diagram can guess what happened next:
Gold Price (COMEX) US$
May 6 - August 28 1999
290 Gordon Brown’s Announcement

280

270

260

250 May 6

In-Between

August 28

Source: Bloomberg

Yup! As anybody with even a rudimentary grasp of market dynamics could have predicted, the gold price fell off a cliff ... and kept on falling. Thomas Pascoe of the UK Daily Telegraph took up the story (several years later, after a battle with the UK government over a series of Freedom of Information requests); and I have to say that for a mainstream media journalist, he did a damned fine job: (UK Daily Telegraph, June 2012): One decision [of Brown's] stands out as downright bizarre, however: the sale of the majority of Britain's gold reserves for prices between $256 and $296 an ounce, only to watch it soar so far as $1,615 per ounce today. When Brown decided to dispose of almost 400 tonnes of gold between 1999 and 2002, he did two distinctly odd things. First, he broke with convention and announced the sale well in advance, giving the market notice that it was shortly to be flooded and forcing down the spot price. This was apparently done in the interests of "open government", but had the effect of sending the spot price of gold to a 20-year low, as implied by basic supply and demand theory. Second, the Treasury elected to sell its gold via auction. Again, this broke with the standard model.

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The price of gold was usually determined at a morning and afternoon "fix" between representatives of big banks whose network of smaller bank clients and private orders allowed them to determine the exact price at which demand met with supply. The auction system again frequently achieved a lower price than the equivalent fix price. The first auction saw an auction price of $10c less per ounce than was achieved at the morning fix. It also acted to depress the price of the afternoon fix which fell by nearly $4. Then, Pascoe dropped the hammer: It seemed almost as if the Treasury was trying to achieve the lowest price possible for the public's gold. It was. We'll come back to Pascoe's article a little later, but in the meantime it's back to 1999 and the rumour mill... There was consternation in the gold community and anguished cries that, as usual, there was a vast conspiracy in play here. Those rumours of large shorts held by a couple of big players in the bullion market just wouldn't go away, but nobody could quite put their finger on what was going on — although a couple of slightly curious names were being whispered in the gold pits: AIG (remember them?) and NM Rothschild. Brown's series of auctions over the following three years emptied most of the UK's gold from the Bank of England's vaults, depressed the price to levels previously unthought of and, according to those of a more conspiratorial mindset, achieved something else. Something hidden, something unknown. But what? The probable answer wouldn't begin to appear from amidst the fog until mid-2004, when, a couple of months apart, a couple of very quiet and matter-of-fact announcements were made, which we will get to shortly. In the meantime, if the UK Treasury was trying to achieve the lowest possible price for its gold, it was doing admirably — right up until September 26, 1999, when a backlash against Brown's actions crystallized in Washington DC through the signing of the Washington Agreement on Gold. (Wikipedia): Under the agreement, the European Central Bank (ECB), the 11 national central banks of nations then participating in the new European currency, plus those of Sweden, Switzerland and the United Kingdom, agreed that gold should remain an important element of global monetary reserves and to limit their sales to no more than 400 tonnes (12.9 million oz) annually over the five years September 1999 to September 2004, being 2,000 tonnes (64.5 million oz) in all.

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The agreement came in response to concerns in the gold market after the United Kingdom treasury announced that it was proposing to sell 58% of UK gold reserves through Bank of England auctions, coupled with the prospect of significant sales by the Swiss National Bank and the possibility of on-going sales by Austria and the Netherlands, plus proposals of sales by the IMF. The UK announcement, in particular, had greatly unsettled the market because, unlike most other European sales by central banks in recent years, it was announced in advance. Sales by such countries as Belgium and the Netherlands had always been discreet and announced after the event. So the Washington/European Agreement was at least perceived as putting a cap on European sales. So that's clear. What is interesting are the criticisms of the agreement, as posted on the same Wikipedia page: • The agreement is not an international treaty, as defined and governed by international law. • The agreement is a sui generis, gentlemen's agreement among Central Bankers, of doubtful legality given the objectives and public law nature of Central Banks. • The agreement resembles a cartel that materially affects the supply of gold in the global market. In this regard, the agreement stretches the borders of antitrust legislation. • The agreement was negotiated behind closed doors. Information was not provided to the public and relevant stakeholders were not afforded the opportunity to comment. • The agreement does not contain formal mechanisms for re-negotiation. Trends in international law regarding public participation and access to information should inform the re-negotiation process, scheduled for 2004. Sounds pretty much par for the course, if you ask me; but that's the world we've allowed to be created by the governments and central banks of the world while we watch American Idol. Anyway, with Brown's sales well and truly underway and the market price suitably depressed, the announcement from Washington caused a small problem. Limiting sales of a commodity has the opposite effect to the pre-announced sales by the UK Treasury, and the inevitable ensued.

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The gold price, freed temporarily from the shackles of the huge overhang Brown had created, soared, as you can see from the chart below:
Gold Price (COMEX) In US$
330

September 1999 - April 2001

320

310

300

290

280

270 Washington Agreement Signed March 2000 September 2000

260

$252.55

$255.55

250 September 1999 April 2001

Source: Bloomberg

...and that — assuming the rumours were correct and there were a couple of entities short a lot of gold and looking to cover into a falling price — created another big problem. The post-Washington Agreement spike would have caused severe problems for anybody short gold, and if those problems caused any kind of systemic risk, then they were problematic for central banks and governments, too. Of course, all this was nothing more than conjecture ... at the time. BUT several years later a conversation surfaced that had involved Bank of England Governor Eddie George, shortly after the Washington agreement was signed in 1999. Whereupon many of the doubts surrounding the motives behind the strange doings in the gold markets disappeared like my buddy Whipper West 20 seconds before the bar tab is presented: (Jesse's Café Américain): In front of 3 witnesses, Bank of England Governor Eddie George spoke to Nicholas J. Morrell (CEO of Lonmin Plc) after the Washington Agreement gold price explosion in Sept/Oct 1999. Mr. George said "We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K.

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You want to find a smoking gun at the crime scene? Well this one has fingerprints on it and the words "Eddie George, Governor of the Bank of England" carved into the butt. Case closed. Except... With none of this ever having been officially acknowledged, the whole business has juuuuust enough uncertainty surrounding it to enable those who don't want to know to put their fingers in their ears and repeat "la-la-la-la-la." As you can see from the chart above, the following 18 months saw the gold price "managed" steadily lower, despite several large spikes in price as the natural forces of supply and demand threatened to overrun the Bank of England — and US Federal Reserve-led intervention. Eventually, enough force was brought to bear to get the gold price back to its pre-Washington Agreement level. This was in large part due to the sales by Brown of the UK's gold stash. When the smoke had cleared and the auctions were completed, Brown's Treasury conducted an autopsy review of the process that would end up costing the UK taxpayer roughly ₤17 bn in lost profits at gold's peak in 2011, and even in the immediate aftermath a cool ₤175 mn. That review was bound to be scathing, right? Wrong: (UK Daily Telegraph): Chancellor Gordon Brown and his Treasury officials have used an internal review to pat themselves on the back for selling more than half of Britain's gold reserves, despite the fact the process lost the taxpayer around £175m. Huh? Say what? The news that one of the world's major central banks was selling its reserves contributed to a collapse in the gold price which was a serious blow to the market. However, the Treasury argues that the auction was a great success. Its review, which has been published on an obscure part of the Treasury website, claims: "The UK Government's sales programme has clearly demonstrated that auctions provide a transparent and fair method for selling gold and similar types of asset." Oh come ON!! Really?! I know government officials have a predilection for trying the Jedi Mind Trick on us, but this is utterly ridiculous. Luckily, not everybody was fooled: Peter Hambro, who runs the eponymous gold company, said: "The idea the auction was a success is completely ridiculous. The point is the Treasury called the bottom of the market with uncanny accuracy. They have forgotten that gold is meant for times of trouble."

