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Europe's Scariest Chart… Got Scarier

While the general level of unemployment in Europe is rising in a scary enough way (more detail here), the one really concerning data point has gone from bad to worse. When we last looked at youth unemployment in Europe, things were stabilizing a little, though at extremely lofty levels. With the release of July’s data, the situation has deteriorated rapidly; Euro-Zone youth unemployment hs now ticked back up to its euro-era record-high of 22.6% (18-year highs). Only Portugal saw an improvement is the rate of unemployment among the Under-25 age group (from 37.6% to 36.4%) though it remains anarchically high. Italy was the hardest hit, back above 35% with its largest rise in youth joblessness in 5 months, Ireland rose back above 30% for its biggest rise in 11 months as France jumped to two-year highs and Spain and Greece are practically deadlocked with ~53% of their younger-generation out of work – new all-time records. Why do we worry? Why is this so scary? Two reasons – this and this.



Data: Bloomberg

Guest Post: Your Window to Buy Gold Below $1,700 Is Closing

Submitted by Jeff Clark of Casey Research,

Even the hardiest investors have been lamenting that gold prices have been stuck in a rut for a long time. Others with less experience have watched the market waiting for something to happen….

And as always, many bailed out of the market entirely, licking their wounds.

But some, including me, have been stocking up.

We’re convinced prices won’t stay down forever.

In fact, I think there’s a good reason to buy gold if you can, and as soon as possible.

Here’s why:

Based on the data I chart below, I believe the window of time to buy gold for less than $1,700 an ounce is very limited.

I examined gold’s three largest corrections since the bull market began in 2001, including how long it took to recover from those corrections and establish new highs.

The conclusion that emerged is that the current lull in gold prices will almost certainly end soon, if it hasn’t already.

Gold set a record on September 5, 2011 at $1,895 an ounce (London PM Fix) and to date has fallen as low as $1,531 (December 29, 2011), a decline of 19.2%. Gold has tested that level several times since but never broke below it.

In order to determine how long it might take to breach $1,895 again, I measured the time it took to mount new highs after big corrections in the past.

The following chart details the three largest corrections since 2001, and calculates how many weeks it took the gold price to a) breach the old high, and b) stay above that level.

(Click on image to enlarge)

In 2006, after a total decline of 22.6%, it took a year and four months for gold to surpass its old high. After the 2008 meltdown, it was a year and six months later before the metal hit a new record. The 16.2% drop in 2003 lasted seven months, and another two months before the price stayed above it.

You can see that our correction has lasted just shy of a year. If we matched the recovery time of 2006, gold would hit a new high on Christmas Eve (Merry Christmas!).

But here’s the thing: that’s how long it would take gold to breach $1,900 again – it will take a couple months or more for the price to work up to that level, meaning the remaining time to buy gold under $1,700 will likely be measured in days or weeks, not months.

This is bolstered by the fact that the price moved up strongly last week.

And just as importantly, we’re on the doorstep of the seasonally strongest month of the year.

This is an educated guess, of course, but what the data make clear is that all corrections eventually end – even the bloodbath in 2008.

The current lag will come to an end too, and we’re certainly closer to the end of this corrective period than the beginning.

This has direct investment implications.

First, once gold breaches its old high, you’ll probably never be able to buy it at current prices again in this cycle.

That’s a rather obvious statement, but let it sink in.

The next few days or weeks will likely be the very last time you can buy gold below $1,700. You’ll have to pay a higher price from then on.

And think about this: it’s entirely possible that by this time next year you will never again be able to buy gold for less than $2,000 an ounce – unless maybe it’s in “new dollars” or some other currency that circulates with fewer zeros on the notes.

Second, the data can help you ignore the noise about gold’s bull market being over and other nonsense spewed from mainstream media types.

If gold doesn’t hit $1,900 until December, you’ll know this is simply normal price behavior and that they’re overlooking basic patterns in the data. And when the price nears that level again and they’re caught off guard by it, you’ll already be positioned.

There are three intelligent ways to buy gold, understanding them means you are there in good time for the turn around.

Regardless of the date, we’re confident that a new high in the gold price will come.

The highs will come because many major currencies are unsound, overburdened with debt, and being actively diluted by governments.

Indeed, the ultimate high could be frighteningly higher than current levels.

As such, we suggest taking advantage of prices that won’t be available indefinitely. I think we all need some of nature’s cure for man’s monetary ills.

The window of time to buy gold at current prices is closing. I suggest taking advantage of the sale while you still can.

