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October 9, 2011
Issue 168  -  Does Greece Matter?
A lot of the headlines recently revolve around Greece and it's financial troubles.  I want to go through the basics of the situation and how they could affect us.
The first thing that you need to understand is counterparty risk.  Counterparty risk is actually a pretty simple topic.  Anytime you have an agreement or contract between two parties, each has responsibilities.  If I pay Best Buy for a refrigerator that isn't in stock, I'm taking the risk that they won't come through with the unit.  Of course this is a very small risk with a large company and my Visa would most likely reimburse me if something were to happen.
With countries, banks and corporations, the risks are much higher.  If a bank promises to backstop a contract should it fall through, they are on the hook for much more money.
In the case of Greece, they owe a LOT of people money.  This is in the form of bonds, where Greece has borrowed money and promised to pay it back with interest.  As Greece borrowed more and more money (much like the U.S.) they became overextended.  As this happens, they get their credit downgraded which results in higher interest rates on new money they borrow.  This becomes more and more of a burden.
Greece was bailed out once before by Europe and the International Monetary Fund.  Now they are back in the same boat.  Without another bailout, they will default.
This is where counterparty risk comes into the equation. 
US bank exposure to Euro crisis may total $640B--Dow Jones, citing a government report
* Dow Jones reports that the $640B figure was cited in "recent research papers written for Congress", without being specific or offering any links to the source documents (our prior comment mistakenly stated 0B; the correct figure was 0B).
* The figure apparently aggregates both sovereign debt and bank debt, as Dow Jones notes that the one of the reports states that: "given that U.S. banks have an estimated loan exposure to German and French banks in excess of $1.2T and direct exposure to the PIIGS valued at $641B, a collapse of a major European bank could produce similar problems in U.S. institutions."
* Note that most references to EU debt exposure have referred to sovereign debt (with a presumption that wholesale EU bank failures would indeed be problematic for US banks).
Now things are looking much clearer.  The root of the "crisis" here is the solvency of the banks.  They are bankrupt as it is and couldn't survive that big of a hit. (without another bailout)  They are whining to "save" them.  Of course they would quickly be replaced as banking, when run correctly, is a very profitable business.  But we must save these banks.  Why?  Because that's what the banks and the owners paid  They own the show. 
If Greece were allowed to fall, there would be repercussions, no doubt, but the crisis would eventually work itself out.  So the bottom line is that Greece matters, but in the long run, only to the money printers.  If they fail, we could see a lot of turbulence in the markets, and that will most likely be down.  This would almost assuredly take down the gold and silver shares too.  This will only be short lived though and they would bounce back pretty quickly.  This is the main reason to stay off margin.  You don't need the added pressure of margin.  In the long run, gold and silver go higher. 
There are signs that the "authorities" are going to try and block gold and silver from the masses.  Of course one of the most obvious ways is the capital gains tax applied to gold.  If you buy the ETF GLD, the tax rate is equivalent to a stock, but if you get the physical, it's taxed at your income tax rate.  Obviously this is a much higher rate.  This acts as a deterrence.  There is even the first rumbling of further restrictions:

03 October 2011

Restricting Gold and Silver Sales in France

A few people have asked me about the recent story concerning France banning cash sales of gold and silver. The story originated herebut was picked up by quite a few other sites.

This is different from the reports of limits specifically on gold and silver sales in Austria.
"According to the bank representatives and manager we spoke with, Austrian banks have now been ordered to restrict the sale of gold and silver bullion purchases and are limiting personal acquisitions of precious metals to 15,000€ (approximately $20,700 USD) at a time, or 11 ounces of gold at today’s prices."
This is just like the elite.  Block the only things that could actually save the little guy in the coming crisis.  For many decades, Americans could rely on their house as an asset.  Now....not so much:
No Rise in Home Prices Until 2020: Bankers

Published: Friday, 30 Sep 2011 | 5:07 PM ET

By: Karina Frayter, CNBC Markets Producer

Home prices are unlikely to recover before 2020 and mortgage defaults will persist for years, says a survey of bank risk managers out Friday.

The survey conducted by the Professional Risk Managers’ International Association for FICO, found that 49 percent of respondents do not expect housing prices to rise back to 2007 levels for another nine years. Only 21 percent of respondents said they would.

The findings, which authors called "a decidedly pessimistic outlook", are a sharp reversal from cautious optimism the survey respondents expressed late last year and in early 2011.

In addition, 73 percent of surveyed bankers say they expect mortgage defaults to remain elevated for at least another five years. And 46 percent believe mortgage delinquencies will increase over the next six months.

