Long, but you'll be up to date 
GOLD INVESTMENT REPORT
PRECIOUS METAL & ENERGY PRICES
STOCK INDEX ANALYSIS
* Introductory Update
* Desperation Hits Central Banks
* Final Defense of the USDollar
* Upcoming Attack of COMEX Gold & Silver
* Investment Implications
HAT TRICK LETTER
Jim Willie CB,
26 November 2008
Look to the website public homepage for notification of posted reports, my Town Crier, on the Sundays nearest the 8th & 15th (http://www.GoldenJackass.com/main5.html). Note that credit card billing shows “2CheckOut.com” or simply “Jim Willie” on transactions. If you do not receive direct email notices on Hat Trick Letter report postings, then I apologize. Each month, they are sent out using the user database list. Occasionally they might be blocked at your receiving end by spam filters. Do not wait for such emails. Check the public website homepage.
“It is a dubious business. It is not clear what will happen to the dollar” – Vladimir Putin
“You can always use cash, which is just as good as money.” – Lawrence Yogi Berra (former New York Yankee baseball idiot savant… as we have seen, US$ as cash legal tender is certainly not money, but rather denominated debt posing as money, the cause of a disaster)
“I am tired of the mushroom treatment, where we are kept in the dark and fed a steady diet of bovine fecal matter.” – Mark Haines of CNBC (in reference to the Paulson TARP Fund mgmt)
“Unless you become more watchful in your States and check this spirit of monopoly and thirst for exclusive privileges, you will in the end find that the most important powers of Government have been given or bartered away, and the control of your dearest interests have been passed into the hands of these corporations.” – Andrew Jackson, 1837
INTRODUCTORY UPDATE
◄ Be sure not to miss the spectacular conjunction of planets and the moon in the southwest sky. That is for those in the Northern Hemisphere, sorry Australians and New Zealanders. Venus will converge with Jupiter, with nearly equal magnitude in brightness. When they are close in a few more days, the moon will enter the picture as a crescent in a spectacular display. For the description of the highly unusual event, check the NASA website (CLICK HERE). One could regard this event as an omen for a COMEX gold default, a stretch, but a legitimate one.
MANY BRIEF ITEMS FEATURED IN DECEMBER MACRO ECONOMIC REPORT.
◄ On 20 May 2008, Bloomberg News reporter Mark Pittman filed a Freedom of Information Act request (FOIA) with the Federal Reserve asking for detailed information relevant to whom the central bank was giving these massive loans and precisely what securities these firms were posting as collateral.
◄ A guy who goes by the name of Mr Mortgage is astute in analyzing banks and balance sheets. He makes two major points. First, he believes Czar Paulson scrapped the $125 billion TARProgram, and confiscated funds, because huge additional bank losses are imminent from prime mortgages. Second, he points out that the Level-2 assets are of larger magnitude than subprimes, 9x larger than subprimes, and have similar default rates as the subprimes. Of the 25 companies he studied, their total assets were $14.6 Trillion. A breakdown shows Level 1 assets totaled $1.3 Trillion, Level 3 assets were only $802 Billion, but Level 2 Assets were $7.3 TRILLION! A disaster continues, just like subprimes.
◄ The US banking system remains busted and insolvent. Of the $6.84 trillion in US bank deposits, their total cash is only $273.7 billion. That is a rock bottom 4.0% cash versus deposits. The rest of the assets are tucked away in off balance sheet acid accounts, imploding commercial real estate deals, Alt-A loan portfolios, Fannie Mae & Freddie Mac bonds, and many revolving debt charades. Commercial banks and investment banks leveraged at 30-1 or more. Many loans simply cannot be paid back.
◄ The commercial mortgage market is in turmoil. Regard this as a direct consequence of the TARP abuse and confiscation. The troubled assets are now ten times more troubled. The ABX chart of AAA-rated subprime mortgage bonds tells the story. The most severe fallout in the bond market from criminal TARP management has been here in commercial MBS arena. Its spreads for AAA-rated bonds are up by 300 basis points in two weeks, and up 450 bpts since May. The iShares Real Estate Fund (IYR) is falling off a cliff. IYR is comprised of America's largest commercial property owners and operators.
