The Phaserl


Monthly Metals Report: OPEC, World Money And Banking Turmoil

from FTM Daily:

Although the metals traded lower last week, it was at least refreshing to enjoy a brief lapse of Federal Reserve monetary escapades dominating the headlines. You know it’s bad when I’m content to see the metals trade lower in exchange for being spared having to endure another Fed speech!  I’m just kidding, but seriously.

The media was all worked up this week about the growing realization that all is not well in the European banking system, specifically with Germany’s Deutsche Bank.

While the situation is certainly dire, it’s typical of the mainstream financial press to wait until the system is on the brink of failure to give coverage.  Those banks dubbed “too-big-to-fail” in the wake of the 2008 crisis are much bigger, more highly leveraged, and have balance sheets more rotten to the core than they did 8 years ago.  With Deutsche Bank sitting on the cusp, German officials are stuck between a citizenry with no tolerance for more bail-outs and a European banking system in desperate need of one.  Alternatives include a bail-in or simply allowing some banks to fail.  To paraphrase Jim Grant, You cannot fix a solvency crisis with liquidity.  The big banks are insolvent, and while another dose of money printing may delay the reckoning, it will ultimately make the problem worse.  In a system ripe with inherent counterparty risk, physical metal is one of the very few assets that are not simultaneously someone else’s liability.  Thursday’s brief panic gave metals investors a glimpse of how the market mayinitially respond if a 2008 style event were to re-emerge.  On Thursday, when shares of DB were plummeting, gold, the dollar, and treasuries rallied.  Silver was flat and the S&P was down sharply.  In 2008, the metals sold off in conjunction with nearly everything else, but were subsequently amongst the first to rebound.

On Wednesday, OPEC agreed, in principle, to a production cut beginning in November.  The cartel decided to cut its production by 750,00 mb/d, although details are to be finalized in November. The tentative agreement caused oil prices to surge over 6 percent on Wednesday, and by another 1 percent on Thursday.  Because specified production limits were not allocated to individual countries, there remains a great deal of uncertainty surrounding the agreement.  We’ll have to keep an eye on how this unfolds, as rallying oil prices can provide a tailwind to gold, and especially silver.  True supply/demand fundamentals would inspire more confidence in this move than promises made by a “cartel” of untrustworthy participants.

Interestingly, in a 1998 testimony before the House of Representatives on derivatives trading, Alan Greenspan said the following:

“…private counterparties in oil contracts have virtually no ability to restrict the worldwide supply of this commodity. Even OPEC has been less than successful over the years. Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”

This quote, although made nearly 20 years ago, has especially timely implications because it illustrates two notable points:

  1. This is an explicit admission by Greenspan that the Federal Reserve is willing to manipulate the price of gold. 
  2. There’s precedent for OPEC being unsuccessful in their attempts to counter the free market price for oil.

I also find it ironic that the head of one cartel (Federal Reserve) cast doubt on the ability of another cartel (OPEC) to influence free-market prices, while in the same breath admitting to his own price suppression scheme.

As of October 1st, the Chinese Yuan now officially makes up 10.92% of the Special Drawing Rights (SDR) currency basket issued by the International Monetary Fund, making it an official reserve currency.  While this is highly significant over the intermediate to long-term, be weary of the hype circulating that this will result in an immediate “dollar crash.”  Global monetary elites do appear intent on advancing the SDR as the global reserve currency, but the SDR still lacks a deep enough bond market and is not immediately suitable as a viable replacement for the dollar.  Both the BIS and the IMF have, however, put forth proposals andwhite papers that lay the framework for that to occur.  In August of this year, the World Bank was approved as the first SDR bond issuer in China.  This is a trend we’ll be monitoring very closely.

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