RBS cuts 3,500 investment banking jobsT)

A branch of the Royal Bank of Scotland is pictured in London, on August 5, 2011.

STORY HIGHLIGHTS

• Royal Bank of Scotland is to cut an additional 3,500 jobs
• It has already announced 2,000 investment banking job cuts as it shrinks its risky operations
• The investment bank will have 13,400 staff within a year, down from the end of September 2011 number of nearly 19,000

(Financial Times) -- Royal Bank of Scotland is to cut an additional 3,500 jobs as the state-controlled bank rapidly shrinks its investment banking activities in response to the worsening economic outlook and wide ranging reforms of the banking sector due to take effect before the end of the decade.

Stephen Hester, chief executive, on Thursday outlined plans to restructure RBS' wholesaling or investment banking operations into two divisions and withdraw from activities such as cash equity broking and merger and acquisition advisory work that were aggressively expanded by former disgraced chief executive Sir Fred Goodwin.

Risk weighted assets, under Basel III regulatory definitions, will be shrunk to £150bn from £225bn under the restruring plan.

The bank will continue to operate in the fixed income and debt raising markets where it has a strong position but reduce its dependence on wholesale funding markets which have frozen up in the last three years.

Since taking over in 2009, Mr Hester has shrunk RBS's balance sheet by £600bn following the disastrous acquisition of Dutch bank ABN Amro in 2008 by Sir Fred, which forced the bank to seek a government bail-out.

It has already announced 2,000 investment banking job cuts as part of Mr Hester's attempts to shrink the highly profitable but risky operations and focus on lending to corporate and institutional clients.

The investment bank, which will be restructured into a markets division and an international banking unit, will have 13,400 staff within a year, down from the end of September 2011 number of nearly 19,000.

However, people close to the bank have said that the staff numbers could fall to below below 10,000 in a worse case scenario.

The two business units will target a return on allocated equity exceeding the cost of capital, currently estimated at 12 per cent, in the medium term.

The unprofitable cash equities, corporate broking, equity capital markets, and mergers and acquisitions businesses will be closed or sold.

"Our goal from these changes is to be more focused for customers, more conservatively funded, more efficient and with better, more stable returns for shareholders overall," Mr Hester said in a statement.

The investment bank has been RBS's growth engine in the last three years, producing an average return on equity of 19 per cent, but Mr Hester made clear on Thursday the bank had to respond to the challenges thrown up by the current economic crisis.

But pressure mounted on the bank just before Christmas, when George Osborne, chancellor, said the bank, which is 83 per cent-owned by the government, should "scale back [its] risky activities".

The government has also accepted proposals from the Vickers commission, which was set up following the financial crisis and recommended splitting investment banking activities and retail banking operations in the UK's leading banks by 2019.

Shares in RBS were 9 per cent higher at 23.75p in morning London trading.

U.S. acts against Chinese oil trader

The U.S. is taking action against three firms in Asia over oil deals with Iran.

STORY HIGHLIGHTS

• U.S. has slapped sanctions on three firms including a major Chinese oil trader
• US State Department said penalties would be imposed on China's Zhuhai Zhenrong

(CNN) -- The US has slapped sanctions on three firms including a major Chinese oil trader for selling refined oil products to Iran, just days after US Treasury secretary Tim Geithner travelled to Beijing to press for Chinese support on Iran sanctions.

The US State Department announced late Thursday night that penalties would be imposed on China's Zhuhai Zhenrong, the Singapore-based oil trader Kuo oil, and the UAE-based independent oil trader FAL.

While the measures are unlikely to have a big immediate impact on these three companies, they send a strong warning signal to energy companies working in Iran at a time when the US has been canvassing Asian countries for more support in isolating Tehran.

The US State Department called the sanctions against the three firms an "important" step in convincing Iran to change its behaviour, and highlighted the "potential connection between Iran's revenues derived from its energy sector and the funding of its proliferation [of] sensitive nuclear activities."

A spokesperson for Zhuhai Zhenrong said the company had not sold gasoline to Iran. "We've never exported a barrel, not even a wee bit of refined fuel to Iran," said Zheng Mei, director of the public affairs department.

According to the statement, the three firms violated US restrictions on supplying Iran with refined oil products that were passed in 2010. "Under the sanctions imposed today, all three companies are barred from receiving US export licenses, US Export Import Bank financing, and loans over $10m from US financial institutions," the US State Department said.

Importing refined oil products like petrol and diesel is crucial for Iran's economy because the country doesn't have sufficient refining infrastructure to process enough of its own crude into products.

China is the biggest buyer of Iran's crude oil and, according to the US State Department, is also a significant source of gasoline for Iran, but Chinese companies have until now avoided sanctions from the US.

China supported the most recent United Nations sanctions resolution on Iran in 2010, and some analysts believe that in exchange for that support the US may have turned a blind eye to Chinese companies which may have violated US laws. Last year the US placed sanctions on seven companies for selling refined oil products to Iran, but none of those were Chinese.

Zhuhai Zhenrong is a state-owned oil trader based in Southern China. The company has a special mandate from the State Council to do crude trades that offset military trade debt with Middle Eastern countries, according to their website.

Ms Zheng, the spokesperson for Zhenrong, said the company would continue buying Iranian crude. "Zhuhai Zhenrong's trade with Iran is carried out under the two governments. The trade accords with international law and Chinese laws and regulations," she said.