◄ The spread or risk premium on 10-year USTreasury credit default swaps hit record wide levels last week, prompted by concerns over bank and carmaker rescues. At risk is USGovt creditworthiness. Ten-year U.S. Treasury CDSwap edged up to 49.8 basis points, according to CMA DataVision. Five-year Treasury CDS grew to 43.5 basis points. The risk premiums have nearly doubled from levels seen two months ago after the collapse of Lehman Brothers. Prior to the financial crisis, default risk premiums on U.S. government debt had been running in the low-to-mid single digit basis points. The British Govt debt, called Gilts, has an even worse CDSwap rate at 86 basis points, on par with Portugal. The French CDS rate is a little above the US, but the German is marginally lower than the US.
◄ In a related tangent, the 30-year USTreasury swap spread turned negative last week, and has remained dancing into negative ground in a bizarre manner. The swap contract trades floating rate for a fixed rate, and pays a price to do so. This implies investors are somehow reckoning that they are more likely to be redeemed on their bond investments by a private counter-party than by the government itself! Yet another Third World symptom.
◄ Gerald Celente of Trends Research Institute forecasts decline of the USEconomy into an ‘undeveloped’ status, with continued job loss, end of Christmas retail phenomenon, and greater challenge in time to put food on the table than gifts under the tree. See his YouTube interview (CLICK HERE). This fellow is not to be taken lightly, as he owns a great track record. He even expects a revolution by the masses against the elite who have stolen their life savings, all by the year 2012. Three other perspectives are offered, by Dmitry Orlov, Michel Chossudovsky, and Jim Kunstler to be provided in detail next month.
◄ Mohammed El-Erian is a bright man, formerly of Harvard University endowment fund management, now at PIMCO. He believes: The USFed doing a lot with the money market, the asset-backed commercial paper market, and Treasury Bond repos. We have a crisis of the system, as a redefinition of the long-term market landscape is underway. Stockholders are the most vulnerable in this environment, since they are positioned as the most junior within the capital structure. A flight to liquidity is occurring, not a flight to quality or a flight to safety, as a global phenomenon takes place toward vast liquidations. US bank officials are making big errors by attacking problems locally, as in spot by spot, as opposed to treating the problems in an aggregate fashion, from a systemic point of view.
◄ The Asia Pacific Economic Co-operation met in Lima Peru in mid-November, one more opportunity for small and large Asian economies to vent anger at the leaders of the corrupt US financial system. A clash occurred between US president Bush and Chinese president Hu Jintao over the global financial crisis. Hu Jintao called for tougher regulation of the world financial system and Bush pressed for free markets. World trade was the set agenda topic, but the division between the US and China undermined any unity. Bush issued a passionate plea for the world to retain its faith in free and open markets, despite the ravages of the global financial crisis. The Chinese president countered with a call for ‘a new international financial order’ including better regulations to prevent a repeat of the devastating collapse of credit and stock markets. This call echoes the call from Germany at the G-20 Meeting (see the USDollar section). The speeches from these two leaders at the 21-member APEC summit hosted by Peru brought into the open simmering resentment from developing nations against the US, which is widely seen to have triggered the crisis through inadequate regulation of its credit markets.
◄ Several comments on the Obama Cabinet, the economic team, and announced programs will come in more detail in the next report. The same insider syndicate players occupy key posts. Expect nothing to change for the stranglehold that the four crime syndicates exert on the United States. Programs will come to help people, but at great cost and a very late arrival.
◄ Sunday November 23 marked the commemoration of the JFKennedy assassination. Banksters are well aware that he threatened the Federal Reserve system. Perhaps someday, history can have a new chapter written, so the people can understand what Kennedy tried to do to remove the central bank stranglehold from the American people, the threats he ignored, and the real reason why he was murdered. Soviets had no role in his death, but banksters did.