Only 15 percent of respondents expect mortgage delinquencies to decline during that period.

"While the housing sector will almost certainly gain strength during the next nine years, many bankers clearly believe prices will remain depressed for half a generation," said Andrew Jennings, chief analytics officer at FICO.

Bankers concerns spread beyond the housing market.

A large number of respondents says they also expect to see an uptick in delinquencies on auto loans, credit cards and student loans.

Small businesses are expected to continue face a challenging credit environment. More than one-third of respondents forecast an increase in delinquencies on small business loans.

Bankers also appear to be pessimistic about recovery in consumer spending, with 64 percent of respondents expecting credit card usage to remain below pre-recession levels for at least five more years.

Half of the respondents expect credit card balances to increase over the next six months, due to higher spending by some households and smaller monthly payments by others.

© 2011

Housing in the U.S. is following the same trajectory as Japan, only delayed by 20 years.  We have a LONG way for housing to recover.  Don't treat it as an asset, it is a home.  If you can cash flow a rental, great, just don't overspend as prices could fall further.  Of course if you can't find a job, buying a house kind of moves down on the old to do list:

It Is Virtually Impossible To Land A Job As "Jobs Hard To Get" Responses Hit 28 Year High

While the fact that the September Conference Board consumer confidence number missed in September, coming in at 45.4, below expectations of 45, and a tiny increase from the revised August 45.2, the shocker was in the responses to "jobs hard to get" category which printed at 50, up from 48.5 in August, and is now the highest number since 1983! Yet despite that it can not get a job to save its life, the public appears to have reverted to Hopium consumption, with the 6 month outlook jumping to 54 from 52.4, even as the current conditions index declines from 34.3 to 32.5, and the lowest since January. And a big red sign for the auto segment, is that Americans expecting to buy a car within 6 months has dropped to just 11.4% from 13% last month. And this even with GM offering subprime loans to deadbeats left and right.
There is no way that government jobs can turn this thing around.  We need private sector growth and that just isn't going to happen without a lot of healing.  Balance sheet healing, credit contraction, and most importantly, a large reduction in government size.  The amount of money being spent by the government, often in completely wasted ways, cannot be overcome. 
On the topic of government waste, here is a doozy from zerohedge:

Zero Hedge Kindly Requests The Immediate Resignation Of Mary Schapiro For Gross Breach Of Professional Responsibilities

Ever wonder why the final SEC report on the flash crash doesn't match up to the forensic evidence found by Nanex?

It seems the SEC/CFTC failed to disclose they didn't get around to interviewing the traders that actually executed the algorithm blamed for dumping 75,000 emini contracts on the market "without regard to price or time" until 2 weeks after publishing their final report on the flash crash! Apparently, they were making a lot of things up to fit a foregone conclusion.

According to the media, it was Waddell & Reed who executed those trades right? Well, no. Barclays executed the contracts using their time tested algorithm called Participation. You simply can't crash a market with the Participation algorithm. This is an algorithm that in fact has sophisticated price and time components. This is an algorithm that would only sell at the offer -- and never at the bid. This was discovered and pointed out by Nanex after just one day reviewing the actual 6,438 eMini contract trades (75,000 contracts) which ZeroHedge helped obtain. But the media was happy to hang the guilt on an out of town mid-west Mutual Fund company, and besides all this stuff was getting way too complicated. After all, when it comes to such complexities, it is only economy PhDs who are fit to opine at will.

Only the SEC/CFTC wasn't counting on anyone double checking their work...

So a week after Nanex published their findings on the eMini trades, the CFTC holds their very first interview with Vijay Pant -- the man in charge of executing the infamous W&R trades at Barclays using the Participation algorithm. Here's a link to the CFTC website showing that meeting. This was the first time the SEC/CFTC actually interviewed those with intimate knowledge about the algorithm blamed for the flash crash in the SEC/CFTC final report.

How many heads will roll for this faux pas? And if it is only one, it better be that of Madoff "dear friend" Mary Schapiro who may have slipped through the cracks after the biggest ponzi scheme, since the US government, was handed to her on a silver platter.

But not this time.

If it is indeed confirmed that the agency, which is already in hot water for purposefully destroying evidence confirming various hedge funds have participated in insider trading, we are confident that the mere onslaught of class action lawsuits against the SEC, which one can now accuse of out right cover up, by anyone who lost money on May 6, will force not one but countless resignations, as the rats abandon the sinking ship, terrified by the prospect of civil and criminal liability pursuing their very own sad and pathetic bureaucratic careers.

