Gary Dorsch 27 Jan 2012

8/3/2019 Gary Dorsch 27 Jan 2012

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Global Money Trends Magazine 1 January 27, 2012

Prez Obama, Fed chief Bernanke, Launch Re-Election Campaigns,- by Gary Dorsch

America is in trouble whether a Democratic or a Republican is chosen for president. As usual,its a choice between the lesser of two evils. Either way, the hardcore woes of Americas middleclass and poor wont end. Politicians' cozy relationship with big corporations and Oligarchic

banks has reinforced crony capitalism, and an unfair playing field. The US-tax system enrichesthe super-wealthy at the expense of the other 49% of taxpayers, while the other half of UScitizens pay no income tax at all. The Federal Reserve is an agent for Wall Street bankers,providing them with trillions of interest free dollars, sunsidizing the profitability of the bigbanks. These are some of the core issues of this 2012 election, that wont be addressed.

There is eternal talk of taking back America, but it is not obvious what taking back Americameans. Its a safe bet that the country will perpetually be a society of haves and have-nots, ofthe political blame game, rather than practical solutions to move America forward. The twomost likely candidates that will battle for the presidency over the next nine months DemocratBarack Obama and Republican Mitt Romney, are elitists, - both are members of the top-1% of

the wealthiest Americans, and their campaign contributors expect a handsome rate of return ontheir high risk investments, starting in 2013.

Its no secret that the Florida primary is a must-win for former Massachusetts governor MittRomney. But, its also a victory that former House speaker Newt Gingrich needs to have too.The reasons for the necessity of Romney winning Florida are well-known: a second-straightloss, coupled with his longtime frontrunner status, could well collapse his campaign under itsown weight. Less obvious, but no less real are the decidedly high stakes for Gingrich in the

January 31st Sunshine State primary. Gingrichs entire campaign, to date, has been built on twobasic elements: 1) The idea that Romney is simply not conservative enough for the averageRepublican primary voter, and 2) The former House speakers demonstrated prowess indebates. A loss in Florida could badly damage Gingrichs argument on both fronts.

Floridas diverse population and its winner-take-all delegate structure whoever wins the statewins all 57 delegates make it a must-win for Gingrich. His only real chance to win theRepublican nomination is to win Florida, a key battleground swing state, with 29 electoral votesin the general election in November. If Romney wins in Florida, followed by Nevada andMichigan, then Gingrichs victory in South Carolina will look like a one-time wonder.


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Theres an awful lot at stake for investors riding on the outcome of the upcoming US elections.Not only is Barack Obamas presidency at stake, but so is Fed chief Ben BubblesBernankes job at the helm of the central bank. Both Gingrich and Romney would fire theFed chief in January 2013, should the American electorate decide to give Mr Obama the boot.That could lead to the eventual unwinding of Bernankes maniacal quantitative easing (QE)schemes, and could even lead to an uptick in short-term interest rates. The end of Obamaspresidency could lead to a stronger US-dollar that in turn, could undermine the prices of keyindustrial commodities and precious metals. If Obama wins, Gold could reach $2,500 /oz.

Regardless if Gingrich or Romney wins the Republican ticket, itll be extremely tough to defeatPrez Obama, whose odds of winning Re-election have rebounded by +10% to 56% today.


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Back on October 4th, when the Dow Jones Industrials slid to the 10,500-level, - culminating adrop of -2,300-points over the previous three-months, there was lots of fear and talk about thepossibility of a double-dip recession in the United States, ignited by a credit crunch in Europe.But Fed chief Ben Bubbles Bernanke was able to stop the Dows slide from crossing into Bearmarket territory, by promising to keep the federal funds rate locked at zero-percent throughthe middle of 2013. Bernanke also hinted strongly at the possibility of unleashing QE-3, whichconvinced bearish traders to cover short positions, and encouraged Wall Street bankers tomove money from the sidelines and plow trillions of dollars into the stock market.

The odds of Obama winning re-election largely hinge on the direction of the US-stockmarket. This week, the Dow Jones industrials managed to climb to the 12,840-level, led by

blue-chips 3M, Caterpillar and Kraft Foods. The Dow eclipsed its 2011 high of 12,810, reachedin April. The last time it closed higher was on May 20, 2008, when it settled at 12,826. TheDow is up +5% so far this year. The S&P-500 index and Nasdaq have gained even more. The

Dow would need to climb another +11% higher to get to its record high close of 14,164,reached on October 9th, 2007. If the Plunge Protection Team (PPT) can manage to inflate theDow to the 14,000-level by Election day, the odds of Obama getting another four years in theWhite House would zoom upwards towards 80-percent.

A key factor behind the Feds success in driving the stock market sharply higher wasits ability to drive the yield on the 10-year Treasury note below 2%, its lowest levelin history. Bernankes strategy is to exert greater influence over long-term bond yields bysetting the expectations of investors. The Fed can manipulate short-term interest rates withgreat ease, but its influence over longer-term yields partly depends on how investors think the

Fed will adjust the fed funds rate into the future.