◄ ### ML-Implode is a fine intrepid website managed by Aaron Krowne, which began by tracking failed lending institutions, and now banks and hedge funds. It is under attack by a group that launders payments from sellers to borrowers through various intermediaries (including native American tribes!). They create the false impression of a downpayment, to meet the FHA 3.5% requirement. The practice, known as ‘seller-funded downpayment assistance’ was outlawed as of October 1 by legislation. However a movement has come via a new bill (HR 6694) to reinstate the practice. The new bill creates in effect a new category of 100% subprime lending BACKED DIRECTLY BY THE TAXPAYER, from even more lax lending requirements! Help ML-Implode stop them with a donation (CLICK HERE).
DESPERATION HITS CENTRAL BANKS
◄ On October 29, the US Federal Reserve cut by 50 basis points the official Fed Funds rate down to 1.0% flat. THIS WAS A HUGE TRIGGER EVENT. Despite the ultra-low rate, do not expect the USFed to be done cutting rates. They have implicitly held onto their easing bias, having said simply that “downside risks to growth remain.” The USFed statement admitted finally to having absolutely no clue what inflation was or what price stability means, when they said “the inflation outlook remains highly uncertain.” One week later, the entire globe of beleaguered central banks (CB) cut their official interest rates also. It was a parade along a failed path. They coordinated rate cuts on October 8, and again followed the USFed soon after with more cuts. They might have wanted to permit a week to pass in order to throw the FOREX market off balance. The important Euro CB cut by 50 basis points to the 3.25% level, surely in reluctant fashion given their steadfast defiant stance. Trichet of the ECB has lost almost as much credibility as Bernanke of the USFed. The central bank franchise system needs a reform overhaul, a topic not even discussed in most visible expert circles.
The most desperate CBs are clearly England and Switzerland among the majors, but also Australia and New Zealand in the second tier. The Bank of England (BOE) cut by 150 basis points unexpectedly, now at a 3.0% low level, in the face of disaster. The Swiss National Bank cut by 50 bpts with the pack, but on November 20 surprised all by cutting another full 100 bpts down to the ultra-low 0.5% level. They have a hidden purpose. The Reserve Bank of Australia cut by 100 bpts in October and plans to cut again this month. The Reserve Bank of New Zealand cut by 100 bpts in October and also plans further cuts. The Bank of Canada cut by 25 bpts in October and plans another 25 bpt cut in December. The Riksbank of Sweden cut by 50 bpts to 3.75% in October and plans another 25 bpt cut in December or soon afterwards. This pattern will most likely continue for a couple more months.
The interpretations, contained messages, and moral of the story are four-fold:
1) ABSOLUTE CONTAGION: the global economy is suffering from broadly felt toxic shock due to purchases of US bonds, a process that has a few more quarters of severe crisis pathogenesis
2) MONETARY POLICY EXTORTION: the major and secondary CB heads want to cut so that the US$ does not fall versus their own domestic currencies, with deep regret that 0% will be the limit on the downside
3) INFLATION EXPLOSION: global monetary growth has gone ballistic, no longer a priority to control amidst desperation, with all talk about limiting price inflation relegated to mumbling in the corner
4) ENDLESS BAILOUTS & RESCUES: the government sponsored bailouts are nowhere near finished, sure to expand in magnificent style, bound to be an endless parade of patchwork and stimulus with eventual climax of mortgage aid.