Guest Post: Paul Krugman’s Mis-Characterization Of The Gold Standard

Submitted by James E. Miller of the Ludwig von Mises Institute of Canada,

With a price hovering around $1,600 an ounce and the prospect of “additional monetary accommodation” hinted to in the latest meeting of the Federal Reserve’s Federal Open Market Committee, gold is once again becoming a hot topic of discussion.

George Soros made news recently when a filing with the Securities and Exchange Commission revealed that he had liquidated his position with major financial firms and had loaded up on gold; approximately 884,000 shares worth.  Jim Cramer, the CNBC personality in constant search of growing business trends, recommends putting at least 20% of one’s assets in gold.  Following the Republican National Convention, the party platform now proposes the establishment of a commission to study “the feasibility of a metallic basis for U.S. currency.”

Like the gold commission before it, this new interest in gold has brought out the critics who regard the precious metal as nothing short of, to borrow the infamous term coined by John M. Keynes, a “barbarous relic.”  Wesleyan University economist Richard Grossman writes in the Los Angeles Times that the idea of a gold commission is a “waste of time and money” because the standard hasn’t “worked for 100 years.”  In The Atlantic, fiat currency enthusiast Matthew O’Brien calls the gold standard a “terrible idea” and presents a few charts demonstrating that linking the dollar to gold failed to keep prices stable.  Economist and New York Times columnist Paul Krugman has praised O’Brien’s article on his blog and makes sure to point out that the price of gold has been highly volatile since 1968 by showing the following chart:


There is a remarkably widespread view that at least gold has had stable purchasing power. But nothing could be further from the truth.

Krugman points out that when interest rates are low the price of gold typically rises.  He claims that as interest rates tend to fall during recessions, gold’s rise in price would lead to “a fall in the general price level.”  Lastly, Krugman ridicules the notion that a true gold standard would prevent asset bubbles and subsequent busts from occurring by calling attention to the fact that America suffered from financial panics “in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933.”

These criticisms, while containing empirical data, are grossly deceptive.  The information provided doesn’t support Krugman’s assertions whatsoever.  Instead of utilizing sound economic theory as an interpreter of the data, Krugman and his Keynesian colleagues use it to prove their claims.  Their methodological positivism has lead them to fallacious conclusions which just so happen to support their favored policies of state domination over money.  The reality is that not only has gold held its value over time, those panics which Krugman refers to occurred because of government intervention; not the gold standard.

Right off the bat, the Nobel Laureate makes the amateur mistake of conflating two different gold standards.  There was not one set standard throughout the 19th century up to the Great Depression.  Until the first World War, the United States and much of the West was under the classical gold standard.  This meant that the dollar was just a name for a set amount of gold; generally 1/20 of an ounce.  Following the massive inflation used to pay for World War I and the Genoa Conference of 1922, the gold exchange standard was adopted by many Western countries including Britain.  Though the United States remained under an imperfect classical gold standard, other Western countries stopped redeeming gold coins for national currencies.  Instead, they redeemed their currencies for dollars or pounds which allowed for expanded fiscal policies because the constraint of gold was not so prominent.  At the same time, President of the New York Federal Reserve, Benjamin Strong, conspired with the head of the Bank of England, Montague Norman, to keep gold from flowing out of Britain by having the Fed adopt “easy money conditions in the United States” and “increase bank liquidity a great deal” according to economic historian Robert Higgs.  This backroom deal was carried out as England readopted the gold standard in 1926 at the pre-World War 1 parity despite the pound being devalued during the war.  Because trade unions and unemployment insurance made wage rates less flexible downwards, the ensuing deflation was detrimental and combated through further inflation aided and abetted by the Fed.

This new international agreement between central bankers may have appeared to be a maintaining of the classical gold standard but it was nothing of the sort.  The inflationary boom in the later half of the 1920s was a product of the monetary scheming of the Fed and Bank of England.  The final result was the stock market crash of 1929 which ushered in the Great Depression.  Contrary to popular belief, the Depression was not caused by the classical gold standard but because of its rejection.

As for the other panics Krugman mentions, neither were caused by the gold standard but by government intervention in the money market.  As economist Joseph Salerno explains, the pervasiveness of fractional reserve banking, or the expansion of credit unbacked by gold reserves, played a key role in creating financial instability.  The panics were caused primarily by

..the establishment of a quasi-central banking cartel among seven privileged New York banks resulting in the almost complete centralization of U.S. gold reserves in their vaults by the National Bank acts of 1863-1864.  This New York City banking cartel was able to expand willy nilly the monetary base and the overall money supply by expanding their own notes and deposits on top of gold reserves.   Their notes and deposits were then used as reserves by lower tier banks (Reserve City Banks and Country Banks) on which to  pyramid their own notes and deposits.