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On January 25th, Fed chief Bernanke left no doubt about the future course of US-monetarypolicy, saying the Fed wouldnt raise the fed funds rate until the end of 2014, adding another18-months to the expected duration of its Zero Interest Rate Policy (ZIRP). Neverbefore in history has the Fed committed itself to a level of interest rates for three-years. Bankers now know they can borrow at zero-percent for three years and lend at higherrates, guaranteeing themselves a hefty profit margin, subsidized by the Bernanke Fed.

Bernanke hopes his ZIRP strategy would convince traders that interest rates will remain lowerfor longer than previously expected. The Fed projects that unemployment will drop no lower

than 8.2% this year, and said that its committed to ZIRP, until the unemployment ratedrops below 6-percent. Economic conditions -- including low rates of resource utilizationand a subdued outlook for inflation over the medium run, are likely towarrant exceptionallylow levels for the federal funds rate at least through late 2014, the Fed said.

Were certainly willing to look for different ways to provide further support for theeconomy if in fact we have this unsatisfactory situation, Bernanke said on Jan 25th.Policy makers are prepared to provide further monetary accommodation if employmentis not making sufficient progress towards our assessment of its maximum level, or if inflationshows signs of moving further below its mandate-consistent rate, Bernanke said at a newsconference after the Federal Open Market Committee meeting in Washington. Bond buying isan option thats certainly on the table, he added.

The Fed said it would continue to swap more of its $2.6-trillion portfolio, from shorter termdebt securities and into longer-term Treasury bonds, a policy dubbed Operation Twist.Bernanke said that the extension of the expected point of takeoff for rising interest rates to2014 implies that asset sales of T-bonds by the Fed would occur later than previouslythought, and presumably in 2015. Bernankes admission that he has an itchy finger tolaunch QE-3, in order to inflate the value of the stock market, and in turn, helps to boostObamas chance of winning re-election. The Fed chief also sent the Gold market soaring.

Bernanke left no doubt that he and his radical band of money printers are prepared to resort to

more quantitative easing, - even if inflation is running above the Fed's newly announced2% target. He saidthe Fed is trying to hold down long-term rates until the pace of economicgrowth picks up more steam, and job gains are deemed satisfactory. He suggested the Fedcould afford to take its time bringing inflation below a 2% target if unemploymentwas running well above what the Fed regards as its longer run level of 5.2% to 6%.

In case that wasnt clear enough, the Fed said it expects to maintain a highly accommodativestance for monetary policy, that could include not just the extension of zero rates butalso further expansion of the balance sheet, Bernanke made clear. At a minimum, hesaid, shrinkage of the balance sheet is apt to be delayed along with the timing of funds ratehikes. One implication of our extension is the expected point of takeoff to late 2014, and is to


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imply that the initial sales from our balance sheets, which again are far down the road, will belater than previously thought. That will be presumably in 2015. And so we do expect to holdour balance sheet at a high level for a longer period, Bernanke added.

The subliminal message thats being sent by Bernanke to the media is that the Fed will

continue to keep the US-banks on artificial life support, by supplying the banksters with trillionsof dollars at zero percent interest rates for at least three more years. Furthermore, the Fed willtry to keep the US-governments borrowing costs pegged at historically low levels, and ifnecessary, would buy more big chunks of Treasury or mortgage debt.

Financial Repression, Despite the mushrooming size of Americas debt, increasing to $15.2-trillion last month, the Fed has still been able to manhandle the Treasury bond market intosubmission, the same way the Bank of Japan (BoJ) has kept 10-year Japanese bond (JGB)yields locked between 1% and 2% for the past 11-years. Today, 10-year JGB yields are below1%, even though the size of Japans debt is 220% times the size of its economic output.

Both the BoJ and the Fed have been able to keep the governments borrowing costs at ultra-low interest rates, through a process known as financial repression. The key mechanism isconvincing the bond market that short-term interest rates will be locked near zero percent foras far as the eye can see. Even if short-term interest rates do increase, the central bank isgreatly limited by how far it can pushup borrowing costs. Japans overnight loan rate hasntbeen above a half-percent for the past 13-years.

In a November 2002 speech, entitled Deflation: Making Sure It Doesnt Happen

Here, Bernanke explained how Financial Repression works. Because long-term interest ratesrepresent averages of current and expected future short-term rates, plus a term premium, acommitment to keep short-term rates at zero for some time, if it were credible, would induce adecline in longer-term rates. At the time, Bernanke was a governor in the Greenspan Fed.

Bernanke added, A more direct method, which I personally prefer, would be for the Fed tobegin announcing explicit ceilings for yields on Treasury debt, say, bonds maturing within thenext two years. The Fed could enforce these interest-rate ceilings by committing to makeunlimited purchases of securities up to two years from maturity at prices consistent with thetargeted yields. If this program were successful, not only would yields on medium-termTreasury securities fall, but because of links operating through expectations of future interest


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rates, yields on longer-term public and private debt, such as mortgages, would likely fall aswell, he said in Nov 2002. As fate would have it, Bernanke would put his financial repressiontheories into practice starting in Q1 of 2009, at a height of the Great Recession.

