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September 11, 2011
Issue 164  -  All But Inevitable
Things are going from bad to worse in the financial world.  The Euro is on the verge of collapse, Japan is close to another recession and the U.S. is getting further and further into debt:
Analysis: Pension funds in new crisis as deficit hole grows Natsuko Waki | Reuters – Mon, Sep 5, 2011

LONDON (Reuters) - Pension funds in developed economies are facing a new crisis as falling equities and tumbling bond yields widen their deficits, threatening the incomes and retirement dates of future retirees.

At the heart of their problems is a steady move by pension plans in the United States, euro zone, Japan and the UK to cut exposure to risk after the financial crisis.

But this "de-risking" may end up depressing their long-term returns from stock market investment and challenge the conventional wisdom that shares generate higher returns than bonds.

With weaker holdings and increased liabilities, companies will find it more difficult to fund existing pension schemes. They may cut new business investments as they use more cash to pay pensions.

For future pensioners, it means they will potentially face a lower retirement income and a longer working life -- or both.

This year has been a nightmare for many in the industry -- which controls $35 trillion, or a third of global financial assets -- and funding deficits are posting double-digit rises.

"We had a credit crisis and government bond crisis, and the third one we have is the pension crisis. This is the one where everything is going wrong and there's no obvious way out," said Kevin Wesbroom, UK head of global risk services at consultancy Aon Hewitt.

The sharp retreat in stocks through the summer has hurt them again by weakening their asset positions and threatening to erode stock market recoveries seen since the equity collapse surrounding the 2007-2009 credit crisis.

Even lower bond yields are proving to be a new headache.

"The real killer is liabilities are going up because in the flight to quality everyone gets out of equities and runs for cover in safe assets like government bonds, and yields are falling," said Wesbroom.

Many defined benefit(DB) pension plans -- where benefits are pre-determined -- pay a fixed stream of income to retirees.

The low-yielding environment makes it harder for the funds to meet these bond-like liabilities, forcing them to accumulate even more fixed income instruments to try to meet their obligations, creating a vicious circle.


Recent data on pension deficits highlight the plight of many pension funds.

In the United States, funding deficits of the 100 largest DB plans rose $68 billion to $254 billion in July, according to the Milliman Pension Fund Index. July marked the 10th largest deficit rise in the index's 11 year history.

Even if these companies were to achieve an optimistic annual return of as much as 8 percent and keep the current benchmark yield of 5.12 percent, their funding status is not estimated to improve beyond 93 percent by end-2013 from the current 83 percent.

Aon Hewitt estimates deficits of DB pension plans for FTSE 350 companies as of end-August rose 20 billion pounds from July to a 2011 high of 58 billion pounds. Their funding ratio stands at 89.8 percent, down from 94.1 percent three years ago.

The drop in the funding ratio is driven by a rally in the fixed income market. In Europe, the double-A rated corporate bond yield -- one of the benchmark rates used by regulators -- fell 300 basis points in the last three years to 3.55 percent, according to Barclays Capital.

The widely used rule of thumb is that a 50 basis points fall in the discount rate roughly results in a 10 percent increase in liabilities.

"Things look substantially worse now than they were during the credit crisis," said Pat Race, senior partner at investment consultancy Mercer.

In reaction to the past few years of an equity decline and volatility, many pension funds are indeed planning to buy more bonds, a move highlighted by Mercer's survey of over 1,000 European DB pension funds in May.

"Trustees do want to de-risk but financial directors have irrational desire to have equities. They are too wedded to equity markets," Race said.

"You still have massive uncertainties with a potential for another dip into recession. I don't see any reversion to days when equities are dominant part of DB plans."

JP Morgan's data shows pension funds and insurance companies in the United States, euro zone, Japan and UK bought $173 billion of bonds in the first quarter, boosting their bond buying for the third quarter in a row.

At the same time, they cut equity buying for a fifth quarter in a row, selling $22 billion of stocks in Q1.

In Europe, pension funds slashed their weightings for equities to an average of 31.6 percent in 2011 from 43.8 percent in 2006, while fixed income holdings rose to 54 percent from 47.8 percent in the same period, according to Mercer.


