Hmmm 02 Jun 2012

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THINGS THAT MAKE YOU GO

HmmmA walk around the fringes of nance

02 June 2012 1

For AFREE Subscription to Tings Tat Make You Go Hmmm..... clickHERE

Te anarch is (I am simpliying) on the side o gold: it

ascinates him, like everything that eludes society. Goldhas its own immeasurable might. It need only show itsel,and society with its law and order is in jeopardy. eRnST JnGeR

Who knows?Not meI never lost control

Youre face, to faceWith the man who sold the world

David Bowie, The Man Who Sold The World

Th road to hll ist pavd with gold, its pavd withfaith. Faith in a dollar thats backed by a belief that peo-pl hav faith i othr popls blif i it. Jarod Kintz

Gold was not selected arbitrarily by governments to bethe monetary standard. Gold had developed for manycenturies on the free market as the best money; as the

commodity providing the most stable and desirablemonetary medium. Murray Rothbard
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2.THINGS THAT MAKE YOU GOHmmm...

02 June 2012 2

In the middle of Soth DakotasBlack Hills, near the Wyoming state line, lies theny town of Deadwood (populaon accordingto the 2010 census, 1,270). Despite its evoca-ve name, its probably fair to say that, with-out the recent eponymous HBO TV series, fewpeople would have even heard of a selement

that, in the 1870s took its name from the deadtrees found in its gulch (yes, gulch). Amazinglyenough, despite its size, Deadwood is the countyseat of Lawrence County which is described thusby the US Census Bureau:

the county has a total area of 800 squaremiles, of which 800 square miles is land and 0square miles is water. Dead wood indeed.

A lile more than two miles south-west of Dead-wood lies another town of which few will haveheard; Lead (thats Lead as in feed not Leadas in dead), and Lead has a claim to fame all ofits ow.

Lead was founded on July 10, 1876, aer fourmen; Fred and Moses Manuel, Alex Engh andHank Harney discovered a gold deposit that theywould sell the following year for $70,000 to a trioof mining entrepreneurs which included GeorgeHearst, future father of William Randolph Hearstthe publishing magnate and James Ben Ali Hag-gin, for whom the presgious Ben Ali Stakeshorse race is named.

That $70,000 payment - whichin todays inaon-decimated

dollars, would be worth roughly$1,500,000 - secured the Home-stake Deposit which would turnot to b th largst ad dpst

gold mine in North America, pro-ducing more than 40 million ounc-es of gold over its life unl it wasnally closed in 2002.

A year aer acquiring the mine,Hearst and his partners soldshares in the Homestake Min-

ing Company and listed it on theNew York Stock Exchange. Home-stake would go on to become thelongest connuously-listed NYSE

stock in history unl it nally merged with Bar-rick Gold in 2001.

The story of Homestake Mining has been onmy mind a lot lately as I have watched preciousmetal mining stocks get decimated over the past6 months - reaching levels that they havent wit-nessed since the very depths of 2008 - when

gold was trading a lile below $800. Its hard toget away from gold these days as the bears re-

joice in golds demise whilst the bulls raonal-ize a healthy correcon in an ongoing bull mar-ket, but the one thing everybody who followsgold is confused about is the performance of themining stocks.

A look at the NYSE Arca Gold BUGS (HUI) index(anecdotally, the BUGS in the name of this par-cular index, for those who arent familiar withit, stands for Basket of Unhedged Gold Stocks)

as a proxy for the mining sector shows just howextraordinary the collapse in the mining sectorhas been (chart, top, next page). The senior goldminers, as a group, lost over 40% from their Sep-tember peak when gold hit $1900 to their recenttrough against a comparave fall of only 15% inthe underlying commodity which, even by thestandards previously set by this parcularly skit-sh group, is quite something.

If we overlay the gold price and add the juniorminers we nd that, not only have the juniors

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02 June 2012 3

(perhaps understandably) underperformed fur-ther sll, but that, as a group, they managed tolose over half of their value in the same period(chart, below).

Now, for many latecomers to the world of goldmining stocks, these moves have been enoughto send buyers scurrying for cover, vowing neverto touch these stocks again. As gold hit $1,900last year, hot money that wanted nothing to dowith gold at $800, thought it was expensive at$1,200 and were convinced that the gold bub-ble had burst at $1,500, ocked to the yellowmetal in sure and certain hope of a bonanza. Buta funny thing happened on the way to the ore...um...the price of gold corrected. Fast.

I have spoken at length previously in thesepags abot th dagrs of listig to th

wrong voices when seeking commentaryon gold but for the benet of anyone whomissed that, here are the dos and donts ofthe gold space:

DO listen to:

Eric Spro, Richard Russell, Jim Sinclair, BillMurphy, James Turk, Harvey Organ, JohnEmbry, Pierre Lassonde, Ben Davies, Egonvon Greyerz, Rick Rule, Marc Faber, JohnHahaway and Bill Fleckenstein (amongstothers)

Do NOT listen to:

Warren Bue, Charlie Munger, Bill Gates, JimCramer, Jon Nadler, anyone speaking on CNBCabout gold whose name does not appear on thelist above, your broker (unless he has heard of

AT LEAST 50% of the names on the list ofDos), the FT, the Wall Street Journal and(sorry Dennis) Dennis Gartman.

There are many commentators who have

been right about gold for 12 straight yearsand there are many who have arrived atthe party late and proceeded to apply thewrong metrics to gold when aempngto predict its future movements. My ad-vice? Listen to the former and ignore thelaer. But I digress...

Lets get back to Homestake Mining, shallwe? Specically, its performance duringTh Grat Dprssio.

By 1930, HomestakeMining had been paying connuous dividendsfor 50 years but during the period 1929-1935,when the US stock market was in a tailspin asDepression gripped the world, Homestakesperformance was nothing short of stagger-ingits share price (parcularly in 1930, 1931and 1932before Roosevelts Execuve Order6102 conscated gold from US cizens) soar-ing as the Dow Jones nosedived. In that six-yearperiod, as the price of Homestakes shares leapt

SOURCE: BLOOMBERG

SOURCE: BLOOMBERG

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02 June 2012 4

almost 600%, it was accompanied by similar per-formance in both earnings AND the companysdividend payoutthe former going from $4.16in 1929 to $32.43 in 1935 (thats compound EPSgrowth of 41% annually) while the laer, by theme 1935 rolled around, had jumped from $7 in1920 to $56 by 1935 as the company connuedto pay out 8-10% of its earnings as a dividend.

Now, when this discussion arises, many peoplelike to point out the fact that the ocial price ofgold in US dollars at that me was xed, and thatsurely this helped drive investment dollars intogold mining shares as it limited the downside inthe price of the metal and there is a lot of meritin that argument aer all, who WOULDNTfeel happy invesng in mining shares if they

knew for certain that the price of gold wouldnot go down? Unfortunately, where the price ofanything is xed by certain pares, that xingcan go in both direcons and that is exactly whathappened in the late-1920s/early-1930s.

Between 1924 and 1930, withthe US on a gold standard, the price of goldtraded in an incredibly narrow range between$20.69 and $20.63 and it was this stability whichsurely drove many into the welcoming arms of

gold mining shares as the worldaround them began to implode.

But then came 1931 and, withdeleveraging and deaon theorder of the day, the gold pricefell from an average of $20.65 in1930 to an average of $17.05 in1931a decline of almost 20%in a year.

As you can see from the chart(le), during that me the priceof Homestake Mining almostdoubled as the Dow Jones Indus-

trial Average lost around 90% ofits val ad it kpt o risig th

following year as gold recoveredall its losses and added a few ex-tra pennies for good measureaveraging $20.69 in 1932 whilethe Dow connued to languish.