Since December 2008, the federal funds rate has been confined to a range between zero and0.25%. Todays effective fed funds rate is 8-basis points, - or virtually at zero percent. Therehave been two upward thrust in the Treasurys 10-year bond yield since QE began in March of2009. The first surge lifted yields from a historic low of 2% to as high as 4%, amid signs of astrong rebound in the US-factory sector, and rapidly diminishing job losses.

A near doubling of the US-factory purchasing managers index from a historic low of 33.3 inDecember 2008, to as high as the 60-level a year later, led to ideas that the Fed wouldeventually begin to lift the fed funds rate to more normal levels. Yet the Fed refused to lift thefed funds rate, and instead launched QE-2 in November of 2010. Printing $600-billion and

injecting the cash into the equity markets, led to a second surge in Treasury note yields to3.75% by February 2011, at the same time the factory PMI hits a high of 61.4.

However, the Fed stayed pat on interest rates, and decided to unveil Operation Twist, -swapping $400-billion of short-term debt for longer-term bonds. When it looked like the factoryPMI might slip below the 50-level, signaling a economic recession, the Treasurys 10-year yieldplunged to record lows of 1.80%, encouraged by the Feds Zero Interest Rate Policy (ZIRP).The Fed is now signaling that the fed funds rate would stay locked at zero-percent for

3-more years, and by saying so, the central bank aims to keep the Treasury 10-year yieldpinned within a narrow range, between 1.50% and 2.50%, and a mid-point of 2%. The powerof the Feds repressive monetary policy is shown on the chart above.

The US Congress shows no signs of wanting to deal with the budget deficit and the Bernankeshows no signs of wanting to raise interest rates at any point during his tenure. The effect ofgetting deeper into QE is like sinking in quicksand, - it will be almost impossible to raiseinterest rates any time after 2014. Imagine for instance, in 2015, if the Fed needed to liftinterest rates 1% higher to fight inflation. With the USs gross public debt likely to exceed over$20-trillion by the start of 2015, each 1% increase in interest rates would add $200-billion peryear to the debt burden and blow a hole in the budget.


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Just like in Japan, the US-central bank cant contemplate lifting interest rates above zeropercent, without worrying about its monumental impact on the budget deficit.

Under financial repression, the US 10-year yield is about 2% lower than if it were allowed tofloat freely, and without the heavy hand of the Feds intervention. Fundamentally, bond yieldsare kept artificially low, helping to fuel the Dow Jones Industrials to the highs of 2011. Sincethe Fed has the ability to manipulate the level of both short-term and longer-term Treasuryyields, the Fed can in theory, and in practice, dictate the general direction of the stock market.The Fed can artificially inflate the value of the stock market by driving Treasury bond yields

below the S&P-500s dividend yield, or conversely, the Fed can drive the stock market lower byjacking-up interest rates above the benchmark dividend rate.

S&P-500 companies paid a combined $245-billion in dividends last year, and with the marketvalue of the index at roughly $12-trillion, the dividend yield is around 2.05% today. Thatsabout +12-basis points higher than the Treasurys 10-year yield of 1.93%. There have been20-periods of time since 1953, when the dividend yield on the S&P-500 Index exceeded theyield on the US Treasurys 10-year Note. Typically, during the following 12 months, after thisrare occurrence, the S&P-500 Index has increased in market value by an average of +20%.

The historical tendency for equities to move to the upside after this cross is certainly worthnoting. The 10-year Treasury yield first fell below the dividend yield in August, and the S&P-500 Index has rebounded about +20% since then. Traders got ZIRP-1 and ZIRP-2 which hasthe effect of inflating the stock market.

Now that Fed hawks Fisher, Kocherlakota, and Plosser are non-voting members this year,Bernanke can go full bore into his Japanese style ZIRP policy, spiced with threats of QE-3 forgood measure. The bottom line is, when bankers and hedge funds can borrow for free and areencouraged to speculate, verbally and nonverbally, to take risk, eventually they will. Problem isof course, that the Feds high octane money can also find its way into key commodities such ascorn, crude oil, gasoline, and soybeans, and create another global inflation shock, like the one

that hit in the first half of 2011, and knocked Emerging stock markets into Bear territory.

Fed Launch of ZIRP-2 Lifts Gold above $1,700 /oz, Although traders have been betting onthe early launching of QE-3, Bullish commodity and Gold traders were also ecstatic to hearabout ZIRP-2 and the Fed chiefs strong hints at launching QE-3 in the future. That was plentyof euphoria to create the psychological effect that the Fed was aiming for. Bernanke is treadingcarefully, aiming to serve president Obamas re-election bid, but also guarding against apolitical backlash from the Republican establishment if he unleashes QE-3 in an election year.For now, Bernanke found the middle ground, by launching ZIRP-2 and hinting strongly at QE-3which were enough to do the trick of elevating the Dow Industrials to the 2011 highs, andkeeping 10-year bond yields below the S&P-500s dividend yield.