The item #4 on endless rescues is the most alarming, since central bankers are out of monetary ammunition, down to rock bottom levels, but have yet to address the mortgage problem at all. Total USGovt bailout costs have reached the exalted $8.5 trillion level. The USGovt has pledged $8.56 trillion in economic bailout for financial institutions so far. Conmen running the rescue programs have left mortgage balance writedowns to voluntary action, with almost zero USGovt subsidies. Mortgage aid in meaningful and necessary terms is actively avoided, since it must come with a price tag up to $2000 billion in the United States alone. The nationalization of the US banking, if not financial system, is highly likely to be followed by an eventual virtual nationalization of the entire mortgage system. Such a decision and desperate socialist action will be the death knell for the USDollar, if it survives to the point when such a program is enacted. The EuroCB and British BOE have more room to cut, and they will, very grudgingly. The item #3 on unbridled monetary inflation is a powerful bull market signal for gold, once asset prices stabilize. Monetary explosion always pushes gold upward in price, but this time much money is directed into a multi-channeled black hole. A fork in the road comes, and my expectation is that officials will take both roads, one directed at households. The item#2 on US$ policy extortion is a crucial aspect of the mutually destructive currency wars, and reveals the strong impact of Competing Currency Devaluation. Foreigners initially wanted to avoid rising domestic currencies. Next they wish to avoid further aggravation to their economies from even lower domestic currency exchange rates, as the queer USDollar rise is based upon US financial failure. A low currency inflicts higher prices upon their economies.
The USFed cut most aggressively, even boasts that it acted first. It had to act first, since it caused the problem with toxic bonds, and the USEconomy has a worse problem to fix by an order of magnitude. My view is that the powerful US ailments are not fixable, since the financial engineering is too deeply rooted and the manufacturing industrial base has been removed in several stages over a 25-year period. The crime syndicates are too deeply rooted into policy making and control of rescue funds. That will not change with any new administration. Besides, the credit derivatives loom like a series of hidden bombs whose fuses intersect in the dark. System continuation is the primary directive, unless they permit the entire United States to go dark. A conclusion can be made.
◄ THE FRANCHISE OF CENTRAL BANKING HAS FAILED, AND GRAND RATE CUTS CONFIRM THIS NOTION EMPHATICALLY!!! THE COLLECTION OF CONCLUSIONS ADDS UP TO ONE POWERFUL FORECAST: GOLD & SILVER PRICES WILL RISE 10-FOLD IN THE NEXT FEW YEARS, ONCE THE CLUTCH IS RELEASED AND THE 10000 RPMS ENGAGE THE ECONOMIC TRANSMISSION TO PRODUCE PRICE SKIDMARKS. Ignore for now the paper price heavy-handed influence, which in my view will suddenly disappear in a volcano of controversy and tumult! Governments will only provide accelerant on the bonfires, hastening the destruction. They are funneling new capital into vast channels extended to failure. They are removing capital from main body of the system. They are agents working directly against capitalism.
Lost faith in the US Federal Reserve has entered both the investment chambers and homes in the United States. This is an obvious new consequence to desperate actions resulting in almost nothing toward solution in 16 months. Countless programs by the USFed, countless bailouts, catering to Wall Street, limited capability to foresee a single problem in advance, stupid public statements about containment and inflation expectations, these are the hallmarks of the USFed. Chairman Bernanke has learned the hard way that usage of the printing press is not the boasted solution. He is sending good money after bad, redeeming criminal fraud, endorsing checks for a broken system, acting like a gigantic banking substitute surrogate, and delivering channeled funds into a vast black hole. He is not inflating much of anything!!! His own vice-chairman described his boss as ‘overwhelmed’ by the financial market collapse, whose lesson is that university teaching in economics is pure horse manure, even at Ivy League schools. The poll by the University of Michigan and Reuters revealed by 26% of Americans are ‘A LOT LESS’ confident in the US Federal Reserve than five years ago. Also, another 29% are ‘A LITTLE LESS’ confident in monetary policy markers generally across the globe.
