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By Eric Pomboy of Meridian Macro Research

September 17 (King World News) - Gold Battle Near Key $1,300 Level - Charts Of The Day

Taking a look at the Gold relative to Net Commercial position chart, we find that (despite gold’s recent pullback), the trend line remains well intact.  As with the ‘05 and ‘08 snap- backs into (bullish) trend line, small retreats should be expected along the way.  In our estimation Gold has already formed a firm bottom and prices will reverse recent declines and move steadily higher....

Continue reading the Eric Pomboy piece below...


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As well, whether the Fed tapers or not our creditors will likely continue to unwind their US debt holdings.  They see the writing on the wall for the Dollar, which will ultimately leave the Fed as buyer of last resort.  If the Fed does in fact taper and our creditors continue to unwind positions, this could send rates moving swiftly higher forcing the Fed right back into the game.  All of this will inure to the benefit of Gold, Silver and the mining shares.

While Gold Open Interest contracts have declined -10.2% so far in 2013, this has been surpassed by a drop of -71% in registered (deliverable) gold at the COMEX.  As it stands today, there are nearly 58 claims per ounce of deliverable gold.  Put another way, the COMEX would have to come up with nearly 38 million ounces ($50 billion) of gold to meet these contracts.  As it stands today, someone could come in and buy all current (deliverable) COMEX gold inventory for $880 million.  The end game is that the COMEX will resort to settling contracts in cash, and the ‘paper’ gold market will effectively go away...with much higher gold prices following thereafter.

The latest data from the National Federation of Independent Business speak volumes.  The first brings into sharp focus a) the struggling economy and, b) the Affordable Care Act (aka-Obamacare) effect on hiring plans.  The monthly Nominal Sales drop of -17 percentage points is the largest since data collection began for this series in 2004, and is the lowest reading since March 2010.  Clearly, businesses hiring plans are not a result of brisk sales.  Rather, they plan to hire part-time workers to fill gaps as they cut current employee hours to remain under the ACA ‘fine’ threshold.  In fact, should the economy be stalling here (as we believe, and as NFIB Nominal Sales seem to indicate), businesses may soon begin to rethink (scale-back) the amount of part-timers they hire going forward.  The second chart: not only have small business expansion plans turned south in the latest reading but remain at levels seen just a few months after the market bottomed in 2009.

With regard to Commercial Banks, loan growth is anemic and looking to head into negative (3-month change) territory.  As well, the deposit/loan ratio remains in record high territory and bank cash/loan ratio is notching new highs.  Commercial Banks still reluctant to expand their loan portfolios...

Next chart: the trend moving higher (Commercial Bank Loans relative to Government Securities holdings) would seem to indicate banks see a positive loan environment, yet this is deceiving.  From 2004 to mid-2008, bank holdings of Government Securities were basically flat (up +1.8%) while loans increased +57%.  Since the start of 2013, Loans are up +0.6% (yet stalling here...see 3-month change in loans chart) while there has been a decrease of -6% in Government Securities.  For purposes of comparison, loan growth for the first 9 months of 2004 was +7.6% vs. +0.6% so far in 2013.  Again, loans are sluggish (flat-lining) at best and any further rise in this ratio may not indicate an expansion in loans...the opposite of what was true in 2004-2008.

Digging into the Loan data a bit further:  In March 2010, The application of new accounting rules caused a large amount of loan balances that had been securitized and sold to be included in banks’ reported loan balances.  If we strip out this number (about $430 billion), Total Commercial Bank Loans & Leases are down -3.8% since the market bottomed in 2009, while the S&P is up +150% and Margin Debt is up +122%.  To look at it another way, Total Federal Reserve Bank Credit is up $1.8 trillion since the market bottom in 2009 while actual loan growth (again, stripping out the $430 billion) is down -$276 billion.