As 1932 turned into 1933, there was a whi ofpanic in the air and so it was, on April 5th, 1933,that President Roosevelt issued Execuve Or-der 6102 forbidding the Hoarding of Gold Coin,

Gold Bullion, and Gold Cercates within theconnental United States and forcing holdersto sell their gold to the government at the man-dated price of $20.67 ($371 in todays dollars):

(Wikipedia): Execuve Order 6102 required

all persons to deliver on or before May 1,

1933, all but a small amount of gold coin,

gold bullion, and gold cercates owned by

them to the Federal Reserve, in exchange for

$20.67 per troy ounce. Under the Trading

With the Enemy Act of 1917, as amended by

the recently passed Emergency Banking Actof March 9, 1933, violaon of the order was

punishable by ne up to $10,000 ($167,700 if

adjusted for inaon as of 2010) or up to ten

years in prison, or both. Most cizens who

owned large amounts of gold had it trans-

ferred to countries such as Switzerland.

Order 6102 specically exempted customary

use in industry, profession or arta provi-

sion that covered arsts, jewellers, densts,

and sign makers among others. The order

-100%

0

+100%

+200%

+300%

+400%

+500%

+600%

+700%

Homestake Mining Co.

Dow Jones Industrial Average

1949

1948

1947

1946

1945

1944

1943

1942

1941

1940

1939

1938

1937

1936

1935

1934

1933

1932

1931

1930

1929

1928

Homestake Mining vs Dow Jones Industrial Average

Percentage Performance

1928 - 1949

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02 June 2012 5

further permied any person to own up to

$100 in gold coins (a face value equivalent to

5 troy ounces (160 g) of Gold valued at about$7800 as of 2011). The same paragraph also

exempted gold coins having recognized spe-

cial value to collectors of rare and unusual

coins. This protected gold coin collecons

from legal seizure and likely melng.

Ad thats how ths thigs td to go, folks.

The twist, however, came immediately aer theenactment of Execuve Order 6102:

The price of gold from the Treasury for inter-

naonal transacons was thereaer raised

to $35 an ounce ($587 in 2010 dollars). The

resulng prot that the government realized

funded the Exchange Stabilizaon Fund es-

tablished by the Gold Reserve Act in 1934.

Th resulng prot that the government real-

izedcould have been worded in another way, solets run it through Google Translate and convertit from Ocialese into Realish:

the resultant 40% overnight devaluaon of the

dollar

So what did this 40% devaluaon in the price ofthe dollar do to gold mining shares? Well, usingHomestake Mining as our proxy again, we can

see from the chart on the previous page that ,at the me of the conscaon, it was up roughly

400% in value over the previous ve years, butfrom there it climbed relentlessly higher as theprice of gold was revalued upwards, increasingits prots by around 50% almost overnightpeaking around 600% higher mid-1938 than ithad been ten years prior, with the Dow Jones slloundering 50% below its 1928 level.

So, gold miners proved to be an acutely smartinvestment through the Great Depression, com-pletely disavowing the noon that owning suchstocks in a deaonary environment was a fool-

ish way to invest ones money.

The performance of gold and the mining stocksduring the inaonary vortex of the 1970s is farfresher in the collecve memory and, seemingly,far asir for th avrag ivstor to gt thir

head aroundlikely because a rising de oatsall boats so people have a far easier me gengtheir heads around rising prices being good forthis parcular corner of the investment universe.

So ow lts fast-forward to 2012 ad tak a look

at the current state of the world and, in parcu-lar, gold and gold-mining stocks

Since its peak at $1,900 in Sep-tember of 2011, gold has undergonea correcon of perfectly healthyproporonsroughly 18% to therecent low print of $1,539and isin the process of building a base be-fore it makes another move higher.(NB I began wring this piece on

Thursday BEFORE golds stunning

breakout performance on Friday af-

ter the disappoinng US data)

Why the certainty? Lets recap just acouple of the factors that aect theprice of gold (and by extension themining stocks) and try to make anassessment of the situaon.

Any aempt to gure out thelikely movement of the gold priceshould begin with the acons of the

$0

$500

$1,000

$1,500

$2,000

20112000199019801970196019501940193019201910190018901880187018601850

1933

FDR RevaluesGold At $35

1973

Nixon RevaluesGold At $42.22

1968

Gold Free FloatMarket Established

The Great

Depression

The Great

Recession

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02 June 2012 6

worlds central banks as they are both the big-gest holders of gold and tend to move largely in

lockstep in long, trending moons. Some wouldsay that they also have both the most to lose bya strengthening gold price as well as the meanswith which to drive the price lower but that isa discussion for another day. What IS certain,is that central banks are, generally speaking, allbuyers or all sellers at the same me and, oncethey set a course in one direcon, they tend tostay that course for decades.

September 1999 saw thsigning of the WashingtonAgreement on Gold whichwas intended to set limits onthe amount of central bankgold that could be sold intothe market in a given 5-yearperiod. It was precipitatedby the extraordinary decisionby Britains then-Chancellorof the Exchequer, GordonBrown, to announce to themarket that he would be sell-ing roughly 60% of Great Brit-ais gold holdigs throgh a

series of public aucons aswell as simultaneous sales byth SnB, Th nthrlads, Astria ad proposd

sales by the IMF. Central bank selling pressure

had overwhelmed the market and drove gold toits low of $252. The Washington Agreement sp-

ulated that signatories could sell a maximum of400 tonnes between them over the next 5 years.It was re-signed again in 2004 and again in 2009.

In fact, central bank gold holdings slid connu-ously from around 1974 through the tail end of2009 (chart, boom le) as the need for gold di-minished (at least in the eyes of the stewards ofglobal nances whose judgement is being shownto be less than prudent in many cases). Coinci-dentally, the selling of gold holdings acceleratedright around the me the gold price hit its na-

dir in 1999. Against every seller, however, therestands a buyer so the gold being disposed of bythe central banks was simply nding its way into

private handssmart money, if you willas ETF and private bullion holdings climbedaggressively (chart, above).

It will hardly cause the sharpest collecve

intake of breath amongst readers whenI point out that, by the me the Chinesecentral bank announced in late 2009 thattheir gold holdings (which had remainedunpublished for several years) had doubledto 1,054 tons, the juggernaut had turnedand central banks had become net buyersof gold for the rst me in almost 40 years.That paern has connueddespite plentyof rhetoric to the contrary from these au-gust instuonsand it WILL connue formany years to come while the world unrav-

2010200520001995199019851980197519701965

900

950

1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,350

Central Bank Gold Holdings1965 - 2010 (oz mm)

SOURCE: TTMYGH

SOURCE: WGC
http://67.19.64.18/news/2011/1-27gc/1.jpg

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02 June 2012 7

els the Gordian Knot of debt with which it hasbound itself over the last thirty yearsas the

latest report from the World Gold Council high-lighted this month:

(Sharps Pixley): Mexico, Kazakhstan and

Ukraine added about 204,000 ounces in

April. The Philippines added a whopping

1.033 million ounces in March with gold now

at 13.6% of its total reserves. UBS highlighted

the Philippines gold purchase is signicant

as this is the second largest monthly Cen-

tral Banks purchase aer Mexicos purchase

of 2.5 million ounces in March 2011. World

Gold Council (WGC) reported that centralbank purchases were 80.8 tonnes in Q1 2012

or around 7% of global gold demand. What

is more interesng is that WGC is now con-

dent that central banks will connue to buy

gold and has added ocial sector purchas-

es as a new element of gold demand while

eliminang ocial sector sales as a negave

supply factor.

The other key driving factor is investment de-mand and, as we highlighted above, tradionally

this source of demand has been the other sideof the equaon to central bank sellingnow thetwo are aligned and that spells higher gold prices

(WGC): The value measure of gold demand

was 16% higher year-on-year at US$59.7bln,

11% below the record from Q3 2011 ofUS$67.1bln. The average gold price of

US$1,690.57 was 22% higher than the aver-

age of Q1 2011. In value terms, virtually all

sectors of gold demand posted year-on-year

increases, with the excepon of physical bar

demand, which was broadly at, and the of-

cial sector, where purchasing acvity was

below Q1 2011s exceponal levels.

