Highlights of the week of January 6, 2014

Gold Prices UpStock Market Crash 2014

Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of January 6, 2014:

  • Flash crash of Gold on Monday, January 6, 2014.
  • NYSE Margin Debt at all time High.

On Monday, January 6th, 2014, at around 10:14 a.m. EST, gold went through, what we now refer to as a “Flash Crash” – a sudden drop in prices in the span of milliseconds as can be seen from below chart.

06-Jan-2014 ~ First Gold Halt of 2014

Figure 1

According to NANEX, that initial drop was caused by a massive 4,200 contract trade that sent gold plunging by over US$30 an oz, from about US$ 1245 to US$ 1215 an oz, in a matter of milliseconds.

Due to the fact that there was no significant news that could have caused this massive dump, some analysts believe it was a result of a Fat Finger trade, others believe a large fund was liquidating a gold position, while others believe it was purposefully done to slow gold’s momentum and defend the US$ 1250 an oz price target from being broken by the suddenly strong gold price.

NYSE MARGIN DEBT DATA (updated November 30, 2013):
The NYSE produces at any end of the month on the NYXdata website, where we can also find historical data back to 1959.

On December 30th, 2013, the NYSE Margin Debt data for November 2013, was released.

As can be seen from below table the Margin debt surged to a record of 424 billion US Dollars , an increase of US$ 60.00 billion or 16.4 procent compared with January 2013.

Securities market credit ($ in mils.), 2013
End of month Margin debt Free credit cash accounts Credit balances in margin accounts
January $364,107 $116,663 $170,229
February $366,139 $116,742 $179,132
March $379,522 $118,899 $168,404
April $384,370 $115,732 $162,753
May $377,002 $120,506 $169,705
June $376,632 $122,208 $168,204
July $382,102 $119,334 $164,296
August $382,926 $118,759 $164,552
September $401,239 $124,425 $166,202
October $412,459 $126,566 $168,241
November $423,703 $125,267 $167,557


Below chart shows the correlation between the chart of the  S&P-500 and the one of the value of NYSE Margin debt, adjusted for inflation, from January 1st 1995 to October 31st, 2013.

NYSE Margin Debt and the S&P-500

figure 2

Above chart shows an astonishing surge in leverage in late 1999, which peaked in March 2000, the same month that the S&P 500 hit its all-time daily high and a similar surge began in 2006, peaking in July 2007, three months before the market peaked in October of 2007.

The above figure also shows that at the end of November of last year, nominal margin debt was at an all-time high. In real (inflation-adjusted) terms, the latest margin debt was at an interim high, 0.7% below the all-time real high in July 2007.

Below chart shows the percentage growth of the NYSE Margin Debt and the value of the S&P-500 from January 1995 up to November 30th, 2013, again based on real (inflation-adjusted) data.

figure 3

Real margin debt at the end of November 2013, the latest available data, is now at a new interim high less than a percentage point from its all-time high. If the accelerating trend in the two previous peaks offers a clue, margin debt may see some further growth.


Gold flash crash:
The fact that the flash crash on Monday, January 6th, in gold didn’t result in the triggering of many stop-loss orders and that the price recovered quite quickly suggests that there is quite a bit of strength behind the scenes, in fact it has been the opposite of the behavior we’ve seen in gold over the last year as these crashes tended to drop the gold price without any sort of recovery.

Prices of precious metals rose on Friday January 10th, after a weaker-than-expected non-farm employment report from the U.S. Department of Labor showed only 74,000 jobs were created, versus about 200,000 expected.

As can be seen from below chart, Gold rose on Friday with USD 20.90 an oz or 1.70 % to close the week at USD 1,248.90 an oz.

figure 4

The yellow metal started the year 2014 very bullish and is up in the first 10 day of the year with approx. USD 46.00 an oz or 3.9 percent.

Furthermore, it is worth mentioning that Gold is being lifted by strong Chinese buying, coin demand and record low speculative positions.

  • It looks as though the gold market may almost be resetting itself as significant fundamentals are returning to levels seen pre-crisis, suggesting major speculators are moving out of the paper gold market. If this is the case, then physical gold may begin to impact its own price, rather than the paper gold market dominating.
  • Indian Government is set to to ease Gold import curb.
  • Premiums on the Shanghai Gold Exchange show that buying picked up significantly last week as the gold price soared past US$1,200 an oz. On Friday January 10, premiums were US$20 nearly US$5 higher than the December average.
  • A Friday report showed that Turkey’s gold imports reached record levels in 2013, totalling 302.3 tonnes, a 150 percent increase on 2012 figures. The increased buying comes on the back of weaker gold prices and a trade relationship with Iran. December 2013 figures were over 60% of those seen in December 2012.

We’re very encouraged by this lack of follow-through and the fact that these actions seem to be the result of a few entities, rather than many entities in unison. This is a bullish factor for gold and simply adds to the many fundamental factors, which we believe will give gold a strong 2014.

We therefore continue to suggest investors to increase positions in physical gold

NYSE Margin Debt:
The financial markets have been soaring while the overall economy has been stagnating. Reckless injections of liquidity into the financial system by the Federal Reserve have pumped up stock prices to ridiculous extremes, and people are becoming concerned.

Despite assurances from the mainstream media and the Federal Reserve that everything is just fine, many Americans are beginning to realize that we have seen this movie before. We saw it during the dot com bubble, and we saw it during the lead up to the horrible financial crisis of 2008.

So precisely when will the bubble burst this time? Nobody knows for sure, but without a doubt this irrational financial bubble will burst at some point.

Ladies and Gentlemen, a bubble is always the biggest right before it bursts, and the burst of a bubble will always cause massive margin calls, which have always led to a recession between three to six months after the burst of the bubble. Figures 2 and 3 confirm this point.

The following 4 signs may be an indication that we are near the peak of an absolutely massive stock market bubble in the USA, which is on the brink of bursting:

  • Shiller P/E-10 ratio to close the year above 26 points, which is highest level since 2007.
  • VIX (fear) Index is currently at 12 points, its lowest level since 2007 as can be seen from below chat.

    VIX all time chart

    figure 5

  • Social media stocks, with no earnings at all gaining triple digit in 2013, for which:
    • Facebook (NYSE: FB) is trading at a valuation of approx. 150 times of next year earnings, and has a market cap of 142 billion USD at the close of the market on Friday, January 10, 2014.
    • Twitter (NYSE: TWTR) -a seven-year-old company which lost 64.6 million dollars last quarter- currently has a market cap of about 30 billion USD.
    • Linkedin (NYSE: LNKD) is currently trading at a valuation of approx. 1000 times of next year earnings and has a market cap of 26.1 billion USD.
  • Google searches for the term “stock bubble” are now at the highest level that we have seen since November 2007.

Similar with 1999 and 2007, the charlatan will try to cool your nerves by telling you again the mother of all lies namely:

  • That due to innovations,
    “This time it will be different
  • Valuation might be a little bit high, but
    “Prices will consolidate and there will be a soft lading”.

Ladies and gentlemen, it is never different! Markets are mostly dominated by the two most disastrous human emotions, namely Greed and Fear, for which the FEAR emotion and subsequent energy is much more intense then Greed. So when the current Hype and Greed turn into Fear and everybody starts running to the door we’ll see these markets and overvalued stocks falling like a rock. BOOM!

Last but not least we herewith want to stress once more the two following applicable quotes that describe the current market situation the best:

John Maynard Keynes

Warren Buffett

Until Next Time,

Eric Panneflek

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