Thursday, November 27, 2014

Debunking the Claim That Puerto Rico’s Tax Benefits Are “Hype” or “Too Good to Be True”

By Nick Giambruno

It was only a matter of time before it happened.

After releasing our groundbreaking free documentary America’s Tax-Free Zone, new and old misconceptions about Puerto Rico’s tax benefits have surfaced. Many of them had previously been debunked.

The purpose of today’s article is to drive a stake through the heart of these misconceptions and forever put them to rest. And there is really no better person on the planet to do that than David Nissman, a true authority on this topic.

David Nissman was appointed by former U.S. President George W. Bush to be the United States Attorney for the U.S. Virgin Islands. He regulated the tax incentive programs there—which have many similarities to the Puerto Rico incentives—for the US federal government during his tenure. He also has written a number of the economic development statutes in place today.

David has since left the dark side and now represents U.S. taxpayers in IRS audits concerning tax incentive programs in the U.S. Territories—like the Virgin Islands and Puerto Rico. His current and former experiences gives him unparalleled insight into the U.S. government’s thinking behind Puerto Rico’s tax incentives.

After reading this article, you should have no doubt that Puerto Rico’s tax incentives are not “hype” and not “too good to be true.” The fact is, they are 100% real and legal. And for those who obtain them, they are here to stay.

Puerto Rico’s tax incentives may allow you to totally eliminate all forms of taxation on capital gains, interest, and dividends and reduce your corporate income tax rate to just 4%. Americans can find similar benefits nowhere else in the world short of renouncing their citizenship. Much ink has been spilled on this already, so if you are new to Puerto Rico’s tax incentives see here to get all caught up.

David will also show that:
  • Puerto Rico’s tax incentives are not some fly by night thing. They fit into the economic development policy that has been supported by the U.S. federal government and both political parties for many decades.
  • It’s nearly impossible for either the U.S. or Puerto Rican governments to end the tax incentives for those who already have obtained them.
Now, we aren’t saying it is impossible that these tax incentives could go away for new participants. That is a possibility, but also not a very likely one. It is also an incentive to obtain your tax benefits from the Puerto Rican government (which come in the form of a legally binding contract) as soon as possible—because once you’ve received your contract giving you your tax benefits, it will be almost impossible for anyone to take them away from you prospectively or retroactively, no matter how hard some politicians will stomp their feet.

Even if the benefits were to somehow magically disappear after a couple of years, you could still reap enormous benefits from participating in them. My colleague Louis James remarked that even if the tax incentives last only for five years, he’d be able to pay for his condo with his tax savings.

And now without further ado, I’ll turn things over to David Nissman, who will put these misconceptions to bed for good.
Until next time,

By David Nissman

When the United States began its relationship with Puerto Rico and the other Territories in the Caribbean in 1898, they were poor and had been economically oppressed. The US government sought to help create financial independence with economic development policies. This was not wholly altruistic. If the Territories were not financially independent, they would be a burden on the federal government.

From the start in the early 20th century, the Territories’ use of incentives to develop their economies was challenged as unconstitutional in violation of Article 1, Section 8, which required that “all duties, imposts, and excises shall be uniform throughout the United States.” The Supreme Court in a line of cases known as the Insular Cases used a line of deprecating and racially insensitive reasoning to accord all inhabitants of the Territories less than full constitutional rights. The less than satisfying trade-off in the outflow from the Insular Cases was that the Territories’ ability to use special tax laws to develop their economies was not restrained by Article 1, Section 8 of the U.S. Constitution.

This policy began in 1900 with the advent of the Foraker Act, which set up the first municipal government in Puerto Rico and permitted Puerto Rico to utilize special taxing measures. During the 114 years since the Foraker Act, Congress and the local governments in the US Territories have enacted many different programs to help the Territories raise revenues. President Herbert Hoover, visiting the Virgin Islands in 1931, was stunned at the poverty and declared:

“[W]e acquired an effective poorhouse, comprising 90 percent of the population. The people cannot be self-supporting either in living or government without discovery of new methods and resources. The purpose of the transfer of administration from the naval to a civil department is to see if we can develop some form of industry or agriculture which will relieve us of the present costs and liabilities in support of the population or the local government from the Federal Treasury or from private charity.... [H]aving assumed the responsibility, we must do our best to assist the inhabitants.”
New York Times, March 27, 1931

Congress in 26 USC 933 (Puerto Rico) and in 934 (the Virgin Islands) has passed statutes that enable the local governments to grant benefits on territorial source income to territorial residents. These laws have been firmly in place since 1960.

Critics always opine that Congress and or the Territorial governments can take these laws away, but they neglect an important component of the legal relationship between the United States government and its Territories. The Territories have a very special status: according to US Supreme Court case law, the Territories have the status of federal agencies. If a federal agency grants a contract to a business or individual, the federal government is bound to honor it. It would be a violation of the Contracts Clause of the US Constitution to take it away. So if an individual or business holds a contract from the Puerto Rico government granting these tax benefits (Act 20, Act 22), the contract is enforceable against both the Puerto Rican and US governments. Not even Congress can affect existing contracts.

Puerto Rico’s tax incentives are carefully considered programs. The Puerto Rican government based them on the Virgin Islands Economic Development Commission (VI EDC) programs. The VI EDC program has been fully vetted and litigated in the federal courts. Everyone recognizes the legitimacy of these programs and how they are part of US developmental policy toward US Territories. The bottom line is, Puerto Rico’s tax incentives are very sustainable.

Because of the continuing discussions in Congress about reforming the tax code, there is quite a bit of fearmongering that Congress may somehow repeal these programs.

Two points must be considered when hearing this:

1) Do we actually believe that our gridlocked Congress is currently capable of reaching a bipartisan agreement to overhaul the US tax code? While the tax code is in serious need of overhaul, this is a project that is years away. When there finally is new tax legislation, the Territories will lobby hard—with the U.S. Department of the Interior (DoI) firmly on their side—to continue making these benefits available.

The United States DoI continues to recognize that the Territorial tax incentives are a necessary component of U.S. developmental policy toward its Territories. In July, 2005, the DoI filed a written statement concerning its own concerns with new tax regulations for the Territories. The paper noted that (emphasis mine):

[t]he Secretary of the Interior has stated that her top priority for the Insular Areas is to promote private sector economic development there. Under the Secretary’s leadership, the Department of the Interior has been implementing a comprehensive program to advance this priority …. Because of the special fiscal and economic challenges faced by the Insular Areas, it has been the policy of successive administrations from both parties to support tax and trade provisions to help the Insular Areas generate sufficient tax revenue and economic activity to meet the most basic needs of their people. Notwithstanding these incentives, each of the Insular Areas continues to experience severe economic and fiscal difficulties. 

