U.S. Mint Runs Out of Smallest American Eagle Gold Coin; Is There a Shortage of Physical Gold? Coordinated Smackdown by Naked Shorts?

Demand for gold coins has surged following the record price plunge in gold last week. Demand is so high that the U.S. Mint Runs Out of Smallest American Eagle Gold Coin.

The U.S. Mint ran out its smallest American Eagle gold coin after demand surged following the biggest drop in futures prices in 33 years.

Sales of the coins weighing a 10th of an ounce were suspended after demand more than doubled in 2013 from a year earlier, the Mint said today in a statement. Total sales of American Eagles in April have almost tripled from a month earlier, according to Mint data on the website.

On April 15, gold futures in New York plunged 9.3 percent, the most since 1980. Retail sales and jewelry demand soared in India, the world’s top buyer, and China, the second-biggest. Coin sales also surged in Australia.

The Mint also sells 22-karat American Eagle coins of 1 ounce, half an ounce and a quarter of an ounce.

The U.S. Mint suspended sales of silver coins in January for more than a week because of lack of inventory. Sales of the coins jumped to a record that month.

Bullish or Bearish?

It’s possible to make a bullish or bearish argument out of this shortage. The bullish argument is simple: demand is strong. The bearish argument is small investors are a contrarian indicator just as they were with silver in January.

I am not taking a short-term stance one way or another, so don’t ask. I do like my chances longer-term as I explained at the Wine Country Conference. See Mike “Mish” Shedlock: A Brief Lesson in History.

Shortage of Physical Gold?

Some writers have spun this story into the message there is a shortage of physical gold. No there isn’t. There is a temporary shortage of certain coins, no more no less.

Divergence Between Physical Gold and Paper Gold?

Other writers have noticed the price premium on small denomination coins and concluded there is some sort of “divergence between physical gold and paper gold”.

Once again, that’s nonsense. Premiums on small denomination coins is not the same a general premium on physical gold itself.

How do I know?

Easy: If I went to buy or sell at GoldMoney (and GoldMoney only deals in physical metals with allocated, audited storage), I would pay the same small markup as before, based on the current futures price.

Here is another way to tell. Go buy or sell a one ounce bar and see how much it costs or how much you can get. Here’s a hint: your selling price will not fetch $ 1900 as it once did, nor would it cost you over $ 1900 to buy.

Smackdown by Naked Shorts?

Many claim blatant manipulation by naked shorts. Mercy! Under this theory, shorts piled on to the tune of 163,000 gold futures. Really?

Keith Weiner tackles that theory for the Acting Man Blog in The Last Contango. Here is the pertinent chart.

Weiner asks “If someone had sold 163,000 futures to cause the price to drop, then wouldn’t the open interest [in futures] have risen? If Santa went down chimneys, wouldn’t there be soot on his red and white uniform?“

The answer to both questions is of course “yes”. Instead, the chart shows a 16,000 open interest drop in gold futures and a 12,000 drop in silver futures.

Ignore the Hype in Both Directions

Bulls blame every drop on manipulation and frequently tout preposterous price targets. Bears cite jewelry demand and other nonsense as if it’s important (and it isn’t).

It is best to ignore the hype and silliness on both sides.

Fundamentally, what has changed? I suggest nothing.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Mish’s Global Economic Trend Analysis

U.S. Mint Runs Out of Smallest American Eagle Gold Coin; Is There a Shortage of Physical Gold? Coordinated Smackdown by Naked Shorts?

Analysis: "Naked" CDS ban and euro zone calm

An illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in the late evening in Frankfurt January 8, 2013.

Credit: Reuters/Kai Pfaffenbach

By Mike Dolan

LONDON | Wed Apr 17, 2013 1:12am EDT

LONDON (Reuters) – The surprising stability of euro government bonds this year owes much to the European Central Bank’s powerful pledge of support, but many wonder if regulation to limit speculation also plays a part.

European Union regulators acted last November after two years fretting about financial derivatives called sovereign credit default swaps (SCDS), insurance-like contracts offering protection against the risk governments default, and suspecting they aggravated serial euro government debt crises.