Moreover, banks, especially the larger ones, were encouraged in their inflationary credit creation by the firmly entrenched expectation that they would be freed from fulfilling their contractual obligations in times of difficulty by the legal suspensions of cash payments to their depositors and note-holders that recurred during panics throughout the 19th century.

In sum, an adherence to a real gold standard was not the main cause of all the financial panics Paul Krugman lists.  It was his favorite institution, the state, and the incessant fiddling around with the economy by the political class that created an unstable monetary system.  It is also worth pointing out that the late 19th century was a period of incredible economic growth for both the United States and the rest of the world in spite of the flawed gold standard.  Though it is often alluded to as a time of robber barons, worker starvation, and terrible deflation, the U.S. economy experienced its highest rate of growth ever recorded as the 1800s drew to a close.  As Murray Rothbard documents in The History of Money and Banking in the United States: The Colonial Era to World War II:

The record of 1879–1896 was very similar to the first stage of the alleged great depression from 1873 to 1879. Once again, we had a phenomenal expansion of American industry, production, and real output per head. Real reproducible, tangible wealth per capita rose at the decadal peak in American history in the 1880s, at 3.8 percent per annum. Real net national product rose at the rate of 3.7 percent per year from 1879 to 1897, while per-capita net national product increased by 1.5 percent per year…

Both consumer prices and nominal wages fell by about 30 percent during the last decade of greenbacks. But from 1879–1889, while prices kept falling, wages rose 23 percent.  So real wages, after taking inflation—or the lack of it—into effect, soared.

No decade before or since produced such a sustainable rise in real wages.

From 1869 to 1879 the total number of business establishments barely rose, but the next decade saw a 39.4-percent increase. Nor surprisingly, a decade of falling prices, rising real income, and lucrative interest returns made for tremendous capital investment, ensuring future gains in productivity.

When the United States maintained a gold standard to a fairly significant degree, the economy blossomed.  The relative absence of inflation ensured that the dollar acted as a store of value in addition to facilitating transactions.  Without the threat of looming price increases, the public was more willing to put off consumption and add to the supply of capital availability by saving.  The prudent technique of producing more than you consume allowed for a greater number of entrepreneurs to put capital to work.  This set the foundation for mass production and giving consumers access to an abundance of goods never thought possible just a century before.

To the Keynesians’ befuddlement, the economic renaissance of the late 19th century occurred at a time where prices weren’t rising or stable but actually falling.  The fall in the general price level occurred as the production capacity expanded at a faster rate than the money supply.  Today, economists of the Keynesian and monetarist school remain convinced that a stable price level is good thing when common sense dictates otherwise.  Falling prices are a godsend for consumers; not a catastrophe.  As long as entrepreneurs are able to utilize the inherent feedback mechanism of an undistorted pricing system to forecast input costs, falling prices are only a minor problem.  The focus on price stability is why many economists missed the Depression and the Fed-engineered boom of the 1920s.  In a free market, the tendency is for prices to fall as production increases.

Krugman denies not only that sound money leads to economic stability and growth, he does so while attempting to show that gold has been incredibly volatile since Richard Nixon cuts the dollar’s tie to the precious metal in 1971.  But Krugman puts the proverbial cart before the horse with his example as it hasn’t been the price of gold that has fluctuated to a high degree but rather the dollar’s value.  As Forbes editor John Tamny pointed out in August of 2011

as Brookes calculated in his essential book The Economy In Mind, “In 1970 an ounce of gold ($35) would buy 15 barrels of OPEC oil ($2.30/bbl). In May 1981 an ounce of gold ($480) still bought 15 barrels of Saudi oil ($32/bbl).” Fast forward to the present, and an ounce of gold ($1750) buys roughly 20 barrels of oil ($85)

Krugman also asserts that when interest rates fall, the price of gold increases [ZH – we discussed the various regime changes between interest rates and gold here in great detail].  But again he makes the same mistake of not recognizing the role dollar manipulation plays in both measures.  Interest rates haven’t been formed by market forces since the Federal Reserve was established.  In a free market, interest rates are determined by the public’s collective time preference or the discounting of future goods against present goods.  When more people are saving, and therefore putting off consumption, there is a higher supply of loanable funds.  This higher supply translates to lower interest rates as the price of present capital lowers.  Under a fiat regime like the Fed which oversees a system of fractional reserve banking, interests rates are manipulated by a few central bankers instead of the market.  These central planners increase the supply of money in an effort to push down interest rates and induce consumers into borrowing. This also has the effect of pushing up the price of gold as investors lose confidence in the dollar’s value.