Special tax provisions for the Insular Areas, in particular, manifest an important underlying principle of US territorial policy: The Federal government does not treat the Insular Areas as sources of revenue. The US has a strong interest in maintaining and enhancing the economic and fiscal well-being of the Insular Areas.
—Statement of the US Department of the Interior, Office of Insular Affairs on Temporary and Proposed Regulations to Implement the American Jobs Creation Act of 2004 (July, 2005)

2) Whether these programs change one day or whether Puerto Rican statehood requires different tax rules, the individuals and businesses that have decrees with the Puerto Rican government will have to be grandfathered in based on the Contracts Clause in the US Constitution. Those individuals and businesses interested in moving to Puerto Rico would be wise to get moving to the extent there is any fear of legislative change.

Finally, it is also not very likely that the Puerto Rican government itself will end these programs. Attracting wealthy people and profitable businesses to relocate to Puerto Rico through these programs is attractive to both of the major political parties in Puerto Rico. Given the financial crisis in Puerto Rico, it is unlikely that the local government—which has committed large resources to marketing these programs—will suddenly embark on a different direction.

In conclusion, those who lawfully fulfill the purpose and requirements of the Territorial tax incentive programs—like Puerto Rico’s Acts 20 and 22—should feel confident that their contracts will be honored by both governments.

Editor’s Note: If you’re considering taking advantage of Puerto Rico’s tax incentives—benefits Americans can find nowhere else—then you should check out our comprehensive video course on the topic. It’s the authoritative guide on Puerto Rico’s tax incentives with information you won’t find anywhere else; and it will save you a lot of time and money. More on that here.
The article was originally published at internationalman.com.


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Sunday, November 23, 2014

Week Ending Crude Oil, Gold and Coffee Markets Summary for Friday November 21st

Our trading partner Mike Seery brings us his weekly call on crude oil, gold and coffee. Could crude oil really be headed lower? If king dollar gets it's way it just might be headed much lower. Here's what Mike has to say about this and other futures commodity trades.

Crude oil futures are up 30 cents in the January contract trading higher for the 2nd consecutive trading session as a short term bottom may have been placed as China cut their interest rate today sending crude oil sharply higher in early trade trading as high as 77.82 a barrel before retracing while currently trading at 76.22 if you are still short this market I would place my stop above the 10 day high which in Monday’s trade will come down to 77.92 risking around 170 points or $1,700 per contract. The U.S dollar was sharply higher and that’s generally very bearish the commodity markets, however with China cutting their interest rate that combated the negativity coming out of the Euro currency causing short covering across the board as many of the commodities including energies, metals, and the grain sector were all higher today but continue to place your stop loss at that level and see what Monday’s trade brings. The fundamentals in oil still remain very bearish as Saudi Arabia has not cut production & the United States continues its torrid pace of production flooding the world market so even if you are stopped out on this trade sit on the sidelines and wait for another trend to develop as I’m not totally convinced that lower prices aren’t ahead in 2015. Crude oil futures are still trading slightly below their 20 but still far below their 100 day moving average telling you the trend is still to the downside and if the U.S dollar continues to move higher that eventually will put pressure on prices once again in my opinion but on a day to day basis anything can occur.
TREND: LOWER
CHART STRUCTURE: EXCELLENT

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As I talked about in yesterday’s blog I am telling investors to remain neutral as I do believe gold prices will remain choppy to lower for the rest of 2014 as prices rallied $9 to trade around $1,200 per ounce as extreme volatility has entered this market and I think today’s price action was very impressive due to the fact that the U.S dollar was up over 50 points which is generally very bearish precious metals, however China cut their interest rate pushing many commodities prices higher. Gold futures are trading above their 20 but below their 100 day moving average moving higher despite the fact that the ECB looks like they’re going to utilize more stimulus which is remarkable in my opinion as I do think if the U.S dollar continues to move higher eventually that will be very bearish gold prices so sit on the sidelines as you do not want to trade a choppy market. This market is extremely volatile with big up price swings and down swings so avoid and move on to a trendy market like the S&P 500. Volatility in gold is amazing lately with many days of a $30 – $50 trading range which is incredible going into the holiday season, however if you remember last year gold’s low was near December 31st and we opened up the next day around $20 higher and I think the same thing will happen because of the fact that stock sales which are losers are sold to offset winning trades come the month of December so I still look for another leg down but still would sit on the sidelines at the current time. TREND: NEUTRAL
CHART STRUCTURE: POOR

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Coffee futures in the March contract sold off around 600 for the trading week currently trading at 190.70 in New York with high volatility in the last week with several sharply higher and lower trading sessions as I am advising investors to stay away from this market as the trend is extremely choppy and difficult to trade successfully in my opinion. Coffee prices are trading right at their 20 & 100 day moving average telling you that the trend is neutral as this volatility will remain for months to come as weather in Brazil is very fickle on a week to week basis as drought concerns are still in the back of traders’ minds as the weather currently is positive for production. The chart structure in coffee presently is very poor as I like to trade markets with tight chart structure which allows you to place tighter stop losses lowering monetary risk in my opinion. TREND: MIXED
CHART STRUCTURE: POOR

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Thursday, November 20, 2014

Cut Trading Risk and Increase Reward with a Strategy I Know You're not Using

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See you in the markets putting this to work,
The Stock Market Club


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Breakfast with a Lord of War

By David Galland, Partner, Casey Research

For reasons that will become apparent as you read the following article, I was quite reluctant to write it.
Yet, in the end, I decided to do so for a couple of reasons.

The first is that it ties into Marin Katusa’s best selling new book, The Colder War, which I read cover to cover over two days and can recommend warmly and without hesitation. I know that Casey Research has been promoting the book aggressively (in my view, a bit too aggressively), but I exaggerate not at all when I tell you that the book sucked me in from the very beginning and kept me reading right to the end.

The second reason, however, is that I have a story to tell. It’s a true story and one, I believe, which needs to be told. It has to do with a breakfast I had four years ago with a Lord of War.

With that introduction, we begin.

Breakfast with a Lord of War

In late 2010, I was invited to a private breakfast meeting with an individual near the apex of the U.S. military’s strategic planning pyramid. Specifically, the individual we were to breakfast with sits at the side of the long serving head of the department in the Pentagon responsible for identifying and assessing potential threats to national security and devising long term strategies to counter those threats.

The ground rules for the discussion—that certain topics were off limits—were set right up front. Yet, as we warmed up to each other over the course of our meal, the conversation went into directions even I couldn’t have anticipated.

In an earlier mention of this meeting in a Casey Daily Dispatch, I steered clear of much of what was discussed because frankly, it made me nervous. With the passage of time and upon reflection that it was up to my breakfast companion, who spends long days cloaked in secrecy, to know what is allowed in daylight, I have decided to share the entire story.

During our discussion, there were four key revelations, each a bit scarier than the last.