Investment demand was the only sector

of the gold market to register year-on-year

growth in the rst quarter, which was led bysolid demand for ETFs and similar products.

So, with that as a background, lets take a lookat gold mining shares and the extraordinary val-ue they appear to oer at these levels aer sixmonths of fear and loathing.

Whilst I was wring this piece, the chart belowhit my inbox from Wesley Legrand in Australiaand it highlights beaufully just how oversoldthe gold mining shares have become.

Originally culled from a piece by James Turk, itseems only fair to let James do the talking:

(James Turk): I want readers to take a look

at the following 30 year chart (see

below), which I believe is the most

important and extraordinary chart

for 2012. It presents the XAU Gold

Mining Index measured in terms

of gold, not dollars. Were mak-

ing history here. Gold stocks have

never been this undervalued before.

Weve had a 12 year bull market ingold, but weve also had a 15 year

bear market in the mining shares

that began with the Bre-X collapse.

Its very rare in market history to

see an outlier like this. This is an ex-

traordinary event. Years from now

we are going to look back and shake

our heads in disbelief at how under-

valued gold stocks were in 2012.

SOURCE: JAMES TURK

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02 June 2012 8

This chart shows that, despite rebounding aer2008s decimaon, mining shares, when priced

in ounces of gold have hit new and unprecedent-d lows.

But in case you think Im cherrypicking, a mat-ter of a couple of hours later, Nick Laird of the

wodrfl Sharelynx website (one of THE bstresources for gold and silver charts on the web),sent me this chart(above) of the BarronsGold Mining Index vsgold and the similarityis eerie:

To illstrat th poitfurther, I am going touse a specic stock,Newmont Mining(NEM) as an examplealog with th eTFs

that follow th sior

and junior miners (and,at this point, I should

disclose that the Vulpes

Testudo Fund has a

long posion in NEM).

Newmont Mining currently trades near a 52-week low and has a dividend of just over 3%.

Newmonts dividend is indexed each quarterto the average price of the gold it sells in thatquarter with step-up provisions of a further 7.5cif the average gold price exceeds $1,700 in a

given quarter and a further 2.5cshould those sales average in ex-cess of $2,000. The company has acash cost of gold mined of around$650/oz and is working hard tolower that gure. Analysts gurethat earnings will hit an all-mehigh this year of close to $5 pershare. The P/E rao? That wouldbe 11x. The same metric in 2008?30x.

Newmont Mining is currentlytrading roughly $20, or 40% belowthe average analyst target price of$67.23 with a yield 50% higherthan that of the S&P500 and a P/Erao 30% lower, while its price-to-book rao, at 1.8x, is also ex-

tremely close to the 2008 lowsIf we revisit the performance ofNEM, GDX and GDXJ when pricedin ounces of gold, it becomes ap-

parent just how beaten up this parcular sectorhas become.

SOURCE: SHARELYNX

SOURCE: BLOOMBERG
http://www.sharelynx.com/http://www.sharelynx.com/

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02 June 2012 9

NEM and GDX are at levels comparable to thevery depths of 2008 (chart, previous page) and,

when comparing the state of the world now ver-sus then, it is incredibly dicult to understand

just why that would be.

Remember, in the Autumn of 2008, panic wasat its zenith and good stocks were being thrownot alog with bad as dlvragig took hold of

th world.

Since then, a number of key metrics that di-rectly aect the price of gold and gold minershave changed so it makes sense to see where westand:

Now, with that as a backdrop, and with the un-derstanding that, as we approach the endgamefor Europe, the choice facing those empoweredto make decisions about how it ulmately playsout is actually a fairly simple oneallow mas-sive, widespread sovereign defaults and a con-nent-wide bank-run or print unlimited amountsof Eurosis anyone sll confused about howthis will all play out?

Europes leaders will NOT arbitrarily choose toinict the pain necessary to deal with the cur-rent debt crisis when they have the means toprint free money at their disposal and the onlyimpediment to doing so is an as-yet undeter-mined percentage of 81 million German cizens.If Germany has to leave the EU in order for themoneyprinng to happen, then mark my words,they will leaveeither because they choose toor because the Lan-bloc (which now includesFrance) force them to. Either way, the end willcome in a shower of confe paper money.

There may well be a period of deaon or dele-veraging prior to inaon taking hold, but with

inaon the central bankers rehose of choice,we can be fairly certain that inaon is in our fu-ture and inaonary environments are good forgold. As for the period of deaon/deleveragingwhich we are seeing now, using the greatest de-aonary period in history as our example wouldseem to suggest that gold stocks will perform ex-tremely well under those condions also.

The fact that gold stocks are behaving so poorlyseems to be as a result of both misunderstand-ing and inadequate knowledge of history on the

part of the vast majority of investors and, aswe have seen with subprime,Greece, Spain, Italy and, oneday, Japan, the UK and the US,nothing maers to anybody un-l it maers to everybody.

When the needfor gold as protecon dawns oneverybody, they will realise thatowning it through gold mining

stocks will provide tremendousupside gearingparcularly

from these bombed-out levelsand, with goldmaking up such a ny percentage of global nan-cial assets (the bulk of the increase over the lastten years has been due to price appreciaon), itwill become a race to own ounces of gold in thegrod.

The recent (April) Thomson Reuters GFMS sur-vey laid things out perfectly:

(UK Daily Telegraph): Rising fears about

[Spain] will send a fresh ood of investment

towards the safe haven metal, according

to the annual report from Thomson Reuters

GFMS.

Philip Klapwijk, global head of metals analyt-

ics at the consultancy, said: We could eas-

ily see last Septembers record high [a clos-

ing high of $1,900.23 on September 5] being

taken out.

A push on towards $2,000 is denitely on

Sep 2008 May 2012 Change

Gold Price $870.95 $1,564 +80%

Average Cash Cost/oz (ABN est.) $480/oz $640/oz +30%

Fed Balance Sheet ($trln) $0.943 $2.86 +300%

ECB Balance Sheet (trln) 1.50 3.02 +100%

Real Rates (US$ 5yr) 2.01% -1.22% -323bp

US Govt. Bailout Commitments (CNN) $29bln $11trln +$10.99trln
http://money.cnn.com/news/storysupplement/economy/bailouttracker/http://money.cnn.com/news/storysupplement/economy/bailouttracker/

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02 June 2012 10

the cards before the year is out, although a

clear breach of that mark is arguably a more

likely event for the rst half of next year.

Demand for gold oen sees a boost when

fears about the situaon in Europe inten-

sify. The metal can likewise benet from the

prospect of more quantave easing (QE),

as investors seek to protect their wealth from

the inaonary eects of central bankers ac-

ons.

The potenal pialls? Well, they lay them outtoo:

In the shorter term, GFMS thinks the appar-

ent abatement of the eurozone crisis and re-

duced expectaons for a third round of quan-

tave easing or QE3 in the US could drive

the gold price lower, perhaps below $1,550 in

the next couple of months.

Anybody see an abatement in the Eurozone cri-sis? Less chance of QE3 aer this weeks GDPrevision and the weakening jobs market in theUSA?

Me neither.

Gold stocks oer tremendous value and, whileit is perfectly possible that they could get evencheaper in the next few months if fear leads topanic which in turn leads to indiscriminate sell-ing, at some point they will be appreciated forthe value they oer and, if like everything elsein the last few years, that realizaon dawns on

everybody at the same me..... look out!

Now, as I explained earlier, I began writ-ing this piece earlier this week in betweenshis driving a taxi for my daughters and,last night, in the wake of appalling US pay-roll data, gold nally busted loose - takingthe gold stocks with it as the NYSE GoldBUGS Index added 7%.