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The fact is, US-Treasury bill rates of return to investors are actually negative, and very volatile.The idea that short-term interest rates are pinned at the floor of Zero-percent is just not true,if one takes the rate of inflation into account. Right now, the 1-year T-bill rate is yielding -280-basis points less than the Labor departments reading of the consumer inflation rate. The realrate of interest fell as low as -376-bps in October, and helping to lift the price of Gold to arecord high of $1,925 /oz last year. With the sharp downturn in the commodities markets in thesecond half of 2011, the US-consumer inflation rate fell by nearly -1%, and lifted the real rateof interest to -285-bps. Gold tumbled by -20%, in line with declines in other commodities.

But Bubbles Bernankes suggestion that the Fed could resume QE even if the inflation ratewas above +2% ignited a powerful rally in the Gold market, lifting the yellow metal above$1,700 /oz. QE-3 could help to re-ignite a powerful rally in a broad array of commodities, andthe next time around, lift Gold above $2,000 /oz. The committee recognizes that hardships

imposed by high and persistent unemployment and under performing economy, and it isprepared to provide further monetary accommodation if employment is not making sufficientprogress towards assessment of maximum level or inflation shows signs of moving below themandated consistent rate, the Fed chief said before a national TV audience.

If there is a method behind Bernankes madness, its that the Fed is closely watchingcommodity prices, and is utilizing proxies such as the Dow Jones Commodity Index (DJCI), as areal-time indicator about the future direction of inflation. Back on Oct 4th, when the year overyear change in the DJCI index fell to a zero percent, the Fed announced ZIRP-1 and said itwould extend thru mid-2013. This week, with DJCIs tumbling to an annualized rate of declineof -13%, the Fed signaled ZIRP-2 extending it thru the end of 2014. The Fed simply wontpermit deflation to develop in the economy and print money vast quantities of dollars, and useits new strategy - ZIRP, in order to encourage traders to buy commodities and equities.

We are prepared to take further steps if we see that the recovery is faltering or inflation is notmoving towards target, Bernanke said when asked about the prospects for more quantitativeeasing. So, that's an option on the table. I think well continue to look at that option and ifconditions warrant we will certainly consider using it, he warned.


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At the start of 2011, Barclays Capital, (Barcap) had estimated investments in the commoditiessector would continue to soar. Indeed, investments had soared by almost $77 billion in the firstfour months of the year, on a combination of strong inflows and rising prices. But investorinterest became particularly negative in December, which saw $7.7-billion of net withdrawals,with outflows from all commodity sectors. Investments in commodities peaked at $418-billionby the end of the first quarter, and then fell after that, Barcap said.

By years end, new investments in commodities was up a scant $15-billion to $399-billion, thesmallest year-on-year increase since 2003. That compared with more than $140-billion that

flowed into the sector in 2009-2010.Barclays forecasts returns of +10% for the mainbenchmark commodity indexes this year,with precious and base metals leading theway. Investors who remain interested in the sector are increasingly looking at moresophisticated strategies rather than buy-and-hold indexes.

The current profile of our price forecast suggests precious metals will be the strongest sectorin 2012, up by almost +20% in the six months to the end of Q2 and +21% on the year as awhole. Investment in commodities has matured and investors are increasingly driven not justby the desire to diversify portfolios but also due to market trends specific to commodities suchas supply constraints and leverage to emerging market growth. Grains and oilseeds are theonly commodities for which Barclays sees negative returns in 2012.

Crude Oil, Gold and Copper are Goldman Sachs top commodity picks this year, theinvestment bank said on Jan 9th. Goldman expects Brent oil to end the year at $127.50 perbarrel and trade at an average of $120 in 2012. Given the current environment, tightfundamentals, the current geo-political situation in Iran, creates massive upside price risk forcrude oil relative to our target. Despite softer Chinese economic growth, demand for oil hascontinued to be resilient and China is due to overtake the United States as the worlds biggestoil importer within 18 months, Goldman added. Both gold and copper sold off last year due totight credit conditions in Europe, but this is likely to balance itself in coming months and lead toa rebound in both metals. Gold and base metals reflect value plays, meaning they have hadevents that have created a significant disconnect between fundamentals and prices, GS said.


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STRIKING gold is generally considered a sign of good luck. Owning it, however, is a sign thatyou expect every form of paper currency to collapse, along with civilization itself. Yet goldminers shares have failed to keep pace. This is new. Gold and gold-mining shares used to riseand fall in lockstep. Over the past 1 -years, the value of the Gold miners index fund,symbol GDX.N, has lost almost a third of its worth, compared to the Gold Bullion ETF,symbol GLD.N Investors in gold miners are losing ground to those who invest in bullion.

Gold bugs, by definition, bet that the price of gold will go up and up. Miners sometimes do theopposite. Investing in gold miners carries risks unrelated to the price of the metal. Asreadily recoverable reserves dwindle in stable places such as North America and Australia,miners are forced to operate in more troublesome ones, such as Africa, Indonesia, or Latin

America. Huge investments can yield disappointing returns if promising mines turn out tocontain less glitter than predicted. In 2002 gold miners spent $500illion on exploration. In2008, they spent $3-billion but finding much less. All the easy Gold has already been mined.

