Mar 162011

Ref: 2011-02-PO of March 15, 2011 Click here for Free PDF Download ScribD

Quake in Japan, Tremors in America

Nature is Supreme:
Nature is the most powerful force dawned upon the universe by almighty God. If humans were to control everything, no one would have ever believed in God. When something wrong is perpetrated over the years, it ultimately gets corrected by the almighty force of nature with glaring violence with a warning and stern reminder “Do not fiddle with me, did you get that?”

In the wake of severe quake followed by Tsunami in Japan, the humanity was served with this violent reminder again. The illiterate people learn the message quickly, but the educated class – so called Investors, speculators, hedge fund managers, pension fund controllers, derivative players – does not learn easily and quickly. The nature has therefore reserved the massive shock – CRASH – in whatever the educated class practice day by day, year by year, decades by decades and centuries by centuries.

Have you heard the word “Crash” from the illiterate class – ever? No. But ask the educated illiterates or Elite Class – they will recall every crash of 1929, 1987, oil shocks  of 1980s, crash of commodities, oil prices crash to $ 9 per barrels, crash of 2003 and crash of 2008 – all in financial markets with the paper and electronic money created by humans to utter defiance of the disciplinary money of God – Gold.

When Japan was not listening to the nature that low interest rates and weaker yen was harmful to its economy for almost 16 years, the Supreme Power assumed the command. It engineered the massive crash in the form of major earthquake of  8.9 scale followed by huge Tsunami that wiped out almost entire north east coastal cities of Japan in less than few minutes. What was built over 66 years since World War II was destroyed in less than 6 minutes. That’s the nature – the Supreme Lord.

Japan – Making money in hard goods, loose in Paper trading
When the Japan was creating fabulous products, everyone admired, including God. HE must be carrying Giant LCD or HD TV to micro TV, gadgets, mobile phones! Just kidding.  But when HE saw that the Japanese were blindfolded by its love for dollar, not God, HE was perturbed. HE tried to teach the Japanese with subtle warnings by causing its NIKKEI crash from 37000 to currently 11,000 (before Tsunami), and not allowing its economy to prosper for 16 years. However, the Japanese did not understand nor did they heed the warnings.

Japan was exporting huge physical inventories to United States, UK, Europe and rest of the world in fierce competition, not in terms of price, but in terms of extra ordinary quality. However, what it earned was kept in Dollar reserve with the United States by deliberately keeping its currency artificially low. Japanese governments in almost every succession went on printing more and more Yen to buy dollar to keep its own currency weak. United States mused. It never objected to Japanese keeping its currency low but went on lecturing China to allow its currency strengthen when both countries were following almost identical policies.


Violent Correction
The nature could not prolong the obvious wrong. It finally struck, caused severest quake on record in Japanese history, and sank almost every asset that was used to build the massive reserve in dollars. When the humans do not heed the warnings, the nature acts, and IT DOES ACT with severest punishment. But even then, the humans do not learn.

When the disaster struck, the natural course for Japanese was to withdraw the dollar and convert into yen. After all, its reserve – a kind of savings – has to be used one day for eventual use in calamity. But the Japanese did not use. They pumped into money market 15 trillion yen created out of thin air (not by selling dollars) which is equal to US$ 183 billion. And what happened – the NIKKEI dropped further by 14% in single day! On following day, it pumped in another 8 trillion yen (almost $93 billions) again out of thin air into the financial markets, that is, the paper market.

Almost 23 trillion Yen went up in smoke in just two days.
When the need of the hour for the Japanese government was to rush massive physical aid to affected people and area under destruction, it went on engaging itself into unprecedented money market operation or in paper and intangible markets with massive force without any conviction.

According to CIA latest figures, Japan today has massive public debt of 197% to its GDP. In the aftermath of quake, its GDP is likely to go down by 30% and its public debt (with 25 trillion yen printed by budget deficits) will rise by 25% that will worsen its Public Debt to GDP ratio to over 353% – in less than 9 months. (Existing Public Debt + 25% of new PD divided by new GDP (Current GDP – 30% deceleration) %.

With massive 25 trillion injected into the system, the specter of inflation will rise very fast. The inflation in Japan will be almost uncontrollable. With huge short supply in daily essentials such as water, electricity and food accompanied by umpteen supplies of additional Yen created out of thin air, Japanese government has played a gamble of lifetime in casino type of operation. In all probability, this gamble is not going to work. With massive political instability, uncertain economy and now the humongous debt with destruction, we do not know how many years the Japan will be thrown back. It will recede into 5th or 6th largest economy after the effects of the dire game is played out in full.

