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12.18.14 - Russia in Economic Turmoil

Gold last traded at $1,194 an ounce. Silver at $15.93 an ounce.

Russia is undergoing what can only be described as economic turmoil and observers are hoping the crisis will be limited to Russia. That could be. After all, some of what we're seeing is trouble of Russia's own making in the form of economic sanctions imposed due to Russian expansionism in Ukraine.

But some of what we're seeing is also due to the collapse of the price of oil, which may very well be a symptom of overall global economic problems; something that is of serious concern to investors everywhere.

The Russian economy may come to “a sudden stop” and a bank run “could be in the cards,” according to an analyst at Moscow brokerage UralSib Capital.

“A full-blown currency and financial-crisis scenario seems to be unfolding in Russia in what was supposed to a quiet week as we head into the holiday season,” Slava Smolyaninov, deputy head of research, wrote in an e-mailed report today. “There is a risk that the economy will come to a sudden stop, along with the banks and the overall financial system. Hence, we may have underestimated the level of financial risk in the event of a full-fledged panic. A bank run could be in the cards.”

“The financial system and banks in particular are clearly in danger as a crisis of trust seems to be developing as well,” Smolyaninov wrote. “We believe the worst is yet to come.”

Russian consumers flocked to stores Wednesday, frantically buying a range of big-ticket items to pre-empt the price rises kicked off by the staggering fall in the value of the ruble in recent days.

As the Russian authorities announced a series of measures to ease the pressure on the ruble - which slid 15 percent in the previous two days and raised fears of a bank run - many Russians were buying cars and home appliances before prices for these imported goods shoot higher.

"This is a very dangerous situation. We are just a few days away from a full-blown run on the banks," Russia's leading business daily Vedomosti said in an editorial Wednesday. "If one does not calm down the currency market right now, the banking system will need robust emergency care."

Earlier this week, the ruble suffered catastrophic losses as traders continued to fret over the combined impact of low oil prices and Western sanctions over Russia's involvement in Ukraine's crisis.

Should the current attempts to shore up the ruble fail, then the Russian authorities could be imposing capital controls.

The turmoil may be limited to Russia this time, but in 1998 when oil fell and the ruble was in crisis mode economic trouble did in fact spread elsewhere. This is a factor investors will need to watch.

Of course, not all the news is about Russia.

The US Federal Reserve is always in the news and this week is no exception. Markets have reacted to a statement from the Fed that it would be "patient" in increasing interest rates. Fed Chair Janet Yellen said the Fed was unlikely to hike rates for "at least a couple of meetings", meaning April of next year at the earliest.

Gold climbed sharply on the news.

In the currency markets, the dollar index was down 0.2 percent after the Fed statement, but the bigger news was that the Swiss franc fell to two-year lows after the Swiss National Bank said it would introduce negative interest rates.

The move forces commercial banks to pay to deposit their francs with the Swiss National Bank — usually they get a small interest rate for doing so.

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12.17.14 - Fed Statement Adds More Confusion

Gold last traded at $1,191 an ounce. Silver at $15.93 an ounce.

Today, the Fed made another confusing and unclear annoucment, causing volatility in the markets. In today's statement, the Fed said they will be "patient" before beginning to raise rates. The Fed went on to say this was "consistent" with their "considerable time" pledge made after the last few FOMC meetings.

“At this point we think it unlikely that it will be appropriate that we will see conditions for at least the next couple of meetings that will make it appropriate for us to decide to begin normalization,” Yellen said in the press conference after the Fed announced its decision.

Traders have no clue what exactly the Fed is trying to communicate, as reflected in the market's reaction. Moments after the Fed statement was released the U.S. dollar sold off, rallied, then dropped again. Treasury yields and crude oil were also volatile.

The only thing that is clear is that the Fed's actions will be heavily dependent on upcoming data; such as employment figures and inflation numbers.

In other news, Russia, the world's 8th largest economy, is in a full-blown state of turmoil right now. With sales of oil and natural gas making up approximately two-thirds of all Russian exports and half of government revenue, it should come as no surprise that falling oil prices have caused significant damage to the Russian economy.

Many economists fear the trouble in Russia may spread to other European nations. Some nations, fearing the possibility of collapse, have demanded their gold reserves be brought back home. Austria is the latest country to make this request, following Germany, the Netherlands and France.

The point of having gold on your own soil is to serve as a hedge against other national currencies. With so many countries wanting this sort of insurance, it clearly demonstrates their lack of confidence in the euro.

According to Australia & New Zealand Banking Group Ltd., gold prices will recover in 2015 as demand in China and India improves. This makes right now the perfect time for investors to add to their portfolio, taking advantage of lower prices before 2015.