Growing pension funds deficits on corporate balance sheets may make it more difficult for companies to access credit and discourage firms which are already hoarding cash from spending cash to expand business.

For wider financial markets, the giant industry's gradual move away from stocks could hit equity risk premium -- excess return of equities over risk-free securities which compensates investors for taking on the relatively higher risk.

This may reinvigorate an academic debate where some economic analysis suggests the equity risk premium should be small, in most cases less than half a percentage point, as opposed to the widely-used range of 4-6 percent.

Indeed, 10-year U.S. Treasuries gave higher total returns in the past 10 years on a rolling basis than world stocks.

"The puzzle... is that for the past 20 years, there has been no net equity risk premium. With the recent sell-off in risk and the rally in bonds, I think there might have been a net premium on bonds," Stephen Jen, managing partner at SLJ Macro Partners, said in a note to clients.

"This has turned financial theory on its head, and managers of pension funds and sovereign wealth funds need to think about this very carefully."


This is a VERY big problem as there a lot of people who will desperately need these future payments.  There is no way that money will be there.   I take that back.  No way it will be there in it's current value.  To keep these pension promises will require inflation.  The promises must be kept with less valuable dollars.  One would think that interest rates should be rising with inflation and that would be correct except in an environment where Treasuries are rock solid collateral.  They aren't in reality rock solid, but as long as the illusion continues, they will continue to be treated as such.  This creates an insatiable demand for these worthless securities as large firms seek safe havens.  When the illusion stops, interest rates sky rocket.  Here is another hint that this may be closer than you think:
As you can see here, our debt is out of control.  Notice the down right pedestrian spending of Bush 2 compared to Obama.  Keep in mind that Bush 2 was spending like an idiot and yet it pales in comparison to Obama's.  Also take a look at Clintons years.  Actually lines in the negative there.  Remarkable. 
The biggest news of the week was the revaluing of the Swiss Franc.  The Swiss decided to peg their currency to 1.20 Euros.  This immediately devalued their currency 9%.  Keep in mind that the Franc was the last currency on earth that had sense of safe haven.  Now that is gone. 

Thank You Swiss National Bank For $2000+ Gold

Submitted by Tyler Durden on 09/06/2011 - 14:05

Confirming that this is a market for idiots, by idiots, was the 4 am response in the price of gold, which following the SNB's Swiss Franc peg announcement did not surge, as it should have considering that the SNB just singularly changed the role of the CHF from a "flight to safety" to a carry currency, making gold the only island of stability in a world of fiat insanity, but instead plunged by over $50. Subsequent attempts to regain the $1900+ level were met with constant program selling for no other reason, than just because someone 'else' was selling. Of course, the logic is completely and totally the opposite. But don't take our word for it: here is Reuters: "Switzerland's decision to peg the erstwhile safe-haven franc to the euro may finally give gold bugs the chance to see prices hit the once-unimaginable $2,000 an ounce mark, as the metal holds on track for its strongest annual rally in three decades. By buying euros in unlimited amounts to weaken the franc, the SNB is in effect putting more of its own currency into circulation, which threatens to trigger inflation. It has also impacted the Swiss currency's status as a haven in its own right. While gold prices initially dipped as the move sparked a rush to liquidity in the form of other currencies such as the dollar, the SNB move is likely to lend firm support to gold in the medium term, analysts said." Precisely. And it is not only Reuters: Bank of America's MacNeill Curry said that Gold will probably rise to $2,050 this year. The rationale - identical to the above: SNB decision to peg franc to euro should also support gold. "They have taken out one of the big safe-haven assets, which is the Swissie." As for the amount of time the idiots will need to realize that QE3 coupled with the SNB action means that gold is now valued somewhere well over $2000: at least a few days...Which everyone who looks for even the smallest golden pullback will be happy to take advantage of.