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Amazingly (though this is government we are talking about here, so the bar over which one has to hurdle to be classified as "amazing" is lower than Kim Kardashian's level of self-respect), despite the fact that the price fell to a 20-year low after the auction process was announced and then soared 30% after its conclusion, the Treasury claimed success based solely upon the fact that "on average, they achieved a price within 75 cents, or 0.3pc, of the market price." I'm sorry, but when you conduct sales like that, you SET the market price. Idiots. The article continues: The review states: "It is not apparent from the data that the market was systematically depressing the price of gold in the run-up to the auctions. Nor is there any evidence that the price of gold systematically rose following the auctions." Not apparent? To WHOM?? As for evidence that the price of gold systematically rose following the auctions, I would suggest looking at ...... the price! IDIOTS. The Bank of England sold 395 tonnes of gold, raising about $3.5 billion. The money has since been invested in euros, yen and dollars as a way of diversifying risk. The review concludes: "Above all, the programme successfully delivered a one-off and permanent reduction in risk on the net reserves as a result of the better diversification achieved." It's just too painful to listen to sometimes. Anyway, back to our story. With things having calmed down and a nice slug of central bank gold having been dumped on the market in order to suppress manage the price, the focus was off the gold market once again. Now, do you remember those two very quiet and matter-of-fact announcements I told you we'd get to? Well here they are: First, on April 14, 2004, came this: (Reuters): NM Rothschild & Sons Ltd., the London-based unit of investment bank Rothschild, will withdraw from trading commodities, including gold, in London as it reviews its operations, it said on Wednesday. Perfectly innocuous.

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Then on June 1st, a few weeks later, a similar and equally low-key announcement hit the wires: (Reuters) — AIG International Ltd., part of American International Group Inc., will no longer be a London Bullion Market Association (LBMA) market maker in gold and silver, the LBMA said on Tuesday." OK ... now Rothschild was an old, established name in the metals markets, but AIG? The derivatives-driven basket-case/liability insurance giant? What the hell were THEY doing up to their eyeballs in gold? Well, one of the most respected names in the bullion markets is that of Arthur Cutten, proprietor of Jesse's Café Américain (if you follow gold and silver but don't have that page bookmarked, I'd recommend you do so right now.) In a post he wrote in March 2010, Arthur asked a pertinent question: (Jesse's Café Américain): Brown's Bottom Is an Enormous Issue In the UK: Was This a Bailout of the Multinational Bullion Banks Involving the NY Fed? The sticky issue is not so much the actual sale itself, but the method under which the sale was taken and who benefited. There has been widespread speculation that the manner in which the sale was conducted and announced was in support of the nascent euro, which Brown favored. This does not seem to hold together however. There is also a credible speculation that the sale was designed to benefit a few of the London based bullion banks which were heavily short the precious metals, and were looking for a push down in price and a boost in supply to cover their positions and avoid a default. The unlikely names mentioned were AIG, which was trading heavily in precious metals, and the House of Rothschild. The terms of the bailout was that once their positions were covered, they were to leave the LBMA, the largest physical bullion market in the world. Ahhh.... now we're getting somewhere... The two names about whom speculation was rife did, in fact, quietly leave the LBMA a couple of years after the fuss had died down. Curiouser and curiouser. Arthur finished with a flourish: The manner in which the sale was conducted, and the speed at which it was undertaken, without consultation of the Bank of England, made many of the City of London's financiers a bit uneasy. "Uneasy," indeed.

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In any case, for whatever reason — perhaps to avoid a major disruption in the bullion markets, maybe to avert a bankruptcy by AIG and/or Rothschild or potentially even "the collapse of the system" (oh how I tire of that hackneyed phrase); it really doesn't matter — the price of gold was taken down precipitously and the market was spooked. Whether a bunch of the UK's gold went to settle contracts outstanding against AIG and Rothschild may never be known; but on the balance of probability, and understanding how important gold is at the centre of our financial system, I'm willing to bet SOMETHING untoward went on in 1999. Which brings us to this past year and the startling parallels between 2013 and the period that concluded with those UK Treasury sales and the disappearance from the gold pits of AIG and Rothschild. In July of 2013 I wrote a piece called "What If?" which I closed by asking the following question: The gold price has been falling heavily for several months, but when the need to own gold jumps again — and it will, this is a long way from over — all the weird and wonderful pieces to this jigsaw puzzle that have been dropped onto the table will slot neatly into place. What if, when that happens, there isn't enough gold to go around? The centrepiece of that particular letter was a chart that plotted the gold holdings at the COMEX, the known holdings of gold ETFs, and the gold price. It also showed the moment when the Bundesbank made their now-famous request that 300 tonnes of gold be repatriated from the vault at the NY Fed to the Bundesbank in Frankfurt. I have had many requests to update that chart, so here it is:
Gold Price vs COMEX Inventories vs ETF Holdings
2000 1200

July 2011-January 2014

1100

1100 1800 1000 1600

1000

Gold Price (US$)
900

900

COMEX Holdings (oz mlns)
1400 800

800

700 1200 600

Venezuelan Central Bank Repatriation Request ETF Holdings (oz mlns)

Bundesbank Repatriation Request

700

600

1000

500 2011 2012 2013

500

Source: Bloomberg 20 January 2014 15

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As you can see, not much has changed. ETF holdings have continued to decline, as has the gold price, while stocks at the COMEX have increased slightly. However, with the help of my buddy Nick Laird of Sharelynx (THE place to find any precious metals chart you could possibly want, plus a lot more), I'll show you in just a sec how even this situation may not be what it seems. But before we get to that, let's recap the striking similarities between 1999 and 2013 to get a feel for what the events of this past year may mean going forward. 2012 saw gold mark time, just as it did during the first five months of 1999, but once 2013 arrived, things changed immediately, after an announcement by a central bank that sent tremors through the precious metals markets. In 1999 it was Gordon Brown's extraordinary statement that the UK would hand billions of dollars to the bullion banks by selling 400 tonnes of gold at pre-announced auctions, and in 2013 it was the German Bundesbank's repatriation request that shook up the markets. Throughout 1999 and beyond, there were hundreds of tonnes of gold being hoovered up at ever-declining prices. It was not easy to say where that gold was going, but the available evidence — which was subsequently bolstered when Eddie George took maybe one too many trips to the courtesy bar — suggested it was going to fill huge holes in the balance sheets of AIG and Rothschild. In 2013, the evidence was overwhelming that the physical gold backing the futures contracts that cascaded down on the COMEX in suspiciously large and totally price-insensitive quantities was headed in one direction and one direction only — east. Gold imports into China through Hong Kong went through the roof. Massively inflated exports of gold from the UK to Switzerland (home of the world's finest smelters) strongly suggested that bullion was being withdrawn from the LBMA warehouses and sent (via Switzerland) to China. Meanwhile, in India, despite frantic efforts by the government to stem the flow of gold, there was no stopping the tidal wave of demand for the yellow metal as insurance against a weakening rupee and ... well, because to Indians gold IS money. Period. But it's the events at the COMEX warehouses that we'll focus on next, because there are yet more strange shenanigans taking place that suggest all is not as it should be. First, it's important to understand how gold is stored at those warehouses.

