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 March 24, 2014.
- Bitcoin price plunges on report PBOC and IRS
- Citigroup among 5 banks failing FED’s stress test.
- Gold Reserves of the Central Bank of the Russian Federation at record high.
BITCOIN PRICE PLUNGE ON REPORT PBOC AND IRS:
The Internal Revenue Service announced on Tuesday, March 25th, that bitcoin should be viewed and taxed as property, giving a little clarity to the shifting regulatory landscape of virtual currency.
Despite the fact that many users treat bitcoin like a regulated currency, “it does not have legal tender status in any jurisdiction,” the agency said.
That means that employers who choose to pay wages in bitcoins will have to report those wages just like any other payment made with property, and bitcoin income will be subject to the normal federal income withholding and payroll taxes.
Bitcoin prices plunged almost 10 percent Thursday March 27th, after a report that China’s central bank ordered banks and payment companies to close the trading accounts of more than 10 exchanges.
Accounts must be closed by April 15, preventing investors in the commodity that advocates promote as a digital currency from doing fund transfers to the exchanges, according to a Caixin news report citing a notice sent to banks and third-party payment companies this month.
Below chart shows how bitcoin prices has plunged more than 60 percent since the beginning of this year.
CITIGROUP AMONG 5 BANKS FAILING FED’S STRESS TEST:
On Wednesday, March 26th, after market close the FED announced the results of the banks stress test.
As can be seen from below chart, CItigroup shares dropped 5.4% Thursday to close at US$47.45 a share after the Federal Reserve rejected the plans of Citigroup and four other banks to raise dividend payments and increase stock buybacks.
Beside Citigroup (NYSE: C), also HSBC North America Holdings (NYSE: HSBC), RBS Citizens Financial Group (NYSE: RBS) and Santander Holdings USA (NYSE: SOV-PC) and Zions (NASDAQ: ZION) failed to meet the Federal Reserve’s capital requirements under its big annual stress test.
The capital plans of Citigroup, HSBC North America Holdings, RBS Citizens Financial Group and Santander Holdings USA all were all rebuffed because of flaws in their oversight practices or what the Fed calls “qualitative concerns.”
Zions Bancorporation’s plan was turned down because it fell short of the minimum capital buffer required in the event of a severe recession.
Twenty-five other banks that took part in the Fed’s annual “stress test” received a green light for their planned dividend payouts and share repurchases. Bank of America (NYSE: BAC) and Goldman Sachs (NYSE: GS) initially fell short of minimum capital requirements but met the standards after reducing their planned dividend payments and share buybacks over the past week.
GOLD RESERVES RUSSIAN CENTRAL BANK AT RECORD HIGH:
On Wednesday, March 26, 2014, The Central Bank of the Russian Federation updated their website with the data for February. As can be seen from below chart, they added 200,000 troy ounces to their official gold reserves during the month for a total reserves of approx. 34 million Troy Ounces.
It will be interesting to see what Russian demand is in March and indeed in the coming months. Sanctions could lead to materially higher demand from the Russian Central Bank.
This would cause a material strain on the already fragile supply demand dynamics of the physical gold market. The possibility of a default on the COMEX gold exchange would become more likely, with a consequent surge in the cost of gold coins and bars and a difficulty of securing physical gold either in allocated gold accounts or for delivery.
PGM CAPITAL COMMENTS:
Bitcoin:
Bitcoin has been hard hit since Tokyo-based exchange Mt. Gox, once the world’s largest, halted withdrawals on February 7th, sending prices tumbling more than 8 percent. The exchange filed for bankruptcy weeks later after about US$470 million in bitcoins belonging to its customers and the firm disappeared from its registries.
Prices dived by about 36 percent from its intraday high immediately after the PBOC notice on December 5th of last year. BTC’s Lee said at the time he was in favor of government regulation of the bitcoin exchanges as it would benefit consumers. BTC China announced two weeks later that it had stopped accepting deposits, triggering another price drop.
Sheng Songcheng, head of the PBOC’s statistics department, said at a briefing on January, 15th of this year, that people needed to be reminded of the risks of dealing in the “virtual commodity” that wasn’t “fundamentally a currency.”
In several previously posted blog articles we have warned our readers that in accordance with our fundamental analysis, bitcoin is a huge bubble that will implode very soon, causing huge loses for bitcoin holders and investors.
CitiGroup:
Citigroup was the biggest recipient of federal bailout money during the 2008 financial crisis, getting US$45 billion in cash infusions and many billions more in guarantees. The Fed said its rejection of Citigroup’s plans “reflects significantly heightened supervisory expectations for the largest and most complex” bank holding companies.
The Fed said Citigroup “has made considerable progress improving” its risk management and control practices the past several years, but its capital plan contained “a number of deficiencies.” For example, the Fed questioned Citigroup’s ability to project revenue and losses “for material parts of the firm’s global operations” in a sharp economic downturn.
The central bank also cited gaps in Citigroup’s own stress testing that reflect “its full range of business activities and exposures.”
Above chart shows the all time chart of the company shares. It is also worth mentioning that the company has reduced its quarterly dividend from US$ 5.40 a share in 2006 to only US$ 0.01 a share currently.
Based on the above we have a STRONG SELL rating on the share of the company.
Russian Central Bank Gold Holdings:
In line with the proposed Economic sanctions of the USA and EU against Russia for their annexation of Crimea, it is worth mentioning that Russia has some US$400 billion in foreign exchange reserves – mostly in U.S. dollars. If they were to diversify just 5%, worth some US$20 billion, of those reserves into gold – it would be equal to nearly 500 tonnes of gold or nearly 25% of global annual production.
Currently the EU imports over 30 percent of their natural gas consumption from Russia. If it gets really hot between Russia and the West on the Crimea issue and Russia decides as a contra measure to accept Gold instead of US-Dollars or Euros for their natural gas deliveries, it will lead to the plunging of the EURO as well as the US-Dollar and the sky will be the limit for Gold.
Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, 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