"What we've signed with Iran are long-term contracts and we import around 12m tonnes of crude from Iran each year," Ms Zheng said. "We've never exported gasoline to Iran. This is out of thin air! "

The US State Department said Zhuhai Zhenrong is Iran's largest supplier of refined oil products, brokering sales of gasoline worth more than $500m between July 2010 and January 2011.

The sanctions are likely to have little immediate impact on Zhenrong because the company does very little, if any, business in the US.

Additional reporting by Gwen Chen in Beijing

Not so far apart

A FEW years ago a prominent former treasury official came to lunch at The Economistand predicted that the debt level would become a national preoccupation. He expected Americans would grow weary of a large debt burden, but refused to say whether Americans would demand fewer services or higher taxes as a result. It turns out he was correct: Americans are both concerned about the nation's debt, and confused about how to solve the problem. Often lost in this confusion is the important distinction between the current deficit (not such a big deal) and the long-term structural debt (a big problem). The best solution for paying down America's long-term debt is some combination of spending cuts and tax increases. And if you listen closely to both Republicans and Democrats (at least the non-crazy ones) they actually seem to agree on that. Unfortunately they're talking past each other.

This post by Jonathan Chait illustrates the point. He accuses Glenn Hubbard, an advisor to Mitt Romney and Dean of Columbia Business School (full disclosure: I was once his student), of misunderstanding the extent of the long-term debt problem. Referencing the chart below, Mr Hubbard claims that the debt problem is real, largely caused by increases in future spending, and may result in very high future taxes.

We see two scenarios in these charts. The extended-baseline scenario assumes current laws (like the expiration of the Bush tax cuts and the implementation of Obamacare) will not be changed in the future, while the alternative fiscal scenario assumes that "widely expected" changes to current law (ie, revenue as a % of GDP remains the same and entitlement spending is not meaningfully cut) come to pass. According to the CBO, the extended-baseline scenario—what it takes to keep debt levels stable—poses significant costs.

Revenues would reach 23 percent of GDP by 2035—much higher than has typically been seen in recent decades—and would grow to larger percentages thereafter. At the same time, under this scenario, government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt—activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II.

Mr Chait accuses Mr Hubbard of misreading the chart and pushing a lop-sided agenda focused on cutting spending. But Mr Hubbard's position is simply that long-term spending is unsustainable and that the debt problem cannot be solved by tax increases alone. That conclusion is not so different from the research Mr Chait cites from the Center for American Progress, a liberal think tank. There is more common ground here than Mr Chait lets on.

Cutting entitlements and raising future taxes does not necessarily leave people worse off. People live progressively longer and the quality of health-care services, so far, has increased and gotten more expensive. So in principle, you can decrease the length of retirement or the level of benefits paid (especially to higher earners who live longer) and still provide a similar present value of real benefits to future generations. A problem with entitlements is that each new generation expects more than the last, longer retirement and the latest and greatest in health-care technology.

Record-high levels of revenue as a percent of GDP may not be so bad either, so long as society gets progressively richer. Taxing citizens 30% of GDP is a much bigger deal in Angola than Denmark because Angolans have much less income to spare. Though for developed countries the distributional consequences are tricky if income inequality continues to widen. Also there can be second order effects from higher taxes, resulting in lower growth. Fairness to future generations is also important. Punting reform to the future makes it more expensive and places a large burden on the young. Striking the right balance is hard, but possible, and the sooner the better. It is not clear that the current law, associated with the extended baseline scenario, gets it right. That probably requires a more efficent tax code and redefining retirement expectations. It belabours the point of just how necessary a thoughtful dialogue is.

The Big Mac index

THE ECONOMIST's Big Mac index is based on the theory of purchasing-power parity: in the long run, exchange rates should adjust to equal the price of a basket of goods and services in different countries. This particular basket holds a McDonald's Big Mac, whose price around the world we compared with its American average of $4.20. According to burgernomics the Swiss franc is a meaty 62% overvalued. The exchange rate that would equalise the price of a Swiss Big Mac with an American one is SFr1.55 to the dollar; the actual exchange rate is only 0.96. The cheapest burger is found in India, costing just $1.62. Though because Big Macs are not sold in India, we take the price of a Maharaja Mac, which is made with chicken instead of beef. Nonetheless, our index suggests the rupee is 60% undercooked. The euro, which recently fell to a 16-month low against the dollar, is now trading at less than €1.30 to the greenback. The last time we served up our index in July 2011, the euro was 21% overvalued against the dollar, but it is now just 6% overvalued. Other European currencies have also weakened against the dollar since our previous index, notably the Hungarian forint and Czech koruna, which have fallen by 23% and 16% respectively. Six months ago both currencies were close to fair value, but they are now undervalued by 37% and 18%.

For the full data set see here.

America’s next CEO?

