Highlights of RBI's FY11 Annual Policy Statement

* Hikes reverse repo, repo rate, CRR by 25bps each
* Reverse repo, repo rate hikes with immediate effect
* CRR hike effective from Apr 24
* CRR hike to impound 125 bln rupees from banks
* FY11 GDP growth projection at 8.0% with upside bias
* March end inflation projection at 5.5%
* FY11 banks' credit growth projection at 20.0%
* FY11 banks' deposit growth projection at 18.0%
* FY11 money supply growth projection at 17.0%
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STANCE
* Hike in policy rates, CRR to help contain inflation
* Hike in policy rates, CRR to anchor inflationary expectations
* Measures to sustain recovery process
* Govt borrow needs, private credit demand will be met
* Hikes to align policy tools with evolving state of econ
* To closely monitor macro events, prices; take warranted steps
* Econ firmly on recovery path, industrial growth broad based
* India economy resilient, recovery consolidating
* FY11 econ growth to be higher, more broad-based vs FY10
* Lower policy rates can complicate inflation outlook
* Lower policy rates also impair inflationary expectations
* Despite 25bps hike in rates, real policy rates still negative
* Need to normalise policy rates in calibrated manner
* Inflationary pressures "accentuated" in recent period
* Inflation getting increasingly generalised
* Capacity constraints to re-emerge as econ growth rises
* Must ensure demand-side inflation does not become entrenched
* FY11 fresh govt bond issuances 36.3% higher vs FY10
* FY11 fresh govt bond issuances "a dilemma"
* Policy considerations demands liquidity be curbed
* Govt borrow needs supportive liquidity conditions
* Need to absorb liquidity without hurting govt borrow plan
* To respond swiftly, effectively to inflationary expectation
* To actively manage liquidity, ensure private credit demand is met
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NIA:IMF SDRs are inflationary, buy silver-gold now

The International Monetary Fund (IMF) has issued new Special Drawing Rights worth approximately $300 bn which shows that inflation is a major problem the worldover, according to National Inflation Association (NIA). Perhaps, thisis the right time to buy gold and silver. NIA said that SDR's may not become the new world reserve currency. In a set of 10 questions and answers on precious metals, inflation and crude oil, it addresses key issues of interest to US and global investors.

1) How much over spot is a good price for silver and gold?
A good price for a 1 oz silver coin like an American Eagle or Canadian Maple Leaf is 12% over spot, and a good price for a 1 oz silver bar is 6% over spot. For gold, a good price for a 1 oz gold coin like an American Eagle or Canadian Maple Leaf is 4% over spot, and a good price for a 1 oz gold bar is 2% over spot. The larger premium for silver compared to gold indicates a shortage in the physical silver market.

2) Now that GATA has blown the doors off the LBMA ponzi scheme, and we know there is only 1 oz of silver for every 100 oz represented on paper, why hasn't there been a panic to dump paper and go into physical? What will it take to trigger a short squeeze?

We don't believe there is only 1 oz of physical silver for every 100 oz represented on paper. Most likely, there is 1 to 3 times more paper silver than physical silver. This is still a major problem that will ultimately result in a major silver shortage and short squeeze, once a large number of COMEX holders begin to demand physical delivery of silver. This is a topic that we will be covering extensively in our new documentary coming out next month.

3) If the silver market is controlled by JP Morgan and others, how does the little guy stand a chance of making money?
The manipulation by JP Morgan through naked short selling is providing an opportunity for normal everyday investors to purchase silver at dirt-cheap prices. Without JP Morgan's naked short selling, it's possible silver would already be well above $30 per ounce right now.

Remember, JP Morgan is not manipulating silver up, they are manipulating it down and the manipulation can't last forever. When investors around the globe call for physical delivery of their silver, there will be a shortage of physical silver and JP Morgan will be forced to cover their naked short position, causing silver prices to explode to the upside.

NIA believes silver will eventually see the biggest short squeeze in the history of all commodities.

4) What is the best way to respond to the overused and baseless argument that we needed the stimulus package or else the U.S. economy would've crashed and we would've had another Great Depression?