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There are two categories under which a holder can store gold at the COMEX warehouses: registered and eligible. Registered gold is that which has been registered with a bullion dealer and can be made available for delivery in the exercise of a COMEX futures contract. Eligible stocks conform to the standards of delivery, BUT they are not available for delivery into a futures contract that has been exercised. Eligible ounces can be moved quite easily to registered status via the issuance of a depository receipt or warrant by a bullion dealer, although the move in the opposite direction is a little more troublesome. With that explained, let's take a look at the two categories as they stood at the end of 2013. We'll begin with eligible ounces:

As you can see, the number of eligible ounces in COMEX warehouses has climbed in recent months (as we saw in the overall numbers in the chart on page 15). This means that more gold is being removed from the deliverable gold stock and put safely into designated private hands.

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When we look at the registered stocks, however, we see the potential for a huge problem:

Source (both charts): Nick Laird / Sharelynx

In short, every ounce of registered physical metal in the warehouses has almost 120 paper claims on it via open-interest futures contracts. That means there may not be enough gold to go around if certain events transpire — and the events we're talking about here are hardly asteroid-strikes-Earth kind of stuff. Speculation about a failure to deliver on the COMEX has floated around many times before and has never come to anything; but as the registered stocks have continued to dwindle, I and many others have warned that just because it hasn't mattered, definitely doesn't mean it won't. Well, this week Tres Knippa, a veteran futures trader, took a look at the registered stocks on the COMEX and outlined just how close to the bone things have gotten. (You can watch Tres' interview in the videos section on page 40.) According to Tres, with stocks on COMEX at the levels they have reached, if just a single entity were to demand physical delivery of a position-limit long in gold futures, meeting that demand would absorb 81% of the registered ounces left in the warehouse. If two were to do so ... well, the only person I can think of who would need the math done for him is Gordon Brown, so I'll leave it to you to work out. But where has all this physical gold been going?

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Well, we've mentioned China and the increase in imports through Hong Kong, which incidentally looks like this:
Chinese Imports Of Gold Through Hong Kong
50,000

2001-2013

40,000

30,000 Peak Gold Price

20,000

10,000

0

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Nick Laird

We've mentioned India's stringent capital controls aimed at slowing the importing of gold, but all those have done (predictably) is send smuggling levels through the roof: (Reuters): In a sign of the times, whistleblowers who help bust illegal gold shipments can get a bigger reward in India than those who help catch cocaine and heroin smugglers.... "There has been a several-fold increase in gold smuggling this year after restrictions from the government, which has left narcotics behind." From travellers laden head-to-toe in jewellery to passengers who conceal carbonwrapped gold pieces in their bodies — in the mistaken belief that metal detectors will not be set off — Indians are smuggling in more bullion than ever, government officials say, driven by the country's insatiable demand for the metal. That suggests official data showing a sharp fall in gold buying, which has helped narrow India's current account gap, may significantly underestimate the real level of gold flows. The World Gold Council estimates that 150 to 200 tonnes of smuggled gold will enter India in 2013, on top of the 900 tonnes of official demand.

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But the elephant in the room is that Bundesbank repatriation request; and as 2013 came to a close, things got even more intriguing as yet more inexplicable information came to light. You'll remember that, when it demanded its 300 tonnes of gold back in January, the Bundesbank was told it would have to wait seven years. No explanation was given and, apparently, none was demanded. In "What If?" I did the math: (TTMYGH): The Bundesbank wants to repatriate 300 tonnes of gold which is, of course, sitting, untouched at the Federal Reserve in New York. That 300 tonnes equates to 300,000 kilograms. A Boeing 747-400, set-up in a standard cargo freighter configuration has, according to its manufacturer, a maximum payload of 112,630 kg, a range of 5,115 miles (4,445 nautical miles) and a typical cruising speed of 0.845 Mach (560 mph). The distance between New York and Frankfurt is 3,858 miles. So, in essence, the German government could charter three 747-400s, send them to New York, load them up with their gold and still have 37,890 kg of space left. To avoid claims of bending the narrative to make a point, I went a step further: Now, I'm aware that there is a maximum amount of gold which is insurable in any one shipment (though I don't know exactly what that amount is); but if we go to extremes and assume it's as little as a single tonne (1,000kg), that would mean — using the same three 747-400s in our previous example — a total of 300 flights or, with each plane flying once per day, 100 days. But not seven years. No, not seven years. Not even close.

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But at the rate the gold actually came back to Germany in 2013 (from both New York and Paris), it will take much, much longer than seven years: (Zerohedge): Yesterday Buba head Jens Weidmann told Bild that gold valued at €1.1 billion has been repatriated so far. Putting a weight to this number: to date the Bundesbank has received shipments of a paltry 37 tons of gold from its existing storage place in either New York or Paris to Germany: "The gold reserves of the country will be stored in Frankfurt because it has a special storage with the corresponding equipment," said Carl-Ludwig Thiele, a Bundesbank board member. The repatriated amount over the course of all of 2013 represents just over 5% of the total stated target of 700 tons, and is well below the 87.5 tons that the Bundesbank would need to repatriate each year if it were to collected the 700 tons ratably every year in the 8 year interval between 2013 and 2020. Pathetic. But in fact it gets much worse. This morning, an article appeared on Zerohedge suggesting that, of the 37 tonnes repatriated in 2013, 32 came from Paris — meaning that just 5 TONNES made its way across the Atlantic: (Zerohedge): The official explanation was as follows: "The Bundesbank explained [the low amount of US gold] by saying that the transports from Paris are simpler and therefore were able to start quickly." Additionally, the Bundesbank had the "support" of the BIS "which has organized more gold shifts already for other central banks and has appropriate experience — only after months of preparation and safety could transports start with truck and plane." That would be the same BIS that in 2011 lent out a record 632 tons of gold... We wonder, how exactly is a gold transport "simpler" because it originates in Paris and not in New York? Or does the NY Fed gold travel by car along the bottom of the Atlantic, and is French gold transported by a simple Vespa scooter across the border to Germany? Supposedly, there was another reason: "The bullion stored in Paris already has the elongated shape with beveled edges of the 'London Good Delivery' standard. The bars in the basement of the Fed on the other hand have a previously common form. They will need to be remelted [to LGD standard]. And the capacity of smelters [is] just limited." So... New York Fed-held gold is not London Good Delivery, and there is a bottleneck in remelting capacity? You don't say... I'm not sure the EXACT thickness that is required of a plot to start people believing that there is something funny going on; but if we're not there yet, I'm hopeful we're not far away. Maybe one more ridiculous statement by one more central bank is all it will take to start the wheels turning in the media. We'll see.