Paint it grey
Start with the advantages. The most important fact about Mr Romney is that he is a non-ideological man who did something that America needs a lot more of. In 2002 he was elected to govern Massachusetts, normally a Democratic stronghold. He passed a version of health-care reform that is at once his proudest achievement and his biggest liability. Back then a system based on obliging everyone to buy private health insurance was a conservative idea, and Mr Romney did a good job of working with a hostile legislature to get it passed. (Today, his party viscerally opposes Mr Obama’s health reforms, which are closely modelled on Mr Romney’s; such are the twists of politics.) He also turned round Massachusetts’s finances, just as he had earlier righted the Salt Lake City Winter Olympics. Mr Romney needs to make these successes count for more than they have so far. Once the primaries are over, and America’s independents rather than the Republican Party faithful become the electorate to win over, he may be able to.
Second, Mr Romney has something that the president and his Republican rivals sorely lack: business experience. For 25 years he made himself and the management consultancies BCG and Bain a lot of money by making companies more efficient which, yes, sometimes means firing people, but also drives economic growth (see article). So far, Mr Romney has done a poor job of defending himself against attacks which are really aimed at the creative destruction which is the essence of capitalism itself. He says he created a net 100,000 jobs during his time at Bain. That figure is impossible to prove, but he could do more to argue that the benefits outweigh the costs. His task has not been helped by disgraceful attacks from fellow-Republicans on corporate restructuring.
Third, Mr Romney seems sure-footed. It is hard to think of a single misstep in this campaign. He may be wooden, but no scandal has ever attached to him. His family life is impeccably monogamous and progenitive. Those who have worked closely with him tend to admire him. On both the economic and the foreign-policy sides, he has already put together impressive and above all sensibly moderate teams.
The debit side of the ledger
A useful list, to be sure: but can it outweigh the negatives? Mr Romney’s pragmatism has an inconvenient flip side: no one is quite sure where he stands. The Republican base does not think he is reliable on such things as gay rights and abortion. That will not matter so much to independents (who will probably also accept that any Republican has to say a few mad things to win a nomination). But people have to trust a president on the main issues, and, despite publishing a long economic manifesto, Mr Romney remains vague over how a lot of it is to be accomplished.

Explore our interactive map and guide to the race for the Republican candidacy

It is not at all clear how he would reform America’s ruinously expensive health-care and pensions systems. His views on what he wants to do about America’s 12m illegal immigrants are also unsettlingly gnomic. And where he has been clear, he has sometimes been wrong: his insistence that, on day one of his presidency, he will brand China as a currency manipulator represents dangerous pandering to populists. His pledge to cut federal spending to no more than 20% of GDP, a sop to his party’s fiscal extremists, would also be dangerous if applied as quickly as he implies.
Mr Romney will have other problems in wooing the electorate. He would be the richest candidate ever to win a big-party nomination and he reeks of privilege. His father was a governor as well, and he himself studied law at Harvard. On the other hand, Mr Obama is a millionaire several times over, can give a fair impression of having come from the planet Vulcan, and also studied law at Harvard. Mr Romney’s lack of charisma is a problem; but perhaps America wants fewer soaring speeches and more pragmatic restructuring plans.
Mr Romney’s last difficulty is one that should not be a problem at all. He is a Mormon and, despite Mormons’ protestations to the contrary, a third of Americans do not consider them to be Christians. There is not much Mr Romney can do about this. He could explain the Mormons’ extraordinary missionary work, but he can hardly risk saying that it is not really any more incredible that God communicated His plans to man in upstate New York in 1820 than He did in Palestine in 0AD. We recall, however, that America was for decades “not ready” for a Catholic president, or for a black one. Eventually, Americans thought better of those attitudes. Prejudice would be a silly reason for the Republicans to reject a man who offers their best chance of beating Mr Obama.

Gold, God and forgiveness

 Gold, God and forgiveness

DO BANKERS inevitably go to hell? What many people today merely hope will come to pass was for Christians in the early 1400s a matter of faith. After all, the Bible, like the Koran, was explicit in its condemnation of lending money at interest, the basis of most banking operations. So in many parts of Christendom moneylending was left to Jews. In several northern cities of medieval Italy, however, ingenious Christians started to find ways round the banking ban. Their contrivances, though legal, were not popular with the church, which held that usurers, by charging for the duration of a loan, were not trading in goods but in time, and this was God’s.
The prospect of an eternity of hellfire was particularly acute in Florence, since it was here that the foundations of modern banking were being laid. As it happened, Florence was also witnessing the first stirrings of an extraordinary flowering of the arts. Before long guilt-ridden bankers were commissioning great works of religious art in the hope that they might after death escape the damnation that the scriptures foretold. In this way were the birth of the international financial industry and that of the Renaissance intimately connected.

 