Four Key Revelations


Once we had bonded a bit, the military officer, dressed in his civvies for the meeting, began opening up. As I didn’t record the discussion, the dialogue that follows can only be an approximation. That said, I assure you it is accurate in all the important aspects.

“Which country or countries most concern you?” I asked, not sure if I would get an answer. “China?”
“Well, I’m not going to say too much, but it’s not China. Our analysis tells us the country is too fractured to be a threat. Too many different ethnic and religious groups and competing political factions. So no, it’s not China. Russia, on the other hand…” He left it at that, though Russia would come up again in our conversation on several occasions.

As breakfast was served, the conversation meandered here and there before he volunteered, “There are a couple of things I can discuss that we are working on, one of which won’t surprise you, and one that will.”
“The first is precision guided weaponry.” Simply, the airplane and drone launched weaponry that is deployed so frequently today, four years after our breakfast conversation, that it now barely rates a back-page mention.

“The second,” he continued,” will surprise you. It’s nuclear armaments.”

“Really? I can’t imagine the US would ever consider using nuclear weapons again. Seriously?”

“Yes, there could be instances when using nukes might be advisable,” he answered. “For example, no one would argue that dropping atomic bombs on Japan had been a bad thing.” (I, for one, could have made that argument, but in the interest of harmony didn’t.)

“Even so, I can’t imagine a scenario that would warrant using nukes,” I persisted. “Are there any other countries doing the same sort of research?”

“Absolutely. For example, the Russians would love to drop a bomb that wiped out the people of Chechnya but left the infrastructure intact.”

“So, neutron bombs?”

“Yeah, stuff like that,” he added before turning back to his coffee.

“Okay, well,” I continued, “you at least have to admit that, unlike last century when hundreds of millions of people died directly or indirectly in world wars, pogroms, and so forth—most related to governments—the human race has evolved to the point where death on that scale is a thing of the past. Right?”

I kid you not in the slightest, but at this question the handsome, friendly countenance I had been sitting across from morphed as if literally a mask had been lifted away and was replaced with the emotionless face of a Lord of War.

“That would be a very poor assumption,” he answered coldly before the mask went back on.

I recall a number of thoughts and emotions coursing through my brain at his reply, most prevalently relief that I had moved with my family to La Estancia de Cafayate in a remote corner of Argentina. We didn’t move there to escape war, but after this conversation, I added that to my short list of reasons why the move had been a good idea.

Recapping the conversation later, my associate and I concurred that Russia was in the crosshairs and that if push came to shove, the US was fully prepared to use the new nuclear weapons being worked on.

Four Years Later


As I write, four years after that conversation, it’s worth revisiting just what has transpired.

First, as mentioned, the use of precision-guided weaponry has now firmly entered the vernacular of US warmaking. Point of fact: there are now more pilots being trained to fly drones than airplanes. And the technology has reached the point where there is literally no corner on earth where a strategic hit couldn’t be made. Even more concerning, the political and legal framework that previously caused hesitation before striking against citizens of other countries (outside of an active war zone) has largely been erased. Today Pakistan, tomorrow the world?

Second, instead of winding back the US nuclear program—a firm plank in President Obama’s campaign platform—the Nobel Prize winner and his team have indeed been ramping up and modernizing the US nuclear arsenal. The following is an excerpt from a September 21, 2014 article in the New York Times, titled “U.S. Ramping Up Major Renewal in Nuclear Arms”…,,

KANSAS CITY, Mo. — A sprawling new plant here in a former soybean field makes the mechanical guts of America’s atomic warheads. Bigger than the Pentagon, full of futuristic gear and thousands of workers, the plant, dedicated last month, modernizes the aging weapons that the United States can fire from missiles, bombers and submarines.

It is part of a nationwide wave of atomic revitalization that includes plans for a new generation of weapon carriers. A recent federal study put the collective price tag, over the next three decades, at up to a trillion dollars.

Third, the events unfolding in Ukraine, where the US was caught red handed engineering the regime change that destabilized the country and forced Russia to act, show a clear intent to set the world against Putin’s Russia and in time, neutralize Russia as a strategic threat.

So the only revelation from my breakfast four years ago remaining to be confirmed is for the next big war to envelope the world. Per the events in Ukraine, the foundations of that war have likely already been set. Before I get to that, however, a quick but relevant detour is required.

The Nature of Complex Systems


Last week the semiannual Owner’s & Guests event took place here at La Estancia de Cafayate. As part of the weeklong gathering, a conference was held featuring residents speaking on topics they are experts on.
Among those residents is a nuclear-energy engineer who spoke on the fragility of the US power grid, the most complex energy transmission system in the world.
He went into great detail about the “defense-in-depth” controls, backups, and overrides built into the system to ensure the grid won’t—in fact, can’t—fail. Yet periodically, it still does.

How? First and foremost, the engineer explained, there is a fundamental principle that holds that the more complex a system is, the more likely it is to fail. As a consequence, despite thousands of very bright people armed with massive budgets and a clear mandate to keep the transmission lines humming, there is essentially nothing they can do to actually prevent some unforeseen, and unforeseeable, event from taking the whole complex system down.

Case in point: in 2003 one of the largest power outages in history occurred. 508 large power generators were knocked out, leaving 55 million people in North America without power for upward of 24 hours. The cause? A software defect in an alarm system in an Ohio control center.

I mention this in the context of this article because, as complex as the U.S. power grid is, it is nothing compared to the complexities involved with long-term military strategic planning. This complexity is the result of many factors, including:
  • The challenges of identifying potential adversaries and threats many years, even a decade or more, into the future.
  • New and evolving technologies. It is a truism that the military is always fighting the last war: by the time the military machine spins up to build and deploy a new technology, it is often already obsolete.
  • The entrenched bureaucracies, headed by mere mortals with strong biases. Today’s friend is tomorrow’s enemy and vice versa.
  • The unsteady influences of a political class always quick to react with policy shifts to the latest dire news or purported outrage.
  • The media, a constant source of hysteria making headlines masquerading as news. And let’s not overlook the media’s role as active agents of the entrenched bureaucratic interests. In one now largely forgotten case, Operation Mockingbird, the CIA actually infiltrated the major US media outlets, specifically to influence public opinion.

    All you need to do to understand the bureaucratic agenda is to take a casual glance at the “news” about current events such as those transpiring in the Ukraine.
  • And, most important, human nature. We humans are the ultimate complex system, prone to a literally infinite number of strong opinions, exaggerated fears, mental illnesses, passions, vices, self-destructive tendencies, and stupidity on a biblical scale.
The point is that the average person assumes the powers-that-be actually know what they are doing and would never lead us into disaster, but quoting my breakfast companion, that would be a very poor assumption.

Simply, while mass war on the level of the wholesale slaughter commonplace in the last century is unimaginable to most in the modern context, it is never more than the equivalent of a faulty alarm system away from occurring.