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Amongst the skeptical minority (in which I firmly place myself), the news of the paltry shipments to Germany was enough to fan all kinds of flames, but what happened next made it seem as though one of the following three things is true of these guys at the Bundesbank: 1) They are demonstrating their complete lack of understanding as to how the gold market works. 2) They are filled with such hubris that they don't care how ridiculous they sound. 3) They are hiding behind "state secrecy" laws that mean they answer to nobody. The Bundesbank announced that the pitiful amount of gold returned to Frankfurt from the USA had first been melted down and recast in New York, supposedly to ensure the bars conformed to LGD (London Good Delivery) specifications. <coughcoughbullshitcough> Now these revelations may not seem to amount to much, but they open yet another crazy can of worms and make it even harder to believe that the gold supposedly sitting in the vault at the NY Fed is actually there. Naturally, this information sparked a firestorm, and front and centre in that storm was Peter Boehringer, president of the German Precious Metal Society and co-initiator of the Repatriate our Gold campaign, who published an open list of questions raised by the Bundesbank's curious behaviour: (Peter Boehringer): The public is still waiting for answers to crucial questions like these: • What kind of gold bars were melted? Original material from the 1950s and '60s? • How can the Bundesbank hint in its press release that some of the old bars already met the LGD specifications when those specifications were not defined and made a standard for central bank bars until 1979? • Why has the Bundesbank not published a bar number list of the old bars? How can there be security concerns about bars that no longer exist? Why has the Bundesbank not published a bar number list of the newly cast bars? • Who exactly melted the bars? Where exactly was this melting performed? Is there a smelter at the Federal Reserve Bank of New York? • Who witnessed the melting and recasting of the bars? • Are there any reports on this in writing, with a valid signature? By whom? • And especially: Why was it deemed necessary to perform this action in the United States as opposed to Frankfurt or nearby Hanau, where there are some of the best facilities in the world for metal probing, melting, and recasting? Had these actions been performed in Germany in a fully transparent manner, it would have been so easy for the Bundesbank to dismiss all questions from "paranoid gold conspiracy theorists."
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These central banks just refuse to help themselves, I'm afraid. They NEVER seem to do the transparent thing where gold is concerned (ironic, given Gordon Brown's insistence on "open government" surrounding the UK gold sales), always leaving themselves open to accusations of foul play. Of course, what that MIGHT just mean is that there HAS been foul play and they have no alternative but to brazen it out and hide behind a wall of "no comments" and claims of a need for security. The gold in every central bank's possession around the world is the property of the citizens of that country — not of the incumbent politicians or central bankers. Consequently, if the people want it audited, there shouldn't be any reason to say no ... unless... 2013 was an absolutely seismic year for gold, but the way in which the tectonic plates shifted has yet to be fully understood. I firmly believe that in the years to come, when we look back at the great game being played in gold, we will pinpoint January 16, 2013, as the day when it all began to unravel. That day, the day the Bundesbank blinked and demanded its bullion, will be shown to be the beginning of the end of the gold price suppression scheme by the world's central banks; and then gold will go on to trade much, much higher. The evidence of suppression is everywhere, though most refuse to believe their elected officials are capable of such subterfuge. However, the recent numerous scandals in the financial world are slowly forcing people to realize that anything and everything can be manipulated. Libor, mortgage rates, FX — all were shown to be rigged markets, but NONE of them have the importance that gold has at the centre of the financial universe, yet all of them are far bigger markets than gold and therefore much harder to rig. Gold is a manipulated market. Period. 2013 was the year that manipulation finally began to unravel. 2014? Well now, THIS could be the year that true price discovery begins in the gold market. If that turns out to be the case, it will be driven by a scramble to perfect ownership of physical gold; and to do that you will be forced to pay a lot more than $1247/oz. Count on it.

*******

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So, naturally,

this week's Things That Make You Go Hmmm... is fairly gold-heavy, but there are a few other distractions to keep you happily occupied, including the fears of Vince Cable as Brexit becomes more of a possibility, the flight of wealthy Chinese from the Mainland, a warning over the upcoming EU elections from Jose Manuel Barosso, and a look at a sweeping corruption probe in, of all places, Greece. Wealthy foreigners are moving their sights from Belgravia to the UK's country estates; the Basel Committee undergoes a worrying wobble; an Aussie iron ore investment goes pear-shaped; and a German newspaper espouses the benefits of QE and asks why Europe is standing by whilst other central banks make hay. Eric Sprott offers yet more evidence of manipulation in the gold markets; Glen Beck takes up the trail of the Bundesbank's missing gold; and Tres Knippa explains the dangerous structure in the COMEX warehouses. Charts of the metric system, countries invaded by Britain, and a potentially scary correction for the S&P round things out; and there's even an opportunity to watch Nigel Farage get his first crack at the new EU president, Antonis Samaras of Greece.

Until Next Time. ******* Wealthy foreigners buy up swaths of UK farmland and country estates
Would you like a farm with that? In addition to snapping up multimillion-pound townhouses in Knightsbridge and Chelsea, rich foreigners are now buying farms and country estates across the UK. Estate agents are reporting a big increase in investment buyers — some from as far away as China — trying to buy swaths of British farmland. The influx has sent the price of farmland to a record high of £6,882 an acre — an 11% jump on this time last year and a 210% increase over the past decade. Andrew Shirley, head of rural research at estate agents Knight Frank, said: "People from around the world who buy a townhouse in Chelsea look around for what else they could buy … increasingly they're looking at country estates and farmland. There has been a significant increase in inquiries from overseas investors."

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Knight Frank had sold to South Africans, Scandinavians and "a lot of Italians", he said. "We're even showing Chinese people around farmland." He said rich buyers were "not going to be sitting on the tractors themselves" but were buying farms for investment or as a "lifestyle estate". Shirley said Scandinavians had long been keen on grouse-shooting and salmon-fishing estates in Scotland, while Middle Eastern racing fans were buying up stud farms around Newmarket, Suffolk. The Chinese are also becoming increasingly attracted to the British countryside, though more for its investment potential than to be country squires. Rich buyers spent £54m on Scottish estates last year, according to the estate agency Savills. One world-renowned grouse-shooting estate changed hands for £20m and two others sold for between £8m and £10m. Evelyn Channing of Savills' rural office said sporting estates had been "at the top of Christmas wish lists" for international businessmen and women. Channing is in the midst of selling a ninebedroom castle set in 10,000 acres of deer-stalking woodland. She said the Cluny estate, which dates back to the 1600s and is on the market for £7.5m, was very likely to be sold to a foreign buyer. Two-thirds of potential buyers had been from Scandinavia, particularly Denmark. The estate, near Kingussie in Inverness-shire, is being sold by the Egyptian-born, Norwegianbased telecoms magnate Alain Angelil, 70, who is reported to have bought the estate, which includes 10 outbuildings, for £2.7m in 2001. Channing said the asking price for country estates had rocketed because only four or five reach the market a year, but arable land was experiencing exceptionally strong demand....
*** UK GUARDIAN / LINK