◄ The US Federal Reserve has accomplished a bizarre feat. They have made short-term lending virtually free, but offer a yield over 3% on long-term bonds. So US banks are deeply engaged in a permitted carry trade. US banks borrow short and lend to the USGovt long, and thus exploit the steep USTreasury yield curve. This is yet another distress symptom, a sign of structural breakdown. The US banks are trying to liquefy from this perverse mechanism, using incredible large volumes of money. It is no wonder that the USFed balance sheet has more than doubled since late summer, and has gone out of control, well past $2 trillion in size. What the USGovt is doing in concert is setting bad precedent after bad precedent. The USGovt, backstopped by the USFed, has made numerous bad contracts with failed financial firms, demanding little in the way of reform, demanding little in the way of warrant investments, demanding nothing on limited executive bonuses, demanding little in interest payments on loans, thus shutting out the private sector. No private investor in right mind would step forward to help an ailing industrial or financial firm on the absurd stupid terms established by the USGovt. However, the Citigroup deal might mark a change, since demands were made and met. In return for $322 billion granted, warrants were placed with the USGovt, limits on dividend payouts were made, but no structural reorganization was announced of substance. In one svelte swoop, Citi was given more than the $275 billion to date doled out to AIG in three blocks.
The US leaders generally are perpetuating the failure of companies whose financing structures are not forced to alter to any meaningful degree. Other firms cannot properly compete, and the aided firms have no incentive to change. TO DATE ALL ACTIONS ARE TO INSTITUTIONALIZE FAILURE, IF NOT REWARD CORRUPTION AND FRAUD. Nowhere in the current set of solutions is direction of money into viable promising company formation with strong future prospects. Instead, we are witnessing staggering diversion of money into failed structures, failed management, and corrupt relationships. If a firm is too big to fail, and it fails, and several such giants fall into this category, then systemic reform is needed in order to prevent the assured systemic failure that will come from propping them all up. The failed for a big reason impossible to deny.
The USFed is slowly revealing that it is out of tools and devices, the end of a policy road. It is left with only grand lending channels for swapped bonds. The USFed has essentially become the only big bank in the USEconomy to lend in volume, as the rest are locked down. A record setting 25% of high-powered money, as in bank assets, a provision by the USFed that actually sits idle as excess reserves. The main loans that US banks do these days are overnight lending. The ultra-low USTreasury Bill yields is a clear undeniable testament to US banks parking money in safe locations instead of lending them. Banks have tightened lending standards for consumer loans, home loans, car loans, credit card lines, student loans, and business loans. They see an advantage of near 0% return instead of losing money with yet another bad loan. In the process, money velocity has sharply dropped, typical of a recession. However, in this case, the dead money velocity and near 0% USTBill yield indicate economic disintegration. The United States criticized Japan for suffering a Zero Interest Rate Policy. The only difference now is that the US is stick in ZIRP-land more quickly, and has no trade surplus to assist the process. The US will therefore flail around and risk systemic implosion, USTreasury Bond default, an eventual USDollar discredit, and a sudden thrust into the Third World.
Recall the formula that M*V = P*T, stated as money supply times money velocity equals prices times transactions. A recession means transactions are down. Falling prices are observed. The other side reveals that although money supply has grown, it is wasted in the black hole of Wall Street, as its velocity has also slowed. The USFed is not pushing on a string, as many prefer to say. Instead, the USFed is entangled in its strings, helpless as money goes down the drain.
◄ Slowly the Western economies are becoming a shambles, approaching ruin. Central Europe is in the best shape in my view, but mine is a biased view since a deep respect is held for the astute Bundesbank and the powerful export giant in Germany. They drag along weaklings, while they accommodate demanded if not blackmailed bad central bank policy. The European Union GDP showed minus 0.5% economic growth in 3Q2008, which is quite good considering the climate. Standing still is an accomplishment. The EU GDP calculation contains a fraction of the US fraud. The US GDP is at least 4x to 5x that in decline. The European Commission has hatched a plan that calls for cooperation by EU member governments to jointly combat the growing economic slowdown with a €200 billion (=US$256B) stimulus plan, announced today. The two-year European Economic Recovery Plan calls on the 27 EU governments to contribute with meaningful spending. The proposed stimulus plan would represent 1.5% of the EU gross domestic product. Around €170 billion would come from national governments, the rest from EU funds and the lending arm known as the European Investment Bank. So in Europe, the United States, and England, enormous programs for bank bond swaps and now giant stimulus programs are proposed or in place. Desperation has set in.