The connection might perhaps be reduced to a single word, whether patronage, or atonement, or Medici. A
longer, and far more pleasurable, elaboration can be found in text, pictures and objects at the Palazzo Strozzi in Florence, where an exhibition devoted to “Money and Beauty” continues into 2012. Subtitled “Bankers, Botticelli and the Bonfire of the Vanities”, it explores the motives of Florence’s bankers in their artistic commissions; the reactions of churchmen to rich Florentines’ displays of luxury and wealth; and the effects of both penitential patronage and ecclesiastical reproach on the works of art that, throughout the 1400s, or Quattrocento, tumbled forth from Florence like coins from a slot machine.
In the background of the exhibition are the Medici, the wool-traders turned bankers who held sway over the Florentine republic in its golden age under Lorenzo the Magnificent, and who produced popes and queens and Tuscan grand dukes until the last of the dynasty died in 1737. Their grip was interrupted by the invasion of Charles VIII of France in 1494, which brought in its wake the brief rule of Girolamo Savonarola, the austere Dominican friar from Ferrara who berated the Florentines for their luxuries, gambling, carnivals, and particularly their wanton paintings, which made “the Virgin Mary look like a harlot”. He called for children to spy upon their parents, prostitutes to be chastised, sodomites burned alive and irreligious frivolities prohibited. Hence the great Bonfires of the Vanities in the Piazza della Signoria in 1497 and 1498, when countless works of art, as well as cards, books and dresses, went up in flames.
Sandro Botticelli, a central figure, was not one of the artists who flung their paintings onto the fires, but he nevertheless fell under Savonarola’s spell, as his later works clearly show. Gone, in these, were the sensuous depictions of idealised beauty seen in his early paintings, such as the “Birth of Venus”. Now Botticelli’s figures were more likely to bear agonised expressions of intense piety, as in “Madonna and Child with the Young St John”.
In between came works like “The Calumny” (pictured above). This shows Midas on his throne, receiving the counsels of Ignorance and Suspicion, with a hooded Envy clasping the hand of Calumny, who in turn, with Deception and Fraud attending, is dragging the unidentified victim by the hair, while Penitence turns hopefully towards stark-naked Truth. Though not overtly religious, the sentiment is morally correct and therefore Savonarola-suitable, as is the turbulent mood, so far removed from the sumptuous lyricism of Botticelli’s earlier, mythological works. When those were made, as the chronicler Giorgio Vasari noted over half a century later, he worked happily for many Florentine families painting “very nude women”.
“Money and Beauty” was proposed in 2006, just after the birth of the foundation that runs the Palazzo Strozzi, a 15th-century building in the middle of Florence built by mercantile rivals of the Medici. Five years of incubation, however, have only improved the show’s timeliness, allowing reflections not just on the role of bankers in general but even on some familiar banking terms whose origins are Tuscan. The most notable may be “risk”, which derives from Tuscan rischio, the amount considered necessary to cover costs when lending money, ie, a euphemism for interest. Another is “florin”. First coined in Florence, florins circulated widely in Europe for centuries—in Britain until 1971—and may yet perhaps make a post-euro return.
It is not just its timing, though, that makes this show so successful. Its themes, and the abundance of artefacts and paintings on which the curators could draw, allow every point to be illustrated with a wonderful work of art: a panel commissioned by the mint; an altar painting showing Filippo Strozzi, who paid for it, almost as prominently as the entire Holy Family; keys, locks, letters of exchange; an account book pointing to the perils of sovereign default (three banks had gone bust when Edward III of England reneged on large loans); a codex containing the sumptuary laws that forbade flashy clothes and ostentatious funerals. (Even Fra Angelico—see next story—so pious he could not paint a crucifix without tears running down his cheeks, chose to depict the Virgin’s obsequies in the manner of an unashamedly opulent 15th-century Florentine funeral.)
The images are merciless. Miserly bishops are shown being whipped with their own moneybags; St Anthony causes a usurer’s heart to be found in a strongbox; a moneylender meets the figure of Death. Balancing these are numberless images of devotional scenes, the Nativity, the Madonna and other religious figures. And also shown are the events with which Lorenzo’s magnificent era ended: Charles VIII’s entry into Florence, Savonarola preaching against luxuries in a city that derived so much wealth from making them, and the fundamentalist friar’s own execution in the very square in which the Bonfires of the Vanities had been held. This is the visual telling of a tale of beauty and bloodshed, lucre and licentiousness, morality, hypocrisy and propitiation.
The telling is not all the work of the Quattrocento. The exhibits benefit enormously from the commentaries of two curators, Ludovica Sebregondi, a specialist in the religious art of the Renaissance, and Tim Parks, a British novelist and author of “Medici Money” (2005). While one puts the exhibits in their art-historical context, the other explains the social and wider significance. With different styles, and sometimes conflicting views, they add considerably to the pleasure of the show.
And should today’s bankers take heed? Though usury has long since lost its power to inspire any penitential effort among Christians, modern moneylenders are accused of other sins: Pope Benedict calls for “moral renewal” in Italy and the Church of England agonises about the godlessness of the City of London. Yet most bankers seem to dread damnation in the hereafter as little as censure in the here and now. Too bad. Without the fear of God, they are unlikely to pay for a new Renaissance.

 

Reimagining the future

“
THAT city will, in the course of time, become the granary of the world, the emporium of commerce, the seat of manufactures, the focus of great monied operations,” predicted DeWitt Clinton, governor of New York in 1824. He was speaking about the effects of the Erie Canal, which connected the Great Lakes to the Hudson River. Originally derided as “Clinton’s folly”, the canal helped to open up the west, allowing New York to benefit enormously from an explosion of trade. Within 15 years of the opening, New York was the busiest port in America, moving more than Boston, Baltimore and New Orleans combined. The plan to open an applied sciences university campus in New York City, reckons Seth Pinsky, who heads New York’s Economic Development Corporation, is an “Erie Canal moment”.
The city’s embrace of high-tech has already begun. Tech clusters have emerged in Manhattan’s Flatiron District and Brooklyn’s Dumbo, home to firms like STELLAService and Etsy. Venture-capital firms and angel investors have been looking at New York more seriously than they once did. Henry Blodget, of Business Insider, notes “the financing ecosystem has also gotten very well developed, from late-stage private equity right down to angel investing.” Some $1.2 billion was invested by venture-capital firms in New York in 2010. The Big Apple even overtook Massachusetts in venture-capital funding for internet and tech start-ups, making it second only to Silicon Valley. And in the third quarter of last year, it surpassed it in venture capital in all categories. Between 2005 and 2010 employment in New York’s high-tech sector grew by nearly 30%. Google alone has about 1,200 engineers in the city.