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Manipulation Of Gold By Central Banks Cannot Continue In 2014
We have already discussed at length the supply and demand imbalance in an Open Letter to the World Gold Council, asking them to revise their methodology because it grossly understates the amount of demand coming from emerging markets. Our gold supply and demand table (Table 1) reflects the latest available data (2013 Q3 in most cases). World mine production, excluding Chinese and Russian production still stands at about 2,100 tonnes a year. Chinese net imports most likely exceeded 1,700 tonnes for 2013 (81% of world mine production) and demand from the rest of the world is rather stable. The overall picture has not changed much since our last article, with the exception of Indian imports. As of the second quarter of 2013, India had cumulative net gold imports of 551 tonnes, which annualizes to 1,102 tonnes. However, Q3 data shows net imports of only 31 tonnes (for a total of 582 tonnes YTD), which annualizes to 776 tonnes. This incredible loss of momentum for "official" gold imports was the result of concerted actions by the Reserve Bank of India and the Indian Government. While the "official" justification for those restrictions is the large Indian current account deficit, this argument makes little sense. According to government officials, Indian's taste for gold and the corresponding imports worsens the country's trade balance, worsens its current account deficit and puts downward pressure on their currency, the Rupee.

Source: Sprott (via Zerohedge)

But, without going into too many details, the classification of gold as a "good" in the trade balance is at best misleading. Since gold is more of an investment vehicle and is not "consumable" per se, it should instead be accounted for in the capital account of the balance of payments instead of the current account.

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Indeed, Switzerland, which is a large net importer of gold, reports its trade balance "without precious metals, precious stones and gems as well as art and antiques" to reflect fact that those are "investments" rather than consumption goods. In this case, why should India be any different and report their trade data excluding gold? To us, all the fuss about gold imports by the Indian Government is a red herring. So, without the intervention in the Indian gold market, the shortage of gold would have wreaked havoc in the market, a situation that Western Central Banks could not tolerate. Chinese mine supply comes from the China Gold Association and is up to October 2013, the annualized number is a Sprott estimate. Russian mine supply comes from the Union of Gold Producers and is up to 2013 Q3. Chinese data is taken from the Hong Kong Census and Statistics Department and covers the period Jan.–Nov. 2013 and is annualized to account for the missing month. Changes in Central Bank gold reserves are taken from the IMF's International Financial Statistics, as published on the World Gold Council's website for 2013 Q1, Q2 & Q3 and include all international organizations as well as all central banks. Net imports for Thailand, Turkey and India come from the UN Comtrade database and include gold coins, scrap, powder, jewellery and other items made of gold. The data is for 2013 Q1, Q2 & Q3. ETFs data comes from GFMS as well. As demonstrated in our Open Letter to the World Gold Council, there was a large supplydemand imbalance in 2013. The evidence presented here suggests that the decline in the price of gold in mid-2013 and the subsequent raid of gold ETFs (but not silver ETFs) was engineered by Western Central Banks to help solve their physical gold supply problem. However, the resulting increase in Indian gold demand exacerbated the problem. The solution was to restrict Indians from importing gold by all means possible in order to help the Western Central Banks regain control of the gold market. However, the rate of drain in gold ETFs cannot continue forever; at the current pace of 930 tonnes/year, there are less than two years of gold left in ETFs. Moreover, Indians have proved highly creative at finding ways around import restrictions.10 Smuggling is on the rise and will most likely increase as smugglers become more sophisticated. Overall, we believe that interest in physical gold from emerging markets will remain a driving force. Besides, mine production is unlikely to grow, as reflected by the significant decrease in capital expenditures expected for the major gold producers (Figure 5). Accordingly, we believe that the manipulation of gold prices by central banks, as demonstrated by the above analysis, cannot continue in 2014. Therefore, we expect substantial increases in the price of precious metals as the true shortages become obvious.
*** ERIC SPROTT (VIA ZEROHEDGE) / LINK

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EU elections may be "tense" as extremism grows, Barroso warns
Growing extremism across Europe requires political parties in favor of deeper European Union integration to make their case more vigorously in a bid to avoid EU election losses, the head of the bloc's executive arm said. A legislative vote in May risks becoming "a festival of unfounded reproaches against Europe" unless mainstream parties deploy "rational arguments and passion," European Commission President Jose Barroso told the European Parliament on Wednesday in Strasbourg, France. The May 22-25 elections to the 28-nation assembly, which has a say over EU laws covering everything from financial services to farming, could be "tense," he said. "We are seeing, in fact, a rise of extremism from the extreme right and from the extreme left," Barroso said. "I hope we'll have a more profound European debate and the European project will be more strongly defended than before. I hope, namely, that the mainstream political forces will be able to leave sometimes the zone of comfort, that they will no longer consider European unification as a given by implicit consent." The EU legislative elections may turn into a verdict on four years of European debt-crisis management fashioned by Germany, which has stressed national budget austerity as a condition for 496 billion euros ($676 billion) of international aid pledges to keep distressed nations in the euro area. The European vote may also signal the U.K.'s future ties to the EU after British Prime Minister David Cameron pledged to renegotiate relations with the bloc before a referendum in 2017 on whether to stay a member. As Cameron's government applies measures to deter EU migrants from claiming U.K.-funded welfare payments, Barroso pledged to defend the right of the bloc's citizens to move freely within the region. "One issue in particular is already in danger of being subject to all kinds of populist rhetoric rather than objective assessment: free movement of people," Barroso said. "Free movement of people is a fundamental principle of Europe. We don't want citizens of first class and citizens of second class." The 766-seat EU Parliament's biggest group is the Christian Democrats, with which Barroso, a former Portuguese prime minister, and German Chancellor Angela Merkel are affiliated. The assembly's No. 2 faction is the Socialists and its third-biggest group is the pro-business Liberals. Nigel Farage, a British member of the EU Parliament and head of the U.K. Independence Party seeking an exit from the bloc, said the May elections will "shatter" the notion of the inevitability of the EU's development.

