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Central Banks becoming Net Buyers of Gold

joey — Tue, 15 Sep 2009 14:44:27 +0000

As central banks around the globe attempt to implement monetary policy and manage their respective fiat currencies, speculation is being made that they will become net buyers of gold rather than net sellers. Since the significant breakdown of the Bretton Woods exchange agreement in 1971, which removed gold backing from the US dollar, central banks have only been net sellers of gold for seven years. Many of those seven years have taken place over the past decade as central banks have been reducing their holdings of gold.

North America’s biggest gold conference, Denver Gold Forum, is being held from September 13-16 in Denver Colorado.

In the keynote speech at the conference, Jeffrey Christian, managing director of CPM group says central banks are expected to buy 6 to 10 million ounces of gold annually due to currency uncertainties. He goes on to say this project is extremely conservative. According to a metals consultancy, GFMS, central banks are set to become net buyers of gold this year. Net official sales are forecast to drop to less than 20 tones, the lowest level since 1988.

Emerging countries which have been building up foreign reserves in currencies are now diversifying into gold due to volatility in the dollar and other major currencies. China has signaled growing interest in gold and other commodity based assets rather than stockpiling their currency reserves in more US dollars and dollar-denominated assets.

Reuters – Central banks seen becoming net gold buyers – http://joeyconway.com/nwtqqx

FT – Central banks set to be net gold buyers – http://joeyconway.com/ryv9re

Denver Gold Group 2009 Forum – http://joeyconway.com/sw94kb

Bank of America Loan Backstop

joey — Wed, 09 Sep 2009 14:51:00 +0000

On January 16^th 2009, Bank of America (BofA) disclosed with its first ever quarterly loss of $1.79 billion, a US government loan backstop for $118 billion on assets mostly from its government encouraged Merrill Lynch acquisition¹. The loan backstop is designed to cover a pool of financial instruments, assets, for up to $118 billion with maturities up to 10 years through the Treasury and FDIC with the Federal Reserve providing the actual non-recourse loan². The non-recourse loans means in the event BofA cannot repay the loan, the government is entitled to seize the risky assets being pledged by BofA as collateral, but if the loan value exceeds the value of the risky assets, it cannot go after BofA for the remaining loan amount.

There are a few strict limits imposed on BofA when using this loan facility: executive compensation must be submitted and approved by the government, dividends on common shares cannot exceed $.01 per share per quarter for three years without government approval, $4 billion of preferred stock with an 8% dividend rate along with other fees are to be paid to the government, and any material disposal of the risky assets in the pool by BofA has to be approved by the government².

As of July 2009, the overall confidence of the economy has picked up and BofA has never used the funding provided by the government loan backstop. Both sides, the government and BofA, agree the accord was never signed, but the government wants BofA to pay fees in the range of $2-4 billion for having the implicit government guarantee and potential access to the loan facility³.

1. Bloomberg – Bank of America Posts Quarterly Loss After Bailout

2. Treasury – Summary of Terms

3. Bloomberg – Bank of America Said to Balk at Paying Backstop Fee

Court Orders Federal Reserve to Disclose Details

joey — Tue, 25 Aug 2009 13:29:20 +0000

Bloomberg News unit sued the Federal Reserve under the Freedom of Information Act for a list of companies in their emergency lending programs . The emergency lending programs created last year by the Federal Reserve contains near $2 trillion in loans.

The Manhattan Chief U.S. District Judge ruled against the central bank saying the central bank “improperly withheld agency records” by “conducting an inadequate search” after Bloomberg News reporters filed a request under the information act. The Judge gave the Fed 5 days to locate the documents and turn them over.

All the Federal Reserve’s actions have been taken, in their opinion, in the public’s interest. If the Fed’s actions are the public’s interest and the public’s money is being used, the public is entitled to know. Perhaps, if the Fed had known last year, using the public’s money in the public’s “best interest” would compromise their secracy, they might have been more stingent with their lending standards or more transparent about their process.

Bloomberg Article: http://joeyconway.com/3t9zev

TALF – Definition and Explanation

joey — Thu, 06 Aug 2009 19:49:58 +0000

Term Asset-Backed Securities Loan Facility – Definition and Explanation

“The Federal Reserve created the Term Asset-Backed Securities Loan Facility (TALF), to help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, residential mortgage servicing advances or commercial mortgage loans,” – The Federal Reserve

Essentially, the Fed is stating, market participants, without this government program, would not be able to meet the credit needs of households and small businesses. In simple economic terms, the demand for credit from households and small businesses would not be met with a sufficient supply of credit from market participants.

There are many different ways to approach this situation. This should be the most straight forward and simple explanation. Market participants, who are businesses required to turn a profit or they will go bankrupt, will supply credit to these households and small businesses until it becomes too risky resulting in unprofitable loans. If there is not a sufficient supply of credit in the market, it most likely means supplying credit is not profitable or the risk outweighs the return. The main risk facing the market participants is that the households and small businesses will default on their credit and the market participants will not make a profit, potentially going bankrupt.

Through this Loan Facility, the Federal Reserve has taken on the role of subsidizing market participants, banks and large investors, thus eliminating some of the downside risk that households and small businesses will default. Since some of the downside risk has been mitigated by the Fed, the market participants are now in turn willing to supply more credit, make more loans. The downside risk of potential default by households and small businesses has been transferred from the balance sheet of banks and investors to the Federal Reserve’s balance sheet which is funded through our tax dollars and the Fed’s ability to print dollars.

CNN Money – Breakdown of TALF Program: To TALF or not to TALF http://joeyconway.com/663n2a

Federal Reserve Definition TALF – http://joeyconway.com/mn5zbc

Federal Reserve TALF F.A.Q. (34 pgs) – http://joeyconway.com/ehnrkp

Federal Reserve purchase of GSE Debt and Securities

joey — Sun, 02 Aug 2009 03:34:16 +0000

Unconventional monetary policy announced by the Federal Reserve Open Market Committee on March 18 2009:

“To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.”

Essentially the Federal Reserve has announced its forcasted purchases for 2009 which will expand its balance sheet. It has forecasted for 2009, purchases of up to $1.25 trillion in agency mortgage-backed securities and $200 billion in agengy debt. It has forecasted from March to September of 2009, purchases of up to $300 billion of longer-term US Department of Treasury securities. All these forecasted purchases for 2009 will result in a total $1.75 trillion increase of the Federal Reserve’s balance sheet over 2008.

The Fed will need to fund itself in order to purchase all of these securities and debt from the markets. The Federal Reserve has three methods of funding: the Fed can borrow the funds, the Fed can ask the Treasury to borrow funds, or it can print money/credit commercial banks’ reserve balances at the Fed.

Federal Reserve Press Release on March 18 2009: http://joeyconway.com/krxy8n

US Budget Watch Summary of Press Release: http://joeyconway.com/94kebt