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Quarterly Market Brief & Stock Pick from Wealthbuilder.ie

Wealthbuilder.ie

On the 21st. May we wrote the following:

“Due to lower highs and lower lows on both the Dow Industrials and Dow Transports there is

now a change of trend in existence in the markets. How long this correction will continue no

one can be sure. A bounce can be expected at any time due to the fact that the market is

terribly oversold based on Stochastics and the McClennan Summation Index. However, I do

not think we have seen support lows in place yet. What is the reason for this capitulation? As

mentioned in my last brief I believed the “flash crash” of the 6th. May mortally wounded all

indices from a technical pointy of view. It will take some time, probably the whole summer,

before some degree of confidence is restored.”

full report in PDF here Wealthbuilder_Quarterly_Brief

Keiser report No.19

If you want to really know what is going on then look at this video
covered in the video is Gold, IMF, UK deficit, George Soros, and many more stories

Is the Irish government involved in these kind of financial tools and were there advised by Goldman sacks?

Can they categorically state on the floor of the Dail that they have no exposure to any of these kinds of toxic synthetic financial tools?

Can they categorically state that none of the Irish financial instustions have any of these derivatives on their books and if they so state then why are they looking for traders in these kinds of derivatives at NAMA

see link http://thepressnet.com/2010/01/16/irish-banks-derivative-trading-losses/

It is my belief that not only are the banks up to their tonsils in these derivatives and are hiding huge losses, the Government are actively concealing such losses from the General public.

we may even be in the same situation as Greece ,because the government will not come out and deny that they have not used the services of Goldman Sacks in the setting up of such derivatives.

Irish Banks Derivative trading losses

I believe that the banks Allied Irish Bank, Bank of Ireland and Anglo Irish Bank are all hopelessly exposed to huge losses as a result of Derivative trading

They should be asked to come clean and give categorical assurances on their Derivative Trading

Apart from the huge losses on their propriety /mortgages business.ie (subprime desaster),  there is another enormous source of losses from the same banks and that is their trading in the “BOND MARKET” again I believe that they have huge exposure here as well

These Banks have lent approximately 400 billion Euros and all of it borrowed from foreign banks, these funds would have had to have  “Hedging ” or have an insurance taken out ,in case of default !

So what kind of insurance did they get then if not Derivatives?

Derivatives typically have a large notional value. As such, there is the danger that their use could result in losses that the investor would be unable to compensate for. The possibility that this could lead to a chain reaction ensuing in an economic crisis, has been pointed out by famed investor Warren Buffett in Berkshire Hathaway‘s 2002 annual report. Buffett called them ‘financial weapons of mass destruction.’ The problem with derivatives is that they control an increasingly larger notional amount of assets and this may lead to distortions in the real capital and equities markets. Investors begin to look at the derivatives markets to make a decision to buy or sell securities and so what was originally meant to be a market to transfer risk now becomes a leading indicator.

These Derivatives were traded like confetti at a wedding and have about the same value now !

 If a bank goes bust, deals are just canceled and the residual amount is transferred to the legal department. Everyone can live with that. The burden is transferred from the agent (trading floor) to the principal (the shareholders). Because risk cannot be hedged properly by market professionals, it needs to be taken over by a succession of outsiders. If outsiders are not willing to play anymore (Derivative traders) or go bust, (AIG) then risk concentrates again inside the market, where it cannot be hedged and goes Bust.

So derivatives are only as safe as their underlying  risk is liquid and delta-hedgeable.

Brian Cowen was the Finance Minister who oversaw all this gambling activity at the major Irish banks and should be made accountable for the Total Destruction of the Irish financial industry 

Brian Lenihian  is colluding with the Greens to hide the catastrophic nature of the major Banks debts! Indeed I go so far as to say they may be kept in the dark as to the combined total losses which I estimate at Anglo Irish Bank to be somewhere north of 120 Billion Euros alone!

If I am wrong, then prove me wrong, by showing us the figures of Anglo Irish Bank .

Open the books let us see for ourselves

Don’t let anyone tell you that Anglo was nor dealing in Bonds or Derivative Products,

  I call on the Minister of Finance to come out on to the Dail floor and tell the Nation that the Irish Banks have no exposure to these Derivative Markets.

 But before you do I have a question for you!

Why was there this amendment made to the NAMA Legislation?

Page 15 of the draft NAMA legislation says that the definition of a “credit facility” includes instruments such as”a hedging or derivative facility.”  Section 56, starting on page 46, then defines eligible assets for purchase by NAMA as a range of different types of “credit facilities” as well as “any other class of bank asset (Derivatives) the acquisition of which, in the opinion of the Minister, is necessary for the purposes of this Act.”