True that Japanese are the most industrious people in the world. But what can they possibly do when their policy makers are running with the speed of Boeing 787 in wrong directions?

The Supreme Nature will reassert itself.  It is possible that –

  1. Japan will have to sell massive amount of US Dollar reserve in favor of its own currency – Yen. It needs more yen at home than dollar overseas. What is the use of savings if it cannot be used even during the days of extreme necessities?
    1. As result, it is possible that Yen will eventually rise with outflux of dollar and influx of yen into the monetary system in Japan

    2. Unless the Japanese Monetary Authority and Bank of Japan adopt another imprudent step to pump in trillions of yen into the money market without selling its dollar reserve.
    3. Whether BOJ pumps in more money or not, it is inevitable that the Japanese Yen will rise from current 82Y/$ to almost 60Y/$ in less than 18 months at the most. There is a strong urge for money to revisit home from overseas, and this will be done very fast whether to the liking of Japanese politicians and businesses or not. Home-coming of Yen will be the biggest development in FOREX market in more than 60 years.
    4. The journey from 82Y to 60Y will not be easy one to start with. Initially, with growth figures of Japan revised down followed by rating downgrade by S&P, Moody and Fitch credit rating agencies, some hedge funds will short the Yen knowing fully well that Japanese government will love their actions. The Yen might show some initial weakness right up to 86.8 levels at the most, after which it may résumé its upward journey stopping at 81, 78, 75 and 71. Once it surpasses the 69Y threshold, it may move to 65, 63.50 and eventually 61 level. There could be concerted actions from G7 nations at the instance of Japan’s request, but such actions cannot stop the rise for long time.
    5. Those who short the Yen presuming lower GDP growth or excessive printing of yen by BOJ will be simply butchered later on.
    6. Those overseas workers working in Japan and getting their salary or other income in Yen should preserve their savings before remitting the amount to their own country in panic. In this authors’ personal opinion, any weakness in Japanese Yen to 86Y or about will be entry point for taking position in Yen. Those who sell Yen in panic may feel hurt later for loss of profits.
    7. Japanese insurers will have no alternative but to sell its overseas assets like stocks, bonds, and treasuries and bring the money back home to meet the insurance claims. These insurers do not have luxury to print the Yen on their back yard. They are private corporations, not government entities who can print the Yen at random out of thin air.
  2. Japanese growth will be knocked off in big punch. It will be a sufficient cause for foreign investors to shun the NIKKEI and invest less in Japan for at least 2 years.
  3. Interest rates may rise in Japan which has been kept at artificially low level for a long time. There will be a dearth of capital, so new capital will come at a cost, not free as before.
  4. Japan will be absent at all future treasury auctions in United States. Or its scale of activity will be substantially cut down. When one major creditor Japan stays away from the participation, there will be rise in effective interest rates in United States. Watch out the LIBOR – it may give first indication of movement in interest rates in United States.
  5. If Japan and its businesses/insurers/banks are obliged to sell the dollars, and buy Yen for use in resurrecting manufacturing plants in Japan, US dollar index (paper trading) and physical dollar itself will come under severe and continuous selling pressure. Gold and silver may gain steadily with faster pace than ever before (barring short term downward prices caused in wrong conception).
  6. The countries exporting food items such as Australia, Canada, USA, China and other nations will gain from their exports if they are not facing foodstuff related inflation and did not ban exports.
  7. There is a wrong conception that the Japanese manufacturers will lose their production advantage. They will make it up by producing more in cheaper overseas plants. Therefore, the countries housing Japanese manufacturers will witness substantial increase in exports from their countries. China, Malaysia and Indonesia will be the biggest gainers in exports. Their respective currency may gain too as result.
  8. With Yen rising, the profitability of Japanese conglomerates will decline in Yen terms but in dollar terms they may not lose advantage due to rise in Yen value. It is possible that some Japanese companies will start preparing their final accounts in US dollar terms rather than their own currency to window dress it better.
  9. Those who contracted debt or contracted “Yen Carry trades” by borrowing in Yen or swapping into their ultimate currency to fund their own requirements will suffer huge losses because their debt in real terms will rise anywhere between 10% and 25% depending on the level of Japanese Yen appreciation versus currency of destination. For instance, a bank like ICICI in India, who contracted Japanese Yen debt equivalent to $ 1 billion of loans or Commercial Borrowings in recent past, will find its profitability shrinking to the extent of Yen appreciation versus Indian Rupees.
  10. The derivative markets which was mainly involved in “Carry Trades against Yen” and in non deliverable forwards, will find themselves losing humongous amount. There could be total collapse of derivative market when the Yen starts strengthening and interest rates in Japan ticking higher from near zero level. Those Yen borrowers for swap transactions will suffer from higher Yan and higher effective interest rates on Yen.

