14 Jan 2012

S & P Credit agency downgrades Nine countries

France’s loss of its top-rated status leaves Germany as the only other major economy inside the eurozone with a AAA credit rating. Photograph: Scott E Barbour/Getty Images

Europe has been plunged into a fresh crisis after France admitted it had been stripped of its coveted AAA rating in a mass downgrade of nine eurozone countries by the credit ratings agency S&P.

The agency downgraded the ratings of Cyprus, Italy, Portugal and Spain by two notches. It also lowered Austria, France, Malta, Slovakia and Slovenia by one notch.

The agency said that its actions on eurozone ratings were "primarily driven by insufficient policy measures by EU leaders to fully address systemic stresses".

Ahead of the announcement share prices plunged, the euro dropped to a 16-month low against the dollar and the European Central Bank was forced to step in to buy Italian bonds after European sources admitted action by the credit ratings agencies was imminent.

Bringing an abrupt end to the uneasy calm that has existed in the eurozone since the turn of the year, the heavily-trailed S&P move rekindled financial market anxiety about a Greek default and possible break-up of the single currency.

Nicolas Sarkozy was due to go on national TV to explain the humiliating loss of France's top-rated status, leaving Germany as the only other major economy inside the eurozone with a AAA rating. French finance minister Fran├žois Baroin downplayed the move, saying it was "not a catastrophe".

The moves followed a warning from S&P last month that it was looking hard at the credit ratings of 15 of the eurozone's 17 members. Germany and the Netherlands were quick to make it clear they were not on the list of targeted countries circulated by S&P to European capitals ahead of an announcement that was expected to be made after the close of business on Wall Street. Investors piled into safe haven assets such as the dollar, while the UK was rewarded with even lower borrowing costs as 10-year bonds slipped below 2%.

Britain is not at imminent risk of a downgrade, but Berlin sought to soften the blow to French pride when a senior German politician close to Angela Merkel said the UK should have been first in line for a cut in its AAA status on the grounds that its collective private and public sector debts are the largest in Europe.

Michael Fuchs, deputy leader of the Christian Democrats, said: "This step is out of order. Standard and Poor's must stop playing politics. Why doesn't it act on the highly indebted United States or highly indebted Britain?"

He added: "If the agency downgrades France, it should also downgrade Britain in order to be consistent."

The FTSE 100 dropped 100 points before recovering late in the day to finish down 26 points at 5636 while the Dow Jones in New York fell 120 points to 12350 by afternoon trading.

S&P was expected to blame the escalating costs of supporting indebted euro nations for the downgrade. The vulnerability of banks in the currency club to bad loans in Greece, Portugal and Ireland is also believed to be a key reason for the downgrades.

The new technocratic government in Athens added to the gloom after talks over a second major bailout to rescue the country's finances broke up without an agreement. Officials from the International Monetary Fund, the European Union and the ECB arrive in Athens on Tuesday for talks on a new €130bn bailout package, which will be impossible unless Greece first strikes a deal with the banks, insurance companies and hedge funds that have lent it money.

The Greek government said talks with its creditors would resume on Wednesday, but analysts voiced concerns that hedge funds were blocking a deal that involves them writing off 50% of their loans.

Germany considers Greece to be the main faultline in the euro crisis and is urgently seeking a resolution to talks over a deal, but has insisted Brussels holds out for a private sector deal. Officials hinted on Friday night that Greece could default on 100% of its loans if the private sector refuses to come back to the negotiating table and accept a voluntary agreement.

A spokesman for the troika said: "We very much hope, however, that Greece, with the support of the euro area, will be in a position to re-engage constructively with the private sector with a view to finalising a mutually acceptable agreement on a voluntary debt exchange consistent with the October 26/27 agreement, in the best interest of both Greece and the euro area."

Unprecedented action by the European Central Bank in recent weeks had reassured many investors that policymakers were getting on top of the crisis. The ECB has lent more than €400bn to eurozone banks to bolster their reserves and prevent a repeat of the 2008 credit crunch.

But the S&P downgrades are likely to undermine these efforts and make foreign banks wary of lending to their counterparts in Europe.

Graham Neilson, chief investment strategist at Cairn Capital, warned: "This is just the start. There will be more to come and not just in Europe – there is simply still too much debt and not enough growth in developed economies."

France has already shown its anger at the prospect of a downgrade. Central Bank chief Christian Noyer raised eyebrows in London before Christmas when he said Britain "has more deficits, as much debt, more inflation, less growth than us".

All The World's Gold Stats

13 Jan 2012

Silver Price Ready to Explode

In the last eight years the silver price has increased close to five-fold, from US$6 / ounce to US$29 / ounce.
It hasn’t been an easy ride for investors.
The price crashes intermittently when the trade gets overcrowded. With just $50 billion of silver bullion above ground, it is a very small market and gets crowded easily. The Silver price has had four major crashes in the last ten years but has still increased five-fold.