Why is the National Treasury Management Agency actively looking to recruit a Derivatives Valuation Service Provider to NAMA?

And before you deny that look below!

Title: Appointment of a Derivatives Valuation Service Provider to NAMA
Published by: National Treasury Management Agency
Publication Date: 19/08/2009
Application Deadline:  
Notice Deadline Date: 08/09/2009
Notice Deadline Time: 16:00
Notice Type: Contract Notice
Has Documents: Yes
Abstract: On the direction of the Minister for Finance, the NTMA is seeking to appoint a Derivatives Valuation Service Provider to provide valuation services (the “Services”) in respect of derivatives positions which will be transferred to NAMA. It is envisaged that one firm will be appointed to conduct the valuation of derivative positions transferring from all of the participating institutions. The Service Provider appointed will be expected to: A. Interact closely with participating institutions in order to extract key data items agreed with NAMA and required in order to carry out the valuation of derivatives. B. Determine derivatives’ valuations based on market-accepted methodologies and market rates. Valuations will incorporate adjustments which will be based on the creditworthiness of the derivatives’ counterparties and which will be specified in guidelines agreed by NAMA with the service provider.

C. The Service Provider will be required to work closely with an Audit Co-ordinator appointed by NTMA. The Audit Co-ordinator will collate valuation data and conduct audits of valuations provided by the Service Provider.

D. The Service Provider will be expected to provide a certificate to NAMA on completion of all valuations which confirms that the valuation of derivatives has been carried out on the basis of a market-accepted methodology and assumptions provided by NAMA and represents a fair assessment of the market value of such derivatives.
CPV: 66000000.

Well Boys I can save you the trouble,

There is no way in hell that anybody can put a valuation on these toxic papers /contracts .

With the collapse of the AIG the effective market no longer exists

To prove my point

When Lehman Brothers declared bankruptcy, it triggered the transfer of large sums in the CDS market to insure buyers of Lehman credit default risk protection against all losses from that event. The sellers of these contracts received the Lehman debt and in return they were obligated to pay the contract buyers (the insured parties) enough money to make the buyers “whole” i.e. to give them their full investment in the bonds back as if they had never bought the Lehman bonds.

The auction for Lehman’s debt occurred on Friday afternoon and the final auction price was $8.62. This means that for each $100 initial par value, the debt is only worth $8.62. The sellers of Lehman CDSs (Derivative contracts) were obligated to pay the insured counterparties 91.375% of the bonds’ face value and, in return, they received the bonds.

Who had to foot the bill for Lehman CDSs (Derivative contracts) Why AIG of course!

There was a 92% loss on the stated value of the Lehman contracts and I would suspect that there in now no value on all other outstanding contracts .Why ,because there isn’t enough money printed all over the world to pay for all the contracts that have being entered into .

The perceived values of these Derivatives were based on “thrust” and not real true values!

  

What are Derivates????

Here is a short introduction I manages to find /compile for those of you that are interested in this the mother of all financial scams.

The current difficulties we are witnessing in the financial markets, is just one leg of a 3 legged stool that has come off .The next leg that is about to fall off is the Derivatives leg

and this is

Derivatives are contracts whose value is “derived” from the price of something else, typically, ‘cash market investments’ such as stocks, bonds, money market instruments or commodities.

An equity derivative, for example, might give you the right to buy a particular share at a stated price up to a given date. And in these circumstances the value of that right will be directly related to the price of the “underlying” share: if the share price moves up, then the right to buy at a fixed price becomes more valuable; if it moves down, the right to buy at a fixed price becomes less valuable.

1.

This is but one example of a particular kind of derivative contract. However, the close relationship between the value of a derivative contract and the value of the underlying asset is a common feature of all derivatives.

There are many different types of derivative contract, based on lot of different financial instruments; share prices, foreign exchange, interest rates, the difference between two different prices, or even derivatives of derivatives. The possible combinations of products are almost limitless. What then are derivatives used for?

Derivatives have two main uses: hedging and trading.

Suppose you have a position in a cash market which you want to maintain for whatever reason – it may be difficult to sell, or perhaps it forms part of your long term portfolio. However, you anticipate an adverse movement in its price. With a derivatives hedge it is possible to protect these assets from the fall in value you fear. Let’s see how.

As we have already said, the value of a derivative contract is related to the value of the underlying asset it relates to. Because of this, with derivatives, it is possible to establish a position (with the same exposure in terms of the value of the contract), which will fluctuate in value almost in parallel with an equivalent underlying position.