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12.16.14 - A Variety of News Reports

Gold last traded at $1,194 an ounce. Silver at $15.75 an ounce.

There are a wide variety of news reports with implications for investors today, starting with continuing evidence of a brightening outlook for gold.

The price of gold is up around 7% since it hit multi-year lows in early November. Back then, many on Wall Street were happily eulogizing the death of the yellow metal. Rumors of gold's demise turned out to be greatly exaggerated. The price of gold has risen in four out of the past five weeks.

Despite this rise, gold is still not far above multi-year lows. As a result, more and more traders are seeing gold as a bargain and are buying. The U.S. Commodity Futures Trading Commission reports an rising trend in long gold positions and gold ETFs are seeing a net inflow of money for the first time since October.

The reasons are actually varied, as reflected by a series of reports today:

• The Russian economy is in the worst shape since 1998 and, given Vladimir Putin's record, that is reason for nervousness for many reasons. Russia's Central Bank raised rates by 650 basis points - to 17% - in an attempt to stop the ruble's crash against other major currencies. The ruble improved by as much as 9% against the dollar before collapsing entirely. Once again we see the failure of central banks to achieve desired policy goals against free market forces. Now Russians are faced with a collapsed ruble AND sky-high interest rates. Russia now finds itself in severe financial straits. If sustained, the new higher rates would squeeze an economy already being hurt by sanctions and by a collapse in oil prices. The ruble's collapse has evoked the turmoil of the 1998 Russian crisis, an event that reverberated through financial markets around the world.

• It seems many American investors have completely forgotten the lessons of the most recent financial crisis of 2007-2009. Six years after the collapse of Lehman Brothers, the lessons of the financial crisis may already be fading from collective memory.Just last week, Congress acted to loosen the regulation of the high-risk investments that ignited the 2008 crisis and housing regulators cut minimum down payments on home loans. The Institute of International Finance declared it "worrisome" that global indebtedness, as a share of world economic output, has reached record levels. All this comes as subprime auto loans for financially stretched buyers are surging. And the so-called too-big-to-fail banks that needed a taxpayer bailout in 2008 now loom even larger than before the crisis; America's five biggest banks account for 44 percent of bank assets, up from 38 percent in 2007.

• Maybe the Chinese know something we don't know. They are dumping their holdings of US Treasury securities, something that could potentially cause problems for the US economy and financial markets by forcing up interest rates. China's holdings of US Treasuries fell to a 20-month low in October, the latest month for which data is available.

• There has been a lot of cheerleading from the Obama administration about the "improving economy" but a closer examination of statistics indicates underlying trouble: 65% of all children in the US now live in a household that receives some form of federal aid, The Census Bureau reports that 1 in 5 of millennials (age 18-34) live in poverty and fod stamp beneficiaries have now exceeded 46 million for 37 straight months. None of these can be described as a sign of a healthy economy.

• The plunging price of oil might mean many things. Some call it a positive for the Western economies. Others call it a sign of deflation. But there may be another side effect for which investors must be prepared: The collapsing price of oil could stoke geopolitical tensions in key producing nations. For example, Iraq - which is battling Islamic State (IS) militants - will take a major hit from the plunging cost of crude. But Iraq is not alone, there could be fallout as well in nations such as Russia, Venezuela, Iran, Nigeria and even Norway.

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12.15.14 - Hedge Funds Seek Safety of Gold

Gold last traded at $1,207 an ounce. Silver at $16.56 an ounce.

After largely missing the downturn in stocks, hedge funds are re-orienting themselves to the safe haven provided by gold.

In fact, hedge funds are now the most bullish on gold since August. The net-long position in New York futures and options climbed for a fourth week, the longest stretch of increases since July.

The move to gold occurs in the wake of the plunge in global equities that has erased about $2 trillion from the value of stocks. In contrast, gold prices are heading for a second consecutive month of gains.

“We are seeing safety trade toward gold,” says Peter Sorrentino , a senior vice president who helps oversee $1.8 billion at Huntington Asset Advisors in Cincinnati. “Investors have begun to see that the equity market is priced for a scenario that may not come to pass. That’s led some to flee the market and use gold as a storehouse.”

The decline in stocks and the rise in gold is no coincidence. Unlike bonds and real estate, gold has historically moved independently of stocks. This makes gold an ideal diversifier for a portfolio weighted heavily in paper assets.

Last week's carnage in stocks has continued this week, with declines across the board in markets in Germany, France, the UK, Hong Kong, Tokyo and the Dow, S&P 500 and the NASDAQ. Ironically the decline is being blamed on something that used to be considered good news: a decline in the price of oil.

The problem perceived isn't that the price of oil is falling, but that it has fallen so far, so fast. Many observers see the drop as a sign of deflation and fear the contagion could spread to other economic sectors.

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