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"It's going to be a battle of national democracy versus EU state bureaucracy," Farage said. "Whatever you may say in this chamber, the people out there don't want the United States of Europe. They want a Europe of sovereign states trading and working together." The debate was tied to the start of the six-month EU presidency of Greece, where the ruling coalition of the mainstream New Democracy and Socialist parties is clinging to a three-seat majority. Greece, which triggered Europe's debt crisis in 2009, has received two rescues totaling 240 billion euros in return for budget cuts and has gone through a six-year recession, has seen the rise of parties opposed to the conditions for aid. In the debate on Wednesday, Greek Prime Minister Antonis Samaras told the EU Parliament that Greece is "on the road to recovery." He said Greek "normality" including economic growth would help marginalize anti-European parties in the country including the nationalist Golden Dawn. Golden Dawn has come in third in recent Greek public opinion polls that put Syriza in the lead and Samaras's New Democracy in second place.
*** EKATHIMERINI / LINK

British exit from EU may scare off foreign investors, admits Vince Cable
Vince Cable has admitted that the government is battling to reassure foreign investors who are increasingly worried about a potential British exit from the European Union. The business secretary has told worried companies that there is a 5% chance Britain will leave. The chancellor, George Osborne, warned last week that Britain will quit if the EU does not reform. Asked by the Observer whether foreign companies had raised concerns, Cable said: "The answer is yes. What I say [to businesses] as a government minister is that the risks of us leaving the EU are very, very low … and I just try to reassure foreign investors." The Conservatives have promised an in-out referendum on EU membership — following a renegotiation of powers with Brussels — by the end of 2017, if they win a majority at the next general election. The latest Opinium/Observer poll suggests 52% of the British public aged over 18 would vote to leave the EU tomorrow, while 34% would vote to stay, representing a small increase since last November when 50% said they would vote to leave. The poll further found that Conservatives would vote to leave by 62% to 30%, while Labour voters would choose to remain but only by a narrower margin of 46% to 40%.
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Companies including US car giant Ford and Japanese rival Nissan — which both have manufacturing operations in Britain — have publicly warned they would reconsider their future in the UK should it choose to leave the EU. "I was surprised that Japanese companies and government — which are normally quite reticent, they don't normally go to the barricades — came out so openly and said 'look, we want certainty'," Cable said. Sources close to the US and Japanese embassies said companies were increasingly questioning UK investment plans. Meanwhile the CBI warned an exit from the EU would put Britain's global future at risk. Writing in today's Observer, the business group's director general, John Cridland, said continued EU membership was crucial for Britain's global economic future. "A large majority of CBI businesses of all sizes are clear: the UK is best served inside a reformed EU, rather than outside with no influence. "The single market is a great British success story and has been an engine for jobs and growth in every corner of the country and across the continent." Adam Nathan, deputy director of pro-European group British Influence, said the uncertainty created by the prospect of a referendum was enough to work against the UK, with companies able to redirect their investment plans or locate their European operations elsewhere. "It's out there now and on the table. Business leaders are factoring [a potential exit] into their strategy reviews. If you are a US or Japanese business you're not going to lose any sleep over such a decision. "There are other countries where you base yourself and operations can be moved quite easily. They may not shout about these decisions, but it can ultimately mean a loss of staff, and a loss of benefits for the UK supply chain."...
*** UK GUARDIAN / LINK

A worrying wobble
IN THE immediate aftermath of the financial crisis, politicians and regulators from around the world stood shoulder to shoulder and promised to tame the excesses in the banking system that had brought the global economy to its knees. Among the first of their proposed reforms was to have more loss-absorbing capital in banks to reduce the risks of future taxpayer-funded bailouts. How quickly memories fade.

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On January 12th the Basel committee, a club of central bankers and supervisors, released new rules that are weaker than their previous proposals (see article). The technical tweaks may let big banks—mostly European ones—off the hook of having to raise as much as €70 billion ($96 billion) in capital. Although banks will still have to meet a leverage target of at least 3%, the formula for calculating it has been softened. The next day brought a surge in the share prices of big banks, which had lobbied hard for a dilution of the rules. Investors' elation ought to be worrying for taxpayers. One of the most remarkable features of the financial crisis of 2008 was the razor-thin capitalisation of many of the world's largest banks. In theory, the banking system had entered the crisis with comfortably thick cushions. New rules known as Basel 2 had insisted that banks have minimum capital ratios of 8%. When the crunch came, however, the actual loss-absorbing capital available to many big banks was less than 2% of their total assets. In other words, they could run up losses of no more than $2 for every $100 invested without going bust, instead of the $8 the regulators had presumed. The startling discrepancy was largely a result of "risk-weighting" of banks' assets: the idea was to reward cautious banks with more creditworthy borrowers by allowing them to have less capital than their more daredevil peers. Yet risk-weighting proved dangerously flawed. Banks suffered losses on supposedly safe assets, whether souped-up bundles of subprime mortgages or Greek government bonds. The complexity of the risk-weighting methodology also let banks run rings around their regulators. An important lesson of the crisis was thus to back up the rules based on risk-weighted assets with a simple and easily verified limit on leverage. The "leverage ratio"—the ratio of equity to assets—is certainly a crude measure. Critics point out that it treats a home mortgage with a big slug of equity in the property no differently from an unsecured credit-card balance owed by a spendthrift student. European banks, which keep most of the mortgages they issue on their balance-sheets and also risk-weight their assets energetically, would be especially hard hit compared with American banks, which offload their mortgages to capital markets with the help of government-backed agencies such as Fannie Mae and Freddie Mac. Only a quarter of Europe's big banks would have met the previously proposed limits without raising capital (or reducing assets), compared with three-quarters of American banks. Tighten leverage standards now, European banks complain, and the flow of credit to the economy will be choked off, harming an incipient recovery. But this misdiagnoses the problem....
*** ECONOMIST / LINK

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Greek Prosecutors Focus on Corruption at the Top
Since the country's financial meltdown, Greeks have protested what many here consider the unfairness of the austerity measures that have raised taxes and trimmed salaries and benefits for average Greeks, while the elite escaped similar burdens or being held accountable for their part in creating the mess in the first place. Suddenly, to the satisfaction of many here, that dynamic has begun to change. Greek prosecutors working independently of politicians — and sometimes in the face of passive resistance from them — are pursuing corruption cases against a widening pool of current and former high-ranking government officials and members of the business gentry once deemed untouchable. In country after country, officials have had difficulty deciding whether or how to prosecute those responsible for the conditions that led to the financial crisis that began in 2008 and the dark economic period that followed. Here in Greece, the country most afflicted by the collapse, prosecutors say that investigations begun over the past year or so are finally coming to fruition. Analysts add that the prosecutors have more influence than ever as Greeks smarting from more than three years of austerity demand punishment for those who ransacked state coffers and pushed Greece close to bankruptcy. "For the first time, Greek justice is reaching really high up," said Aristides Hatzis, a professor of legal theory at the University of Athens. "One reason is that the public desire for catharsis is strong. Another is that the political system is weak and has too much to lose by trying to intervene. It risks being exposed." In the past couple of weeks alone, prosecutors have reeled in several prominent businessmen, including Dimitris Kontominas, the owner of a television station and an insurance company, as well as Angelos Filippidis, the former chief executive of Hellenic Postbank, and several of his colleagues, over a loan scandal deemed to have cost the former bank some $678 million. On Wednesday, Mr. Kontominas, 75, was released from detention after posting a record $6.8 million in bail and was barred from leaving the country. The day before, he answered from an Athens hospital bed to charges of fraud and money laundering. Mr. Filippidis, who prosecutors allege recklessly approved loans without guarantees, is in a Turkish jail awaiting extradition to Greece after his arrest at an Istanbul hotel on Jan. 10. Also in custody is the former managing director of the country's Skaramangas shipyards, Sotiris Emmanouil, who prosecutors say took $31 million in bribes to secure a submarine deal with the German company Ferrostaal. At the same time, prosecutors are deepening an investigation into a new scandal involving kickbacks for state defense contracts that has implicated senior members of the Greek military for the first time.