It is also possible with derivative contracts to go either long or short; in other words you can take an opposite position to the position you have in a particular underlying asset (or portfolio).

Hedging involves taking a temporary position in a derivatives contract(s), which is equal and opposite to your cash market position in order to protect the cash position against loss due to price fluctuations. As the price moves, loss is made on the underlying, whilst profit is made on the derivative position, the two canceling each other out.

Protecting assets which you hold from a fall in value by selling an equivalent number of derivative contracts, is known as a short hedge.

 2.

A long hedge, on the other hand, involves buying derivatives as a temporary substitute for buying the underlying at some future point. This is to lock in a buying price. In other words, you are protecting yourself against an increase in the underlying price between now and when you buy in the future.

Cash and derivatives markets move together more or less in parallel, but not always at the same time, or to the same extent. This introduces a certain amount of what is called hedge inefficiency, which may need to be adjusted. At other times, an imperfect hedge might be knowingly established, which leaves a small exposure to the underlying market depending on the risk appetite of the individual.

Trading

Derivatives trading, as opposed to hedging, means buying and selling a derivatives instrument in its own right, without, that is, a transaction in the underlying. For instance, a trader can get exposure to the US government bond market by buying and selling US government bond futures without ever dealing in the actual bonds themselves.

The aim when trading derivative contracts is profit, not protection.

The risks associated with derivatives are very different to those incurred in the cash markets. When buying a share for example – a long position – your maximum possible loss is the amount you originally paid for it.

Derivatives, on the other hand, exhibit a lot of different risk profiles. Some provide limited risk and unlimited upside potential.

For example, the risk of loss with a derivative contract which confers a right to buy a particular asset at a particular price is limited to the amount you have paid to hold that right. However, profit potential is unlimited.

Others display risk characteristics in which while your potential gain is limited, your losses are potentially unlimited. 

For example, if you sell a derivative contract which confers the right to buy a particular asset at a particular price, your profit is limited to the amount you receive for conferring that right, but, because you have to deliver that asset to the counterpart at expiry of the contract, your potential loss is unlimited.

Because of the wide range of risk profiles which derivative contracts exhibit, it is vital that you have a clear understanding of the risk/return characteristics of any derivative strategy before you execute it.

Leverage

Apart from the structure of the instrument itself, the source of a lot of the risk associated with derivative contracts stems from the fact that they are leveraged contracts.

Derivative products are said to be ‘leveraged’ because only a proportion of their total market exposure needs to be paid to open and maintain a position. This percentage of the total is called a ‘margin’ in futures markets; and a ‘premium’ in options markets. In this context, ‘leverage’ is the word used in all English-speaking derivative markets.

Because of leverage your market exposure with derivative contracts can be several times the cash you have placed on deposit as “margin” for the trade, or paid in the form of a premium.

Leverage, of course, can work both in your favor and against you. A derivative which gives you a market exposure of 10 times the funds placed on deposit is excellent if prices are moving in your favor, but not so good if they are moving against you, as losses will mount up very rapidly.

 3.

In other words, with leveraged positions, losses are magnified as well as gains.

Follow link to see advertisement

http://www.e-tenders.gov.ie/search/show/search_view.aspx?ID=AUG125404

What is the Bond Market??

 Bond marke

From Wikipedia,

 
 
 
 
 
 
 

The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. As of 2006, the size of the international bond market is an estimated $45 trillion, of which the size of the outstanding U.S. bond market debt was $25.2 trillion.

Nearly all of the $923 billion average daily trading volume (as of early 2007) in the U.S. bond market takes place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges.

References to the “bond market” usually refer to the government bond market, because of its size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve.

 

Market structure

Bond markets in most countries remain decentralized and lack common exchanges like stock, future and commodity markets. This has occurred, in part, because no two bond issues are exactly alike, and the number of different securities outstanding is far larger.

However, the New York Stock Exchange (NYSE) is the largest centralized bond market, representing mostly corporate bonds. The NYSE migrated from the Automated Bond System (ABS) to the NYSE Bonds trading system in April 2007 and expects the number of traded issues to increase from 1000 to 6000.[1]

 Types of bond markets

The Securities Industry and Financial Markets Association classifies the broader bond market into five specific bond markets.

Bond market participants

Bond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both.

Participants include:

Because of the specificity of individual bond issues, and the lack of liquidity in many smaller issues, the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds. In the United States, approximately 10% of the market is currently held by private individuals.

Bond market volatility

For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.