As mines age, extracting gold gets harder and costlier. Ores give up less of the metalaveragegrades have fallen by 30% since 1999 according to GFMS. And ore must be hauled up fromever greater depths. Energy costs for fuel is pricier. So, too, are labor expenses and newequipment. A decade ago the average cost of extracting an ounce of gold from the groundstood at a little over $200. In 2010, it hit $857, says GFMS.

The US fed funds ratecould stay locked atzero percent for as longas the eye can see. Itwould mean that higheryielding commoditycurrencies, such as theAustralian, Canadian,and New Zealand

dollars, could climb tonew record heightsagainst the US-dollar,as foreign central banksseek better alternatives.

The emerging LatinAmerican currencies,such as the Brazilianreal, Chilean peso, andPeruvian Sol could alsorise significantly againstthe US-dollar.

But as long as US-deposit rates are locked

near zero percent,central banks wouldlook more favorablytowards investing inthe purest form ofhard currency - Gold.

To profit from ZIRP,a weaker US-dollar andendless money printingby central banks,traders are better offbuying Gold bullion, orGold related ETFssuch as GLD, DGP, or

DBP, rather thanbuying Gold minershares.


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Most damaging of all for the marriage between Gold bugs and Gold miners has been the arrivalof a seductive new financial tool. Exchange-traded funds (ETFs), backed by physical Gold, offerinvestors direct exposure to the Gold price without any exposure to gold miners themselves.They have become popular: in less than a decade Gold ETFs have gone from nothing toholding some 2,200 tons of goldnearly a whole years production.

Traders buy Metals ahead of Feds shift to QE-3, Traders can also gain exposure to Copper(ETF symbol JJC) and Silver (ETF symbol = SLV) with exchange traded funds to profit from themoney printing operations of the worlds biggest central banks. Yet the commodities markets

are designed to fool most people, most of the time. Last year, the price of Silver climbed about+90% higher in the first three months of the year, soaring higher in a parabolic fashion to$9.50 /oz, before the market imploded, and rattled investors with two vicious shakeouts, fromearly May thru the end of December to as low as $26.50 /oz. Copper crashed alongside Silverin September, since both commodities are primarily industrial metals.

However, since the beginning of January, traders have started to shift money back into Copperand Silver, reckoning that the price correction is over, and that the longer-term Super CycleBull market is about to resume. Central banks in Brazil, China, Chile, and India have all startedto ease their monetary policies, by cutting interest rates or injecting liquidity into the bankingsystem. The Fed, the Bank of England, and the ECB are all engaging in massive moneyprinting, through QE. Copper and Silver have built sustainable basing patterns in thefourth quarter, and now appear to be ready to rumble higher in the months ahead.

Industrial metals jumped higher, following Jan 27th remarks by Bernankes right hand man, -the former Goldman Sachs partner and NY Fed chief William Dudley. The pace of economicrecovery remains sluggish by historical standards and unemployment is likely to remainunacceptably high for the near term. There is a risk that inflation could fall below levelsconsistent with price stability. The US-economy will probably slow this year while confrontingrisks skewed to the downside.Monetary policy has done and will continue to do its part insupporting the recovery -- but it is not all-powerful, Dudley said. Yet QE-3 would be a powerfultool that can lift the metals markets significantly higher. The MZM money supply in theUnited States hit a record high of $10.75-trillion last week, and has increased +10.2%from a year ago, which in turn, could provide the fuel for powerful Gold rally.


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Outlook for Gold, and Silver (Bullish), The World Gold Council reported on Jan 23rd, thatcentral banks added some450 tons of gold to their existing reserves in 2011, drivenmainly by purchases from emerging economies that are seeking alternative investments to theUS dollar. Chinas gold imports from Hong Kong, a proxy for overseas buying, set a record inNovember for the fifth consecutive month as demand from the worlds largest gold consumercontinued to defy expectations.Chinas gold imports have soared in recent months, as Chineseinvestors pour their savings into popular gold bars. Chinas gold imports via Hong Kong inNovember were leapt +20% from the previous month to 103-tons, bringing Chinastotal gold imports to 389-tons during the first 11-months of 2011.

For the past few weeks, Global Money Trends (GMT) has projected a short-term Goldrally to above $1,700 /oz. Gold hit a high of $1,734 /oz today, and this rally could runout of steam at around the $1,775 /oz area, before profit-taking sets in. Longer-term, - byyears end, GMT expects Gold to trade above $2,000 /oz, lifted higher by QE, and

additional rounds of monetary easing in the Emerging nations. Silver is expected to tagalong for the ride to the upside. Silvers initial upside target is $35 /oz, before profit-takingsets in. Longer term, by years end, Silver could climb into the $38 to $40 /oz area.