Tremors in America
There will be more consequences. Most worried persons will be Bernanke and Geithner (and Obama himself) because none of their high profile visit is going to work in their favor this time. They can’t bring even moral pressure on Japan not to sell the treasury or buy more of them in future auctions. Their day of inevitable will be nearer than before. When Japan starts selling treasury, Chinese are not going to sit behind and watch their value shrinking right before their eyes – they have even greater stake after all. Based on the cardinal investment rule  “ If you can’t fight them, better join them”  the Chinese  will be forced to join the Japanese in selling treasury dollar game. US dollar is going to be vulnerable in future. Give or take 4 to 6 months, and you will have heavily losing US dollar in the Forex game.

All in all, the currency market is going to witness the massive upheavals. The major beneficiaries will be Aussie dollar and Canadian dollars. Minor beneficiaries will be Brazil Real and South African Rand. Controlled currencies of China and India may not rise much in spite of higher exports for obvious reasons. They have surplus food stuff to export to Japan; secondly, they are least affected by inflation due to stronger currency and economy, and finally they are benefitted by higher hard and soft commodities. Aussie dollar might rise to 1.20 and Loony (Canadian Dollar) may rise to 0.88 to 0.92

It is amazing that the Japanese leadership is engaged into paper trading exercise when it should focus on real tangible asset exchange and development.

They have still not understood that it has been adopting deliberate “weak yen’ policy right from 142Y to current 82Y in last 16 years with disastrous result. If it has amassed US dollar reserve of about $900 billion, it has in real sense lost nearly $300 billion in Forex losses, if you take average rate of 120Y. That is, they shorted or sold Yen at average price of 120 and now can get back only 82 or 2/3rd of what they sold. That is, they lost 1/3rd of $900 billion or cool $ 300 billion in Forex losses.

Japanese Government will learn it hard way that “Selling Yen and Buying US Dollar is injurious to Japanese Wealth” and by the time it realizes the truth, it will be too late.

Anil Selarka (also known as Kalidas)
Hong Kong               Camp: USA
March 15, 2011 – Ref: 2011-02-PO


©2011 by Anil Selarka (Kalidas)          All Rights reserved by the Author

Mar 062011

Massive Collapse

Ref: 2011/01/Post of March 7, 2011 (update 6 of  8 March, 2011)

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Read the following:
Bank of England Governor Mr. Mervyn King warned “Britain could face another financial crisis if the banking sector is not reformed. ..that imbalances in the banking sector remain and are “beginning to grow again”. …The U.K. allowed a banking sector to build up –which contained the seeds of its own destruction. In the interview, he also expressed regret for not sounding a louder warning over his concerns before the last banking crisis, which culminated in a multibillion pound (dollar) bail out…”

The European Central Bank’s President Jean-Claude Trichet shocked the markets Thursday by saying interest rates could be raised as soon as the next policy meeting in April – far earlier than expected – to fight inflation across the 17-nation eurozone.

Wall Street Journal reports that …The Brazilian real posted modest gains at the opening Thursday following a Brazilian Central Bank decision to raise the country’s base interest rate by a half point to 11.75%. ….Russia is all set to increase interest rates for the first time since financial crisis…China PBOC (China’s Central Bank) Officials: “May See Money Market Interest Rate Rises, Fluctuations -Report”, and in USA the banks such as Citibank and Bank of America have started raising 5 year CD Rates to 2%. Swiss National Bank also says that low rates are no longer sustainable.” George Soros said only today (6/March/2011) that “Act II of Global Financial Crisis is here”

In short, we have chorus of banks singing of higher rates in 2011. In short, the world is entering into vicious cycle of rising interest rates. The 2 years old party is over.

When the rates rise, the derivatives collapse which was the main cause of financial crisis at first place, and another derivative debacle would result into second wave of financial crisis. The third stage will be final one. Most derivative trades are almost 30 times leveraged. If the rates rise by 0.25%, the potential cost effect on margin cash is 30 x 0.25 = 7.5%

In short, the Long Term Rates have begun to take hold and they are entering the first wave of interest rate rise. Read my article ” Maturity Mismatch” published almost 13 months ago (on 20 Jan 2010) – which clearly illustrates where the Bankers would face the next crisis – and that prophecy is about to come true in next 6 to 9 months, rising in intensity from July onward, but strongly in September to December.