Those history buffs among you will confirm that up until about a week before World War I began, virtually no one in the public, the press, the political class, or even the military had any idea the shooting was about to start. And 99.9% of the people then living had no idea the war was about to begin until after the first shot was fired.

Back to the Present


It is a rare moment in one’s life when the bureaucratic curtain falls away long enough to reveal something approximating The Truth. In my opinion, that’s what I observed over breakfast four years ago. That, right or wrong, the proactive military strategy of the US had been turned toward Russia.
Knowing that and no more, one can only guess what actual measures have been planned and set into motion to defang the Russian bear.

Based on the evidence, however, the events in Ukraine appear to be a bold chess move on the bigger board… and to be fair, a pretty damn effective move at that. The problem for the US and its allies is that on the other side of the table is one Vladimir Putin, self made man, black belt judo master, and former KGB spy master.

And that’s just scratching the surface of this complicated and determined individual. One thing is for sure: if you had to pick your adversary in a global geopolitical contest, you’d probably pick him dead last.
Which brings me to a quick mention of The Colder War, Marin’s book, which was released yesterday.
I mentioned earlier that the book had sucked me in and kept me in pretty much straight through until I finished. One reason is that while you can tell Marin has a great deal of respect for Putin’s capabilities and strategic thinking, he doesn’t shy away from revealing the judo master’s dark side. As you will read (and find quoting to your friends, as I have), it is a very dark side.

But the story is so much bigger than that, and Marin does a very good job of explaining the increasingly hostile competition between the US and Russia and the seismic economic consequences that will affect us all as the “Colder War” heats up.

Before signing off for now, I want to add that it is not Marin’s contention that the Colder War will devolve into an actual shooting war. In my view, however, due to the complexities discussed above, you can’t dismiss a military confrontation, even one involving nukes. Every complex system ultimately fails, and the more the US pushes in on Putin’s Russia, the more likely such a failure is to occur.

I recommend Marin’s book, The Colder War; here is the link.

We’ll leave the lights on down here in Cafayate.

Casey Research partner David Galland lives in La Estancia de Cafayate (www.LaEst.com).
The article Breakfast with a Lord of War was originally published at casey research.com.


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Wednesday, November 19, 2014

The Looming Uranium Crisis: Strategic Implications for the Colder War

By Marin Katusa, Chief Energy Investment Strategist

In the wake of one singular event—the disaster at Fukushima in March 2011, the effects of which are still being felt today across the planet—nuclear power has seemingly fallen into utter disrepute, at least in the popular mind. But this is largely an illusion.

It’s true that Japan took all 52 of its nuclear plants offline after Fukushima and sold much of its uranium inventory. South Korea followed with shutdowns of its own. Germany permanently mothballed eight of its 17 reactors and pledged to close the rest by the end of 2022. Austria and Spain have enacted laws to cease construction on new nuclear power stations. Switzerland is phasing them out. A majority of the other European nations is also opposed.

All of this has resulted in a large decrease in demand for uranium, a glut of the fuel on the market, and a per-pound price that fell as low as $28.50 in mid-2014, down nearly 80% from its peak of $135 in 2007.

Currently, it’s languishing around $39 per pound, still below the cost of production for many miners—about 80% need prices above $40 to make any return on investment, and even at that level, no new mines will be built. It’s easy to hear a death knell for nuclear energy on the breeze. And that may well be the case for Europe (except for France). But Europe is hardly the world.

South Korean plants are back online. Japan is planning to restart its reactor fleet (despite a great deal of citizen protest) beginning in 2015. Russia is heavily invested, with nine plants under construction and 14 others planned. China, faced with unhealthy levels of air pollution in many of its cities due to coal power generation, is going all in on nuclear. 26 reactors are under construction, and the government has declared a goal of quadrupling present capacity—either in operation or being built—by 2020. India has 20 plants and is adding seven more. And in the rest of the developing nations, nuclear power is exploding.

Worldwide, no fewer than 71 new plants are under construction in more than a dozen countries, with another 163 planned and 329 proposed. Many countries without nuclear power soon will build their first reactors, including Turkey, Kazakhstan, Indonesia, Vietnam, Egypt, Saudi Arabia, and several of the Gulf emirates.

For years, China, with its stunning GDP growth rate, has been seen as the leading destination for natural resources. “Produce what China needs” has been every supplier’s ongoing mantra. Yet, as many Americans fail to realize, it’s their own home that is the biggest uranium consumer. Despite having not opened a new plant since 1977 (though six additional units are scheduled to open by 2020), the US is the world’s #1 producer of nuclear energy, accounting for more than 30% of the global total. France is a distant second at 12%; China, playing catchup, sits at only 6% right now. The 65 American nuclear plants, housing just over 100 reactors, generate 20% of total US electricity.

Yet uranium is the one fuel for which there is very little domestic supply.


As you can see, the US has to import over 90% of what it uses. That’s a huge shortfall—and it’s persisted for many years. How has the country made it up?

In a word: Russia.

America’s former Cold War archenemy—and antagonist in the unfolding sequel, the Colder War—has in fact been keeping the US nuclear fires burning, through conduits like the Megatons to Megawatts Program.
When the USSR collapsed, Russia inherited over two million pounds of HEU—highly enriched uranium (the 90% U-235 needed to fashion a bomb)—and vast, underused facilities for handling and fabricating the material. Starting in 1993, it cut a deal with the US dubbed the Megatons to Megawatts Program. Over the 20 years that followed, 1.1 million pounds of Russian weapon-grade uranium, equivalent to about 20,000 nuclear warheads, was downblended to U3O8 and sold to the United States as fuel.

That source was very important in helping to fill the US supply gap for those two decades. It represented, on average, over 20 million pounds of annual uranium supply, or half of what the country consumed. I’m sure it would have come as a shock to most Americans if they’d realized that one in ten of their homes was being powered by former Soviet missiles.

Megatons to Megawatts expired in November 2013, but US dependence on Russia did not. Russia is easily able to maintain its sizeable export presence, due largely to present economics.

Because of all the uranium swamping the market since Fukushima, separative work units (SWUs) are trading at very low prices. SWUs measure the amount of separation work necessary to enrich uranium—in other words, how much work must be done to raise the product’s concentration of U-235 to the 3-5% that most reactors require for fission?

The tails that are left behind when U-235 is separated out to make warheads still contain some amount of the isotope, usually around 0.2% to 0.3%. When the price of SWUs gets low enough, it’s a condition known as “underfeeding,” meaning it’s worth the effort to go back and extract leftover U-235 from the tails. That’s done through the process of re-enrichment, the reverse of the procedure that creates HEU. It’s kind of like getting fresh gold from old ore that had already yielded the easy stuff.

After the Soviet Union broke up, Russia had a lot of enrichment capacity it no longer needed for its military program. And major uranium companies like Areva and Urenco had sent trainloads of enrichment tails to Russia in the 1990s and early 2000s.