Much of this growth has been organic, but there has been some help from City Hall. Since 2002 the city has set up more than 40 projects to help the biotech sector and helped create a network of incubators supporting start-ups in that area. It also established a $22m municipal entrepreneurial fund, the first of its kind outside Silicon Valley. A year ago Michael Bloomberg, a tech entrepreneur before he became New York’s mayor, called on universities to pitch plans to develop and operate a new tech campus in New York in exchange for access to city-owned land and up to $100m in public money.
New York received seven proposals from 17 top institutions, including Stanford University which did so much to create Silicon Valley. Almost 6,000 companies, including Google, Hewlett-Packard and LinkedIn, trace their beginnings to Stanford. But Stanford withdrew from the competition last month, days before the mayor announced the winning proposal, which came from Cornell, an Ivy League university, and its partner Technion, an Israeli technology institute. The latter is considered to be one of the driving forces in Israel’s tech industry. It helped turn Israel from a country of orchards to one of semiconductors. Some 4,000 start-up companies are located around its campus.
The two bodies have plans to build a $2 billion 2m square feet (610,000 square metres) campus on Roosevelt Island, one subway stop from mid-town. Cornell and Technion hope to have a temporary facility up and running as soon as this autumn and complete their permanent home by 2017. The bid had huge support from Cornell alumni, including a $350m gift from Charles Feeney, who made his fortune through the Duty Free Shopping Group. That is one of the largest donations in the history of American higher education.
According to the city’s analysis, over the next 30 years the campus will generate more than $7.5 billion in economic activity, with 600 companies spinning out of the new school directly; these are projected to create 30,000 jobs. Some 20,000 construction jobs will also be created, not to mention about $1.4 billion in extra tax revenue. And it should help quench the never-ending demand for qualified engineers. The mayor has not ruled out naming additional winners. And some of the losing plans will go forward regardless. So New York could soon have several applied sciences campuses. Look out, Silicon Valley.

Will 2012 be another stellar year for gold investors?

NEW YORK - 

In contrast to the closing months of 2011, gold has begun the new year on a more positive note.  Whatever the metal's short-term prospects - indeed even if gold takes another dive - we believe 2012 will be another stellar year for gold investors.

Gold topped out at an all-time high just over $1,924 an ounce in early September - a whopping gain of some $600 or about 50 percent from last January's low point.  But as investors know all too well, gold prices can be quite volatile - with big upswings often followed by big downturns, albeit around a rising long-term trend.  Such has been the experience of the past four months with gold shedding roughly 30 percent from its all-time high to its recent late-year low point of $1,522.  But, let's not forget, even allowing for this deep price correction, gold still closed the past year with just about the best annual gain of any asset class!

Looking ahead, 2012 could well turn out looking much like the past year for gold - with sizable gains, possibly as much as 50 percent (or more) from the recent lows, but also with occasional big declines that may lead many observers of the gold scene to mistakenly declare an end to the yellow metal's bull market.  Just as gold bears have been wrong over and over again in the past decade, so will they continue to be wrong in 2012.

The story of gold in recent years has been a tale of institutional traders and speculators - including hedge funds, commodity funds, and the trading desks at the big banks and financial firms - producing great two-way volatility as they rushed into gold (as we saw last summer) and then, not just unwinding long positions, but shorting the metal in a big way (as we saw this past fall).

Driving these institutional players, in addition to momentum and technical trading indicators, has been the flight from the euro into U.S. dollar assets - and the appearance of dollar strength pushing gold lower, particularly at times of massive euro capital flight.

Importantly, much of this negative activity has taken place in gold derivative markets - but, all the while, long-term physical demand has remained fairly robust.

Buying from the Asian gold-market giants - China and India - for both jewelry and investment has continued to remain firm in spite of higher prices that years ago might have discouraged continued accumulation.

Having just returned from two weeks in China and meetings with many players in the country's gold market, I can tell you that gold demand remains strong despite the recent slowdown in economic activity, thanks to personal income growth albeit at a slower pass, rising wealth among those most likely to buy gold, and also inflation fears.  Moreover, higher gold prices, rather than discouraging demand, have attracted new investors to the market.

Meanwhile, global net central bank gold buying has not just continued but has accelerated as reserve managers look for opportunities to shed U.S. dollars - and euros too - in favor of something that has a longer track record as a reliable store of value.

Central bank reserve managers, ever sensitive to buying without disrupting the market, have used episodes of price weakness to step up their buying.  This behavior now reduces downside risk while it is also helping set the stage for a surprising sizable snap-back in the metal's price.

What few gold pundits realize is that the amount of physical gold available in the world gold market - the "free float" - is shrinking, thanks not only to Chinese and other Asian buyers, many of whom are unlikely to sell, but also due to renewed interest and accumulation of gold by a growing number of central banks.  For central banks, the holding period may be measured in decades if not longer.  As a consequence, future demand will have a much more high-powered affect on the price of gold - and this is one of the reasons we expect much higher prices in the years ahead.

Short-term trading in derivative markets may, at times, produce a great deal of gold-price volatility - and can trigger significant price corrections - but, in my book, it does not affect the long-term price trend.  What governs the price of gold over the long term are the market's real-world supply and demand fundamentals - and these have been decidedly bullish and are becoming even more so.  Hence, my long-standing long-term forecast of higher gold prices over the next several years.