This may or may not be the dawning of acollecve realizaon (we have seen manyfalse examples), but, if the deteriorangdata leads to the inevitable appearance ofQE3 (and its hard to see how the Fed, in anelecon year, could take any acon AFTER

Junes meeng) the price of gold (and with it, theprice of mining shares) will head for new highsonce again.

Count on it.

But I will leave you this week with the wordsof a gentleman for whom I have a tremendousamount of admiraon, Raoul Pal.

In a recent presentaon entled The End Game,

Mr. Pal had the following to say about the nextstage of the crisis:

We dont know exactly what is to come, but

we can all join the very few dots from where

we are now, to the collapse of the rst major

bank

With very limited room for government bail-

outs, we can very easily join the next dots

from the rst bank closure to the collapse

of the whole European banking system, and

then to the bankruptcy of the governments

themselves.

There are almost no brakes in the system to

stop this, and almost no-one realises the seri-

ousness of the situaon.

Got Gold (miners)?

************

No space or a recap of whats instore for you this week so dive in, folks...

0

1

2

3

4

5

6

7

8

9

10

201020092008200720062005200420032002200120001995199019801968

SOURCE: TTMYGH

Gold As % Of GlobalFinancial Assets1968 - 2010
http://www.zerohedge.com/news/big-reset-2012-and-2013-will-usher-end-scariest-presentation-everhttp://www.zerohedge.com/news/big-reset-2012-and-2013-will-usher-end-scariest-presentation-ever

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02 June 2012 11

Contents02 J 2012

Did We See A Boom In Gold Today?

All Eyes Turn To The Policy Makers

Wall Street Food Chain

The End Of The Euro: A Survivors Guide

Spain Faces Total Emergency As Fear Grips Markets

Wall Street Journal Says Comex Has Been Classied As Too Big To Fail

Eurozone Is Unsustainable Warns Mario Draghi

China To Restart Nuclear Power Programme

The Fear Factor: Prevenng A Big European Bank Run

A Gold Anchor Standard?

Alexis Tsipras Is the Greek Who Makes Europe Tremble

Charts That Make You Go Hmmm.....Words That Make You Go Hmmm.....

And Finally.....

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02 June 2012 12

Quite a ew of the uncivilized en-tered the markets today, and sparked a rally ingold ad silvr i what appard to b a obvi-

ous ight to safety and also a powerful reliefrally aer the awful pounding the metals and theminers had taken into the Comex expiries anddelivery dates.

Some of the dividend paying gold and silverstocks had impressive gains even moreso thanthe metal, with at least one royalty trust up 11percent or so. Yes I ipped one from yesterday,and even trimmed my enrely outsized bullion

posions bought on the dips back to something alile more normal and comfortable. Of course Inever touch my long term holdings in place since2000. It is not raining nearly hard enough yet.

During hard mes a solid dividend paying mineris hard to beat, unless you get lucky with oneof those loery ckets known as junior miners.When the right me comes I hope to be there.But for now I will play it a bit more safe. I seemore potenal downside in stocks unl thebaks stp p ad prit it p hardr. no tllig

how well they will fare against the splash fromacross the sea.

Aer a triple spiked test of support, the goldmarket went vercal today, marking perhaps

what might be regarded by some of the moreastute as a well-rounded boom. I live for days

like today. Much of this was due to a reversalof the sheer manipulaon for short term gains,that broke in the face of the unfolding global cur-rency crisis. Bam!

Never underesmate the power of the CFTC tostand idly by while the markets, taken in hand bythe tans of Wall Street, degenerate into some-thing that resembles a round of golf at the Pied-mont Driving Club, or an impromptu ght clubmeeng at the New York Athlec Club.

Well, boys will be boys, in proporon to theirtoys.

Chart-wise follow through is everything. Yes wehave a short term rounded boom, and the po-tenal for much larger formaons including abroad cup and handle the likes of which we havenot seen in quite some me. But do not under-esmate the baseness of desperate men accus-tomed to having their way.

But rst things rst. We must see if gold canbreak the intermediate downtrend and then

establish at least a broad trading range, whichwill form the lid of the potenal cup. It couldhappen in a rush, given some exogenous triggerevent and the right convergence of circumstanc-es, but I suspect it will be a long and arduousclimb, fought in stages and levels.

Chart porn-wise, the cup and handle, should itwork, would take gold well over $2,000 by yearend or so, and probably set up a new leg intothe 3s.

But that now is all speculaon. Time to do thehard climbing work for now, one day at a me.

O O O JESSES CAFE AMERICAIN/ LINK

Te eurozone crisis hasmoved in denite cycles. Markets deteriorate,policy makers to take acon; markets rally, policymakers relax only for the turmoil to resume ascondence ebbs away again.

Aer a week in which Spains borrowing costs

SOURCE: JESSE
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approached euro-era highs, US bond yields sankto record lows, equies tumbled and the euro

suered sharp swings, some strategists think2012 is lookig lik a rr of 2011.

This me, itis Spain mov-ing closer to abailot, rath-

er than Italy,whil a strog

rslt for th

far-le in Greeces repeat elecons this monthcould push Athens towards a euro exit. The mar-

ket turmoil has focused aenon on a possibleresponse from governments and central banks.

It feels that weve now moved into the inter-venon zone where all paths lead to the nextmajor round of acon from the authories. Itsdicult to see how the market regains its poisewithout it, says Jim Reid, a senior strategist atDeutsche Bank. The authories cant aord toget this wrong or we will likely have another cri-sis o or hads.

The range of possibilies is wide, though there isno sign yet that acon will be taken. Short-termmeasures include a rate cut by the EuropeanCentral Bank, which holds its next rate-sengmeeng next week, a resumpon of govern-ment bond-buying under its securies marketprogramme and another round of ultra-cheapECB loans for banks.

Some are looking for polical progress on apan-European deposit guarantee, bank recapi-talisaons, government investment to smulate

growth and, potenally, a banking licence for theEuropean Stability Mechanism, Europes perma-nent bailout fund, to boost its repower.

Hard decisions are unlikely before the Greekelecon on June 17, but this weeks volality hassparked speculaon the ECB could act sooner.

One possibility could be to restart the SMP tostem the rise in Spains borrowing costs. Theycould blow the cobwebs o the SMP, says a se-nior government bond trader. Its the only thingthey can do to calm things down in the short

term.

But the ECB is unlikely to resume bond-buyingunless the dierence between Spanish and Ger-man benchmark 10-year yields widens further. Itis now at 535 basis points, and Pavan Wadhwa,global xed-income strategist at JPMorgan, es-mates the spread would have to climb another25-50 basis points before the SMP could be re-acvated.

Interest rate cuts are not expected at nextweeks ECB meeng, nor for now is another doseof cheap three-year money under the centralbanks longer-term renancing operaon, orLTRO.

Most economists surveyed by Bloomberg be-lieve the ECB will keep its policy rate on hold at1 per cent. Jonathan Loynes of Capital Econom-ics expects Mario Draghi, ECB president, to holdopen the prospect of further banking assistanceshould the threat of a funding crisis becomeacute, but says he is unlikely to announce anymeasures at Wednesdays meeng.

Investors and analysts are pessimisc that poli-

cians will make meaningful headway in other ar-eas, such as a pan-European deposit guarantee,an ESM bank licence or capital injecons intoSpaish baks.

O O O FT / LINK

Te global monetarysystemwhich has evolved and morphed over the pastcentury but always in the direcon of easier,cheaper and more abundant credit, may havereached a point at which it can no longer operateeciently and equitably to promote economicgrowth and the fair distribuon of its benets.Future changes, which lie on a visible horizon,may not be so benecial for our oceans over-sized creatures.