Great stockpiles were built up, and they’ll be put to use until the pendulum swings the other way and we get “overfeeding,” where the price of SWUs makes re-enrichment too costly to continue. We will go from under- to overfeeding in the near future. Rising demand from the Japanese restart and new plants coming online ensures that it will happen, and probably within the next 24 months. The market is already anticipating it, with the per-pound price of uranium up more than 35% in the past few months. It’s going to double to $75… at the least.

Meanwhile, though, the ability to profitably produce fuel-grade uranium from tails confers on Russia a number of significant advantages. Among them:
  • It permits the country to exploit a previously worthless resource.
  • The more tails it can use as feedstock, the fewer it has to dispose of.
  • Most important, it means Russia can conserve much of its mineral supply for a future when higher prices will dramatically increase its leverage. That includes in-ground ore, of which it has a lot, and probably uranium picked up on the cheap when Japan did its massive post-Fukushima fuel dump (though it has never been officially confirmed who the buyers of Japan’s uranium supply were, I have some very connected sources who tell me it was the Russians who snapped most of it up).
This is one part of Vladimir Putin’s plan to dominate the world energy markets. In my book, The Colder War, I call it the “Putinization” of uranium.  And he has nicely positioned his country to pull it off.
In January 2014, Sergei Kiriyenko, head of Russian energy giant Rosatom, was bursting with enthusiasm when he predicted that Russia’s recent annual production rate of 6.5 million pounds of uranium would triple in 2015.

Rosatom puts Russia’s uranium reserves in the ground at 1.2 billion pounds of yellowcake, which would be the second largest in the world; the company is quite capable of mining 40 million pounds per year by 2020. Add in Russia’s foreign projects in Kazakhstan, Ukraine, Uzbekistan, and Mongolia, and annual production in 2020 jumps to more than 63 million pounds. Include all of Russia’s sphere of influence, and annual production easily could amount to more than 140 million pounds six years from now.

No other country has a uranium mining plan nearly this ambitious. By 2020, Russia itself could be producing a third of all yellowcake. With just its close ally Kazakhstan chipping in another 25%, Russia would have effective control of more than half of world supply.

That’s clout. But it doesn’t end there.
Globally, there are a fair number of facilities for fabricating fuel rods. Not so with conversion plants (uranium oxide to uranium hexafluoride) or enrichment plants (isolating the U-235). And the world leader in conversion and enrichment is…. yes, Russia.

All told, Russia has one-third of all uranium conversion capacity. The United States is in second place with 18%. And Russia’s share is projected to rise, assuming Rosatom proceeds with a new conversion plant planned for 2015. Similarly, Russia owns 40% of the world’s enrichment capacity. Planned expansion of the existing facilities will push that share close to 50%.

That’s Putin’s goal—to corner the conversion and enrichment markets—because it wraps Russian hands around the chokepoints in the whole yellowcake to electricity progression. It’s a smart strategy, too—control those, and you control the availability and pricing of a product for which demand will be rising for decades.

And that control will tighten, because the barrier to entry for either function is very high. Building new conversion or enrichment facilities is too costly for most countries, and it is especially difficult in the West due to the influence of environmentalists.

It’s worth reiterating. Russia is on track to control 58% of global yellowcake production; currently responsible for a third of yellowcake-to-uranium-hexafluoride conversion; and soon to hold half of all global enrichment capacity.

There’s a word for this: stranglehold.

That is what Putin and Russia will have on the supply chain for nuclear fuel in a world where new atomic power plants are being constructed at warp speed, which will force the price of uranium ever higher. It will give Russia enormous global influence and great leverage in all future dealings with the US America can mine some uranium domestically and buy some more from its Canadian ally. But even taken together, those sources put only a small patch on the supply gap.

The US government would do well to make peace with Putin, if it can, because the domestic nuclear power industry—and by extension the economic health of the country—is at the mercy of Russia, indefinitely.
To get the full story, click here to order your copy of my new book, The Colder War.

Inside, you’ll discover more on how Putin has cornered the market on Uranium, and how he’s making a big play to control the world's oil and natural gas markets. You’ll also glimpse his endgame and how it will personally affect millions of investors and the lives of nearly every American.



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Monday, November 17, 2014

Free Webinar: Why you Should Trade Options on ETFs

Our trading partner John Carter of Simpler Options is back with another one of his wildly popular free trading webinars. His focus this time is "Why you should trade Options on ETFs". John took the time to give us idea what he'll be walking us through step by step in this weeks webinar by producing this great video [just click here to watch]  that included how we can play the next big move in the dollar. A move that John predicts most traders will miss.

Just Click Here to get your Reserved Seat for the Webinar

This weeks webinar is Tuesday evening November 18th at 8 p.m. est

In this free webinar John Carter will discuss....

  *  Why trading options on ETFs are perfect for newbies, retirees, part time traders, and full time traders

  *  Why options on ETFs are safer than trading futures or forex while allowing you to hold on for bigger
       moves

  *  What ETFs should you trade options on and which ones should you avoid so you’re choosing the most
       consistent ETFs to trade

  *  The 5 reasons why you should learn how to trade options on ETFs and stabilize your trading account

  *  Why options on ETFs are ideal for small account traders who want to either safely grow their account
       or try for a home run trade

And much more….

Just click here to get your reserved space asap, John's classes always fill up and turn people away so sign up now and make sure you log in 10 minutes early so you don't lose your spot.

See you Tuesday evening!


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The Return of the Dollar

By John Mauldin


Two years ago, my friend Mohamed El-Erian and I were on the stage at my Strategic Investment Conference. Naturally we were discussing currencies in the global economy, and I asked him about currency wars. He smiled and said to me, “John, we don’t talk about currency wars in polite circles. More like currency disagreements” (or some word to that effect).

This week I note that he actually uses the words currency war in an essay he wrote for Project Syndicate:

Yet the benefits of the dollar’s rally are far from guaranteed, for both economic and financial reasons. While the US economy is more resilient and agile than its developed counterparts, it is not yet robust enough to be able to adjust smoothly to a significant shift in external demand to other countries. There is also the risk that, given the role of the ECB and the Bank of Japan in shaping their currencies’ performance, such a shift could be characterized as a “currency war” in the US Congress, prompting a retaliatory policy response.

This is a short treatise, but as usual with Mohamed’s writing, it’s very thought provoking. Definitely Outside the Box material.

And for a two-part Outside the Box I want to take the unusual step of including an op-ed piece that you might not have seen, from the Wall Street Journal, called “How to Distort Income Inequality,” by Phil Gramm and Michael Solon. They cite research I’ve seen elsewhere which shows that the work by Thomas Piketty cherry-picks data and ignores total income and especially how taxes distort the data. That is not to say that income inequality does not exist and that we should not be cognizant and concerned, but we need to plan policy based on a firm grasp of reality and not overreact because of some fantasy world created by social provocateur academicians.