Jeffrey Nichols, Managing Director of American Precious Metals Advisors, has been a leading gold and precious metals economist for over 25 years. He is also Senior economic Advisor to Rosland Capital.  See www.nicholsongold.com

about 2011 summy og gold and selver interest and opportunites for trading

If you're bullish about the long term for gold and silver, it's mouthwatering to watch them undergo a major correction after taking earlier profits that added to your deployable cash. For a little historical perspective on pullbacks, consider the following charts.


The current 15.6% gold decline, while considered a "major" correction, is not out of the ordinary, particularly following the late summer spike. And after each big selloff, there was a price consolidation phase that in every instance led to higher prices. The message: hold on, and buy the big dips.




Not surprisingly, silver's biggest corrections are larger than gold's. This is also true for the rebounds; they've been quite dramatic. If we apply the biggest three-month recovery of 44.3% to the current correction, that would take silver to $40.63… meaning we probably shouldn't expect $60 silver by year-end.
[There's still time to capitalize on the anomaly in the metals market that will bring amazing profits to those who are positioned for it. This report will help you get started… and offers a special bonus, too. Don't delay – the tide could turn very soon.]
Regarding www.skoptionstrading.com. We have just closed another trade which generated a profit of around 23%, however, we had two trades that were not profitable so the profit on our portfolio now stands at 374.43% since inception.
Please be aware that discussions are taking place regarding an increase in the price for this service for new members, so if you are thinking about joining us, then do it sooner rather later in order to save yourself a fair few bucks by avoiding this additional expense.
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An annualized return of 94.38%
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Average trade open for 48.13 days
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Also many thanks to those of you who have already joined us and for the very kind words  that you sent us regarding the service so far, we hope that we can continue to put a smile on your faces.

 
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The Daily Market Report

Despite Correction, Gold Poised to Register Another Solid Performance in 2011
Bar1
23-Dec (USAGOLD) — Gold is consolidating just above the $1600 level going into the Christmas holiday. The last London gold fix of 2010 was $1405, so barring any dramatic price changes in the last week of the year, the yellow metal is on-track for yet another double-digit gain of about 14%.
That’s pretty impressive given the dramatic delveraging sell-off from the 1920.50 record high we saw in September, which prompted all manner of commentary proclaiming the end of gold’s decade-long rally. More recently — amid another bout of deleveraging associated with rising uncertainty about the fate of European Union — the yellow metal retested the September low at 1534.06 along with important channel support. While much was made of the technical damage done by the recent move below the 200-day moving average, gold continues to display good resilience, underpinned by solid fundamentals.

Monthly Gold Chart

Daily Gold Chart

Those supporting fundamentals are unlikely to change anytime soon as the world continues to seek solutions for an overwhelming level of debt and anemic growth prospects. Thus far, the focus remains on creating more of what is arguably to primary source of the problem. Debt.
Of course someone needs to buy that debt, so we have also witnessed unprecedented — and in some instances “unlimited” — liquidity pumps to perpetuate the now institutionalized game of “hide the debt.” I don’t think that anyone really believes that more debt is really the answer to our global debt crisis, but in staving off a complete economic catastrophe several years ago with massive deficit spending and liquidity schemes, the United States effectively set the tone. Actually, the US was simply following the example set by Japan more than 20-years ago; drive interest rates to zero and hold them there by printing currency and buying bonds with it.
In fact, Japanese debt is fast approaching ¥1 quadrillion! That rather ominous benchmark is expected to be surpassed by the end of Japan’s fiscal year in March. The BoJ’s balance sheet is a startling ¥138 trillion. Meanwhile the Fed’s balance sheet has contracted in recent months, but is still in excess of $2.7 trillion. But perhaps most troubling is the expansion of the ECB’s balance sheet. Despite their persistent assurances that quantitative measures simply aren’t an option, the ECB’s balance sheet has grown by nearly a third, approaching €2.5 trillion. Hey Mr. Draghi, if you’re not engaged in QE, explain that exploding balance sheet.
There are policymakers in Europe, including ECB board member Lorenzo Bini Smaghi, that favor true — or at least un-obscured — quantitative easing by the ECB to prevent another recession in Europe. Imagine the implications for the central bank’s balance sheet if the objections are ultimately circumvented.
Late in December, the ECB unleashed a wall of money, €489 bln ($638 bln) in 3-year LTROs to 523 eurozone banks. The positive reaction to all this new liquidity was very short-lived. The euro remains under pressure and eurozone spreads have widened back out.
As the FT’s Gillian Tett pointed out in a recent column, the hope was that the banks would use this abundance of cheap ECB money to buy European sovereign debt, much in the same way that US banks plowed the proceeds from mortgage backed securities sales to the Fed into US Treasuries. Basically, the private sector ends up financing the government with funds provided by the government. Being in the middle of this financing cycle results in a potential profit bonanza for the banks.
ZIRP and liquidity. Liquidity and ZIRP. From here to eternity…
There are growing rumblings that the Fed is about to extend their ZIRP guidance from mid-2013 out to 2014 and potentially beyond. I’m sure when the BoJ launched their quantitative measures they were expected to last maybe a couple of years. Here it is 20 some years later and Japan still has 0% interest rates. Do you suppose this is our fate as well?
Some of the major financial firms are predicting lofty average gold prices for the coming year: Goldman Sachs $1810, Barclays $2000 and UBS $2050 to name just a few. We maintain that the long-term uptrend in gold is protected as long as we remain in a negative real interest rate environment. This in fact seems all-but assured for quite some time. On top of that, the ongoing expansions of debt, monetary bases and central bank balance sheets, along with broadly positive supply/demand dynamics — highlighted by robust investment and central bank demand — conspire to underpin gold as well in the new year.
On behalf of everyone here at USAGOLD – Centennial Precious Metals, we wish you a very merry Christmas and a most prosperous 2012.