This should have meant much higher gold prices.  But what happened?  Gold crashed $50 in about ten minutes.  Why?   Intervention.  That's the only explanation.  Dampen the enthusiasm to slow the rise in gold.  This won't work, but it buys them some time.  They're going to need all the time they can muster:

Former Fed Official Poole Sees Risk Of "Astonishing Rise" In Inflation

Submitted by Tyler Durden on 09/08/2011

Speaking at a Bloomberg inflation meeting this morning, former St. Louis Fed official William Poole was quite vociferous in his concerns over current Fed policy noting that Bernanke paid too much attention to equity prices. He also noted that there is a risk of an 'astonishing rise in inflation'.





But perhaps in antithesis of Trichet's 'You Can't Handle The Lies' moment this morning, this headline caught our eyes:



This is on the heels of his comments during an August 26th interview with Tom Keene at Bloomberg where he was 'flabbergasted' at the Fed's August 9th decision to 'date' fed rates policy in such a 'calendar' manner as opposed to 'economy' centric manner.

POOLE: I would describe the [Fed] decision on August 9 as being simply unprincipled. I know of no article, paper - professional paper in the last 25 years, 35 years perhaps that would justify this approach to policy. All the academic research, including research within the Federal Reserve makes policy dependent on the state of the economy, not the state of the calendar. So I'm flabbergasted, makes no sense to me.

Now Fed officials are loathe to use words like astonishing, so this is a rather scary prediction.  Just how high of rate would you say is astonishing?  10%?  20%?  Higher?  Whatever that rate would be, it will make what is happening today, seem tame in comparison.  As always, this is just another sign that you need gold and silver.  Just make sure you own the REAL thing.  Not a paper substitute, not a "pooled" account, real, in your hands metal.  Here 's another warning sign of why that is so important:

GLD trading today at a 2 percent discount to gold

Submitted by cpowell on 10:41AM ET Tuesday, September 6, 2011. Section: Daily Dispatches

1:40p ET Tuesday, September 6, 2011
Dear Friend of GATA and Gold:

Maybe closer observers can comment on this more authoritatively, but the gold exchange-traded fund GLD, which the other day undertook something of a publicity campaign with CNBC to show that it has the gold it claims to have, only to put blinders on the CNBC reporter, take him to a mysterious vault, and assist him in displaying a gold bar apparently owned by someone else (, today seems to be trading at a huge discount to real metal. That is, at 1:30 p.m. ET, gold was quoted at $1,872 but GLD, whose shares are meant to track the price of a tenth of an ounce of gold, was trading at about $183, or nearly $4 or about 2 percent less than ordinarily would be expected. Has the publicity campaign failed? Are questions about the exchange-traded fund and its custodian, the major gold short HSBC, gaining some respect?

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

GLD, the ETF for gold is a joke.  Don't touch this with a ten foot pole.  This could blow up anytime.  When GLD first started trading it traded almost identically with the price of gold.  Why is it now selling at a 2% discount?  Lack of confidence.  Even the "confidence building" story by Bob Pisani on CNBC is now being mocked as the bar they showed from GLD actually belongs to another ETF.  So all that gold wasn't GLD's at all. Wow, you don't suppose they were trying to mislead us?  More people are figuring out that this isn't true gold.  It is only a derivative.  There is no WAY GLD has all the gold they claim.  If they did, it wouldn't trade at 98% of gold's price. (and you wouldn't need "proof" pieces from CNBC) The Saudi's seem to want the real thing too.  Here is a report from Dubai: (GATA)

From: Jason Gibb
Sent: Tuesday, September 06, 2011 6:29 AM
To: Steve Merrill
Subject: PAMP Gold

I thought you might find it interesting to know.
I was in PAMP gold's office in Dubai yesterday, they are completely out of any gold bars between 1g and 1 Kilo meaning the 2.5g, 5g, 10g, 50g and 100g bars are completely sold out at the wholesaler level.
I asked why because I have never encountered this before, they said it was the first time, because the PAMP mint had some technical difficulties.
They said that the next shipment will be in 20 days.
These wholesalers are never out of this product because they are the suppliers of the jewellery manufacturers and sellers
BTW the 1g are still in stock because they carry a 20% premium baring fee.
And the 1 Kilo are in stock because it is getting expensive to buy a Kilo of gold at $61,000 a bar.
There is still lots of gold in the market under other brands, but not many selling smaller bars without substantial premiums, I found one selling smaller bars at spot rates and cleaned out another supplier Swiss Gold of every ounce, 2.5g, 5g, 10g, 50g, and 100g, and one ounce they had left, which added up to 23 ounces including a few bars in Tolas, but to see a premium swiss brand like PAMP which is one of the most popular with no stock, it is a sign of things to come in my opinion.