But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds fall, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rise, since new issues pay a lower yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country’s monetary policy and bond market volatility is a response to expected monetary policy and economic changes.

Economists’ views of economic indicators versus actual released data contribute to market volatility. A tight consensus is generally reflected in bond prices and there is little price movement in the market after the release of “in-line” data. If the economic release differs from the consensus view the market usually undergoes rapid price movement as participants interpret the data. Uncertainty (as measured by a wide consensus) generally brings more volatility before and after an economic release. Economic releases vary in importance and impact depending on where the economy is in the business cycle.

Bond investments

Investment companies allow individual investors the ability to participate in the bond markets through bond funds, closed-end funds and unit-investment trusts. In 2006 total bond fund net inflows increased 97% from $30.8 billion in 2005 to $60.8 billion in 2006.[2] Exchange-traded funds (ETFs) are another alternative to trading or investing directly in a bond issue. These securities allow individual investors the ability to overcome large initial and incremental trading sizes.

Bond indices

Main article: Bond market index

A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The most common American benchmarks are the Lehman Aggregate, Citigroup BIG and Merrill Lynch Domestic Master. Most indices are parts of families of broader indices that can be used to measure global bond portfolios, or may be further subdivided by maturity and/or sector for managing specialized portfol

Bond market
   
Bond · Debenture · Fixed income
   
Types of bonds by issuer Agency bond · Corporate bond (Senior debt, Subordinated debt) · Distressed debt · Emerging market debt · Government bond · Municipal bond · Sovereign bond
   
Types of bonds by payout Accrual bond · Auction rate security · Callable bond · Commercial paper · Convertible bond · Exchangeable bond · Fixed rate bond · Floating rate note · High-yield debt · Inflation-indexed bond · Inverse floating rate note · Perpetual bond · Puttable bond · Reverse convertible · Zero-coupon bond
   
Securitized Products Asset-backed security · Collateralized debt obligation · Collateralized mortgage obligation · Commercial mortgage-backed security · Mortgage-backed security
   
Derivatives Bond option · Credit derivative · Credit default swap · CLN
   
Pricing Accrued interest · Bond valuation · Clean price · Coupon · Day count convention · Dirty price · Maturity · Par value
   
Yield analysis Nominal yield · Current yield · Yield to maturity · Yield curve · Bond duration  · Bond convexity  · TED spread
   
Credit and spread analysis Credit analysis · Credit risk · Credit spread · Yield spread · Z-spread · Option adjusted spread
   
Interest rate models Short rate models · Rendleman-Bartter · Vasicek · Ho-Lee · Hull-White · Cox-Ingersoll-Ross · Chen · Heath-Jarrow-Morton · Black-Derman-Toy · Brace-Gatarek-Musiela
   
Organizations Commercial Mortgage Securities Association (CMSA) · International Capital Market Association (ICMA) · Securities Industry and Financial Markets Association (SIFMA)

Retrieved from “http://en.wikipedia.org/wiki/Bond_market

     See also Link

(http://www.investinginbonds.com/)

The Derivatives bubble

 

 


 

Derivatives have grew into a massive bubble, some USD
1,144 Trillion
by 2007. The new derivatives bubble was fuelled by five key economic and political trends:

  1. Sarbanes-Oxley increased corporate disclosures and government oversight
  2. Federal Reserve’s cheap money policies created the subprime-housing boom
  3. War budgets burdened the U.S. Treasury and future entitlements programs
  4. Trade deficits with China and others destroyed the value of the U.S. dollar
  5. Oil and commodity rich nations demanding equity payments rather than debt

In short, despite Buffett’s clear warnings,”
in my view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

That warning was in Buffett’s 2002 letter to Berkshire shareholders. He saw a future that many others chose to ignore. On Buffett’s mind also was His acquisition of General Re four years earlier, about the time the Long-Term Capital Management hedge fund almost killed the global monetary system. How? This is crucial: LTCM nearly killed the system with a relatively small $5 billion trading loss. Peanuts compared with the hundreds of billions of dollars of subprime-credit write-offs now making Wall Street’s big shots look like amateurs. Buffett tried to sell off Gen Re’s derivatives group. No buyers. Unwinding it was costly, but led to his warning that derivatives are a “financial weapon of mass destruction.”


A massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession. In five years comes from the most recent survey by the Bank of International Settlements, the world’s clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier’s window at a racetrack or casino, where you’d place a bet or cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs for the tainted drugs and lead-based toys we buy.