“Risk-On, Risk-Off”

It sounds like a play on words, based on the Karate Kid refrain, Wax-On Wax Off, and for all I know it was. Still, I rather like this characterization – coined by a research team at HSBC – of the markets‘ current performance. Moreover, you’ll notice from the placement of that apostrophe that I’m not just talking about forex markets, but about the financial markets in general.

What we mean is that when risk appetite is high, credit markets and equities and high-yielding currencies tend to rally together. When risk appetite fades, “those assets fall and government bonds and safe-haven currencies, including the U.S. dollar, the Swiss franc and, in particular, the Japanese yen rally.” Data from Bloomberg News confirms this phenomenon: “The 120-day negative correlation between Intercontinental Exchange Inc.’s Dollar Index and the Standard & Poor’s 500 Index was at 42.4 percent today, and has been mostly above 40 percent since June 2009.”
Skeptics counter that this correlation is tautological. Anyone can point to a stock market rally and declare that “Risk is Back On.” In addition, it’s not wholly unsurprising that there are strong correlations between low-risk currencies and low-risk assets, and between high-risk currencies and high-risk assets. According to HSBC, however, this time is different.

For example, models suggest that the recent decline in volatility should have caused these relationships to break down. That they defied predictions and remained strong suggests that we have witnessed a significant paradigm shift. In the past, “Rising correlations are also tied to weak macroeconomic conditions.” At the moment, this could hardly be more true, with global economic growth flagging.
Statisticians love to teach the dictum, Correlation does not imply causation. Nonetheless, I think that in this case, I’d wager to say that the equity and credit/bond markets are driving forex, rather than the other way around. Consider as evidence that, “[Retail] Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year,” and shifted this capital into bonds. While this wouldn’t in itself be enough to drive the Dollar higher, it epitomizes the steady shifts that have been taking place in capital markets for nearly a year, broken only by the S&P/Euro rally in the spring (which now appears to have been an aberration).

In fact, these shifts are once again creating shortages of Dollars: “This week, two banks bid at the European Central Bank’s weekly dollar liquidity providing auction – the first time there have been any bids since May – suggesting that they could not raise dollars in the market.” This suggests that demand for the Dollar could continue to grow.
Some analysts have suggested that the low-yielding US Dollar is already on its way to becoming a funding currency for carry traders, but I think this is wishful thinking. The HSBC report supports this conclusion, “A weakening of the ‘risk on-risk off’ paradigm is likely only once macro conditions are improved in a sustainable way…Currency performance will likely be tied to the ebb and flow of the perception of risk for some months to come.” In short, until there is solid proof that the global economy has emerged from recession (even if ironically it is the US which is leading the pack downward), the Dollar will probably remain strong.

Trading In Emerging/Exotic Currencies Increases

The long wait is over! The Bank of International Settlements (BIS) has just released the results from its Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, conducted in April 2010. The report contains a veritable treasure trove of data, perhaps enough to keep analysts busy until the next report is released in 2013. [Chart below courtesy of WSJ].

First, the data confirmed earlier reports that average daily forex volume had surged to a record level in 2010: “Global foreign exchange market turnover was 20% higher in April 2010 than in April 2007, with average daily turnover of $4.0 trillion compared to $3.3 trillion. The increase was driven by the 48% growth in turnover of spot transactions, which represent 37% of foreign exchange market turnover. The increase in turnover of other foreign exchange instruments [consisting mainly of swaps and accounting for the majority of forex trading activity] was more modest at 7%.” In addition, for the first time, investors and financial institutions accounted for a larger share of turnover than banks, whose trading activity has remained roughly unchanged since 2004.

The composition of the turnover actually didn’t change from 2007, interrupting a shift which had been taking place over the previous 10 years. Specifically, the share of overall turnover accounted for by the so-called major currencies actually increased in 2010, from 172% to 175%. [Since there are two currencies in every transaction, total volume sums to 200%]. Growth in the G4 currencies (Dollar, Euro, Pound, Yen) was more modest, however, increasing from 154% to 155%. This reversal is probably attributable to the credit crisis, which drove (and in fact, continues to drive) investors out of emerging market currencies and back into safe haven currencies, namely the Dollar, Yen, and Pound. However, this theory is belied by the significant increase in Euro trading activity, which certainly hasn’t benefited from the recent trend towards risk aversion.

While emerging currencies as a group accounted for a smaller share of overall activity, certain individual currencies managed to increase their respective shares. The Singapore Dollar, Korean Won, New Turkish Lira, and Brazilian Real all fit into this category. Still other currencies, such as the Indonesian Rupiah and Malaysian Ringgit, also managed impressive gains but account for such a small share of volume as to be insignificant when looking at the overall the picture. Those who were expecting even bigger growth should remember that it’s ultimately a numbers game: the amount of Ringgit it outstanding is dwarfed by the number of Dollars, so any gains that the Ringgit can eke out are impressive. In addition, when you consider that the overall forex pie is also increasing, the nominal increase in volume for these small currencies was actually quite large.