Is that all that may cause the financial crisis again? Well, it is not the question of again because the first financial crisis never ended – they were touted to have ended but it has not. Now, apart from Interest rates, which factor will cause the real financial crisis. Read the banner title of this report – yes, you read correctly – Silver and Gold to (will cause) collapse of the American Banks and several other banks in UK and Europe.

Top American, British, German and some Swiss Bank have reportedly amassed “huge short position in the real money metals ” – Gold and Silver. The position is so huge that it will take at least next 3 years of full production of Gold and Silver to cover the shorts if entire world production is given to these banks without even an ounce entering the private consumption market. In reality, it will take at least 10 years to cover some short positions of gold and silver by these banks.

The buyers of futures in gold and silver have become emboldened, and have begun to assert on physical delivery on expiration months (Trade At Settlement) rather than traditional cash settlement in the form of reversing original buy or sell positions or roll over to future months.  A rumor is taking hold that JP Morgan Chase, the most infamous shorter of Gold and Silver, is so much worried about the rise in gold and silver prices that it has begun to acquire Copper by spending over $ 1 billions as hedge. How could a copper with over 1 million tonnes of production be a hedge for gold with only 2,500 tons of production of gold and silver.

While Gold is patronized by the Central Banks, silver is where the private investors play huge role
. Even United States has stopped minting Silver Dollar Coins due to enormous shortage of metal. In 1959, US Treasury held 2.06 billions ounces of Silver most of which was sold later to contain the silver prices. Treasury has virtually no silver inventory and it has turned buyer for the first time last year for its requirements of silver for minting coins (Silver Eagle and Buffalo). It stopped minting coins in September, 2010 – 4 months ahead of schedule – due to heavy demand and shortage of supply. You can not use paper derivative to mint coins, by the way!


Gold future contract ended in February, and next major contract to expire will be April delivery. Silver contracts on other hand, will expire this month, that is, on 29/3/2011 and in May (active month now for roll over)  Almost all major buyers of Silver future contracts are insisting on physical delivery, not cash settlement. This is where the trouble comes. If one major bank needs gold, it can still be borrowed from one of the central banks – but who will be the delivery based seller for Silver?


When the gold to silver ratios was hovering between 58 to 60, we suggested that we would sell some when the ratio improves to 40 or about. Today, the gold is at $1430 and silver at $ 35.55 which gives the ratio of 40.28. Our prophecy has turned out to be right spot on within few months (less than 4 months).

The rumors circulating in the market suggest that the Gold may rise to $ 1680 this time before meaningful correction. If Gold prices do go to $ 1680, and Gold/Silver ratio improves further to 32, then silver prices could rise to $1680/GS Ratio of 32 = $52.50. In India, if Rupee rate remain constant at Rs 45/dollar, the silver price may rise to $52.50 x 45 x 32.15 (1 kg = 32.15 troy ounce) = Rs 75,954 or about Rs 76,000. Allowing 10% chance for judgment error, the price could hit anywhere between Rs 65,000 to Rs 68,000 per kg in less than 4 to 8 months.

The March 2011 itself might see its price well above $41 or about Rs 60,000 to Rs 65,000 per kg.

Our old article in December 2009   as it appeared in this blog. Click it to read it and see how prophetic it was. CLICK THE IMAGE below to read the article now.

Our original prophecy in the article Gold $6400 Silver $80 may come true within 12 to 18 months at least for silver, if not gold. We may see the silver prices in India reaching Rs 100,000 per kg level. I would sell almost 80% of my total silver holding at that time, regardless of what the market says at that time. Also look at the historical prices of silver since 1792. Look at the prices from 1979 to 1983 and then from 2003 onwards.

Following banks could be vulnerable:
JP Morgan, Citibank, Bank of America, HSBC USA (USA, HSBC Holdg (UK/Hong Kong), its subsidiary Hang Sang Bank, Bank of China (Hong Kong), Royal Bank of Scotland, Barclays (UK) Deutche Bank (Europe – Germany), UBS (Switzerland) and some leading Investment Banks like Goldman Sachs, JP Morgan Securities, Morgan Stanley may come under attack. There could be huge outflow from managed funds that might trigger stock market collapse.