CHINA will maintain a robust growth in demand for key commodity imports such as Iron oreand Copper this year, albeit at a slower pace of increase. Imports of iron ore and copper intoChina, the largest consumer of the industrial metals, are closely watched as a bellwether for

the health of the worlds second-largest economy and a prelude for future market directions.The nation now accounts for as much as 60% of the global seaborne iron ore trade and 40% ofworldwide copper consumption. China imported 686-million tons of Iron Ore, - the steel-makingingredient last year, up +10% from 2010. Chinese steel mills have taken advantage of lowerprices to build up iron ore inventory levels back to highs last seen in March 2011, at 42 days ofconsumption versus a low of 27-days in the last quarter of 2011.

Chinas Copper inventory sitting at the nations bonded warehouses now stands at 300,000-tons, significantly lower than the record 700,000-tons in April 2011. Chinas imports of refinedcopper hit a record 406,937 tons in December, up +78% from a year earlier and exceeding theprevious monthly record of 378,943 tons in June 2009.


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Beijings clampdown on lending cast a pall over commodity markets in the second half of lastyear, with the benchmark price gauge, the Reuters-Jefferies CRB index, falling as much as -21% from a peak in May. However, the government-induced credit crunch in the Chinesecommodities industry is ending, according to western traders, triggering a wave of bullishnessabout the outlook for industrial raw materials. End users and investors increased imports ofspot refined copper, the most popular in the Chinese and international market.

Chinese trading houses are starting to gain easier access to credit, allowing them to makelarger purchases of commodities. Copper has rallied +16% in the past six weeks and on

Wednesday touched a four-month peak of $8,455/ ton. Beijing is widely expected to ease thetight grip over credit supply this year, to bolster slowing economic growth amid the heightenedexternal economic turmoil, analysts said. Chinas expanded at a +8.9% annualized rate in thefourth quarter from a year earlier, - the slowest increase since Q3 of 2009. On Nov 30 th, thePeople's Bank of China (PBoC) announced a surprise cut of 50 basis points in the reserve

requirement ratio for commercial lenders, the first such reduction in nearly three years,injecting 350-billion yuan of extra liquidity.

Outlook for Copper, (Bullish), Further easing of Chinese monetary policy is expected to lendsupport to the Shanghai red-chip stock market, and lessen fears of a hard landing in theworlds #2 economy. QE in England, the Euro zone, Japan, and the US is expected to buoy awide range of commodities, including industrial metals. Still, according to the chart on page 12,Chinese imports of Copper vary widely from month to month. The latest sharp increase incopper prices can deter importers. GMT thinks theres enough steam left in the Copper rally to

lift the red-metal to around $4.25 /lb in the months ahead, up from $3.87 today. No markettravels in a straight line, and support on pullbacks is seen at $3.65 /pound.

So far, 2012 has been a good year for commodity currencies. The Australian dollar has alreadyrisen 4% and the Canadian dollar 2% against the US- dollar in the last four weeks alone. Boththe leading commodity currencies are well bid because Canadian and Australian banks arentdirectly exposed to the Euro-zones financial problems. Now there are two additional factorsthat have made these currencies even more attractive: further QE in the other G-7 countries aswell as a more relaxed attitude by the global traders towards the perils of the Euro-zone debtcrisis.The Bank of England about to introduce QE-3 in February and that the ECB could lowerits interest rates and theres speculation that the Fed will resort to QE-3 as well. Commoditiesare getting support from the idea that further monetary easing will start debasing majorcurrencies such as the US-dollar and the British pound.


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On the one hand, global traders appear to be more confident that a solution will be found thatwill prevent the Euro from falling apart. This reduced threat of financial Armageddon has helpedto whet the appetite for risky assets and encourages investors out of their traditional safehavens. On the other hand, a downgrade in the credit rating of many key Euro-zone countriesmeans that the pool of triple-A credit countries left to investors is greatly reduced, helping toensure that triple-A rated Australia and Canada, which already offer higher interest rates thanmost, have become even more attractive. Each currency has also been helped by its ownpeculiarities too. While Australia may offer a higher yield, with rates up at 4.25% comparedwith Canadas 1%, Canadian bond markets are larger and more liquid. This makes them an

even more attractive destination for more nervous investors.

Outlook for Aussie Dollar, - Usually seen as a proxy for global growth, the Australian dollarhas in the past experienced steep falls during times of sharp meltdowns in Euro-zone and US-stock markets. With recent data suggesting that China is likely to achieve a soft landing, the

outlook for Australias commodities trade with China has improved. Also, news that Russia isplanning to diversify some of its foreign-exchange reserves into the Australian currency isanother supporting factor for the Aussie. Still, is Aussie is highly correlated with the price ofCopper. If GMTs upside target for the red-metal of $4.25 /lb is realized, the Aussie dollar couldreach new record heights at $1.1200 in the months ahead, from around $1.0650 today. TheAussie has good support at the $1.0400 area on any possible pullback.