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Meanwhile, a former conservative minister, Michalis Liapis, is being investigated amid reports that he used European Union subsidies to renovate his holiday home. Mr. Liapis, a cousin of former Prime Minister Kostas Karamanlis, received a suspended jail sentence this month for driving a car with fake license plates in an apparent attempt to skirt increased road taxes. At the front line of this crackdown are the capital's two top corruption prosecutors, Eleni Raikou, 52, and Popi Papandreou, 36. Ms. Papandreou, known as "the Terminator" for her meticulous investigations, compiled the report that led to the money-laundering conviction last October of former Defense Minister Akis Tsochatzopoulos, a landmark verdict in a country where top-ranking state officials are rarely prosecuted. Officials, who spoke on the condition of anonymity, said they had not come under political pressure. "We are a parallel authority," one said. "I don't take orders from the prime minister."...
*** NY TIMES / LINK

Rich Chinese continue to flee China
Do the wealthy Chinese know something we don't? A new report shows that 64 percent of Chinese millionaires have either emigrated or plan to emigrate—taking their spending and fortunes with them. The United States is their favorite destination. The report from Hurun, a wealth research firm that focuses on China, said that one-third of China's super rich—or those worth $16 million or more—have already emigrated. The data offer the latest snapshot of China's worrying wealth flight, with massive numbers of rich Chinese taking their families and fortunes overseas. Previous studies show the main reasons rich Chinese are leaving is to pursue better educations for their kids, and to escape the pollution and overcrowding in urban China. But analysts say there is another reason the Chinese rich are fleeing: to protect their fortunes. With the Chinese government cracking down on corruption, many of the Chinese rich—who made their money through some connection or favors from government—want to stash their money in assets or countries that are hard for the Chinese government to reach. According to WealthInsight, the Chinese wealthy now have about $658 billion stashed in offshore assets. Boston Consulting Group puts the number lower, at around $450 billion, but says offshore investments are expected to double in the next three years. A study from Bain Consulting found that half of China's ultrawealthy—those with $16 million or more in wealth—now have investments overseas.

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The mass millionaire migration out of China is also hitting luxury companies hard. Hurun said China's luxury sales last year fell 15 percent—the biggest drop in over a half a decade. Spending on gifts, which made up a sizable portion of luxury sales, fell 25 percent. Bentley Motors last week said that its sales in China slowed last year in part because of "the migration of high net worth individuals from China." In other words, it isn't that wealthy buyers in China are spending less—they're just disappearing. Most are looking for permanent residences, Hurun said. The United States was their top destination, which any real estate agent in San Francisco, Seattle or New York can confirm. Europe is their second favorite destination, followed by Canada, Australia, Singapore and Hong Kong.
*** CNBC / LINK

Crisis Management: Europe Eyes Anglo-Saxon Model with Envy
Should the European Central Bank follow the Anglo-Saxon model and buy up vast quantities of sovereign bonds in attempt to finally overcome the euro crisis? ECB head Mario Draghi is under pressure to act now. But what are his options? Britain has it better. At least that's how it seems. The country's financial situation is improving, even though it was worse off than many euro-zone member states at the beginning of the financial crisis. It was more bloated, its financial sector was in bad shape and the country had one of the largest real estate bubbles and highest rates of private debt in the world. But while large areas of the euro zone continue to be plagued by mass unemployment and stagnation, the United Kingdom now appears to be on the road to health. The year 2014 could even see economic growth of 3 percent. Furthermore, investment is growing and the real estate sector is making progress. In 2008, the situation in the UK wasn't all that much different than that in Spain. Yet while the British are slowly leaving the crisis behind, the Spanish would be ecstatic if they could avoid further economic contraction this year. What is the fundamental difference between the two countries? Spain has the euro. Britain has the Bank of England. The European Central Bank and the Bank of England will both publicize their next steps on Thursday. Whereas the entire world will listen closely to hear how ECB head Mario Draghi intends to counter deflation risks and credit crunches in countries like Spain and Italy, his Bank of England counterpart Mark Carney will more likely be confronted with questions about when he intends to begin tightening monetary policy.
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The US Federal Reserve's newly appointed chairwoman Janet Yellen is likely to be affirmed by the Senate on Monday, and has also indicated that she will begin scaling back the bank's crisis intervention programs immediately. It is the next step in the Anglo-Saxon strategy: That of pumping vast quantities of fresh liquidity into the market with concurrent currency devaluation as a way of softening the recession. And there are not a few, including the head economist for Deutsche Bank, who demand that the ECB must also finally begin buying unlimited quantities of sovereign bonds from struggling euro-zone member states. The impatience is understandable. The longer the crisis continues, the more threatening it becomes. The differences in the credit markets of the common currency zone remain stark: Companies in Spain and Italy must pay interest rates that are almost double those paid by firms in Germany, if they are able to borrow money at all.Furthermore, the economic pain continues, along with all of the social and political consequences that result. When, in the sixth year of the crisis, all reform efforts, spending cuts and savings measures have still not generated reliable growth, isn't it time for the ECB to finally do all it can to kick-start the process? A glance across the Channel shows how the Bank of England acted to prop up the economy. In the course of the crisis, the bank tripled its balance sheet total, particularly because it purchased vast quantities of sovereign bonds, a process known in financial jargon as "quantitative easing." The strategy resulted in low long-term interest rates and a shot in the arm for financial markets. By comparison, the ECB doubled its balance sheet total, but its direct intervention in the sovereign bond market had less impressive results. Draghi now has two options: Either he can once again pump huge quantities of money into European banks as the ECB did in the winter of 2011/2012, but this time with the condition that the money must be loaned to companies in need of financing. That, however, would be a significant intrusion into the business operation of the banks, which would be forced to take on additional risks. Or the ECB could buy sovereign bonds, thus sinking long-term interest rates, a move which would only work were the bank to focus on purchasing debt from those euro-zone states that are struggling the most....
*** DER SPIEGEL / LINK

Can Sino Iron Dig Out of Its Investment Hole?
It looked like a profitable, no-brainer investment when China's CITIC Pacific bought an Australian iron ore mine for US$ 450 million. The year was 2006, and soaring Chinese demand for the raw material needed to make steel and other iron products was pushing Australian ore prices to new heights. Imported ore prices shipped to China had hit US$ 60 a ton.