As for recent headlines out of Europe: Eurozone Industrial Production drops from +0.6% to -1.5% (June to July); bad debts at Italian banks rose +22.2% from a year ago; Italy looks to raise its 2013 debt ceiling 22.5% (from EUR 80 billion to EUR 98 billion); Portugal plans to cut State Worker Pensions by 10%; Portugal 5-year Credit Default Swaps up 22.5% since August 15th (up 20% on the year); Poland seizes half of citizens’ pensions; France revises its 2014 deficit forecast from 2.9% to 3.6% and lowers growth forecast from 1.2% to 0.9% ; ECB says Spain likely not to meet deficit forecast; Spain’s public debt reaches record levels (+15% year-over-year); Eurozone Unemployment notches record levels; ECB says Greece may need one, possibly two more bailout packages.  Exactly a month ago, headlines cheered a Europe officially out of recession.  That was fast.

It reminds of July 11, 2008 when an optimistic Chris Dodd, speaking of the rout in Fannie Mae and Freddie Mac shares, said:  “The economics are fine in these institutions and people need to know that”. Fannie Mae was $13.20/share at the time of that statement. Less than 4 months later it was $0.30/share.  That was fast too.

Yes, all is fine in Europe.  Nothing to see here.  Moving on...

Should rates continue to rise, not only will Real Estate be under significant pressure but we will be staring down the barrel of a potential bursting of the derivative bubble.  As of Q1 data from the Bank for International Settlements, total global notional value of interest rate derivative contracts stands at $489.7 trillion ($441.3 trillion if you exclude option contracts).  To put this number into perspective, it equates to 8.5x Total Global Exchange Market Capitalization, and 7x global GDP.  In the US alone, total notional value of all derivatives are 17x total Commercial Bank Assets (13.5x if looking at interest rate derivatives), and is 3.5x Total US Household Net Worth.

The average derivative/asset ratio at the top 3 banks (JPM, Citi, BofA) as of Q1 stands at 37.6x. This is higher than the average leverage ratio (32x) of Lehman, Bear Stearns and Merrill Lynch leading up to the 2008-09 recession.  The average exposure of these 3 banks to interest rate contracts (% of total derivatives) is 78.7%.  A mere 0.1% loss on interest rate derivative contracts would send these banks reeling, a 3.5% loss would wipe out all of their assets, and a 10% loss would exceed all US Commercial Bank Assets combined.

The derivative implosion in 2008-09 was largely confined to Credit Derivatives, which globally as of Q1 stand at $25 trillion, down from $58.2 trillion in Q4 2007 (note: US Commercial Banks still have $13.9 trillion in credit derivatives on their books...which is $213 billion more than their total combined assets).  Interest rate derivatives are 17.6x this number which, under higher rates, could make this the largest financial bubble to burst in history.  In sum, if interest rates continue to rise, the global banking system will likely be under unprecedented stress with failures virtually guaranteed.  Failures would be seen across a wide swath of entities including commercial banks, investment institutions, states/municipalities, and insurance companies.

Our final chart gives a good view of the economic landscape....the ‘new normal’ as it were.  It would seem clear the stock market is completely divorced from reality.

The prevailing wisdom is that the financial crisis is behind us.  In part, the belief is that time & distance alone have sufficiently insulated us from further market turmoil.  Yet, time & distance have simply allowed for massive accumulation of debt, an ever- expanding Fed balance sheet with no realistic (sans-market-shock) exit plan, nothing more than a bad comb-over for the Real Estate sector, zero resolution to unfunded liabilities/entitlement programs, record disability & food stamp recipients, record low labor force participation rate, stressed states/municipalities, a five-fold increase in federal student loan debt, a surge in margin debt, foreigners selling our debt at a steady clip, etc.  Old and new bubbles and troubles everywhere.

The thought is that all of this remains in the rear-view mirror.  In our estimation, the coming flood of negative data/developments (especially if/when interest rates move higher) will close the time/distance gap rather rapidly and we will soon discover that Objects In Mirror Are Closer Than They Appear.  Much, much closer.

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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Eric King

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