Financial Meltdown, Back-To-Back “Stick Saves” & Gold

On the heels of more turbulence in key global markets, today 40-year veteran, Robert Fitzwilson, put together another extraordinary piece. Fitzwilson, who is founder of The Portola Group, discussed financial meltdown, back-to-back “stick saves,” and what this all means for battered traders and investors in the gold market. Below is Fitzwilson’s outstanding and exclusive piece for KWN.

Fitzwilson: “There is a term in ice hockey called a stick save. Instead of using the curved end of the hockey stick, the player uses the handle end to move the puck. It has been described as having no points for style, and often fails, but sometimes saves the day for the player and his or her team.

Below is a chart of the Dow Jones Industrial Average from 1970 to the present. You can clearly see two stick saves early last decade and the second during the 2008 meltdown.

The first stick save was engineered largely by the policy of driving rates to zero. While it saved the stock market and thrust the real estate markets to new heights, it sowed the seeds for the horrendous crash in 2008….

“A larger stick save was required in the 2008 debacle, requiring the completion of the zero interest rate objective as well as the creation of massive amounts of money on a global and historic scale.

It is no wonder that many people are terrified of equities when one looks at this chart. The volatility has been incredible. You can barely see the Crash of 1987 on the chart, although that was a stomach churning decline on the order of 23%.

The chart below is for gold during the same period.

While the Dow Jones has increased by roughly 14 times since 1980, the price of gold has merely doubled from the peak. Despite that disparity, most people look favorably at the chart for stocks, and are adamant that gold is overvalued.

For stocks, valuation metrics are used such as price-to-earnings ratios. For gold, there is no attempt to relate the price to the forces that drives the metal’s price. What drives gold is the excessive, massive creation of fiat currency. Since 1980, the amount of debt-based money has exploded. If that simple valuation metric of comparing the price of gold to the amount of money is applied, gold is drastically undervalued.


Ex-Goldman trader Taylor pleads guilty to wire fraud

Ex-Goldman Sachs Group Inc trader Matthew M. Taylor pleaded guilty on Wednesday to defrauding the Wall Street bank with an unauthorized $8.3 billion futures trade in 2007, saying he exceeded internal risk limits and lied to supervisors to cover up his activities.

Taylor, 34, pleaded guilty to one count of wire fraud in federal court in lower Manhattan on Wednesday morning, after voluntarily turning himself into federal authorities earlier in the day.

The Massachusetts Institute of Technology graduate pleaded guilty about four months after the Commodities Futures Trading Commission filed a civil complaint against him. The CFTC accused Taylor of fabricating trades to conceal a huge, unauthorized position in e-mini Standard & Poor’s futures contracts, which bet on the direction of the S&P 500 index.

Taylor on Wednesday told U.S. District Judge William Pauley that his trading position at Goldman exceeded risk guidelines set by his supervisors “on the order of 10 times.” He also admitted to making false statements to Goldman personnel who questioned him about the position, which led to a $118 million loss for Goldman Sachs.

“I am truly sorry,” Taylor said.


Taylor, who joined Goldman in 2005, worked in a 10-person group called the Capital Structure Franchise Trading (CSFT), and was responsible for equity derivatives trades.

After his trading profits plunged in late 2007, his supervisors told Taylor his bonus was going to be cut and instructed him to reduce risk-taking, the charging documents said.

Instead, he “amassed a position that far exceeded all trading and risk limits set by Goldman Sachs, not only for individual traders … but for the entire CSFT desk,” according to charging documents.

Taylor attempted to hide his actions by putting false information into a manual entry system, according to charging documents filed in his case. When supervisors and other employees confronted him about discrepancies compared with his actual positions, Taylor repeatedly lied, the document said.

In court, Taylor said he covertly built the position in an effort to restore his reputation and increase his bonus. He earned a $150,000 salary and expected a bonus of $1.6 million, according to court documents.

Taylor was fired from Goldman in December 2007, shortly after the incident, according to brokerage industry records. He then took a job at Morgan Stanley, where he had first worked after graduating from MIT, but left that firm again last summer.

Prosecutors are seeking a prison sentence of 33 months to 41 months and a fine of $7,500 to $75,000.

During the hearing, Pauley questioned how the government came up with its proposed sentence, given the size of Goldman’s loss. Steve Lee, a prosecutor, said it was based on Taylor’s compensation.

Pauley stressed the “court may not be bound by that calculation” come sentencing, adding that he was “puzzled” by the deal.

“He cooked Goldman’s books, and that’s not sophisticated?” Pauley asked.

A person familiar with Goldman’s equities trading business said Taylor’s trading position was significant – representing roughly 20 percent of e-mini trading volume the day it was established. The market moved against Taylor’s position, leading to the loss, said the person, who declined to be named.

For perspective, the $8.3 billion position Taylor took in the e-mini futures market was twice the size of the $4.1 billion trade the U.S. Securities and Exchange Commission highlighted in a report on the causes of the May 6, 2010, “flash crash” in which a series of e-mini trades caused the Dow Jones Industrial Average to plunge 700 points in a matter of minutes.

Taylor said he knew his actions were wrong and illegal but established the trade anyway to augment his reputation and increase his compensation.

Taylor’s bail includes a $750,000 bond with two co-signers. His sentencing hearing is set for July 26.

Taylor’s activities first came to public light in November when the CFTC sued him.

In dismissing Taylor, Goldman noted he was fired for taking an “inappropriately large proprietary futures positions in a firm trading account,” according to a filing with the Financial Industry Regulatory Authority.