10 Year Silver Price in USD/oz

Source: Goldprice

In the first half of 2004 it fell by 36%.
Then during the first half of 2006 the silver price fell 38%.
In 2008 it fell for most of the year with the peak to trough fall a colossal 61%.
Then in 2011, from its April peak to its low point in late December, silver lost 48% in price.
But between these savage dips, silver has surged.
The net result is, if you invested US$10,000 in silver at the start of 2004, it would now be worth US$48,309.
Last year left a bad taste in the mouth for many silver investors. The 48% correction was brutal. And now there’s a lot of negative sentiment around silver.
But – believe it or not – when negative sentiment builds to this point it is often the best time to invest. As Warren Buffet says, “be greedy when others are fearful and fearful when others are greedy.”
There are also some clear signs this latest correction is now finished.
The main sign comes from the silver futures market.
It is now cheaper to buy a silver futures contract than real, physical silver. Silver rallied more than 60% the last time we saw this happen towards the end of 2010. As I write this, physical silver is US$28.98 / ounce. A silver futures contract is $28.93 / ounce.
This 5-cent difference may sound like small bickies but it is very important. Futures contracts are usually higher than the price of the commodity. Not so much as a price predictor but more to reflect the cost of storing the commodity and the opportunity cost of the capital.
When the futures price dips below the commodity price like this, even by just 0.2%, it is a clear signal to expect higher prices. The market calls this ‘backwardation’.
The silver market went into backwardation a few weeks ago on 28 December 2011. The next day, silver started a three-day bounce that increased the silver price by 12%. This included silver’s biggest one-day move in over three years – a 6.6% jump.
Backwardation tends to happen when there is a shortage of a commodity. The result is a much higher commodity price, which encourages people to sell. Backwardation was in play during the last silver rally that drove the price from $25 / ounce to its peak of $49.50 / ounce.
This is a very exciting development for silver investors. It’s also good to put the silver market in some historical context to see what the next few months could bring.
Like gold, silver tends to set its low point for the year in the first six weeks of the year.
In six of the last 10 years, the low price for the year was set by 8 February.
With a significant correction behind us, and backwardation now in play, it’s easy to imagine we may see the 2012 low point for the silver price very soon. That’s if we haven’t seen it already.
Compared to its recent precedents, the 48% correction in 2011 was bigger than those in 2004 and 2006 and was only smaller than the 61% fall we saw in the GFC of 2008.
What would happen if silver fell further and matched the drop we saw in the GFC?
We would see it down at $19.50/ounce. It’s hard to imagine given the current set up, but anything can happen with silver. I’m a buyer of silver at current prices. But if silver fell this far I would buy even more! The silver price has more than tripled since its GFC drop.

Since 2008′s correction, the silver price has more than tripled

Since 2008's correction, the silver price has more than tripled
Click here to enlarge

Source: Slipstream Trader

Something I’ve written about in Diggers and Drillers for a while is that you should watch for the cost of buying silver through a bullion dealer to break away from the spot price. The tangible, physical stuff should command a premium. Buying physical silver is very different to buying ‘paper silver’ through a commodities exchange. There is a lot of doubt that silver bought this way is backed by the real stuff. Since the collapse of MF Global, investors have woken up to this.
One way to measure what premium physical silver should be trading at is to watch the price of the Sprott Physical Silver Trust (PSLV) against the spot price of silver. The market believes that Sprott’s fund carries the silver it claims and isn’t a bad proxy for the real value of silver.
So it’s interesting to see Sprott’s silver trust surge in value against the silver price recently. The chart below shows just that. I’ve divided the value of a unit of the Sprott Physical Silver Trust by the silver spot price; my ‘Sprott-to-spot’ index. Since the start of December, the relative value has increased by more than 20%.

‘Sprott-to-spot index’ shows physical silver is commanding a growing premium

'Sprott-to-spot index' shows physical silver is commanding a growing premium

Source: Stockcharts, D&D edits

What does this actually tell you? Investors struggle to buy large amounts of silver, and are prepared to pay above the market price for physical if they trust you have it.
For the average investor, we may find that buying bullion from dealers may start coming with extra costs, which reflects its true value above the spot price.
2012 also brings the likelihood of more money printing from the Fed, and possibly the ECB. This is not something you can bank on. But either would be bullish for precious metals prices. As the money supply of the major currencies of the world increases, the price of hard assets, such as gold and silver, rise to reflect their value.
So the stars seem to be aligning for a big year. Silver normally bottoms out at this time of year, the correction looks finished, the metal has gone into backwardation, and physical metal is now priced at a premium.
I expected big things from silver last year based on the fundamentals. All those fundamentals are still in place, and now we have everything you have just read about today on top of that as well.
With a painful correction now out of the way – and the price knocked back down – the silver market looks ready to explode again.