To grasp how significant this bubble is let’s look at these numbers

U.S. annual gross domestic product is about $15 trillion

  • U.S. money supply is also about $15 trillion
  • Current proposed U.S. federal budget is $3 trillion
    • U.S. government’s maximum legal debt is $9 trillion
    • U.S. mutual fund companies manage about $12 trillion
    • World’s GDPs for all nations is approximately $50 trillion
    • Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
    • Total value of the world’s real estate is estimated at about $75 trillion
    • Total value of world’s stock and bond markets is more than $100 trillion
    • BIS valuation of world’s derivatives back in 2002 was about $100 trillion
    • BIS 2007 valuation of the world’s derivatives is now a whopping $516 trillion

Moreover, the folks at http://www.bis.org/statistics/derstats.htm
BIS tell me their estimate of $516 trillion only includes “transactions in which a major private dealer (bank) is involved on at least one side of the transaction,” but doesn’t include private deals between two “non-reporting entities.” They did, however, add that their reporting central banks estimate that the coverage of the survey is around 95% on average.

Also, keep in mind that while the $516Trillion “notional” value (maximum in case of a meltdown) of the deals is a good measure of the market’s size, the 2007 BIS study notes that the $11 trillion “gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets.”


The fact is, derivatives have become the world’s biggest “black market,” exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations. And in today’s slowdown, plus a volatile global market, Wall Street knows derivatives remain a lucrative business.

Recently Pimco’s bond fund king Bill Gross said “What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.” In short, not only Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America’s leaders can’t “figure out” the world’s USD .1,144 Trillion $ derivatives.(see below)

BIS is primarily a records-keeper, a toothless tiger that merely collects data giving a legitimacy and false sense of security to this chaotic “shadow banking system” that has become the world’s biggest “black market?”

Here are some of the types of derivatives that are out there.

Have you ever heard of them?

Chances are your local bank manager hasn’t either!

But I bet his Head office has a few slick traders that are trading these on a Daly bases and I’m

Pretty sure that they must be in it up to their necks!

  • Foreign exchange contracts
  • Listed credit derivatives
  • OTC ( over the counter)
  • Forwards and forex swaps
  •  Currency swaps
  • Options on Interest rate contracts
  • Forward rate agreements
  • Interest rate swaps
  • Options on
    Equity-linked contracts
  • Forwards and swaps
  • Options on Gold & Other commodities
  • Credit default swaps
  • Single-name instruments
  • Multi-name instruments
  • Unallocated instruments
  • CDS (credit default swaps)
    CDSs are derivatives whose cost is determined using financial models and by arbitrage relationships with other credit market instruments such as loans and bonds from the same ‘Reference Entity’ to which the CDS contract refers

     

  • ABS (asset-backed securities)
  • MBS (mortgage-backed securities)
  • OTC derivatives
  • Futures

    To name but a few!

  •  According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland — the central bankers’ bank — the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:

  • 1. Listed credit derivatives stood at USD 548 trillion;

    2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:

    a. Interest Rate Derivatives at about USD 393+ trillion;

    b. Credit Default Swaps at about USD 58+ trillion;

    c. Foreign Exchange Derivatives at about USD 56+ trillion;

    d. Commodity Derivatives at about USD 9 trillion;

    e. Equity Linked Derivatives at about USD 8.5 trillion; and

    f. Unallocated Derivatives at about USD 71+ trillion.

 

For a more indebt information on the latest actual derivative figures please follow this link

It makes very interesting reading

Link  http://www.bis.org/statistics/derstats.htm

Source http://www.elliottwavetechnology.com

Tom Foremski at http://www.siliconvalleywatcher.com/mt/archives/2008/10/the_size_of_der.php

Russian-Roulette

 

Let’s consider a well publicized recent sale of Russian gold bullion to itself:

I noticed this article to-day by Rob Kirby

And it is a very worrying development indeed!


Russia sells gold to itself

December 14, 2009 3:47pm by Emma Saunders

The Russian central bank data table appended below is the World Gold Council. It states that Russia possesses 607 [actually, now officially 640 tonnes with the addition of the recent 30-ish tonne purchase from itself] metric tonnes of gold bullion.
will spend $1bn next week, buying 30 metric tons of gold from Gokhran, the state repository. Gokhran had planned to sell 20-50 MT on the open market, but cancelled after news of the sale leaked. The sale would have helped plug Russia’s budget deficit, and, apparently, purchase some diamonds from state-run miner Alrosa….

Does this not strike you as being odd?

In case you missed it, Russia announced that they are selling gold to THEMSELVES!?!?

The source of the gold

The revelation that Russia is “selling gold to itself” and lack of acknowledgment that Gokhran exists – is a MAJOR omission by the World Gold Council in their aggregate gold bullion data.