Gold is in short supply all over the world.  People are waking up to the realities of a world full of fiat currencies that can (and eventually will) go to zero.  Of course the power structure in this country wants you as far from gold and silver as possible.  The better to keep the charade going.  This story from CNBC is a doozy, saying that it's better to own balance sheet bankrupt European banks instead of no liability, money for thousands of years, gold: (GATA)


Hi, Bill!
I was listening to CNBC this morning and managed to catch the commentary that suggested gold was not a safe haven. The deep thinkers instead recommended buying European banks as a safe haven. This has to be a new low even by CNBC standards.

Notice today the announcement that the Suissy would be pegged to the Euro (yet another example of market intervention at the CB level) had the reaction of immediately driving gold lower. To me this is yet another bullish development for the gold fundamentals. In effect, gold will now be rising even faster in Suisse Francs.

The dollar strength today is in line with the long running pattern established by the Cartel. They always act pre-emptively before they make their move. Taking gold down a notch and running the dollar higher will just represent a temporary intervention prior to the next stimulus move by the Fed. In short nothing has changed. The reversal today is temporary, the manipulation remains in effect at all levels, and the bananaheads remain ignorant by choice.

Euro banks a safe haven? Now I have heard everything...

Imagine this guy is actually giving "advice" to the paying customers!  Amazing.  To show the TRUE reality of things look at this chart:
This is the price of the median home divided by gold.  Hmmmmm......seems to me gold has been a LITTLE better as an investment huh?  Why do "professionals" still tell people that real estate is a great investment and to avoid gold?  It's a place to live....period.  If you can rent out your house and pay the bills with the rent, it CAN be an investment, but our artificially low interest rates, have distorted that all to hell, so that metric is flawed too.  The old rule of thumb is if you can charge 1% of the homes value for rent, it's a good investment.  That is just not possible in most places today.
Imagine what housing prices would be if interest rates were free floating?  What if the average rate was 10%?  That probably wouldn't help prices.....  Don't worry though, the banks will be all right.  You are worried about the banks right?  You're not?  That's why you aren't a politician:

Rep. Bachus tells local paper that Washington should 'serve' banks

By Peter Schroeder - 12/13/10 01:41 PM ET

Rep. Spencer Bachus (R-Ala.), the incoming chairman of the House Financial Services Committee, is coming under fire from liberal groups for suggesting that federal lawmakers and regulators exist to "serve the banks."

Bachus, who is poised to oversee the implementation of the Dodd-Frank financial regulatory overhaul, made the comment in an interview with The Birmingham News.

"In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks," he said.

This is truly astonishing.  They are there to SERVE BANKS!  WTF!  Aren't they elected to serve US?!!!?  This makes my blood boil.  To imagine that an elected official has this crazy ass backwards view of things is not to be believed.  These guys don't care about anybody but number 1.  Get self sufficient.  Protect your assets.  Gold and silver have a long way to go in appreciation.  Here is another potential nail in the gold manipulation coffin:
Andrew McGuire  -  LBMA Shorts Will be Forced to Take Losses 

With gold trading near the $1,900 level and silver above $42, today King World News interviewed London Whistleblower Andrew Maguire.  When asked about key developments in China regarding the Pan Asia Exchange Maguire stated, “Silver and this 11 kilo gold contract, international rolling spot contract, are the game-changers.  This is not going to be welcomed by the naked short LBMA bullion banks.  These are competing contracts, but the difference is they are 100% backed by physical metal.  That means that this metal will have to be purchased one to one as these contracts open, and not just listed as a paper entry (as the LBMA does in many cases).”