Obama Sends Request To Congress For $1.2 Trillion Debt Ceiling Increase

Two days ago we wondered how long it would take for Obama to restart the debt ceiling theater. Not that long it turns out.
So with Congress in recess, will Obama succeed in passing another automatic vote using base trickery? The same Obama, who as recently as 3 hours ago warned Congress that any attempts to pass approval on the Keystone Pipeline without his involvement are "counterproductive"... In other news, America' new debt ceiling of $16.3 trillion, or 107% of GDP is now just a formality, about to be interrupted by a little circus clowning.

From Bloomberg:
President Barack Obama formally notified Congress today that that the government needs more borrowing authority.

The written certification to raise the debt ceiling to $16.394 trillion starts a 15-day clock for Congress to consider and vote on a joint resolution disapproving of the increase.

Under legislation passed Aug. 2 after months of wrangling between the
administration and Republican lawmakers, the president is given the
power to veto any disapproval resolution that clears both chambers of

The law calls for Obama to notify Congress when the debt came within $100 billion of the current $15.194 trillion limit.

While the threshold was reached Dec. 30, when the president was in
Hawaii and Congress was on holiday break, Obama agreed to a request from
congressional leaders to delay the notification request, ensuring the
deadline for congressional action didn’t lapse before lawmakers returned
to Washington.


12 Jan 2012

2012 Will Mark the End of the Euro

The Euro-zone in its current form is in its final chapter. Anyone who argues otherwise is not paying attention.
Consider the Greek situation. Greece’s debt problems first made mainstream media headline news at the beginning of 2009. The IMF/ EU/ ECB/ and Federal Reserve have been working on this situation for two years now. And they’ve yet to solve anything: after two bailouts, significant debt write-downs, and numerous austerity measures, Greece remains bankrupt.
Now, if the Powers That Be cannot solve Greece’s problems… what makes anyone think that they can address larger, more dangerous issues such as Italy or France, etc?
Consider that the world’s central banks staged a coordinated intervention in November… and Italy’s ten year is back yielding more than 7% less than two months later. Again, a coordinated intervention by the world’s central banks bought less than two months’ time for Italy.
And now we find the debt contagion spreading to France:
French Debt Costs Rise at Bond Sale as AAA Decision Looms
France sold 7.96 billion euros ($10.2 billion) of debt, with 10-year borrowing costs rising in the country’s first bond auction of the year as credit-rating companies threaten to cut the nation’s AAA grade.
The government sold 4.02 billion euros of the bonds maturing in October 2021 at an average yield of 3.29 percent, from 3.18 percent on Dec. 1. The euro fell to its weakest level against the dollar in 15 months, and the extra yield investors demand to hold French 10-year bonds instead of benchmark German bunds widened to the most in about six weeks.
“There’s still the threat of a downgrade hanging over France and until we get that situation cleared up you can’t signal the all-clear,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London.
France has the biggest debt burden of the six top-rated euro nations, at 85 percent of gross domestic product. Its 10- year yield spread to German debt widened to a 21-year high of 204 basis points on Nov. 17 amid concern Europe will struggle to contain the region’s debt crisis. Today, it reached 151 basis points, or 1.51 percentage points, the most since Nov. 25. It was at 149 basis points at 5:39 p.m. Paris time compared with a premium of 47 basis points for AAA rated Finland and 39 basis points for the Netherlands. Read more

The significance of this cannot be overstated. European nations need to roll over hundreds of billions if not trillions of Euros’ worth of debt in 2012. And this is at a time when even more solvent members such as France and Germany are staging weak and failed auctions.

  Maturing Debt Plus Budget Deficit as a % of GDP
  2011 2012
Portugal 21.6% 21.0%
Italy 22.8% 23.1%
Ireland 19.5% 18.0%
Greece 24.0% 26.0%
Spain 19.3% 18.7%
UK 15.7% 13.6%
France 20.6% 19.7%
Germany 11.4% 10.5%

Previously, EU sovereign nations would rely on European banks for these debt needs. However, European banks have their own debt issuance problems to deal with. To wit, before the end of 2012…
  • French banks need to roll over 30% of their TOTAL debt.
  • Spanish banks and Italian banks need to rollover more than 33% of their TOTAL debt.
  • German banks need to roll over nearly 40% of their TOTAL debt.
  • Irish banks need to roll over almost HALF (50%) of their TOTAL debt.

Thus, the question becomes: WHO is going to buy all this debt? China’s increasingly focusing on domestic issues. Japan is on the verge of its own solvency Crisis. And the US is running terrible Debt to GDP and Deficit to GDP ratios as well.
Again… who’s going to put up the funds to roll over this debt? The only player that could possibly do that would be the ECB. But Germany won’t stand for that level of debt monetization. And the Fed can’t monetize everything in today’s political climate
Thus, the fact remains: the EU in its current form will be broken up sometime in 2012. The Powers That Be are rapidly losing control over there. And once the stuff really hits the fan, it’s going to make 2008 look like a joke.
If you’ve not already taken steps to prepare for this, NOW is the time to do so.