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CITIC Pacific Group then chairman, Larry Yung, charged forward, electing to acquire 25-year mining rights to 2 billion tons of magnetite — with an option for an additional 4 billion tons — at Cape Preston, Western Australia. A subsidiary CITIC Pacific Mining was formed to manage the project, called Sino Iron. Planned investment was more than US$ 3 billion. What Yung didn't know was that the price tag on his decision would be far higher than expected and shake his Hong Kong-listed company to the core. The difficult experience has provided lessons for other Chinese companies to follow if they choose to invest overseas. The project has endured years of delays and legal snags. Disputes between CITIC Pacific and the owner of the mine's mineral rights, Australian businessman Clive Palmer, are continuing in Australian courts. Nevertheless, processed magnetite ore from the strip mine in Western Australia is now being exported to China aboard ore carriers. The first ship loaded with Sino Iron ore powder sailed from the port of Cape Preston on December 2, bound for a CITIC Pacific steel mill in the eastern province of Jiangsu. It's been a hard lesson. A source in Australia with government ties who asked not to be named said, "From Australia's point of view, we are very sorry that this project has become so difficult and the costs have been so high." Colin Barnett, the governor of Western Australia, said in recent years "Chinese companies swarmed" into his province in search of mining profits and "investing in some well-known iron ore projects. If there's a lesson, it's that they did too much too soon" without taking time to "find high-quality assets and partners." But at least some of the pain was self-inflicted, said Chang Zhenming, CITIC Group chairman. "Sino Iron's difficult issues in the past happened because the company wasn't truly familiar with the local situation," Chang said. "This is 'tuition' Chinese companies are paying as they 'go out,'" which is another way of saying investing overseas. After landing in Australia, CITIC Pacific executives tried to make all the right moves. For example, they staffed the management team with local professionals in hopes of minimizing their "outsiders' disadvantage." The first executive chairman appointed to head Sino Iron and manage the mining project was Barry Fitzgerald, an Australian with more than 30 years of experience in the mining industry. But Fitzgerald and other local staffers found it hard to work for CITIC Pacific. So in early of 2010, Fitzgerald resigned. He was replaced by Hua Dongyi, former head of CITIC's construction subsidiary in Africa. Hua holds the post today. Another staffing snafu that cost the Chinese dearly swirled around general hiring for the mine's construction and operations. The owners learned only after launching the project that Australian labor laws would not let them lean on imported, low-wage workers from China.

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It was expected Chinese laborers would work at the mining site for state-owned engineering contractor Metallurgical Corp. of China (MCC), with which CITIC Pacific contracted to provide gritty jobs, such as digging the mine and building processing facilities. Under the January 2007 contract, MCC agreed to install crushing and pellet plants, procure mining equipment and build a camp for mine laborers. The mine was supposed to be up and running within three years. But Australia's labor regulations stood in the way of the plan to import labor, slowing the project. One rule says a foreign worker must speak English, and earn at least a grade six on the International English Language Testing System. Moreover, all foreign electricians, welders and other tradesmen have to pass Australian-standard professional exams before they can work in the country. Australian law also says the same wage rates apply to foreign and domestic workers, blowing away MCC's plan to pay mainland China rates and house imported workers in low-cost camps. Labor costs thus mushroomed far beyond expectations, as MCC and CITIC Pacific were forced to staff their operations with Australians. At the construction period peak, only about 400 of the site's 4,000 workers were Chinese. Worker housing costs also ballooned dramatically to US$ 300 million, from a MCC's initial quote of US$ 30,000, said CITIC Pacific President Zhang Jijing. In the project's early years, cost overruns and CITIC Pacific's decision to double the mine's lifetime output to 2 billion tons from 1 billion tons of ore hiked the project cost to US$ 1.75 billion from an initial estimate of US$ 1.11 billion. Moreover, production capacity was increased to 24 million tons from 12 million tons of ore per year....
*** CAIXIN / LINK

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Charts That Make You Go Hmmm...

Source: UK Daily Telegraph

Average house prices have surged beyond the £1 million mark in almost 50 areas
of the country, with Britain's economic recovery creating a new generation of property millionaires, a study shows. The report, an authoritative analysis of sale values in England and Wales, identifies 43 locations where houses now sell for an average of more than £1 million, including several outside London. It highlights how dozens of property hot spots have emerged not just in the South East, but also across the country, with average prices in areas of Buckinghamshire and Oxfordshire reaching more than £900,000. In parts of Somerset, homes now sell for an average in excess of £800,000, while in several areas of the North and the Midlands, the average sale price is more than £500,000....
*** UK DAILY TELEGRAPH / LINK

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What kind of blowback should we prepare for? The lesson of history is that trying to

force things to get better does not merely create unwelcome repercussions. It does not merely slow the pace of natural evolution. Attempts to enforce a certain outcome always appear to create the opposite effect. We do not find a law of adverse consequences. We find a law of opposite impacts. Let us review the sample examples from the previous charts. Every effort to jam an ideology or a plan down the throat of the world only creates the opposite of the intended effect. I would maintain that this is one of the few lessons from history that can be relied on. If the Federal Reserve is trying to force feed us prosperity then the inevitable blowback will be adversity. If the Fed is trying to compel the most dramatic economic recovery in history, then the blowback may well be the deepest depression in history. If the Fed is trying to enforce confidence and optimism then the blowback will be fear and despair. If the Fed is trying to force consumers to spend then the blowback will be a collapse in consumer confidence. I sincerely hope that I am completely wrong here, that I am missing something, that there is a flaw in my logic. However until I can locate such a flaw I must trust the technical case for treating this Fed force-fed rally in the stock market as something that will end badly. Here's how it plays out....
*** WALTER ZIMMERMAN (VIA ZEROHEDGE) / LINK

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At the top,

the only 3 countries in the world that DON'T use the metric system.

At the bottom, the only 22 countries in the world that the British haven't, at one time or another, invaded. These two maps were plucked from 40 that will change how you see the world. Fascinating stuff.
*** A SHEEP NO MORE / LINK

Source: asheepnomore.com

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Words That Make You Go Hmmm...
Glenn Beck has
graced these pages before but not for some considerable time. This week, however, he's back with a bang as he sets off on the trail of the Bundesbank's missing gold. He's a little confused about some of this, but overall it's a good segment that shows the trail is warming up... CLICK TO WATCH

He's back! Nigel Farage returns to the
European parliamentary stage in what will be a crucial year for Europe, and he wastes no time at all in telling the new President, Antonis Samaras of Greece, a few home truths. Classic Farage... CLICK TO WATCH

Tres Knippa is an experienced futures
trader and an avid Japan-watcher. He has recently turned an eye towards gold. In this interview on Canada's BNN, Tres lays out a scenario we have talked about in these pages often (including today). If Tres is right, things are rapidly coming to a head, and the possibilities he offers up are all pretty bad news for anybody short gold... CLICK TO WATCH

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and finally...

Thanks, Michael...

Hmmm...

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Grant Williams
Grant Williams is the portfolio manager of the Vulpes Precious Metals Fund and strategy advisor to Vulpes Investment Management in Singapore — a hedge fund running over $280 million of largely partners' capital across multiple strategies. The high level of capital committed by the Vulpes partners ensures the strongest possible alignment between the firm and its investors. Grant has 28 years of experience in finance on the Asian, Australian, European, and US markets and has held senior positions at several international investment houses. Grant has been writing Things That Make You Go Hmmm... since 2009. For more information on Vulpes, please visit www.vulpesinvest.com.

*******
Follow me on Twitter: @TTMYGH YouTube Video Channel: http://www.youtube.com/user/GWTTMYGH ASFA Annual Conference 2013: "Wizened In Oz" 66th Annual CFA Conference, Singapore 2013 Presentation: "Do The Math" Mines & Money, Hong Kong 2013 Presentation: "Risk: It's Not Just A Board Game" Fall 2012 Presentation: "Extraordinary Popular Delusions & the Madness of Markets" As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from time to time, the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm... may reflect the positioning of one or all of the Vulpes funds—though I will not be making any specific recommendations in this publication.

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