But three months later, Taylor was hired by Morgan Stanley as an equity derivatives trader.

Taylor, whose criminal sentencing is set for July 26, faces a maximum of 20 years in prison.

Goldman paid $1.5 million last year to settle charges with the CFTC that it had failed to appropriately supervise Taylor.

The bank has since put in place procedures to catch wayward trading activity more quickly.

“We are very disappointed by Mr. Taylor’s unauthorized conduct and betrayal of the firm’s trust in him,” the bank said in a statement on Wednesday.

A spokesman for Morgan Stanley declined to comment on Taylor’s guilty plea.

Last year, a Morgan Stanley spokesman said he left the firm unrelated to the charges against him.

Taylor’s lawyer, Thomas Rotko, said his client accepted responsibility for his actions, which he called “an aberration.”


Demand for Gold Coins Goes Through the Proverbial Roof

Demand for Gold Coins

Similar to everything else financial, gold bullion prices follow the same main premise of economics: prices rise when demand increases, and prices decline when the supply increases.

At present, on the demand side, we have central banks buying gold bullion. In fact, they have turned into big buyers, collectively buying the most gold in 49 years in 2012. Central banks are buying gold bullion because they need it, as the fiat currencies they created are causing great havoc to their reserves. In these pages, it is very well documented which central banks are buying. What is interesting is that the list of gold bullion purchasers is increasing.

Demand from individual investors for gold bullion is also increasing. In the first three months of 2013, the U.S. Mint sold about 40% more gold bullion coins than it did in the first quarter of 2012. It sold 292,500 ounces in coins of gold bullion from January to March of this year, compared to 210,500 in the same period of 2012. (Source: The United States Mint web site, last accessed April 2, 2013.)

Now, for the supply side of the story; worldwide gold bullion production from mines in 2012 totaled 2,700 tons. Compared to 2011, the increase in gold mined was a menial 1.5% in 2012. (Source: “Mineral Commodity Summaries,” U.S. Geological Survey web site, January 2013, last accessed April 3, 2013.)

In 1990, worldwide gold bullion production from mines was 2,127.3 tons. A simple calculation shows gold bullion mine production has only increased about 27% over a 23-year period, or a compound annual growth rate (CAGR) of 1.04% per year. (Source: United States Geological Survey web site, last accessed April 2, 2013.)

When I look at the current demand and supply equation of gold bullion, I affirm my bullish status on the metal.

There hasn’t been a major world discovery of gold bullion in years. Nor are any major mines expected to come on-line in the next three years. We have supply that isn’t really changing, but we have robust demand, as central banks and individual investors alike are rushing to the metal.

The recent pullback in gold bullion prices is very normal. Only in bubbles do prices increase without rest. I continue to see gold bullion having a shiny future ahead.

(Want to know what gold stocks are the best buy right now? In our just-released special report, Lombardi’s Second Quarter 2013 Gold Forecast Report, you’ll find our analysis of the U.S. money supply and its implications for gold; current gold supply and demand; central bank activity in the gold market; our specific price projections for gold bullion; our top-five senior gold stock picks; and our top-five junior gold stock picks, all complete with charts. Click here for ordering info.)

Michael’s Personal Notes:

In the first quarter of 2013, key stock indices like the Dow Jones Industrial Average and the S&P 500 rose an unprecedented 10%.

Below, I’ve charted a comparison of the performances of the Dow Jones Industrial Average and the S&P 500:

DJLA S&P 500 stock chart

In economics, the stock market is often referred to as a leading indicator. If the market is rising, as it has been, it is an indicator that the economy will improve in the months ahead. But, as this stock market has been rising, economic data have not been improving.

As I have been harping on about in these pages, the key stock indices are rising on nothing but optimism and an ever-increasing money supply—both of which can only last for so long. Economic uncertainty is still present and future expectations are dismal.

For the first quarter of 2013, 86 S&P 500 companies have issued negative corporate earnings guidance—that’s 78% of all the S&P 500 companies that have issued earnings guidance so far. (Source: FactSet, March 28, 2013.)

The Manufacturing Purchasing Managers’ Index (PMI), monitored by the Institute for Supply Management (ISM), decreased 2.9% from February to March. The index stood at 51.3 in March, compared to 54.3 in the previous month. (Source: Institute for Supply Management, April 1, 2013.)

As for unemployment, it is still very high. On Friday, the Bureau of Labor Statistics (BLS) will be reporting the jobs numbers. It won’t surprise me to see the unemployment rate unchanged (maybe even rise), because companies on key stock indices are looking to cut their costs—and the only option left for them is to decrease their workforce.

On top of this, risks in the eurozone still persist. These debt-infested countries are suffering. Greece is in an outright depression. Italy and Spain are witnessing their economic conditions quickly eroding. The two strongest nations in the region, Germany and France, are starting to see their economies slow. A significant number of U.S. companies on key stock indices derive their revenues from the eurozone.

The key stock indices may rise a bit as irrationality can go on for a while. In 2007, the economic conditions in the U.S. economy were anemic, but the S&P 500 and the Dow Jones Industrial Average were driven to all-time highs. Later we witnessed one of the steepest market sell-offs ever registered for key stock indices. The same thing could happen again this year with the markets.

What He Said:

“The conversation at parties is no longer about the stock market, it’s about real estate. ‘Our home has gone up this much or our country home has doubled in price.’ Looking around today it would be very difficult to find people who believe that one day it could be out of vogue to own real estate because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in Profit Confidential, June 6, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.