The balance between nancial whales and plank-ton powerful creditors and much smaller debt-ors is signicantly dependent on the success-ful funconing of our global monetary system.What is a global monetary system? It is basically

... It eels that weve now moved intothe intervention zone where allpaths lead to the next major round oaction rom the authorities
http://www.ft.com/intl/cms/s/0/7eb5bec8-ac00-11e1-923a-00144feabdc0.html#axzz1wZzYW9DU

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how the world conducts and pays for commerce.Historically, several dierent systems have been

employed but basically they have either beencommodity-based systems gold and silver pri-marily or a at system paper money

The global monetary system seemed to be work-ing smoothly, and instead of Shamu, it was la-beled the great moderaon. The laws of natu-ral selecon and modern day nance seemed tobe funconing as ancipated, and the whaleswere ascendant.

Funconing yes, but perhaps not so moderatelyor smoothly especially since 2008. Policy re-sponses by scal and monetary authories havemanaged to prevent substanal haircung ofthe $200 trillion or so of nancial assets that

comprise our global monetary system, yet in theprocess have increased the risk and lowered thereturn of sovereign securies which represent itscore

now, howvr, with v th uitd Stats sf-

fering a credit downgrade to AA+ and oeringnegave 200 basis point real policy rates for theprivilege of invesng in Treasury bills, the willing-ness of creditor whales as opposed to debtors

to support the exisng system may soon de-scend. Such a transion occurs because lenders

either perceive too much risk or refuse to acceptnear zero-based returns on their investments.

As they queson the value of much of the $200trillion which comprises our current system, theymove marginally elsewhere to real assets suchas land, gold and tangible things, or to cash anda gurave maress where at least their moneyis readily accessible.

O O O BILL GROSS / LINK

In every economic crisisthere comes a moment of clarity. In Eu-rope soon, millions of people will wake up

to realize that the euro-as-we-know-it isgone. Economic chaos awaits them.

To understand why, rst strip away your il-lusions. Europes crisis to date is a series ofsupposedly decisive turning points thateach turned out to be just another stepdown a steep hill. Greeces upcoming elec-on on June 17 is another such moment.While the so-called pro-bailout forcesmay prevail in terms of parliamentary seats,some form of new currency will soon ood

the streets of Athens. It is already nearlyimpossible to save Greek membership inthe euro area: depositors ee banks, tax-payers delay tax payments, and companiespostpone paying their suppliers either

because they cant pay or because they expectsoon to be able to pay in cheap drachma.

The troika of the European Commission (EC),European Central Bank (ECB), and InternaonalMonetary Fund (IMF) has proved unable to re-store the prospect of recovery in Greece, and anynew lending program would run into the samedicules. In apparent frustraon, the head ofthe IMF, Chrisne Lagarde, remarked last week,As far as Athens is concerned, I also think aboutall those people who are trying to escape tax allthe me.

Ms. Lagardes empathy is wearing thin and thisis unfortunate parcularly as the Greek failuremostly demonstrates how wrong a single cur-rency is for Europe. The Greek backlash reects

SOURCE: BILL GROSS/BLOOMBERG
http://www.pimco.com/EN/Insights/Pages/Wall-Street-Food-Chain.aspxmailto:wendy%40portolagroup.com?subject=TTMYGH%20Referral%20-%20%22The%20Plot%20Thickens%22

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the enormous pain and diculty that comeswith trying to arrange internal devaluaons (a

euphemism for big wage and spending cuts) inorder to restore compeveness and repay anexcessive debt level.

Faced with ve years of recession, more than 20percent unemployment, further cuts to come,and a stream of failed promises from policiansinside and outside the country, a polical back-lash seems only natural. With IMF leaders, EC of-cials, and nancial journalists oang the ideaof a Greek exit from the euro, who can nowinvest in or sign long-term contracts in Greece?

Greeces economy can only get worse.

Some Europeanpolicians are nowtllig s that a or-

derly exit for Greeceis fasibl dr

current condions,and Greece will bethe only naon thatleaves. They are

wrong. Greeces exit is simply another step in a

chain of events that leads towards a chaoc dis-soluon of the euro zone.

During the next stage of the crisis, Europes elec-torate will be rudely awakened to the large -nancial risks which have been foisted upon themin failed aempts to keep the single currencyalive. If Greece quits the euro later this year, itsgovernment will default on approximately 300billion euros of external public debt, includingroughly 187 billion euros owed to the IMF andEuropean Financial Stability Facility (EFSF).

O O O SIMON JOHNSON/ LINK

Spain is acing th gravst dagrsince the end of the Franco dictatorship as thecountry is frozen out of global capital marketsand slides towards an epic showdown with Eu-rop.

Were in a situaon of total emergency, theworst crisis we have ever lived through saidex-premier Felipe Gonzalez, the countrys elder

statesman.

The warning came as the yields on Spanish 10-year bonds spiked to 6.7pc, pushing the risk

premium over German Bunds to a post-eurohigh of 540 basis points. The IBEX index of stocksin Madrid fell 2.6pc, the lowest since the dotcombust in 2003.

Chaos over the 23.5bn rescue of crippled lend-er Bankia has led to the abrupt resignaon ofcentral bank governor Miguel ngel FernndezOrdez, who tesed to the senate that he hadbeen muzzled to avoid enaming events as con-dence in the country drains away.

Markets are on tenterhooks as Spanish yieldstest levels that forced the European Central Bankto respond last November with its 1 trillion li-quidity blitz. Nobody is short Spanish debt rightnow because they are expecng ECB interven-on, said Andrew Roberts, credit chief at RBS.If it doesnt come -- if we take out 6.8pc -- weregoing to see a hyberbolic sell-o, he said.

Italy felt the full brunt of contagion from Spain onWednesday, with 10-year yileds back near 6pc.The euro fell to a 2-year low of $1.239 against

the dollar. Crude oil and metal prices plummet-ed and save-haven ight pushed rates on 2-yearGerman debt to zero. Gilt yields fell to 1.64pc,the lowest in history.

Mr Roberts said the collapse in Spanish tax rev-enues is replicang the paern in Greece. Fiscalrevenues have fallen 4.8pc over the last year,and VAT returns have slumped 14.6pc. Debt ser-vice costs have risen by 18pc.

The country is caught in a classic deaonaryvice: a rising debt burden on a shrinking eco-

nomic base. Once you get into such a negavefeedback loop, you can move beyond the pointof no return quickly, he said.

The European Commission has soened itsstance, giving Madrid an extra year unl 2014 tocuts its budget decit from 8.9pc to 3pc of GDP,though this sll amounts to a scal shock. Brus-sels told premier Mariano Rajoy to widen theVAT base and speed rerement at 67.

There is no sign so far that the ECB is ready to

relent as Frankfurt and Madrid cross swords in

...Some European politicians arenow telling us that an orderlyexit or Greece is easible undercurrent conditions, and Greece

will be the only nation thatleaves. Tey are wrong.
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an escalng test of will. The ECB has scotched MrRajoys tentave plans to recapitalize Bankia by

drawing on ECB funds.It is dangerous to play chicken when you aredriving a Seat and the ECB is driving a tank, saidprofessor Luis Garicano from the London Schoolof Economics (LSE).

O O O UK DAILY TELEGRAPH / LINK

President Obamas stan-dard gripe is that the economy has per-formed so poorly during his term because of

the nancial crisis he inherited from George W.Bush. But this week it is Mr. Obama who has be-queathed to his successors a landmark in nan-cial regulaon. It is bound to haunt them, thoughnot as much as it will haunt taxpayers.

J.P. Morgans recent trading loss and the result-ing Washington blather about ghter regulaonhav grabbd hadlis.

Lile noced is that on Tuesday Team Obamatook its rst formal steps toward pung taxpay-ers behind Wall Street derivaves trading -- notbehind banks that might make mistakes in deriv-aves markets, but behind the trading itself. Yes,the same crew that rails against the dangers ofderivaves is quietly posioning these nancialinstruments directly above the taxpayer safetyt.