Andrew Maguire continues:

“The LBMA bullion banks, as we know, operate on a fractional reserve basis and that’s been backed up by the industry apologists such as Jeffrey Christian.  So unlike the LBMA, there is no counter-party risk associated with the ownership of these new Pan Asia contracts.

Eric, there have been some delays with regards to fully implementing the trading platform for the Pan Asia Exchange.  The bottom line here is that the Chinese made a determination that they did not trust any trading platform or software developed in the West.  Consequently, they are designing their own software from the ground up and the new platform will be launched very soon in the fourth quarter. 

When fully launched, this is going to have two pivotal effects on the supply/demand fundamentals as worldwide business will migrate to this exchange.  The last time we discussed retail demand taking place as the new exchange in Asia gets up and running, there will be institutional effects as well.  This will force short covering as existing customers of the LBMA move their business to the Pan Asia Exchange.  It will force the shorts to crystallize their losses as the tremendous short leverage will have to be unwound.

As an example, if you had a pension fund that went to the LBMA and said ‘We want ten tons of gold at $1,700,’ the LBMA banks do not purchase the  ten tons of gold at $1,700, instead they merely issue a ledger entry, a ledger receipt and a piece of paper is given to the pension fund, which leads the pension fund manager to believe they own ten tons of physical gold. 

Because the LBMA does not go out and purchase the physical gold, the price of gold does not experience upward pressure the way that it would under normal supply/demand fundamentals.  Meaning supply/demand is not affected as it should be.  Now typically this pension fund, like many others will not ask for their physical gold.  That’s the system, they (the LBMA bullion banks) know that no one is going to ask for this unallocated gold to be allocated into a physical account.  Furthermore they don’t expect this pension fund to ask for delivery....

Once the trading in China is up and running completely, and that hasn't happened yet as this type of operation takes a long time to get volumes and procedures up and going, this could blow up at any time.  The jig is up, the only variable is timing.  Hang on to your metal.  More evidence from GATA:
 According to the World Gold Council the overall level of global mine production is relatively stable. Supply has averaged approximately 2,497 tonnes per year over the last several years. 2500 tonnes is equal to 80.4 million troy ozs.
The Silver Institute tells us there were 735 million ozs. of Ag mined from the earth’s crust in 2010. Simple math [735 / 80.4] tells us that “nature” is implying that the gold / silver ratio should be 9.14: 1.
Mull this over carefully because it's important.  This is the TRUE measure of the actual ratio of gold to silver.  Whatever is coming out of the ground is hard to fake and alter.  I'll use 10:1 as the WORST case ratio here.  What does that mean for the future price of silver?  A very smart guy has an answer:   

Eric Sprott - From Here Silver is a 30 Bagger to $1,200


When asked where he sees the price of silver headed Sprott responded,“I think silver will outperform gold in the next decade.  If silver should trade at a 16 to 1 ratio (to gold), it will probably trade at 10 to 1 because things tend to overshoot.  Let’s use Jim Sinclair’s $12,000 target, that would suggest $1,200 silver, which is a thirty bagger from here...The biggest reason it (silver) should go there is people should fear bank deposits, that’s what I think they should fear.”

 Not sure we'll get that high, but even if it "only" goes to $120, I think you'd be ok with it.  Just a guess...
GORO  (closed $21.56, down $.80, average price paid $6)
This week is options expiration.  There are a number of puts in the $20 strike price.  There could be pressure down to that point.  After this week that should ease up the pressure.  If you have free money and were thinking of buying GORO, this is a good week. 
Mexus Gold  (closed $.155, flat, average price paid, $.22) 
The rumor is Mexus is about to start their gold mining operation in Mexico.  This could produce income before the cable pulling.
Alexco Resource Corporation -  AXU  (closed $9.08, up .79, recommended at $7.90)  
Stocks    (Current status, out, sold on March 18)
This week may bring a buying opportunity for a small portion of my tax deferred money. 
Physical Gold  (Closed $1852, down $31,  average price paid $395)
Physical Silver  (Closed $41.40,  down $1.90,  average price paid $5.31)
I'm closing this week with a video of a dui traffic stop.  This guy is a hoot.  Have a great week!