This weeks new video "How you can Profit from ETFs on the Unexpected Move in the Dollar".....Just Click Here

The calls for income redistribution from socialists and liberals based on Piketty’s work are clearly misguided and will further distort income inequality in ways that will only reduce total global productivity and growth.
I’m in New York today at an institutional fund manager conference where I had the privilege of hearing my good friend Ian Bremmer take us around the world on a geopolitical tour. Ian was refreshingly optimistic, or at least sanguine, about most of the world over the next few years. Lots of potential problems, of course, but he thinks everything should turn out fine – with the notable exception of Russia, where he is quite pessimistic.

A shirtless Vladimir Putin was the scariest thing on his geopolitical radar. As he spoke, Russia was clearly putting troops and arms into eastern Ukraine. Why would you do that if you didn’t intend to go further? Ian worried openly about Russia’s extending a land bridge all the way to Crimea and potentially even to Odessa, which is the heart of economic Ukraine, along with the Kiev region. It would basically make Ukraine ungovernable.

I thought Putin’s sadly grim and memorable line that “The United States is prepared to fight Russia to the last Ukrainian” pretty much sums up the potential for a US or NATO response. Putin agreed to a cease-fire and assumed that sanctions would start to be lifted. When there was no movement on sanctions, he pretty much went back to square one. He has clearly turned his economic attention towards China.

Both Ian Bremmer and Mohamed El Erian will be at my Strategic Investment Conference next year, which will again be in San Diego in the spring, April 28-30. Save the dates in your calendar as you do not want to miss what is setting up to be a very special conference. We will get more details to you soon.

It is a very pleasant day here in New York, and I was able to avoid taxis and put in about six miles of pleasant walking. (Sadly, it is supposed to turn cold tomorrow.) I’ve gotten used to getting around in cities and slipping into the flow of things, but there was a time when I felt like the country mouse coming to the city. As I walked past St. Bart’s today I was reminded of an occasion when your humble analyst nearly got himself in serious trouble.

There is a very pleasant little outdoor restaurant at St. Bartholomew’s Episcopal Church, across the street from the side entrance of the Waldorf-Astoria. It was a fabulous day in the spring, and I was having lunch with my good friend Barry Ritholtz. The president (George W.) was in town and staying at the Waldorf. His entourage pulled up and Barry pointed and said, “Look, there’s the president.”

We were at the edge of the restaurant, so I stood up to see if I could see George. The next thing I know, Barry’s hand is on my shoulder roughly pulling me back into my seat. “Sit down!” he barked. I was rather confused – what faux pas I had committed? Barry pointed to two rather menacing, dark-suited figures who were glaring at me from inside the restaurant.

“They were getting ready to shoot you, John! They had their hands inside their coats ready to pull guns. They thought you were going to do something to the president!”

This was New York not too long after 9/11. The memory is fresh even today. Now, I think I would know better than to stand up with the president coming out the side door across the street. But back then I was still just a country boy come to the big city.

Tomorrow night I will have dinner with Barry and Art Cashin and a few other friends at some restaurant which is supposedly famous for a mob shooting back in the day. Art will have stories, I am sure.
It is time to go sing for my supper, and I will try not to keep the guests from enjoying what promises to be a fabulous meal from celebrity chef Cyrille Allannic. After Ian’s speech, I think I will be nothing but sweetness and light, just a harmless economic entertainer. After all, what could possibly go really wrong with the global economy, when you’re being wined and dined at the top of New York? Have a great week.

John Mauldin, Editor
Outside the Box
subscribers@mauldineconomics.com

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The Return of the Dollar

By Mohamed El-Erian
Project Syndicate, Nov. 13, 2014

The U.S. dollar is on the move. In the last four months alone, it has soared by more than 7% compared with a basket of more than a dozen global currencies, and by even more against the euro and the Japanese yen. This dollar rally, the result of genuine economic progress and divergent policy developments, could contribute to the “rebalancing” that has long eluded the world economy. But that outcome is far from guaranteed, especially given the related risks of financial instability.

Two major factors are currently working in the dollar’s favor, particularly compared to the euro and the yen. First, the United States is consistently outperforming Europe and Japan in terms of economic growth and dynamism – and will likely continue to do so – owing not only to its economic flexibility and entrepreneurial energy, but also to its more decisive policy action since the start of the global financial crisis.

Second, after a period of alignment, the monetary policies of these three large and systemically important economies are diverging, taking the world economy from a multi-speed trajectory to a multi-track one. Indeed, whereas the US Federal Reserve terminated its large-scale securities purchases, known as “quantitative easing” (QE), last month, the Bank of Japan and the European Central Bank recently announced the expansion of their monetary-stimulus programs. In fact, ECB President Mario Draghi signaled a willingness to expand his institution’s balance sheet by a massive €1 trillion ($1.25 trillion).

With higher US market interest rates attracting additional capital inflows and pushing the dollar even higher, the currency’s revaluation would appear to be just what the doctor ordered when it comes to catalyzing a long-awaited global rebalancing – one that promotes stronger growth and mitigates deflation risk in Europe and Japan. Specifically, an appreciating dollar improves the price competitiveness of European and Japanese companies in the US and other markets, while moderating some of the structural deflationary pressure in the lagging economies by causing import prices to rise.

Yet the benefits of the dollar’s rally are far from guaranteed, for both economic and financial reasons. While the US economy is more resilient and agile than its developed counterparts, it is not yet robust enough to be able to adjust smoothly to a significant shift in external demand to other countries. There is also the risk that, given the role of the ECB and the Bank of Japan in shaping their currencies’ performance, such a shift could be characterized as a “currency war” in the US Congress, prompting a retaliatory policy response.

Furthermore, sudden large currency moves tend to translate into financial-market instability. To be sure, this risk was more acute when a larger number of emerging-economy currencies were pegged to the U.S. dollar, which meant that a significant shift in the dollar’s value would weaken other countries’ balance of payments position and erode their international reserves, thereby undermining their creditworthiness. Today, many of these countries have adopted more flexible exchange-rate regimes, and quite a few retain adequate reserve holdings.

But a new issue risks bringing about a similarly problematic outcome: By repeatedly repressing financial-market volatility over the last few years, central-bank policies have inadvertently encouraged excessive risk-taking, which has pushed many financial-asset prices higher than economic fundamentals warrant. To the extent that continued currency-market volatility spills over into other markets – and it will – the imperative for stronger economic fundamentals to validate asset prices will intensify.

This is not to say that the currency re-alignment that is currently underway is necessarily a problematic development; on the contrary, it has the potential to boost the global economy by supporting the recovery of some of its most challenged components. But the only way to take advantage of the re-alignment’s benefits, without experiencing serious economic disruptions and financial-market volatility, is to introduce complementary growth-enhancing policy adjustments, such as accelerating structural reforms, balancing aggregate demand, and reducing or eliminating debt overhangs.

