Whilst China quietly and efficiently goes about their business we have seen recent attempts at driving up the price of Crude above $50, on the back of the MOU signed by Saudi Arabia and Russia, failing to materialise because of the reluctance of nations to cut production. However, a startling development suggests that statistics demonstrated that there have been drawdowns on oil inventories, which would help to drive the price of oil northwards, are actually a result of supplies being moved from one storage facility to another, in notional paper terms.
The movement out of long term bonds into short term debt suggests that the talk of interest rate hikes in the US is merely hot air. I would expect to see the Fed announce further QE in relatively short order. The Federal Open Market Committee (FOMC) meeting commences on 20th September, we await what they don’t say.
The demand for gold continues unabated, including central banks. The squeeze on supply in the West is rapidly becoming a death grip. At some point China is likely to create an arbitrage which will see gold flowing east as sellers seek to take advantage of the price differential between London and Shanghai.
On 15th September approximately 2 tonnes of eligible gold was moved out of JP Morgan and approximately 1 ton of eligible gold was moved out of ScotiaMoccata, which is approximately 4.5% and 2.5% of total eligible amounts currently in storage. Eligible gold is stored in warehouses, for a private party, which conforms to exchange standards, but it is not available for delivery to contracts. In the last month approximately 17 tons of gold has left the Comex.
Given the Chinese two day autumn festival holiday, on Thursday and Friday, it was unsurprising to see 70 tons of paper contracts dumped into the market to knock the price of gold to 1308. No doubt the Chinese will be back in earnest next week to continue buying the physical metal.
There is huge consternation amongst the banks over the implementation of Basel III regulations, with regards to their Tier One capital requirements. This is the core capital banks needed to withstand financial stress at a future point in time. It is understood and hardly surprising that they are having problems meeting those requirements.
It is our understanding that the frequency and magnitude of stress events within a number of US banks is not only increasing, but the interval between them is decreasing. If this is indeed the case then the risk of systemic failure is therefore increasing.
Current market gyrations and dislocations are supporting my analogy about the 100 plate theory whereby there are 100 plates all spinning and they have to remain in equilibrium. If one should stop and fall then it will cause the remaining 99 to do so and cause financial implosion. The desperation is now palpable as they try to keep that equilibrium going, but are at serious risk of taking their eye off the one plate which will bring them crashing down.
Zerohedge has reported that foreign banks sold $343 billion of US treasuries in the last year. We believe it is substantially higher and would ask the question why Luxembourg has increased its treasury holdings by 21% in the last 12 months, Ireland by 20%, Cayman Islands by 18% and Switzerland by 10% in the same period of time.
It also remains to be seen just who has been buying up US stocks as foreign investors, particularly the Chinese have been dumping them furiously, with $115bn sold in the last 3 quarters of 2015. In total foreign investors sold $170 billion worth of stocks in 2015. The dumping of stocks continues in 2016. For sure corporate buybacks account for some of the uptake, but where has the remaining stock gone?
Quietly under the radar, China continues to undergo enormous internal reform. The purge of party officials, thus far in 2016, dwarfs what Erdogan has done recently in Turkey. China seeks an open global market were individual nations find their own path towards integration and development with the rest of the world. By enlarging their own domestic market they will address the issues of the size of their population and their ever-growing needs. There is no doubt, China is rotating its economy to serve its internal interests as well as its international aspirations via the financial infrastructure it has put in place to serve its needs. China always has a plan, the west rarely understands what it is.