++Additionally, the World Gold Council also reports that as of October 2009, gold exchange-traded funds held 1,750 tonnes of gold for private and institutional investors.

The World Gold Council’s data keeper is GFMS Ltd. The GFMS web site makes the following claim:

GFMS is the world’s foremost precious metals consultancy, specializing in research into the global gold, silver, platinum and palladium markets.

GFMS is based in London, UK, but has representation in Australia, India, China, Germany, France, Spain and Russia, and a vast range of contacts and associates across the world.

Our research team of fifteen full-time analysts comprises qualified and experienced economists and geologists; while two consultants contribute insights on important regional markets.

Executive Chairman Philip Klapwijk and CEO Paul Walker appear regularly at international conferences and seminars, and their articles have been widely published. All analysts travel regularly and extensively to stay in touch with GFMS’ unrivalled network of contacts and sources of information around the world.

With 15 full-time analysts, two consultants and “representation” in Russia – how is that GFMS [and by extension the World Gold Council] can omit such a large hoard as stored at Gokhran and materially misreport the nature of Russian gold reserves? They didn’t even mention the existence of Gokhran in a footnote.

Gold professionals who have been inside Gokhran [Russian] State bullion depositories have provided me with personal accounts of this bullion depository. They report scenes reminiscent of the movie Gold Finger – on steroids – literally countless metric tonnes of neatly stacked gold bullion.

So, a better question might be, what else – regarding GOLD – has GFMS and the World Gold Council not reported or omitted?

Getting A Beat On Where the World’s Physical Gold Is Stored

It is generally accepted that for the entirety of mankind’s existence on this planet – the earth’s crust has yielded roughly 160 thousand metric tonnes of gold. The World Gold Council / GFMS identifies where roughly 32 thousand tonnes of that total are located.

We might add to what’s listed above, the following:

“No one knows exactly how much gold has been passed from generation to generation and is now stashed in safe deposit boxes across India. But bullion analysts estimate Indian families are sitting on about 15,000 tonnes of gold worth more than $US550 billion ($A600 billion).”

Then, if we conservatively assume that the rest of the world has as much as India stored away in safe deposit boxes – that’s another 15,000 metric tonnes.

Therefore by using reported World Gold Council / GFMS data plus some very conservative assumptions, we can approximately account for 62,000 metric tonnes of the world’s roughly 160,000 metric tonnes ever mined.

By the process of elimination and adjusting for the 62 thousand metric tonnes referenced above, there is a residual 98 thousand metric tonnes of physical gold bullion; the location of which cannot be readily identified.

The very nature of World Gold Council / GFMS data may be characterized as being static and don’t tend to change much year-over-year. This demonstrates that the owners of gold bullion DO NOT GENERALLY
TRADE THEIR PHYSICAL STASHES
– they sit on them!

The Conundrum That “IS” the London Bullion Market Association [LBMA]

The LBMA is considered to be the world’s foremost physical gold market. Here is their data on the number of ounces of gold “transferred” DAILY – by month, year-over-year – from Nov. 08 – Nov. 09:

Month Millions of Ounces Transferred / Day
Dec 08 17.5
Jan 09 18.8
Feb 09 23.8
Mar 09 22.2
Apr 09 20.5
May 09 21.9
Jun 09 20.5
Jul 09 17.7
Aug 09 16.4
Sep 09 20.6
Oct 09 20.8
Nov 09 21.5
Total 242.2

There are 22 business days per month, so the LBMA claims to have traded 151,046 metric tonnes of gold in the most recent 12 month period.

242.2
x
22 = 5,328 million physical ozs or 151,046 metric tonnes

The LBMA reports that they have “transferred” or traded 151,046 metric tonnes of gold – a commodity that when folks possess it, they are demonstrably inclined NOT TO trade it. Using another bench mark, annual global mine production is in the neighborhood of 2,500 metric tonnes. The LBMA claims to have sold last year’s global mine supply over 60 times in 12 months.

The LBMA claims to do this year-in, year-out.

This implies that ANY LBMA physical gold stocks are HIGHLY LEVERAGED through trade in paper gold

London is but one exchange where gold trades. Others include N.Y., Tokyo, Dubai, Bombay and different points in China. Don’t forget, physical ounces traded on ANY of these exchanges are additional ounces that London cannot be trading.

The reality is that every physical ounce of gold reported to be in the vaults of the LBMA and exchanges in general, is sold tens and perhaps more than a hundred times over in paper form. This paper selling suppresses what would otherwise be the freemarket gold price.