In his crusade to keep Keynesianism as a legitimate school of thought, Krugman has yet again attempted to mischaracterize gold and blame it for crises caused solely by government intervention.  What Keynesianism amounts to is a theory of state worship and the virtue of hedonism.  Its leading proponents declare there is such thing as a free lunch and that it is served directly by the printing of money.  In other words, it is based on backwards logic and remains distant from reality.

The Keynesians admit there was a housing bubble then fret over an “output gap.”  They blame market exuberance for recessions but then prescribe the exact same policies that lead to exuberance to begin with.  This irrationality was best displayed with a remarkable quote by former Treasury Secretary and former director of President Obama’s National Economic Council Lawrence Summers who wrote in an editorial for the Washington Post:

The central irony of a financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it can be resolved only with more confidence, borrowing and lending, and spending.

Keynesians have no pure economic theory; they are totally ad hoc in their approach.  Any data point which fits their view is trumpeted.  Any theory that presents a challenge to the idea that the economy can be finely tuned like a child’s trinket is dismissed as right-wing propaganda.  Keynesians ultimately reject the golden rule of economics: savings represents deferred consumption and producing more than is consumed.  Real savings in the form of capital goods (factories, equipment, machinery, etc.) are the backbone of any economy.  Government only squanders these scarce resources through its constant pillaging of wealth.

Keynes himself was contemptuous of the middle class throughout his professional career.  This is perhaps why he held such disdain for gold.  Gold is the market’s choice for money; not the statist ruling class dependent on spending virtually unlimited sums of tax dollars.  Because a true gold standard prevents runaway inflation and budget deficits from occurring in perpetuity, Keynesians will do all they can to discredit gold as a workable form of currency.  Their allegiance lies with the state and paper money; not the natural choices of the common man.

The Zero Hedge Daily Round Up #116 – 30/08/2012

There’s most likely one Zero Hedge conspiracy theorist out there, who’s looking into my family history right now, and has come to the conclusion that I’m a Luciferian Jew (can’t forget the Jew part), who has serious connections with the Vatican church. It’s true. I’m actually a statist vampire, personally Christened by the late Mr. Rothschild himself. Hahahahahaha, oh buddy. This is the Zero Hedge Daily Round Up.

1. 125 Harvard undergrads face plagarism probe. 2. US drought: underestimated. 3. Fortescue implodes: seeks $1.5 billion loan. 4. Wall street profits down. Wall street salary up. 5. Finland reject pooled funds. 6. U.S. Vehicle assemby rate, August decline 8%. 7. Rich feel the hurt. 8. Saving rates drop. 9. Morgan Stanley: German ratification of ESM only 60%.

Alternatively, you can download the show as a podcast on iTunes or any RSS capable device.

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Julius Reade

Charting The Unprecedented 'HFT-Driven' Rise In Intraday-Trading Volatility

Sometimes a picture can paint a thousand words; in the case of these two charts from Nanex, it paints more as it is abundantly clear that since Reg NMS, the ‘noise’ in our daily trading markets has risen exponentially as the apparent price we pay for the ‘liquidity-providing’ machines is up to 15-times more normalized ‘price-changes’ – or put another ‘smoothed’ way: averaged over a 20-day period, intraday volatility has doubled since HFT began (and was six times larger during the flash crash). How’s your mean-variance efficient-frontier look now? Or your delta/gamma hedging program?


Nanex ~ 30-Aug-2012 ~ SPY Intraday Volatility

For the symbol SPY, we took the number of NBBO (National Best Bid and Ask) price changes and divided that number by the trading session price range (high minus low). We call this ratio the Relative Intraday Volatility (RIV). We then plotted the RIV for each trading day from January 2006 through August 29, 2012 as shown in the chart below. The dark blue line is a 20 period moving average of the RIV. Notice how the year before Reg NMS was implemented, the RIV was very stable and flat. Since Reg NMS, the average Intraday volatility in SPY is twice as high today, and was nearly six times higher during August 2011. The second chart is scaled to include the entire range of data: note the August 2011 peak is 15 times higher than before Reg NMS. 

1. SPY Relative Intraday Volatility from January 2006 through August 29, 2012

2. Same as chart above, but scaled to show the August 2011 peak.


Source: Nanex