The stimulus package didn't stimulate the economy but it actually stifled it because we needed to go deeper into debt and borrow the money that was used on projects that added no production to our economy. The jobs that were created were temporary but we still owe the debt. We will need to print the money to pay the debt back, which will ultimately lead to hyperinflation.

Our country does not have access to unlimited financial resources. The money that we borrowed for the stimulus package took away from the money that could've been borrowed by a small business, which could've invested the money into building a factory that would've produced goods and generated real wealth for decades to come.

Our economy needed to enter a recession in order to clean out the toxic assets and imbalances. Today, all of the toxic assets still exist on the balance sheet of the Federal Reserve and the economic imbalances that caused the last crisis have grown larger than ever before.

Instead of going through a steep recession, we will now be forced to eventually endure a hyperinflationary Great Depression. Remember, when there is a boom created by cheap credit, there must eventually be a bust. There is no way around it. All the government has done is push the real collapse down the road while making the eventual outcome a lot more devastating.

5) Why do you not like investing into Real Estate? Isn't it smart to buy Real Estate that is cash-flow positive and then use that cash-flow to purchase precious metals?

Real Estate that is cash-flow positive today, might not be so in the future. In our opinion, it will be impossible for landlords to increase their rents at the same rate as inflation. If you are a landlord, your real cash-flow will diminish over time.

During periods of high inflation, preserving ones purchasing power becomes a lot more important than generating cash-flow. We believe Real Estate will continue to decrease in real value because Real Estate is not very liquid and prices are still at artificially propped up levels. Those who own Real Estate will do poorly compared to those who own precious metals.

6) Do you believe the discovery of many large oil shale deposits in the U.S. will drive down oil prices?

There are several major shale deposits in the U.S. that contain large amounts of oil and natural gas. The cost of extracting oil from these formations is very high and we doubt it will have much of a damper on oil prices. Although it is cheaper and easier to extract natural gas from these formations, we believe the existence of these shale deposits is already factored into our current low natural gas prices. We expect to see many vehicles convert to run off of natural gas in the future, which could lessen the demand for oil, but it will take many years for these conversions to take place. We believe $100+ oil is inevitable due to increasing demand from China and India, and the Federal Reserve's monetary inflation.

7) Do you believe Special Drawing Rights (SDRs) being issued by the IMF will accelerate the U.S. into hyperinflation? Are SDRs being setup to become the new world reserve currency?

From 1970 to 1981 the IMF issued $30 billion worth of SDRs, and gold and silver prices soared to record real highs. The IMF recently issued approximately $300 billion worth of new SDRs. Certainly, this shows that inflation is a major problem around the world and now is the time to own gold and silver.

We don't believe SDRs are being setup to become a new world reserve currency. It would be much more beneficial to China for them to allow their own currency to become the reserve currency.

8) I am considering a career in the military. With the coming collapse, will the military offer me and my family any type of security or will the hyperinflation affect the military as well?

We don't think the U.S. government will be able to afford the military it has today for much longer. Our military needs to be scaled back immediately if we want to prevent hyperinflation. During hyperinflation, the army will most likely be used mainly to protect government officials. Those who are left in the military will demand to be paid in gold, until our gold reserves are completely depleted.

9) I work at Disney Orlando as a server. I make about $300 a day on average. My seniority is rather high. What will happen to my job when the economy collapses?

We can't picture Disney World in Orlando ever closing its doors and going out of business. Certainly, your wages will decline in purchasing power and workers will demand higher nominal wages. Disney will have to increase admission fees and if visitors can't afford them, Disney will layoff employees. Hopefully your level of seniority will ensure your job safety.

The good thing about Disney World is many Asian visitors and foreign tourists come each year. We might see the percentage of foreign visitors increase in the years to come and make up a larger percentage of Disney World's theme park revenues.

10) If the government imposes a value added tax, how will that affect inflation?

We believe Americans are already taxed to the hilt and any additional taxes will have the effect of reducing tax revenues. We need to move the discussion in America away from taxes and towards inflation. It is impossible to fund our current level of government spending and pay back our national debt through taxation. It will all be paid through massive monetary inflation.