We urge any and all class action lawyers among our readers to do their thing.

This story is exhibit A in the case against our regulators and their bought and paid for status.  The "flash crash" was perpetrated by the major firms and they made out like bandits.  Yet, the regulators, after "looking into it," actually publish fabricated data?  This is beyond repair at this point.  I don't even hold out hope for an Elliot Ness type figure draining the swamp.  They have become too powerful.  Protect yourself.
GORO  (closed $18.52, up $0.10, average price paid $6) 

Gold Resource Corporation Announces $20 Million Stock Repurchase Program


Press Release Source: Gold Resource Corporation On Tuesday September 27, 2011, 1:12 pm EDT

COLORADO SPRINGS, CO--(Marketwire -09/27/11)- Gold Resource Corporation (AMEX: GORO - News) today announced that its Board of Directors has approved a $20 million stock repurchase program. Gold Resource Corporation is a low-cost gold producer with operations in the southern state of Oaxaca, Mexico. The Company has returned over $25 million to shareholders in monthly dividends since declaring commercial production July 1, 2010.

Gold Resource Corporation, in response to the downward pressure on its stock, is implementing a share repurchase program. Under this program, the Company may repurchase its common shares from time to time in open market transactions at prevailing market prices. The program will be funded from available working capital. The timing and the amount of any repurchases will be determined by management based on evaluation of market conditions, share price, and other factors. This Board approved program is effective immediately, has no pre-established closing date, and may be suspended or discontinued at any time. The Company is not obligated to repurchase any dollar amount or specific number of shares of its common stock under the program.

"Management believes that at current price levels the Company's stock is undervalued and represents an attractive investment opportunity for the Company in addition to an opportunity to further reduce its already tight capital structure," stated Gold Resource Corporation's President, Mr. Jason Reid. "With only fifty-three million shares outstanding as a producer, in an industry where most producers have hundreds of millions of shares outstanding, this share buyback may further leverage our ability to distribute our meaningful monthly future dividends. This share repurchase program further demonstrates our commitment to deliver shareholder value."

Thanks to Harrison for pointing out that I missed this press release last week.  This is move by the company to counter the shorts.  This will supply some support to the stock, but only under $16 as that was there last private placement price.  I don't think this is a cure all, but a nice step.  More good news this week: 

Gold Resource Corporation Increases Third Quarter Production by 87%

COLORADO SPRINGS, CO--(Marketwire -10/06/11)- Gold Resource Corporation (AMEX: GORO - News) confirms its record production forecast for the third quarter ended September 30, 2011 with preliminary production results of approximately 25,200 ounces precious metal gold equivalent (AuEq), which is the highest number of quarterly ounces produced to date and is approximately an 87% increase from the previous quarter. Gold Resource Corporation is a low-cost gold producer with operations in the southern state of Oaxaca, Mexico. The Company has returned over $28 million to shareholders in monthly dividends since declaring commercial production July 1, 2010.

Gold Resource Corporation's 87% production increase keeps it in line with the current annual target of 60,000 to 70,000 ounces AuEq for 2011. The level of production during the third quarter represents a current annual run rate of over 100,000 AuEq ounces. Continued mill optimization of metallurgical recovery and increasing average head grades from the Arista Mine contributed to these record production levels.

"We are excited by these developments and will release the full financial results for the third quarter at the time we file our quarterly report with the Securities and Exchange Commission. The El Aguila Project and the hard work of its team members continue to impress management each month. We look forward to a strong finish for 2011 and to a significant continued production ramp up for 2012 targeting 140,000 ounces of precious metal gold equivalent," stated Gold Resource Corporation's President, Mr. Jason Reid. "We are well positioned on an exciting production and cash flow trajectory."

This is outstanding.  Production is ramping up nicely.  Before too long this is going to be a juggernaut.  The shorts can still take the price lower, but in the long run, the only thing that matters is results.  If they produce, the shorts will go away.
Mexus Gold  (closed $.14, unchanged, average price paid, $.22) 
Alexco Resource Corporation -  AXU  (closed $6.84, up $0.10, recommended at $7.90)  
Stocks    (Current status, out, sold on March 18)
Still waiting for a final large down leg to start slowly buying back.
Physical Gold  (Closed $1652, down $30,  average price paid $395)
Physical Silver  (Closed $31.91,  up $1.00,  average price paid $5.31
This week's video has a dancer that looks almost computer generated.  Have a great week!