After all, global growth, at its current level, is inadequate for mere redistribution among countries to work. Overall global GDP needs to increase.

The US dollar’s resurgence, while promising, is only a first step. It is up to governments to ensure that the ongoing currency re-alignment supports a balanced, stable, and sustainable economic recovery. Otherwise, they may find themselves again in the unpleasant business of mitigating financial instability.

How to Distort Income Inequality

By Phil Gramm and Michael Solon
Wall Street Journal, Nov. 11, 2014

The Piketty-Saez data ignore changes in tax law and fail to count noncash compensation and Social Security benefits.

What the hockey-stick portrayal of global temperatures did in bringing a sense of crisis to the issue of global warming is now being replicated in the controversy over income inequality, thanks to a now-famous study by Thomas Piketty and Emmanuel Saez, professors of economics at the Paris School of Economics and the University of California, Berkeley, respectively. Whether the issue is climate change or income inequality, however, problems with the underlying data significantly distort the debate.

The chosen starting point for the most-quoted part of the Piketty-Saez study is 1979. In that year the inflation rate was 13.3%, interest rates were 15.5% and the poverty rate was rising, but economic misery was distributed more equally than in any year since. That misery led to the election of Ronald Reagan, whose economic policies helped usher in 25 years of lower interest rates, lower inflation and high economic growth. But Messrs. Piketty and Saez tell us it was also a period where the rich got richer, the poor got poorer and only a relatively small number of Americans benefited from the economic booms of the Reagan and Clinton years.

If that dark picture doesn’t sound like the country you lived in, that’s because it isn’t. The Piketty-Saez study looked only at pretax cash market income. It did not take into account taxes. It left out noncash compensation such as employer-provided health insurance and pension contributions. It left out Social Security payments, Medicare and Medicaid benefits, and more than 100 other means-tested government programs. Realized capital gains were included, but not the first $500,000 from the sale of one’s home, which is tax-exempt. IRAs and 401(k)s were counted only when the money is taken out in retirement. Finally, the Piketty-Saez data are based on individual tax returns, which ignore, for any given household, the presence of multiple earners.

And now, thanks to a new study in the Southern Economic Journal, we know what the picture looks like when the missing data are filled in. Economists Philip Armour and Richard V. Burkhauser of Cornell University and Jeff Larrimore of Congress’s Joint Committee on Taxation expanded the Piketty-Saez income measure using census data to account for all public and private in-kind benefits, taxes, Social Security payments and household size.

The result is dramatic. The bottom quintile of Americans experienced a 31% increase in income from 1979 to 2007 instead of a 33% decline that is found using a Piketty-Saez market-income measure alone. The income of the second quintile, often referred to as the working class, rose by 32%, not 0.7%. The income of the middle quintile, America’s middle class, increased by 37%, not 2.2%.

By omitting Social Security, Medicare and Medicaid, the Piketty-Saez study renders most older Americans poor when in reality most have above-average incomes. The exclusion of benefits like employer-provided health insurance, retirement benefits (except when actually paid out in retirement) and capital gains on homes misses much of the income and wealth of middle- and upper-middle income families.

Messrs. Piketty and Saez also did not take into consideration the effect that tax policies have on how people report their incomes. This leads to major distortions. The bipartisan tax reform of 1986 lowered the highest personal tax rate to 28% from 50%, but the top corporate-tax rate was reduced only to 34%. There was, therefore, an incentive to restructure businesses from C-Corps to subchapter S corporations, limited liability corporations, partnerships and proprietorships, where the same income would now be taxed only once at a lower, personal rate. As businesses restructured, what had been corporate income poured into personal income-tax receipts.

So Messrs. Piketty and Saez report a 44% increase in the income earned by the top 1% in 1987 and 1988—though this change reflected how income was taxed, not how income had grown. This change in the structure of American businesses alone accounts for roughly one-third of what they portray as the growth in the income share earned by the top 1% of earners over the entire 1979-2012 period.

An equally extraordinary distortion in the data used to measure inequality (the Gini Coefficient) has been discovered by Cornell’s Mr. Burkhauser. In 1992 the Census Bureau changed the Current Population Survey to collect more in-depth data on high-income individuals. This change in survey technique alone, causing a one-time upward shift in the measured income of high-income individuals, is the source of almost 30% of the total growth of inequality in the U.S. since 1979.

Simple statistical errors in the data account for roughly one third of what is now claimed to be a “frightening” increase in income inequality. But the weakness of the case for redistribution does not end there. America is the freest and most dynamic society in history, and freedom and equality of outcome have never coexisted anywhere at any time. Here the innovator, the first mover, the talented and the persistent win out—producing large income inequality. The prizes are unequal because in our system consumers reward people for the value they add. Some can and do add extraordinary value, others can’t or don’t.

How exactly are we poorer because Bill Gates, Warren Buffett and the Walton family are so rich? Mr. Gates became rich by mainstreaming computer power into our lives and in the process made us better off. Mr. Buffett’s genius improves the efficiency of capital allocation and the whole economy benefits. Wal-Mart stretches our buying power and raises the living standards of millions of Americans, especially low-income earners. Rich people don’t “take” a large share of national income, they “bring” it. The beauty of our system is that everybody benefits from the value they bring.

Yes, income is 24% less equally distributed here than in the average of the other 34 member countries of the OECD. But OECD figures show that U.S. per capita GDP is 42% higher, household wealth is 210% higher and median disposable income is 42% higher. How many Americans would give up 42% of their income to see the rich get less?

Vast new fortunes were earned in the 25-year boom that began under Reagan and continued under Clinton. But the income of middle-class Americans rose significantly. These incomes have fallen during the Obama presidency, and not because the rich have gotten richer. They’ve fallen because bad federal policies have yielded the weakest recovery in the postwar history of America.

Yet even as the recovery continues to disappoint, the president increasingly turns to the politics of envy by demanding that the rich pay their “fair share.” The politics of envy may work here as it has worked so often in Latin America and Europe, but the economics of envy is failing in America as it has failed everywhere else.

Mr. Gramm, a former Republican senator from Texas, is a visiting scholar at the American Enterprise Institute. Mr. Solon was a budget adviser to Senate Republican Leader Mitch McConnell and is a partner of US Policy Metrics.

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Important Disclosures

The article Outside the Box: The Return of the Dollar was originally published at mauldineconomics.com.


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Saturday, November 15, 2014

New Video: How You Can Profit with ETFs from the Unexpected Move in the Dollar

You've seen us talking about a new Options strategy that John Carter was working on recently...and he is finally sharing it with us.

Video: My Favorite Way to Trade Options on ETFs

This strategy is the "sleep at night as you trade options" strategy. And we ALL need that!