Look at the following table which contains the Gold derivative position as of latest quarter.  The Gold derivative position is

Look at the derivative exposure on Gold for <1 year which is $106 billion, that is, equal to
(1 tonne = 32,150 troy ounces @ $1435 = $46,135,250 or $0.04613 Bln; 106/0.04613 = 2,300 tonnes. This is the position only in United States. We are not counting other major markets such as London. Further, above numbers are not enough. The gold liability of top bank is valued at $42.2222/troy ounce against present market price of $ 1435, that is, the liability is understated by nearly 34 times. In other words, the Gold shorted in United States alone is almost one year’s global production or consumption. If we use today’s gold price, then the gold shorted by them will be anywhere between 2300 tons to any number of times between 1 and 34 depending on the valuations used for derivative exposure. only US treasury is using $ 42.2222 for valuing its gold assets (and liability under lien).

Yes, Gold and Silver – the real money – might destroy paper money such as US$, GBP and Euro and all paper derivatives such as US$ Index. Gold and Silver ETF (if they do not have back up metals) , Gold and Silver futures. Cash money and spot market will dictate the future markets in days to come.

Derivative Sand Castle:
Now look at the total derivative exposures of entire banking system of United States from the following latest figures from the Office of the Comptroller of Currency Administrator of National Banks, United States. There is over 234 trillion dollar of total derivative exposures (of all kinds) of American Banking System of which nearly 96% belongs to top 5 banks – viz. JP Morgan, Bank of America, Citibank, Goldman Sachs and HSBC USA. Imagine $ 234 trillion notional exposure is nearly 17 times the size of entire US economy! The top 4 banks are those who nearly failed during first financial crisis.

There is total of $234 trillion of exposures in all kinds of derivatives valued at notional value of contracts. They count only 3% to 5% as real exposure. In other words, entire banking system of United States and for that matter, including UK and Europe, live on borrowed time. When the time ends, we do not know because almost all central banks are pumping trillions of dollars to save them but they are not able to because the inflation is exploding, and if the rates go higher, even by 5oo basis points (5%), everything will collapse. The interest rate swap alone constitute $196 trillions of exposure or about 83.4% of total exposure.

Will Silver break the 31 Year high soon?
Look at the above graph. The 31 year high was $ 50 achieved during market manipulation days of Hunt Brothers. It is far away from current level of $35.50 – almost 40%. The newspaper columnist and some analysts would go on commenting that the silver is not able to break the 31 year high, so it is relatively weak – but it is not so. The price of $50 in 1979 was only temporary and can not be used as standard reference point. If we take the average price of $20 as base, and considering about 6  times valuation, it could reach $120 at reasonable potential. Allowing overshoot level by another 20% in huge short covering rally, it could go to at least $ 138 level. The True measure or level to arrive at would be the Money in Circulation (MIC) now divided by MIC in 1978.  That is, take the price of silver pre-1979 days (weighted average of 1975 to pre-1979) multiplied by the ratio of MIC 2011/MIC 1978. With trillions of dollars or currencies being printed with physical supply increasing only marginally, the price of silver has to be several times than it is now.

What about Indian Rupee? Good question, if the government allows some freedom to Rupee to firm up, it may go to Rs 41 or about. The gold and silver prices in rupees in India will be about 10% lower than above target in rupees.

India was once upon a time a “bullock cart country” and old congress had symbol of two Oxes – one black and another white. India is still a bullock cart country – but this time around the two bulls are Gold and Silver.

Will the silver or gold or both will correct next week? Normally they go down during the early phase of the expiration month cycle (that is, if the futures expire in April, the initial few weeks of March is a golden period for the derivative players to short) and pick up in last two weeks ahead of settlement month (April in this case) in short covering. You have to look at US Dollar Index too, because they buy the dollar index to convey the dollar strength, and short the gold and silver to cause them fall.

This month around it happened only for one day but the trend reversed immediately. If they do not correct until Wednesday next week, the silver bull will run riot. We are going to be in fast market. Let us see how far do we go?

The Second Stage of Financial Crisis is coming. Silver and Gold will cause it. Both bond and equity markets may correct violently due to higher interest rates.

It is also possible that Government of India might sell 200 tons of gold in next 8 months to book profit that may reduce its budget deficits. When it happens, the gold price may correct strongly on downside for short period and back up again. Silver will also follow its elder companion Gold and may react more on the downside same way it is reacting more  upside.

We have not had exciting action movie on Hollywood or Bollywood for quite some time. Wait – your wish will be fulfilled soon when Silver and Gold bull will run riot and there will be many headlines on the first and third page.

Kalidas (Anil Selarka)
USA,  March 6, 2011


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