As w otd

in May 2010,th athor-

ity for thisr e g u l a t o r yachievementwas isrtd

into Con-grsss pd-

ing nancial reform bill by then-Senator ChrisDodd. Two months later, the legislaon wasre-named Dodd-Frank and signed into law byMr. Obama. One part of the law forces much ofthe derivaves market into clearinghouses thatstand behind every trade. Mr. Dodds pet provi-sion creates a mechanism for bailing out these

clearinghouses when they run into trouble.

Specically, the law authorizes the Federal Re-serve to provide discount and borrowing privi-leges to clearinghouses in emergencies. Tra-dionally the ability to borrow from the Fedsdiscount window was reserved for banks, butthe new law made clear that a clearinghousereceiving assistance was not required to be orbecome a bank or bank holding company. To gethelp, they only needed to be deemed systemi-cally important by the new Financial StabilityOversight Council chaired by the Treasury Secre-tary.

Last year regulators nalized rules for how theywould use this new power. On Tuesday, theybegan using it. The Financial Stability OversightCouncil secretly voted to proceed toward induct-ing several derivaves clearinghouses into thetoo-big-to-fail club. Aer further review, regula-tors will make nal designaons, probably laterthis year, and will announce publicly the namesof instuons deemed systemically important.

Were told that the clearinghouses of Chicagos

CME Group and Atlanta-based InterconnentalExchange were voted systemic this week, andrumor has it that the council may even designateLondon-based LCH.Clearnet as crical to the U.S.nancial system.

U.S. taxpayers thinking that they couldnt possi-bly be forced to stand behind overseas deriva-ves trading will not be comforted by remarksfrom Commodity Futures Trading CommissionChairman Gary Gensler. On Monday he empha-sized his determinaon to extend Dodd-Frank

derivaves regulaon to overseas markets whensubsidiaries of U.S. rms are involved.

Readers know Mr. Gensler as the chief regula-tor of MF Global, which was run into bankruptcyby his old Beltway and Goldman Sachs pal JonCorzine. An esmated $1.6 billion is sll miss-ing from MF Global customer accounts. What anamazing feat Mr. Gensler will have performed if,through his agencys oversight, he can manage tohave U.S. customers eat the cost of Mr. Corzinesbets on foreign debt and have U.S. taxpayers un-

... Te Financial Stability OversightCouncil secretly voted to proceedtoward inducting several derivativesclearinghouses into the too-big-to-ail club. Ater urther review, regula-tors will make fnal designations
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derwrite bets in foreign derivaves trading.

If theres one truth weve learned about govern-ment nancial backstops, its that sooner or lat-er they will be used. So eventually taxpayers willhave to bail out one derivaves clearinghouseor another. It promises to be quite a mess. Andif the 45th president spends his rst term whin-ing about his predecessors mistakes, hell havea poit.

O O O WSJ (VIA GATA) / LINK

Te head o the European CentralBank hit out at the polical paralysis gripping theregion as he warned the eurozones set-up wassstaiabl.

Mario Draghi said the central bank could not llthe vacuum le by member states lack of ac-on as it was claimed the zone is on the point ofdisintegraon.

Amid escalang talk of a potenal bail-out forSpai, th prs-

idt of th

ECB said thecentral bankwas powr-

lss to stop th

dbt torado.

Its not ourduty, its not inour mandateto ll the vac-

uum le by the lack of acon by naonal govern-ments on the scal front, he said.

Chrisne Lagarde, the head of the InternaonalMonetary Fund, last night denied that an IMFbail-ot of Spai was big prpard.

There is no such plan. We have not receivedany request to that eect and we are not doingany work in relaon to any nancial support,she said, following a meeng with Spains dep-uty prime minister, Soraya Saenz de Santamaria.

Olli Rehn, the EUs top economic ocial, calledfor urgent acon to avoid a disintegraon of theeurozone. The economic aairs commissioner

said that policians had made progress but ithad been uneven and seemingly inecient....

Italys prime minister Mario Mon warned of thehuge possibilies of contagion. Ireland lookedset to approve the Fiscal Pact in its referendumbut in Greece the an-austerity Syriza party tookthe lead in some polls.

In a thinly disguised demand for acon fromGermany, Mr Draghi said leaders had to decidewhether to stand by the current eurozone. Thesooner the vision is claried the beer for theEuropean Union, he told the European Parlia-ment.

Poinng at the chaoc and ongoing rescue at-tempts of Bankia in Spain, Mr Draghi said thehandling of the raging bank crises was the worstpossible way of doing things.

He said policians and regulators repeatedly un-deresmated the scale of their banks problems.This is the worst possible way of doing things,he said Everyone ends up doing the right thing,but at the highest cost.

Data showed investor condence draining fromthe eurozone. Nearly 100bn of deposits waswithdrawn from Spain in the rst three monthsof the year.

O O O UK DAILY TELEGRAPH / LINK

Beijing has indicated that itwill li its year-long moratorium on new nuclearprojects in a move that will breathe life into anindustry plagued by uncertainty since the disas-ter at Japans Fukushima Daiichi reactor last year.

Chinas cabinet announced it had approved the2020 nuclear strategy, nalised new safety stan-dards and nished inspecng the countrys ex-isng nuclear plants. Aer the Japanese nuclearcrisis China suspended approvals of new reac-tors while it conducted safety inspecons anddraed new regulaons.

As the worlds largest energy user China is keyto seng the direcon of future global nuclearexpansion. Beijings latest announcement marks

...In a thinly disguised demand or

action rom Germany, Mr Draghisaid leaders had to decide whetherto stand by the current eurozone.Te sooner the vision is clarifedthe better or the European Union,he told the European Parliament.
http://www.telegraph.co.uk/finance/financialcrisis/9304027/Eurozone-is-unsustainable-warns-Mario-Draghi.htmlhttp://www.gata.org/node/11412

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a major step towards the full resumpon of itsnuclear building programme, which accounts for

40 per cent of global reactors under construcontoday.

This is th

main hurdle,said Go Sho,

energy analystat Barclays.Approvals for

new nuclearreactors arearound the cor-

ner, they are going to come very, very soon.

Restarng nuclear approvals will help boostgrowth and create jobs in Chinas nuclear sec-tor at a me when Beijing is weighing opons onhow to prevent a further slowdown in the econ-omy, although the plans are not formally part ofany smulus programme.

China draws most of its energy from burning coalbut Beijing is building up wind, solar, hydropow-er and nuclear power as it seeks to shi toward

non-fossil fuel sources. The country is targeng60GW of nuclear capacity in 2020, according tocomments by Chinese ocials, which would putChinas reactor eet on par with that of France.

In the aermath of the Japanese nuclear cri-sis in March 2011, several European countriesabandoned or postponed plans for nuclear ex-pansion. However many emerging economies,including China, remained commied to nuclearpower and are seng the pace of global nucleargrowth.

Chinas new safety regulaons are expected toprovide a boost worldwide for the latest nucleartechnologies, especially for third-generaonreactors being built in China by Wesnghouse ofthe US and Areva of France.

Chinese nuclear companies are also trying to ex-pand their presence overseas and have bid forreactor contracts around the world.

The combinaon of technical experience, op-eraonal experience and support that can come

out of China will make China a leader in the glob-al nuclear industry, said George Borovas, head

of the nuclear pracce at global law rm Pills-bury. We are starng to see it already. Chinesecompanies are in the internaonal marketplacemuch more aggressively than they were one ortwo years ago.

O O O FT.COM / LINK

In continental capitals adbank boardrooms there is a common fear. It isthat th slow jog of dposits lavig baks i

Greece and, more recently, Spain, may turn into

a full-blown run that quickly spreads from bankto bank, and then from country to country. Therehave already been some warning signs, such asa sudden acceleraon of deposit oulows fromGreek banks in May.