Here's just a taste of what John shows you in this video:

*  Why trading options on ETFs cuts your risk so you can sleep at night

*  How you can profit with ETFs from the unexpected move in the dollar

*  Why you avoid the games high frequency traders play by trading ETFs

*  Why most analysts have the next move in the dollar wrong and how to protect your investments

*  What are some of the markets that will be impacted by the dollars next move

Here's the link to watch the video again

Enjoy the video,
The Stock Market Club


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Friday, November 14, 2014

Paper Gold and Its Effect on the Gold Price

By Bud Conrad, Chief Economist

Gold dropped to new lows of $1,130 per ounce last week. This is surprising because it doesn’t square with the fundamentals. China and India continue to exert strong demand on gold, and interest in bullion coins remains high.

I explained in my October article in The Casey Report that the Comex futures market structure allows a few big banks to supply gold to keep its price contained. I call the gold futures market the “paper gold” market because very little gold actually changes hands. $360 billion of paper gold is traded per month, but only $279 million of physical gold is delivered. That’s a 1,000-to-1 ratio:

Market Statistics for the 100-oz Gold Futures Contract on Comex
Value ($M)
Monthly volume (Paper Trade) $360,000
Open Interest All Contracts $45,600
Warehouse-Registered Gold (oz) $1,140
Physical Delivery per Month $279
House Account Net Delivery, monthly $41


We know that huge orders for paper gold can move the price by $20 in a second. These orders often exceed the CME stated limit of 6,000 contracts. Here’s a close view from October 31, when the sale of 2,365 contracts caused the gold price to plummet and forced the exchange to close for 20 seconds:



Many argue that the net long term effect of such orders is neutral, because every position taken must be removed before expiration. But that’s actually not true. The big players can hold hundreds of contracts into expiration and deliver the gold instead of unwinding the trade. Net, big banks can drive down the price by delivering relatively small amounts of gold.

A few large banks dominate the delivery process. I grouped the seven biggest players below to show that all the other sources are very small. Those seven banks have the opportunity to manage the gold price:


After gold’s big drop in October, I analyzed the October delivery numbers. The concentration was even more severe than I expected:


This chart shows that an amazing 98.5% of the gold delivered to the Comex in October came from just three banks: Barclays; Bank of Nova Scotia; and HSBC. They delivered this gold from their in house trading accounts.

The concentration was even worse on the other side of the trade—the side taking delivery. Barclays took 98% of all deliveries for customers. It could be all one customer, but it’s more likely that several customers used Barclays to clear their trades. Either way, notice that Barclays delivered 455 of those contracts from its house account to its own customers.

The opportunity for distorting the price of gold in an environment with so few players is obvious. Barclays knows 98% of the buyers and is supplying 35% of the gold. That’s highly concentrated, to say the least. And the amounts of gold we’re talking about are small—a bank could tip the supply by 10% by adding just 100 contracts. That amounts to only 10,000 ounces, which is worth a little over $11 million—a rounding error to any of these banks. These numbers are trivial.

Note that the big banks were delivering gold from their house accounts, meaning they were selling their own gold outright. In other words, they were not acting neutrally. These banks accounted for all but 19 of the contracts sold. That’s a position of complete dominance. Actually, it’s beyond dominance. These banks are the market.

My point is that this market is much too easily rigged , and that the warnings about manipulation are valid. At some point, too many customers will demand physical delivery and there will be a big crash. Long contracts will be liquidated with cash payouts because there won’t be enough gold to deliver. I saw a few squeezes in my 20 years trading futures, including gold. In my opinion, the futures market is not safe.

The tougher question is: for how long will big banks’ dominance continue to pressure gold down?

Unfortunately, I don’t know the answer. Vigilant regulators would help, but “futures market regulators” is almost an oxymoron. The actions of the CFTC and the Comex, not to mention how MF Global was handled, suggest that there has been little pressure on regulators to fix this obvious problem.

This quote from a recent Financial Times article does give some reason for optimism, however:

UBS is expected to strike a settlement over alleged trader misbehaviour at its precious metals desks with at least one authority as part of a group deal over forex with multiple regulators this week, two people close to the situation said. … The head of UBS’s gold desk in Zurich, AndrĂ© Flotron, has been on leave since January for reasons unspecified by the lender…..

The FCA fined Barclays £26m in May after an options trader was found to have manipulated the London gold fix.

Germany’s financial regulator BaFin has launched a formal investigation into the gold market and is probing Deutsche Bank, one of the former members of a tarnished gold fix panel that will soon be replaced by an electronic fixing.

The latter two banks are involved with the Comex.

Eventually, the physical gold market could overwhelm the smaller but more closely watched U.S. futures delivery market. Traders are already moving to other markets like Shanghai, which could accelerate that process. You might recall that I wrote about JP Morgan (JPM) exiting the commodities business, which I thought might help bring some normalcy back to the gold futures markets. Unfortunately, other banks moved right in to pick up JPM’s slack.

Banks can’t suppress gold forever. They need physical gold bullion to continue the scheme, and there’s just not as much gold around as there used to be. Some big sources, like the Fed’s stash and the London Bullion Market, are not available. The GLD inventory is declining.



If a big player like a central bank started to use the Comex to expand its gold holdings, it could overwhelm the Comex’s relatively small inventories. Warehouse stocks registered for delivery on the Comex exchange have declined to only 870,000 ounces (8,700 contracts). Almost that much can be demanded in one month: 6,281 contracts were delivered in August.

The big banks aren’t stupid. They will see these problems coming and can probably induce some holders to add to the supplies, so I’m not predicting a crisis from too many speculators taking delivery. But a short squeeze could definitely lead to huge price spikes. It could even lead to a collapse in the confidence in the futures system, which would drive gold much higher.

Signs of high physical demand from China, India, and small investors buying coins from the mint indicate that gold prices should be rising. The GOFO rate (London Gold Forward Offered rate) went negative, indicating tightness in the gold market. Concerns about China’s central bank wanting to de-dollarize its holdings should be adding to the interest in gold.

In other words, it doesn’t add up. I fully expect currency debasement to drive gold higher, and I continue to own gold. I’m very confident that the fundamentals will drive gold much higher in the long term. But for now, I don’t know when big banks will lose their ability to manage the futures market.

Oddities in the gold market have been alleged by many for quite some time, but few know where to start looking, and even fewer have the patience to dig out the meaningful bits from the mountain of market data available. Casey Research Chief Economist Bud Conrad is one of those few—and he turns his keen eye to every sector in order to find the smart way to play it.

This is the kind of analysis that’s especially important in this period of uncertainty and volatility… and you can put Bud’s expertise—along with the other skilled analysts’ talents—to work for you by taking a risk-free test-drive of The Casey Report right now.

The article Paper Gold and Its Effect on the Gold Price was originally published at casey research


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