The Russians are known to be very shrewd and calculating. It makes one wonder whether the Russian announcement of a sale of gold bullion – TO THEMSELVES – might not have been a “tell” signaling their intention to not only withhold physical metal from the market and ensure that paper promises of delivery of real metal are honored.

Could it be that the Russians are really signaling that the assignment of false, arbitrary values [using futures / derivatives] to finite resources will no longer be tolerated?

If so, the real leverage is in owning physical gold bullion – not the paper promises.

The Elephant In The Room

More Pieces of the Puzzle 

by Rob Kirby | August 4, 2009


This following article was an address by Rob Kirby at the Gold Anti-Trust Action Committee Inc., GATA Goes to Washington — Anybody Seen Our Gold?, at the Hyatt Regency Crystal City Hotel, Arlington, Virginia, Saturday, April 19, 2008. The original address has been updated and added to since new information has come to light.

My name is Rob Kirby – proprietor of Kirbyanalytics.com, proud GATA supporter and frequent contributor to Bill Murphy’s LeMetropolecafe.com. I would like to extend a warm welcome to GATA delegates from all over the world to Washington, D.C.

I’d like to delve into the numbers, or math, showing how J.P. Morgan’s derivatives book cannot be ‘hedged’.

As per their call reports filed with the Comptroller of the Currency’s Office, we know J.P. Morgan’s derivatives book grew by a cancerous 12 Trillion from June 07 to Sept. 07. The OCC’s Quarterly Derivatives Report serves as the public’s only peek into the opaque and murky world of derivatives-flim-flammery.

Flim Flammery is the understatement of the century. In fact, dealer notionals have EXPLODED parabolic-ally in recent years while END USER demand has been static and virtually non-existent.

 

J.P. Morgan’s derivatives book is epitomized by the chart above; it clearly serves no observable or commercially productive purpose, it’s pyramidal in structure and its elephant-sized interest rates derivative composition exerts pressure on the global interest rate complex.

Let’s look at the composition of their book:

 

We’re shown that 65 %, or, 61.5 Trillion of the total is IRS [on page 22 of 32].

Hedging Mechanics of Interest Rate Swaps > 3 yrs. Duration

Interest rate swaps > 3 yrs. in duration customarily trade as a “spread” – expressed in basis points – over the current yield of a corresponding benchmark government bond. That is to say, for example, 5 year interest rate swaps [IRS] might be quoted in the market place as 80 – 85 over. This means that the 5 yr. swap is “bid” at 80 basis points over the 5 yr. government bond yield and it is “offered” at 85 basis points over the 5 year government bond yield. Let’s assume that 5 year government bonds are yielding 1.90 % and the two counterparties in question consummate a trade for 25 million notional at a spread of 84 basis points over. Here are the mechanics of what happens: The payer of fixed rate pays [1.90 % + 84 basis points =] 2.74 % annually on 25 million for 5 years. The other side of the trade – the floating rate payer – pays 3 month Libor on 25 million notional, reset quarterly – typically compounding successive floating rate payments at successive 3 month Libor rates so that actual cash exchanges are settled “net” annually. To ensure that the trade remains a “true spread trade” [and not a naked spec. on rates] and to confirm that 1.90 % is a true measure of where current 5 year government bond yields really are – the payer of the fixed rate actually buys 25 million worth of physical 5 year government bonds – at a price exactly equal to 1.90 % – from the receiver of the fixed rate at the front end of the trade. So, in this regard, we can say that 25 million IRS traded on a spread basis creates a “need” for 25 million worth of 5 year government bonds – because it has a 5 year bond trade of 25 million embedded in it.

  • Interest rate swaps of duration < 3 years are typically hedged with strips of 3 month Eurodollar futures instead of government bonds.

In recent years the Chicago Mercantile Exchange [or CME] has developed an interest rate swap – futures based hedging product for the 5 and 10 year terms. I acknowledge the existence of these products but due to their 200k contract size and amounts traded, as reported in archived CME volume data, they do not materially impact the numbers in this presentation.

As demonstrated, Interest Rate Swaps create demand for bonds because bond trades are implicitly embedded in these transactions. Without end user demand for the product – trading for “trading sake” creates ARTIFICIAL demand for bonds. This manipulates rates lower than they otherwise would be.

I learned these basics – first hand – over 15 years as a broker in Capital Markets. My largest client at that time was Citibank Canada – who pioneered these instruments for Citibank worldwide. For the bulk of the 1980’s, Citibank Canada was the largest interest rate derivatives player in the world.