A erce debate is now taking place as to the bestway to avert a run that, if it started, might be dif-cult to contain and could lead to massive capitalight from the euro zones peripheral countries,which have 1.8 trillion ($2.2 trillion) in house-hold deposits (see chart). Increasing numbers of

people think the answer is greater nancial in-tegraon. On May 30th the European Commis-sion said there ought to be full economic andmonetary union, including a banking union; inte-grated nancial supervision and a single depositguarantee scheme.

The rst step is to shore up condence in the re-gions banks by making sure they have enoughcapital to withstand a crisis. It is far cheaper torecapitalise banks, aer all, than to stand behindall of their deposits. Yet such eorts have beenbungled me and again. Europe has twice overthe past two years tried to reassure depositorsand investors that its banks are sound by subject-ing them to stress tests that were supposed tomimic an economic downturn. In each case thetests were soon followed by revelaons of deepcapital holes in some banks (newly naonalisedBankia among them). Since some naonal regu-lators have lost the condence of markets, theyar havig to brig i otsidrs to assss how

much capital their banks need.

... Beijings latest announcementmarks a major step towards the ullresumption o its nuclear buildingprogramme, which accounts or 40per cent o global reactors underconstruction today
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Actually raising the capital is the next big prob-lem for countries such as Spain or Italy, whichare already struggling to convince markets thattheir public debt is sustainable. Ideally it shouldcome from the European Stability Mechanism(ESM), Europes new bail-out fund, as a direct

capital injecon into banks rather than as loansto governments, which then use the money torecapitalise their ailing lenders.

Injecng capital is polically dicult. Core coun-tries such as Germany fret they will lose a leverof inuence over government policies in pe-ripheral countries by handing over equity. Theyalso stand a greater chance of losing money ifthe ESM takes on the risk of bank invesng, notleast because they know even less about thebalance-sheets of individual lenders than those

of naonal governments. Peripheral countriesare less than keen on handing ownership of im-portant banks to bureaucrats in Brussels. Andunless the capital is accompanied by supervisoryreforms, local regulators may encourage banksto lend more freely at home since the risk of losswill have been exported.

O O O ECONOMIST / LINK

Forgive the hyperbole ithe headline but we wanted to get your aenon

as something quite profound is happeningthat could propel gold to record new highs.

Yes, potenally the biggest thing since thebirth of the gold ETF and the liberalizaon ofthe Chinese gold market in 2003. A decadeon and we have grounds for saying that goldmay well see a signicant leg higher... the bignew thing in gold. Ill explain...

Banking capital adequacy raos, once thedomain of banking specialists are set to be-come center stage for the gold market aswell as the wider economy. In response tothe global banking crisis the rules are to be

ghtened in terms of the assets that banksmust hold and this is potenally going tovery much favour gold. The Basel Commit-tee for Bank Supervision (or BCBS) as part ofthe BIS are arguably the highest authority inbakig sprvisio ad it is thir rol to d-

ne capital requirements through the forthcom-ing Basel III rules.

In short, they are meeng to consider makinggold a Tier 1 asset for commercial banks with100% weighng rather than a Tier 3 asset with

just a 50% risk weighng as it does today. At thesame me they are set to increase the amountof capital banks must set aside as well. A doublewin potenally.

Hitherto banks have been much dis-incenvisedto hold gold while being encouraged to hold ar-guably riskier assets such as equity capital, cur-rencies and debt instruments, none of whichhave fared too well in the crisis. With this po-tenal change in capital adequacy requirements,bank purchases of gold would drive up its value

relave to other high quality qualifying assets,increasing its desirability for regulatory purposesfurther. This should result in gold being re-pricedto bring it on a par with all other high quality as-sts.

Currently banks have to have core Tier 1 capitalrao of 4% of which will rise to 6% from the be-ginning of next year. In addion to its store ofvalue merits, central to the argument in favourof gold as a bank reserve is its countercyclical na-ture to most other assets in that it tends to be

SOURCE: ECONOMIST/CITI
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inversely correlated. Gold is ideal as it bears nocredit risk, it involves no other counterparty and

it is no ones liability. It is a reserve asset diversi-er if you like.

This is a treble win for gold - it would be a majorendorsement of its role in preserving wealth andas a store of value from the highest nancial au-thority, it would lead to signicant purchases ofgold by major nancial instuons and it wouldlead to a reappraisal of its value with respectto other Tier 1 capital such as quality sovereigndebt. Under the new rules gold could become avery signicantly larger proporon of a reserve

pool which is about to grow very much larger.

The 2 quesons that come to my mind are whenand how much metal - on ming Basel III kicksin from January 2013 with a further ghteningin capital adequacy raos in 2018. That said, itis not yet clear when golds re-rang to Tier 1might take place.

In terms of amount of gold that could be pur-chased that is harder sll - if we thought thatsay 2% of total current Tier 1 capital held by

commercial banks globally might be convertedinto gold (forgeng for a moment about theincreases in capital yet to be seen) - this wouldsuggest that 2% of the $4,276,000,000,000would be converted to gold. That is equivalent to$85,000,000,000 in gold which at current marketprices is equivalent to 1,700 tonnes of gold.

Another way of looking at this is to consider thatcommercial banks would be holding gold for pre-cisely the same reason that central banks do -and the largest 110 central banks in the world

have 16% of their reserves as gold - as such agure of just 2% is really quite a modest expecta-on - ulmately it will be a queson of price andexpectaons of price change that would deter-mine the rate of uptake in the short term.

O O O ROSS NORMAN / LINK

Just weeks ago, Alexis Tsipras, 37,was an obscure opposion polician. Now, hesrvig th powrs that b i th eropa

Union because he and his leist party Syriza a

group whose membership ranges from hardlineCommunists to moderate socialists have the

potenal of forming a government aer the June17 elecons. A teenage member of the Com-munist Youth of Greece, Tsipras has executeda dramac and canny polical metamorphosis,transforming himself fromthe leader of a radi-cal leist coalion to a le-of-center standardbearer for an-bailout and an-austerity popu-lism. And in so doing, he has confounded the os-sied polical class of Greece, which acceded tothe strictures imposed by the E.U. in order forAthens to receive the funds it needs to sasfyits creditors. Now, Tsipras may hold the future ofth ro ad th e.u. i his hads. All h ds

to do is wi ogh sats to govr.

Tsipras spoke to TIMEs Joanna Kakissis at theSyriza oce on Koumoundourou Square in Ath-ens. Following is the transcript of the interview:

TIME: Are you willing to make

the necessary structural reforms

in Greece to revive the economy?

ALEXIS TSIPRAS: It is obvi-

ous that Greece and the Greekeconomy has its own particu-

larities that played a role in mak-

ing this economic crisis deeper

and longer. Indeed, we must

make structural reforms which

will the public sector more reli-

able, create an effective and fair

taxation system, and ght the

black economy which has been

like a kind of gangrene on the

Greek economy. As far as I know,

the underground economy repre-

sents 30% of the GDP.

At the same time, we will try to

restore faith in the law and con-

vince people that the state is

equitable and effective. We will

destroy corruption and the in-

terconnection of political and

economic power from its roots.
http://johnston-sequoia.blogspot.ca/2012/06/gold-anchor-standard.html?goback=.gde_3812407_member_120678016

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02 June 2012 21

Without the contribution of the

citizens, these reforms cannot

take place. But in order to con-tribute, the citizens want to know

that these reforms will not be im-

plemented only to those who have

low incomes but those who have

high incomes and come from the

upper class. There is a Greek say-

ing: The sh always stinks from

its head, (which means, roughly,

corruption starts at the top). So if

we dont ght the problem at its

roots, then we wont be able to

establish positive morale that can

encourage all Greeks to also ght

against it.

But you need a long time to make

such reforms...

Some things need time, but

some other can change quickly.