A key argument was that in allowing punters to bet on and profit from a sovereign default without even owning the underlying bonds, the market was prone to speculation and overshoot that had unnerved investors and precipated the very creditor strikes, bailouts and even the defaults being bet on.

For many, it was like taking fire insurance out on a house you didn’t own and the uncovered nature of trading in this market introduced more than a little moral hazard.

As a result, the EU banned uncovered or “naked”, positions in sovereign CDS, in tandem with other reporting requirements and circuit breakers on “short selling” in other systemic securities such as bank stocks.

The financial industry, perhaps predictably, cried foul and said the ban would distort price information, hit market liquidity in SCDS and ultimately backfire by scaring off potential bond buyers who would feel less comfortable hedging as a result.

Five months on, however, many puzzle at how relatively stable euro zone government bonds have remained through at least two events – Italy’s inconclusive elections and the messy Cyprus bailout – that would previously have caused major ructions across the bloc’s sovereign debt markets.

That’s not to say SCDS markets are not functioning at all. Pricing there still suggests about a 70 percent probability of an eventual sovereign default in Cyprus, for example.

But some point out that SCDS and underlying bond market gyrations in recent hotspots such as Slovenia are much more in step.

For most investors, the announcement last August of ECB’s bond-buying backstop, or Outright Monetary Transactions, is the prime protector here. But it may also suggest that the sorts of financial derivatives and trading activity the wider public saw malfunction so spectacularly over of the past decade can be effectively tamed.

But in a surprisingly blunt paper, the International Monetary Fund weighed in strongly against the EU ban last week – saying it found little evidence that SCDS overall had been out of line with bond spreads and that for the most part premiums reflected the underlying country’s fundamentals – even if they reflected them quicker than the cash market.

“Overall, the evidence here does not support the need to ban purchases of naked SCDS protection,” it said in a special chapter on the subject in its latest World Economic Outlook.

Even though the IMF report said it found signs of overshoot in default insurance premia for “vulnerable European countries in times of stress”, it said it couldn’t make a direct case for this causing higher sovereign funding costs per se.

For the most part, it endorsed the industry line that the ban would create more distortions than it would resolve and that a drop in CDS volumes and liquidity, which it said was observable this year, may deter bond buyers fearful of less efficient hedging.

The hedge fund industry, represented by the Alternative Investment Management Association, was quick to say the report “essentially vindicated” the industry position.

IMF ADJUDICATION?

The IMF’s resolute support of the industry line, not only in its analysis but its recommendations, was starkly clear.

Among those claiming the market had aggravated sovereign funding pressures include Rouen Business School professor Anne-Laure Delatte, whose report last summer looking at Greece, Ireland, Portugal, Italy and Spain and claimed SCDS and bank CDS had played a dominant role in driving market sentiment:

“We obtain empirical support of an intuition, often heard from market practitioners, that CDS prices affect market sentiment and serve as a coordinating device for speculation.”

Curiously, she reckoned the EU ban itself was flawed in that it excluded bank CDS which often led sovereign speculation and also exempted dealer banks consider to be ‘market makers’.

And given that the top 15 dealer banks account for almost 90 percent CDS trading activity, one wonders whether anyone apart from this concentrated group and leveraged hedge funds were really affected much either way.

As the IMF and others point out, the size of notional SCDS outstanding – at about $ 3 trillion last June – was only about 6 percent of $ 50 trillion of total government debt. So does it matter to long-term investors?

Scott Thiel, Head of European and Global Bonds at the world’s biggest asset manager Blackrock, says he was instinctively against banning financial market activity that reduced price visibility. By changing his view of CDS price signals, he said, it limited his options in managing portfolios.

However, he also said he understood what regulators were trying to do and was equivocal about the overall impact.

“When investors ask me if we have been more or less active in derivatives over the past year, my general answer is ‘less active’ because of what’s happened with regulation,” said Thiel, who said he remains particularly bullish on Italian debt regardless.

“It certainly makes portfolio management less efficient but that may have positive and negative effects – we’ll see.”

(Editing by Ron Askew)

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Reuters: Business News

Analysis: "Naked" CDS ban and euro zone calm