Highlights of the Week of; July 15, 2013

BankruptDebt

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 July 15th 2013.:

  • Detroit Files For Chapter 9, Bankruptcy protection.
  • Precious metals recovering.
  • China reforms interest rate market.

Detroit Files For Chapter 9, Bankruptcy protection:
The city of Detroit, once defined as America’s industrial might, music powerhouse and automobile capital of the world, — which has liabilities of more than US$18.5 billion — filed for chapter 9, bankruptcy protection on Thursday, July 18 2013.

Read the bankruptcy filing

Below video, shows a press conference in which Detroit Mayor Dave Bing and city Emergency Manager Kevyn Orr speak, following Detroit’s bankruptcy filing on Thursday, July 18, 2013.

Detroit on Thursday became the largest American city to file for bankruptcy, a historic move sure to ignite complex battles in coming months with creditors, pensioners and unions who stand to lose significantly as the state tries to rescue a city whose failure Gov. Rick Snyder said was 60 years in the making.

Detroit’s two pension funds on Wednesday, July 17th, sued emergency manager Kevyn Orr and Gov. Rick Snyder in an attempt to block Orr from slashing pension benefits for thousands of current and active city workers as part of his plan to restructure the city’s massive debt.

The lawsuit asks the Ingham County Circuit Court to declare that Snyder cannot authorize Orr to take any actions — including filing for municipal bankruptcy — that would cut pension benefits, which the lawsuit says are protected by the state constitution.

Precious metals recovering:
Gold futures advanced on Friday, July 18 for the fourth time during this five-day trading week, to close on USD 1295.70 an ounce, on signs of increasing physical purchases.

In the week of July 15, the gold price crossed, both the 10-day as well as the 14-day simple moving average from below to above, which is considered by technical analysts as a change in the trend and a sign to go long on Gold.

See below 1-year gold price technical chart in which its daily price, its 14 SMA and 200 SMA are plotted.

Gold 1 Year Technical Chart

Beside this, the current price of gold is below its marginal production cost of USD 1,300.00 an oz including capex. According to an article by Citi’s, sustained high capital budgets and a falling gold price have resulted in a fast contraction in margins – so much so, that no gold company under their coverage will generate Free Cash Flow at spot gold.” as can be seen from below chart.

20130707_gold

The price of Silver, although recovering, has not been able yet to close the week above the technical price 14-day simple moving average price, as can be seen from below chart.

1 Year Silver Technical Chart

Regarding Platinum and Palladium, below Technical charts are even more bullish, for which the price of Palladium is flirting with its 52-week high and that during the week of July 15 its 14-day SMA crossed its 200-day SMA to above from below, which can be considered as very bullish.

1 Year Platinum Technical Chart

1 Year Palladium Technical Chart

China reforms interest rate market:
On Friday, July 19, the People’s Bank of China, -China’s central bank- has moved to liberalise certain types of interest rates, by scrapping the lower limit for commercial interest – rates eliminating controls on discounted bills – commonly used as a method of payment between companies in China.

Economists see these steps taken by the country’s central bank, as an important signal of the Chinese leadership’s intention to reform interest rates, a crucial step in broader financial reforms.

Comments:
The last 2 years we have been warning our readers not to get fooled by the USA-media hype about the European debt crisis and subsequent risk of default. We stated more than once that currently the biggest threat to the world Economy, is Japan’s 225% debt to GDP and USA  over 110% debt to GDP. When off-balance sheet items are included, the current USD Debt to GDP is over 700%. We have also warned the Investor that it isn’t IF, but WHEN will the current US bond market bubble will implode.

Detroit:
Below you’ll find a copy of a video of October 13 2012, just nine months before Detroit was to file for bankruptcy in which USA’s president Barack Obama,  informed the nation that after 3 years of struggling, Detroit and its automotive industry is getting back on their feet.

On Friday July 19, Standard & Poor’s Ratings Services cut its rating on Detroit’s general obligation debt to ‘C’ from ‘CC’, and gave the bankrupt Michigan city a negative outlook.

Standard & Poor’s credit analyst Jane Ridley said;

“The downgrade reflects the city’s position as the subject of a bankruptcy petition, as of July 18, 2013,”

“The negative outlook reflects our expectation that, given the Emergency Manager’s statements regarding debt restructuring, actions taken to date, and negotiations currently underway with bondholders, we could lower the rating in the one-year time horizon of the outlook”

As can be seen from below chart, Detroit has shrunk from its peak population of nearly two million in 1950 to about 700,000 today.

Detroit population chartDamaged by cuts in state aid and a crash in real-estate values that crimped tax revenue, Detroit in recent years borrowed to meet operating costs as well as long-term liabilities such as pensions and health insurance for city workers.

The city’s unemployment rate has nearly tripled since 2000 and is more than double the national average.

After reading the above, investors should ask themselves the following questions:

  • Which (USA) City or State will be next?
  • Will Detroit once the pride of the USA Industrial power, be an example for the Future of the USA?
  • If yes, do you still want to buy its 10-year note against a current rate of 2.5 percent?
  • How safe are your nest-egg, invested pension and social security premium, if they are invested in USA debt-securities?

Gold:
Regarding the price, although all fundamentals are in line for a huge second leg of the Gold Bull market to bring its price north of USD 5,000.00 an oz by 2016, the amount of shorts in the market on the other hand, as can be seen from below chart, demonstrated the unprecedented technical sentiment for the yellow metal.

Amount of Gold Shorts

Before the long overdue short squeeze to take place gold must first cross the resistance level of USD 1,300.00 an ounce, then US$1395.00 an oz will be merely the first stop.

In the current crucial phase of the global (financial) crisis, please keep in mind that, currently politicians and central-bankers are doing their utmost to do window dressing, either to win the upcoming election or to leave office at a glance.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Gold, Silver and other precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely

Eric Panneflek

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