For instance, I cant understand

why the last two and half yearswe are chasing our tail when it

comes to taxation. We taxed poor

people again and again, but no

one talked about what we really

needed, which is an assets reg-

ister by which every Greek will

be obliged to register their prop-

erties, their bank accounts in

Greece or abroad, as well as their

mobile assets, such as the shares

of a company they possibly have.

Only in this way, we will be able

to tax everyone according to their

real capability of paying taxes and

we will create a system which will

share the responsibilities in a fair

way. Of course, for these policies

to be effective, we should also

create a high-penalty system for

those who break the law. Whoever

makes a false statement about

his assets should be punished by

having a bit part of these assetsconscated. There is no magical

way out of the crisis. However,

there are for sure solutions, tough

but fair, in order to share in a just

way the responsibilities, establish

a positive morale and give a boost

to the Greek economy.

There are some outside Greece

who say Greece wants it both

ways...

Its a paradox to think Greece

can stay in the euro zone if the

austerity policies continue to be

implemented. The austerity pol-

icy, and especially this extreme

policy based on the term inter-

nal devaluation, is exactly what

we should have avoided.

Its the wrong prescription, the

wrong medicine for the patient,

because Greece has a production

base with a special characteris-

tic: 90% of the small businesses

production, which are the founda-

tion of the Greek economy, is not

exported. It is sold on the domes-

tic market. So, when you make a

horizontal cut of the wages and

the pensions, inevitably there is

an impact on the consumption.Hence, 200,000 small Greek

businesses have closed down!...

O O O TIME / INTERVIEW
http://www.time.com/time/printout/0,8816,2116075,00.htmlhttp://www.time.com/time/printout/0,8816,2116075,00.html

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22.CHARTS THAT MAKE YOU GO Hmmm...

02 June 2012 22

In keeping withthis weeks gold-based theme,this presentaon from Busi-ness Insider entled The TruthAbout Gold contains a series ofexcellent charts that oer sev-eral perspecves on the yellowmetal...

A look at a log-term chart of US 10-yeartreasury yields oers stark

perspecve

CLICK TO VIEW PRESENTATION

CLICK TO ENLARGE

SOURCE: BUSINESS INSIDER

SOURCE: THE BIG PICTURE
http://www.ritholtz.com/blog/2012/05/what-is-the-all-time-low-10-year-yield/http://www.scribd.com/doc/93256583/The-Truth-About-Gold

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02 June 2012 23

Courtesy o myfriend Barry Ritholtz comes this great chart (above) that demonstratesjust how lackluster the employment recovery has been since January 2008despite what the BLSmight have you believe...whilst below, Soc Gens Albert Edwards shows the severity of the decline inlabor force parcipaon in the US along with what the real unemployment rate WOULD be had somany not given up looking for work... not good.

SOURCE: BLS/SOC GEN

SOURCE: RITHOLTZ/THE CHART STORE

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02 June 2012 24

riggered by another ECRI commentary, Why Our Recession Call Stands, Im nowfocusing inially on the year-over-yeargrowth of the WLI rather than ECRIspreviously favored, and rather arcane,method of calculang the WLI growthseries from the underlying WLI (seethe endnote below). Specically thechart immediately below is the year-over-year change in the 4-week mov-ing average of the WLI. The red dotshighlight the YoY value for the monthwhen recessions began.

As the chart above makes clear, theWLI YoY is currently at a lower levelthan at the starng month for ve ofthe seven recessions during the pub-lished series. Of course, the same canbe said for its interim YoY trough in2010. In any case, the behavior of thisindicator over the next quarter or sowill be especially interesng to watch.

A key argument inECRIs latest rearma-on of its recessioncall is seen in the long-term paern of year-over-year real personalincome (illustrated be-low, which I updatedwith the latest PCE datareleased this morn-ing)...The commentaryincludes explanaonsfor a couple of anoma-lies in this series, suchas th dowward spik

in December 2004, which was the YoY oscillaon from Microsos one-me dividend payout 12months earlier.

O O O DOUG SHORT/ LINK

SOURCE: DOUG SHORT

SOURCE: DOUG SHORT
http://advisorperspectives.com/dshort/charts/indicators/ECRI-WLI.html?ECRI-WLI-YoY.gifhttp://advisorperspectives.com/dshort/updates/ECRI-Weekly-Leading-Index.php

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25.

02 June 2012 25

WORDS TH AT MAKE YOU GO Hmmm...

Focusing back on what could hap-pen if the market were allowed to think for itself, RickSantelli & Gary Kaminski deface the edice of centralbanker largesse and blame it for the actual demise weface - nong that it is now clear that whether it is QEor actual rate easing, using jobs as the argument forexcessive intervenon is a failed concept... they ask andanswer the queson: Have rates been too low for toolong? and how those who played by the rules con-nue to be the ones who are penalized.

(via zerohedge)

Hes back and hes sll angry.Whats more, hes sll the only MEP pre-pard to spak th trth abot erop.

Nigel Farage (who will, I believe, one day beseen as the lone voice in the wilderness thathe is) pleads for the breakup of the euro andthe restoraon of human dignity... anothertour de force.

Incidentally, the quality of the queson askedby the Greek representave demonstratesth lvl of drstadig i th eropa

parliament

On the subject of gold and mining stocks, I chaed with Geo Candyof Mineweb last week about those very subjects and, for those amongst you witha few minutes to spare aer wading through this weeks Things That Make You GoHmmm..... click on the mugshot (le) to hear that conversaon...

CLICK TO WATCH

CLICK TO WATCH
http://www.mineweb.com/mineweb/view/mineweb/en/page96990?oid=151902&sn=2010+Detail&pid=92730http://www.youtube.com/watch?v=RQ9uHUDkTq4http://www.zerohedge.com/news/santelli-and-kaminsky-broken-rules-unpredictability-and-deleveraging

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SUBSCRIBE UNSUBSCRIBE COMMENTS

and fnally

02 June 2012 26

Hmmm

For any non-Europeans struggling with the concept that the Eurozonecould possibly split apart, this great video (courtesy of the good folks at ZeroHedge) shows thatthis woldt exactlybe an unprecedented event in Europes history which has been spoy atbst.....

THING S THAT MAKE YOU GO H MMM..... 2012
http://ethreemail.com/subscribe?g=bdc736behttp://ethreemail.com/unsubscribe?g=bdc736bemailto:TTMYGH%40me.com?subject=Hmmm.....%20Feedbackhttp://www.zerohedge.com/news/greek-election-aftermath-1000-years-contextmailto:TTMYGH%40me.com?subject=Hmmm.....%20Feedbackhttp://ethreemail.com/unsubscribe?g=bdc736behttp://ethreemail.com/subscribe?g=bdc736be

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As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from me-to-me,the views I express and/or the commentary I write in the pages ofThings That Make You Go Hmmm..... mayreect the posioning of one or all of the Vulpes funds - though I will not be making any specic recommenda-ons in this publicaon.

Grant

www.vulpesinvest.com

Grant Williams

Grant Williams is a portfolio and strategyadvisor to Vulpes Investment Manage-ment in Singapore - a hedge fund running$200million of largely partners capitalacross multiple strategies.

In 2012, all Vulpes funds will be opened tooutside investors.

Grant has 26 years of experience in nance

on the Asian, Australian, European and USmarkets and has held senior positions atseveral international investment houses.

Grant has been writing Things That Make You Go Hmmm..... for the last three years.

For more information on Vulpes please visit www.vulpesinvest.com
http://users/Grant/Library/Caches/Adobe%20InDesign/Version%207.0/en_GB/InDesign%20ClipboardScrap1.pdfhttp://www.vulpesinvest.com/http://www.vulpesinvest.com/http://users/Grant/Library/Caches/Adobe%20InDesign/Version%207.0/en_GB/InDesign%20ClipboardScrap1.pdf

Hmmm 02 Jun 2012

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