ASX-200 Rally Challenges Resistance, Despite softer economic data in recent weeks,Australias Foreign Minister and Former Prime Minister, Kevin Rudd, says the local economy is

on solid footing as a result of robust fundamentals out of its top trading partner China.Therehave been too many doom and gloom predictions about the mainland. China has an enormousself interest in remaining strong. Beijing needs to generate 25 million new jobs each year itselfto provide employment for the next group of 19-20 year olds popping out into the work force,he said. The Chinese leadership is intensely intelligent about how it crafts its way through theeconomic challenges it faces, he said, pointing to the Politburos ability to rapidly manipulateits fiscal and monetary policies according to the economys needs.Beijings shift to lessen itsreliance on consumer markets in North America and Europe has made it more resilient in theface of external headwinds. The long term policy settings of the new five year plan will be oneof the most significant developments of the decade, he said.


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Australias economy grew a faster-than-expected +2.5% in the third quarter of 2011 from ayear earlier, driven by consumer spending and mining activity. But there was a surprising fall of29,300 jobs in December, for a subdued end to a year that saw zero jobs growth, addingto the case for further central bank cuts in interest rates. Australias 1-year T-bill rate isyielding 3.64% with traders having already priced in 50-basis points of additional rate cuts bythe Bank of Australia to the 3.75% level in the months ahead.

Australia is now more dependent on China than any other country in the world and whileChinas growth is undoubtedly slowing, demand for Australia resources remains solid. In the

fiscal year ended 2011, China gobbled up A$65-billion worth of local goods, or about5% of Australias A$1.3-trillion economy. This compared with just A$18-billion from theEuropean Union and A$9-billion from the United States.

On Jan 24th, the IMF called for swift action from the 17-nation Euro zone, saying Europes debtcrisis could tip the world economy into recession and a bigger firewall is urgently needed tokeep the damage from spreading, The IMF chopped its estimate for 2012 global growth to+3.3% from +4% just three months ago and warned it could drop as low as +1.3% if Europelets the crisis fester for much longer. For 2013, it predicted growth of +3.9 percent.

Outlook for ASX-200

Index (Bullish), - Remarkably,the ASX-200 Index is stillclosely tracking the Aussiedollars exchange rate with theJapanese yen. Japanesehousehold assets stood at 1.54quadrillion ($20-trillion), with

more than half of it parked in

low yielding Japanesegovernment bonds.

A large chunk of the balanceis parked in Australian equities,and large buy and sell ordersout of Tokyo can roil the ASXmarket. An upside breakout forthe Aussie dollar above 82-yencould pave the way for the ASX-200 Index to challenge keyoverhead resistance at the4,350-level.

If the Aussie dollar can rallyto 85-yen as expected, the

ASX-200 would be expectedto follow suit, climbinghigher to the 4,600-level.

Downside Risks for

Commodities and GlobalEquity markets, - Not a singleday goes by, when some mediaoutlet isnt publishing anotherdoom and gloom article aboutthe outlook for the global

economy.As far as markets areconcerned, bullish sentiment isas strong as ever, with traders

routinely shrugging off negativenews and instead focusing onthe remedies such as QE andcentral bank rate cuts.


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The epicenter of the danger is Europe but the rest of the world is increasingly affected," IMFchief economist Olivier Blanchard said. There is an even greater danger, namely that theEuropean crisis intensifies, and in this case the world could be plunged into another recession.IMF Managing Director Christine Lagarde warned on Jan 23rd that a failure to erect a larger wallagainst financial contagion could lead to a 1930s moment. These self serving scare tacticsarent swaying many traders in the markets, who are instead, bidding up industrial metals andequities, and focusing intently on the central banks money printing operations.

The Euro zones economy is now expected to go into a mild recession in 2012 as a result of the

rise in sovereign yields, the effects of a cutback in bank lending, and the impact ofgovernmental austerity measures. Growth in Emerging and developing economies is alsoexpected to slow because of the worsening exports to Europe and a weakening of internaldemand. During 201213, growth in Emerging and developing economies is expectedto average 5--percenta significant slowdown from the 6--percent growth

registered during 201011 and about percentage point lower than projected in theSeptember 2011. Despite a substantial downward revision of percentage point, developingAsia is still projected to grow most rapidly at +7.5% on average during 201213.

Moreover, geopolitical oil supply risks are increasing again. The oil market impact ofintensified concerns about an Iran-related oil supply shock (or an actual disruption) would belarge, given limited inventory and spare capacity buffers, as well as the still-tight physicalmarket conditions expected throughout 2012, the IMF warned.

The ECB is also increasingly concerned about the health of the Euro zone economy and its

Oligarchic banks, and has cut interest rates twice since November. It has also injected 489billion Euros in ultra-cheap three-year loans into the banking system and made it easier forbanks to access its funding. Data on Jan 27th showed a credit crunch was developing last monthin the Euro-zone. The monthly flow of loans to Euro zone firms - a key indicator ofcredit conditions - dropped by 37-billion Euros in December, the biggest fall sincerecords began in 2003. Lending had also contracted in November. Bank loan to the privatesector are now only +1% higher from a year ago. The Euro zones M3 money supply - amore general measure of cash in the economy - grew at an annual +1.6% in December,

slowing from +2% in November. M3 growth remains well below the ECBs reference rate of4.5%, above which the bank sees dangers to medium-term price stability.