The ongoing search for yield in all corners of the financial markets is likely to bring some of the more obscure currencies into the fold. “In June, I began getting questions about Uruguay, Vietnam and others,” said Win Thin, senior currency strategist at Brown Brothers Harriman in New York…investors often asked Mr. Thin questions about less-familiar currencies such as the Ukrainian hryvnia and Romanian leu.” In the same article, however, Mr. Thin cautioned that interest in such currencies is still probably lower than in 2007-2008, for a good reason. “It’s not like the Group of 10, or even the more liquid emerging market currencies where, if you decide you’ve made a mistake, you can get out.”

Due to the lack of liquidity and higher spreads, these obscure currencies aren’t really suitable for trading. Of course there will be a handful of institutional and even retail investors that want to make long-term bets on these currencies. They tend to be more aware of the risk and less sensitive to the higher cost and lower convenience. The overwhelming majority of traders, however, churn their portfolios daily, if not hundreds of times per day. A 10pip spread on the USD/MXN (Dollar/Mexican Peso) would be considered too high, let alone a 50 pip spread on any transaction involving the Ukrainian hryvnia.

In short, the majors will account for the majority of trading volume for the foreseeable future, regardless of what happens to the Euro. At the same time, that won’t prevent a handful of selected emerging currencies, such as the Chinese Yuan, Indian Rupee, Brazilian Real, and Russian Ruble from increasing their share. As liquidity rises and spreads decline, volume will increase, and their rising importance will become self-fulfilling.

Trend is your friend

Raise your hand if you’ve ever heard that expression before? Well, now there’s proof that this well-worn phrase is more than just a pointless platitude: “Royal Bank of Scotland Group indexes that track the performance of four of the most popular currency strategies show that the so-called trend style was the best-performing method, returning 7.3 percent this year through August.”

“Trend-Style” trading is also known as trend-following, and is just as it sounds. Traders identify one-way patterns in specific currency pair(s), and attempt to ride them for as long as possible. Given all of the big movements in currency markets this year, it’s no wonder that trend-following is the most popular. If you look at the 52 week trading ranges for the six most popular USD currency pairs, you can see that highs and lows are often as far as 20% apart. The EUR/USD pair, for example, fell 20% over a mere 7 months. Anyone who sold in December 2009 and bought to cover in June 2010 would have earned an annualized return of 35% without leverage! Even if you had captured only a couple months of depreciation would have yielded impressive returns. In addition, you could have traded the Euro back up from June until August and reaped a 60% annualized return. Best of all, both of these trends (down, then up) unfolded very smoothly, with only minor corrections along the way.

I’m sure serious technical analysts are rolling their eyes at the chart above, but the point stands that trend-following has never been easier and rarely more profitable than it is now. One fund manager summarized, “Trend-following investors are capturing the momentum in several big currency moves. You have so much uncertainty in the world now with regard to inflation or deflation, which typically makes currency markets and interest rates move. That is good for trend followers as it causes volatility, which typically creates good profits.” In other words, there is a tremendous amount happening in forex markets at the moment, and this is reflected in protracted, deep moves in currency pairs, which can change direction without notice and yet continue moving the opposite way for just as long. If you think this sounds obvious, look at historical data (5-10 years) for the majority of currency pairs: while trends have always been abundant, it was only recently that they began to last longer and became more pronounced.

The other three strategies surveyed by the Royal Scotland Group (“RSG”) were the Carry Trade, Value Trade, and Volatility Trade. Unfortunately, data was only offered for the carry trade strategy (confusingly referred to by RSG as the volatility strategy), which is down 5.9% in the year-to-date. The carry trade strategy involves selling a currency with a low yield and favor of one with a high yield, and profiting from the interest rate spread. In order for this strategy to be profitable, however, the long currency must either appreciate or remain constant. Thus, when volatility is high – as it has been over the last 2-3 years – this is a losing strategy.

We can only guess that a true volatility strategy probably would have been the second most profitable strategy. This strategy can be implemented through the use of long and short spot positions, as well as through trading in options and other derivatives. As I said, there is no shortage of volatility at the moment: “Since the collapse of Lehman Brothers in 2008, the dollar has seen record volatility against the euro…including six moves of at least 10%.” For traders that profit from volatility, the current uncertainty has created a windfall situation.

However, it has made value trading – based on fundamentals and the notion of Purchasing Power Parity (PPP) – risky and unpopular: “The volatility also has made what would appear to be a straightforward bet against the dollar fraught with risk. Three factors tend to move currencies: the pace of growth, debt levels and interest rates. By those standards, the dollar should be falling against the currencies of emerging-market and commodity-producing nations.” Not only is this not the case (a decline in risk appetite has turned the Dollar into a safe-haven), but even betting on a protracted Dollar decline is itself risky because of surging volatility. One way around this is to trade a Dollar Index (by way of an ETF, for example) which is inherently less volatile (half as volatile, to be exact) than individual currency pairs.

That’s not to say that value trading isn’t profitable over the long-term. “Empirical evidence suggests that currencies…show a tendency to revert back toward PPP in the longer run.” Given current volatility/uncertainty, however, this strategy is unlikely to be profitable in the short run. Fortunately, uncertainty doesn’t negate opportunity, and traders should plot strategy accordingly.