India cuts US debt holdings by over $1 bn in Feb

India slashed its holdings of American debt by a little over USD 1 billion in February while China, which is locked in a currency row with the US, trimmed the holdings by USD 11.5 billion during the same period.

According to the US Treasury Department, India has slashed its holdings to USD 31.6 billion in February, while it was at USD 32.7 billion in January.

China, which is also the largest holder of US Treasury bonds, has cut its holdings to USD 877.5 billion in February, one of the lowest levels in nearly nine months.

In January, China's holdings stood at USD 889 billion. Both the US and China are locked in a row over the issue of revaluation of Chinese currency yuan. In recent months, American authorities have been stepping up pressure on the latter to revalue yuan.

Going by official statistics, China has been trimming its holdings continuously since October last year, when the same was at USD 938.3 billion.

Meanwhile, India's holdings have come down by more than USD 10 billion since June last year. At that time, India held Treasury bonds worth USD 42.2 billion.

As per the Treasury data, Japan held bonds worth USD 768.5 billion, making it the second largest holder of American debt after China.

Among the BRIC (Brazil, Russia, India and China) nations, the second largest holder of American debt is Brazil, followed by Russia and India.

As in February, Brazil held Treasury bonds to the tune of USD 170.8 billion, while Russia held American debt worth USD 120.2 billion.

The US economy grew 5.6 per cent in the last three months of 2009, shrugging off the adverse impact of the financial meltdown.

Sugar production: This season, it is under-estimation

If 2008-09 was a year of the Centre and the industry both overestimating the country's sugar output, the 2009-10 season is turning out to be just the other way round.

At the start of the 2008-09 sugar season (October-September), the Centre reckoned production at 220 lakh tonnes (lt), assuming Uttar Pradesh (UP) to contribute 70 lt and Maharashtra 61 lt. As the season progressed, these were pared, first to 205 lt, 62 lt and 57 lt and then to 188 lt, 59 lt and 51 lt, respectively. Even right up to August, the Centre maintained production to be in the 150-155 lt range. However, when the season ended, the final all-India number came to 145.38 lt, while being 40.64 lt for UP and 45.78 lt for Maharashtra. And predictably enough, the Union Food and Agriculture Minister, Mr Sharad Pawar, laid the blame for this divergence of nearly 75 lt between initial and final estimates on the industry.

At the Indian Sugar Mills Association's annual meeting on December 22, Mr Pawar even threatened to penalise factories for “late and incorrect reporting” of their production figures to the Sugar Directorate. This time though, it is quite the opposite. On November 6, the Food Ministry convened a meeting of State Cane Commissioners and based on their inputs, production for the 2009-10 season was pegged at 146.14 lt. This included 47 lt from Maharashtra and 39.60 lt from UP.

While the Centre stuck to this internal estimate (while publicly proclaiming a 160 lt figure), the industry put it a tad lower at 140-145 lt. By January, the consensus within the trade was a production of below 140 lt, with some even venturing a sub-130 lt number. All that was enough for sugar prices to hit the stratosphere, as ex-factory realisations surged by about Rs 10/kg between Christmas and mid-January. But since then, prices are back to – actually lower than – where they were and, worse, seemingly headed further down. The trigger, again, is production, which is now seen to top 170 lt (according to Mr Pawar), with the National Federation of Cooperative Sugar Factories expecting it even higher at 180-185 lt. The way output estimates have been revised upwards – and may well be revised further – is better captured by looking at just Maharashtra and UP.

Maharashtra mills were originally anticipated to crush just 410 lt cane, which, on an average 11.5 per cent recovery, would have yielded slightly over 47 lt of sugar. But as on March 31, crushing for the ongoing season had touched 531.11 lt, with corresponding sugar production of 60.81 lt. The latest projection of total crushing and production for the season are 560 lt and 65 lt, respectively.