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The ECB left its repo lending rate unchanged at 1% at its last policy meeting in January,pausing to assess the impact of its crisis-fighting measures implemented so far and notingtentative signs of stabilization in the economy. However, the latest M3 and lending numbersare a reason for further monetary easing. The ECB is still likely to cut interest rates in March,and they could go as low as 0.50% before the middle of the year. Thus, while theeconomic news sounds negative, Bullish traders focus on the remedies QE and rate cuts.

Top IMF officials emphasized repeatedly that Europe needs to bolster its rescue funds to winmarket confidence and lower yields on sovereign bonds so that countries like Italy and Spain

can borrow at affordable rates. The most immediate policy challenge is to restore confidenceand put an end to the crisis in the Euro area by supporting growth while sustaining adjustment,containing deleveraging, and providing more liquidity and monetary accommodation, it said inits latest World Economic Outlook report. With the right set of measures, the worst candefinitively be avoided and the recovery can be put back on track. These measures can be

taken, need to be taken, and need to be taken urgently.

Thats already happening. Since the ECB began its massive lending program to the Oligarchicbanks, encouraging them to utilize the cheap money by buying sovereign bonds, the yield onItalys 10-year note has plunged from as high as 7.50% in late November to as low as 5.90%today. Similarly, Spains 10-year note yield has dropped to around 5% from as high as 6.75%in November. The ECB is subsidizing the profitability of the banks, and indirectly monetizing thedebts of the Euro zones weak debtor nations. Lending margins for the banks would increaseeven further, if the ECB lowers the interest rate attached to its 3-year loans in the monthsahead, as expected. Still, the threat to the global economy is that the Euro-zone banks restricttheir lending to sovereign and big blue-chip companies, while cutting off credit to households,small and medium sized businesses, thus creating a credit starved economy.

Next month, the ECB is expected to issue a second tranche of 3-year loan to the Oligarchic

banks that could total 500-billion Euros, to help push sovereign bond yields even lower.


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In the face of a barrage of doom and gloom articles in the media, theres little evidence that aslowdown in the global economy or in Europe has hurt the exports of German companies listedon the Frankfurt stock exchange. The German DAX surged 5% to above the 6,500-level thisweek, as German exports hit 95-billion Euros, the second highest level in history in November.


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Likewise, the sharp slide of Italian bond yields so far this year, from around 7.18% in lateDecember to 5.90% today, has restored confidence to the Euro-zone bond markets, and liftedthe Euro currency to $1.3200 today, from as low as $1.2625 just two weeks ago. The I-Shareexchange traded fund for the German stock index, ticker symbol EWG.N rebounded to close at$21.67 /share today, after hitting a low of $17 in October. GMT is bullish on the GermanDAX-30 Index, expecting the magic elixir of QE in Europe and elsewhere, to lift the DAX-30Index to the psychological 7,000-level in the months ahead. Likewise, EWG.N could extend itsrecent gains to the $25 /share level in the months ahead. Support is seen at $21 /share.

Rebound in Gasoline prices a threat to Obamas Re-Election, - Perhaps the only reason

the Fed hasnt already launched Qe-3 is the worry that printing money could ignite anotherexplosive rally in crude oil and gasoline prices. Sharply higher prices at the pump could deal a

blow to the US-economy and reduce the disposable income of US-consumers, thus triggering abacklash against the President. Already, the cost of unleaded gasoline in the wholesale markethas increased by 45-cents a gallon since Thanksgiving Day. Demand for gasoline, the mostwidely used US petroleum product, fell -4.3% in December from a year ago, to 8.53-millionbarrels a day. Annual demand was -2.1% lower, at 8.8-million barrels a day.

Yet despite weaker demand for gasoline, the price has increased by 20% over the past six

weeks, and helping to restore the profit margins of oil refiners. Because the spread betweencrude prices and refined products is the main driver of refinery profit margins, futures contractshave been established to allow refining companies to hedge their results. The most common ofthese is the Nymex 3:2:1. Trading this contract allows the refining company to account forprice swings in the 3 products--crude, unleaded gasoline, and heating oil--in a 3:2:1 ratio.

The 3-2-1 crack spread is an approximation of the profit margin that a refiner earns by turningcrude oil into end-use products. Take the price of two barrels of gasoline and one barrel ofheating oil, divide by three, subtract this average from the price of a barrel of crude, and thatsthe crack spread. The crack spread closed at $23 /barrel today, up from as low as $6.30 barrelin late November, but still below last years high of $37 /barrel.

Unleashing QE-3 in the United States could lift gasoline futures towards $3.15 /gallon, or about

23-cents higher than todays close. The cost of a bushel of corn increased by 5% this week to$6.40 /bushel, and the cost of 100-pounds of live cattle, ready for slaughter, rose to a recordhigh of $126, as the US cattle herd fell to 91-million in 2011, its lowest since 1952.


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Gary Dorsch 27 Jan 2012