Here’s the breakdown of 12 Trillion in derivatives growth in 3 months:

 

65 % of 12 Trillion, or, 7.8 Trillion of it is Interest Rate Swaps

35 % of 7.8 Trillion, or, 2.73 Trillion requires bond hedges

2.73 Trillion / 66 days per quarter = 41.4 billion in bonds per day

Here’s the math showing that 35 % of interest rate swaps require bond hedges:

 

So, in the latest quarter it took 41.4 billion in bonds per day JUST TO SATISFY HEDGING OF THE GROWTH in their SWAP BOOK.

The existing book minus the growth, or 80 Trillion, – 52 Trillion of that is IRS. 65 % of the 52 Trillion figure – 33.8 Trillion – matures in 3 yrs. or less with the lion’s share of that in under1 year as you can see here:

 

Assume a conservative average maturity of 18 months [6 quarters] then one sixth of 33.8 Trillion, or 5.63 Trillion worth of Swaps roll off and need to be replaced every 3 months.

35 % of 5.63 Trillion, or 2 Trillion, required bond hedges to keep the book static.
 
2 Trillion / 66 days = another 30.3 billion bonds required per day.

So, In Aggregate: J.P. Morgan required more than 71.7 billion worth of bonds each business day – from Jun. 30 to Sept. 30 / 07 – JUST FOR THEIR SWAP BOOK – if it is hedged.

Some, like the OCC themselves, might argue that ‘netting’ – or balancing short against long internally within J.P. Morgan’s book – reduces the amount of bonds required to hedge. Over time netting would have some effect – but “netting” generally occurs at day’s end. This math does not even work intra-day:

According to the U.S. Treasury:

“During the July – September 2007 quarter, Treasury borrowed $105 billion of net marketable debt….”

J.P. Morgan is but one of 20 primary dealers of U.S. treasury securities.

50 % of all Treasury Securities auctioned over this period were 2 yr., 20 yr, or 30 yr. – so they were not used to hedge swaps. This leaves a balance of around 50 billion bonds suitable for hedges.

Treasury also tells us foreign participation in U.S. bond auctions typically tops 20 %. So you’re now left with 40 Billion in “net new” U.S. Treasury Securities – suitable for hedges – to distribute among all domestic players for an entire quarter. The growth component of J.P. Morgan’s book alone, if it’s hedged, requires more than 1.4 billion more than this amount every day!

Bonds required to hedge the growth in Morgan’s Swap book are 1.4 billion more in one day than what is mathematically available to the entire domestic bond market for a whole quarter?

This interest rate swap book is not hedged. J.P. Morgan is the FED.

 

If you believe the yeomen’s work of John Williams of Shadow Gov’t Stats – this helps explain how we get bogus inflation reports from officialdom in the 2 % range when in reality it is running “double-digits”.

Historically, bond vigilantes would have spotted the ruse and sold bonds raising rates of interest to levels commensurate with real inflation rates at 10 % plus the historic premium of 250 points or 12 – 14 % nominal market rates.

If you’re wondering where the bond vigilantes have gone:

They have all lost their jobs. Long ago, the last of the true bond vigilantes sold bonds – intuitively correct I would argue – not realizing that J.P. Morgan’s Swap Book was a “black hole” of stealth artificial demand. They lost their shirts along with their jobs.

Nowadays – bond traders who have chosen to remain employed – resemble trained monkeys and play the game the way their masters intend them to:

 

Monetary authorities have long been pursuing expansionary monetary policies while attempting to cloak their actions by suppressing rising interest rates and other natural market reactions.

This has completely perverted our whole banking and monetary system.

This is why false values have been assigned to a host of financial instruments.

This explains why the gold price has been suppressed. It’s another canary in the coal mine that was vigorously and nefariously silenced.

If you’re wondering why J.P. Morgan never seems to get caught up in any sort of hideous mark-to-market losses concerning their derivatives or hedge book – consider that back in the spring of 2006, Business Week’s Dawn Kopecki reported,

“President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye.”

So do any of you think that J.P. Morgan gets a pass? I would suggest to you that if they had not – our whole financial system would already have collapsed in a heap.

You see folks; hubris has been cast upon us in an attempt to have us believe that wealth is really created on a printing press and on trading desks in N.Y. at J.P. Morgan or Goldman Sachs.

Remember, real wealth really comes from the earth – like gold – just as it always has.

 

 

Copyright © 2009 Rob Kirby
Editorial Archive

 

contact information

Rob Kirby | Kirby Analytics | Toronto, Ontario, Canada | Email | Website

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.or machholz

 

 

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