Likewise with UP which looks set to produce 50-52 lt, against the initial sub-40 lt estimate. In both States, it appears mills simply did not account for the possibility of higher cane yields due to farmers taking extra interest in their crop this time. “We failed to gauge the grower's enthusiasm for applying more fertilisers and other inputs in view of remunerative cane prices, just as we last time underestimated his anger and indifference on not being paid adequately and in time”, a UP miller admitted.

Gold ETFs: prudent investment or paper dream?

Almost all market and bullion analysts in the recent years harped on a new investment option — the Gold Exchange-Traded Funds (ETFs). Till a decade ago, there were no easy options to invest in gold like the equities market. Realising this, innovative people brought out the gold ETFs to make gold investment easy for investors. The development of the gold ETF market in 2003 changed the way people invested in bullion.

Now, gold ETFs are an efficient way to invest in gold without dealing with the troubles of holding the physical metal.

Gold ETFs are traded just like shares of stock. You can buy and sell a gold ETF just as easily as shares of any company. And they trade on major stock exchanges including New York, London, and Sydney. However, some gold ETFs buy and hold the physical bullion, while others invest in futures contracts.

But when the gold ETFs came into the market, nobody anticipated a fraud will spoil the image of ETFs within 10 years of its existence. So, last week, when the Commodity Futures Trading Commission (CFTC) heard a case regarding manipulations in bullion market by gold cartels, the gold ETF scam hit the investors like a bolt from the blue.

Now, the gold ETFs’ image is at stake. Soon, investors are set to question the credibility of the gold ETFs. The reason is the facts emerged during the CFTC hearing.

The whistle-blower in this biggest gold fraud was Andrew Maguire, an experienced precious metal trader in London. In an riveting interview (which is available on the internet all over the world) with GATA director, Adrian Douglas, Maguire describes a new dynamic impacting gold. The fact is that, there is a huge short position in the market.

The CFTC hearing confirmed what GATA has been saying all along, that the gold market is being manipulated. And, how? The gold cartel has accumulated a huge short position and the huge short positions are ‘naked’, which means these positions are not hedged. There is 100-times more paper-gold outstanding than physical gold.

So, if you are buying ETFs, be sure that there is no gold guarantee for your piece of paper which offers you the ownership of some specific quantity of the yellow metal. In reality, it is just a piece of paper which you bought paying huge sums.

Recently, the World Gold Council reported that the world’s total gold ETF market grew 85% relative to 2008.

During the hearing Adrian Douglas of GATA said: I would just like to make a comment. We are talking about the futures market hedging the physical market. But if we look at the physical market, the LBMA, it trades 20 million ozs of gold per day on a net basis which is 22 billion dollars. That’s 5.4 Trillion dollars per year. That is half the size of the US economy. If you take the gross amount it is about one and a half times the US economy; that is not trading 100% backed metal; it’s trading on a fractional reserve basis. And you can tell that from the LBMA’s website because they trade in “unallocated” accounts. And if you look at their definition of an “unallocated account” they say that you are an “unsecured creditor”. Well, if it’s “unallocated” and you buy one hundred tonnes of gold even if you don’t have the serial numbers you should still have one hundred tonnes of gold, so how can you be an unsecured creditor? Well, that’s because its fractional reserve accounting, and you can’t trade that much gold, it doesn’t exist in the world. So the people who are hedging these positions on the LBMA, it’s essentially paper hedging paper.

Bart Chilton uses the expression “Stop the Ponzimonium” and this is a Ponzi Scheme. Because gold is a unique commodity and people have mentioned this, it is left in the vaults and it is not consumed. So this means that most people trust the bullion banks to hold their gold and they trade it on a ledger entry. So one of the issues we have got to address here is the size of the LBMA and the OTC markets because of the positions which are supposedly backing these positions which are hedges, but it is essentially paper backing paper.

So the giant Ponzi trading of gold ledger entries can be sustained only if there is never a liquidity crisis in the real physical market. If someone asks for gold and there isn’t any the default would trigger the biggest “bank run” and default in history. This is, of course, why the Central Banks lease their gold or sell it outright to the bullion banks when they are squeezed by high demand for real physical gold that can not be met from their own stocks.