The US aggregates are falling off a cliff in unison, all telling the same disastrous story. The comparison can best be characterized as Europe has entered a notable recession, but the US has entered disintegration. Business confidence across several of the major European economies is near record lows. The German IFO index of business climate index is at 85.8, the lowest in 16 years. The German PMI manufacturing index came in at 36.7 for November, down from 42.9 in October, below the 50 level that indicates recession. The paired PMI service index came in at a more steady 46.2, down only a little from 48.3 a year ago. The same PMI indexes across all the EU made similar moves toward reversal. An ugly contrast will be very evident, as Southern Latin nations will experience a much worse recession than Central Europe. As an important footnote, the EU economy, and the UK economy also, need for energy prices (crude oil & natural gas) to remain low, or at least contained. But this produces a backlash effect.
The surprising Swiss National Bank hefty rate cut in my opinion is a cooperative gesture to push down the LIBOR rate almost singlehandedly. Low Swiss rates helped to fuel a large portion of European property loans, especially in Eastern Europe. The oversized cut paves the way for several other central banks to continue their rate cuts down toward 1%, in a global embarrassment to central banking. The Swiss have come a long way in destroying their image as a premier banking center, having compromised in many crucial respects. The biggest compromise in integrity occurred when the Swiss joined the US & UK gold sales game that gutted their central banks of currency collateral, and joined the insane game to permit lending to go to insane levels without proper controls. The two marquee big Swiss banks, Credit Suisse and UBS, are both reeling, fighting for survival amidst massive depositor withdrawals.
◄ England has entered a much more powerful recession than Europe, but not yet a disintegration. The BOE reacted to their own Anglo-style economic disaster, whose dependence had been built atop housing bubble, just like in the United States. They ordered the biggest official interest rate cut in 27 years. What an embarrassment! The 3Q2008 registered GDP growth came in at minus 0.5%, but that figure is grossly exaggerated. Estimates of UK GDP growth in 2009 at minus 1% are laughable. Their GDP will be on the order of minus 3% to 4% next year. The UK jobless rate is the worst in 16 years. Incredibly house sellers have dropped their asking prices by £16,900 in just the last two weeks, a 6.5% annual decline. The market is suddenly removal denial, as a housing spiral heads downward. BOE governor Mervyn King left the door open to a ramp down to 0% in interest rates. King said the central bankers “are prepared to cut the bank rate to whatever level is necessary.” This is an alarming statement, a capitulation.
Kenneth Clark is a highly respected former conservative Chancellor of the Exchequer (finance minister) from 1993 to 1997. He delivered an urgent warning for a “catastrophic crisis [that will be] far worse than anything that has occurred in my lifetime” for England. See the UK Telegraph article, complete with a video (CLICK HERE). As national unemployment reached an 11-year high of 1.82 million, Clarke claimed the number of jobless could soon reach three million. He has called for a temporary cut in Value Added Tax to boost spending. To American readers, that is akin to a national sales tax. Rising unemployment will have a devastating effect on families and lead to more mortgage defaults in his opinion. Clarke slammed Gordon Brown as having received undue credit for his role in attempting to shore up the global economy. He is more to blame for the problem.
Clarke stated, “There will be a very serious recession next year. I think the big problem in 2009 will be the catastrophic fall in consumer spending demand. Spending in shops will get worse. [Unemployment] is going to go up a long way. Whether we will get back to three million again, is one of those slightly morbid questions I really do not know the answer to. But it could get pretty big… The idea that Gordon has saved the world is not true. We still have a major, major crisis in this country, and public finances are in a terrible mess. We are not yet in a state where we can be absolutely certain we are not going to have something close to meltdown next year. You do have to see what can be done with taxes.” He cautioned that Britain has mounting debt, which is unsustainable, but said policymakers should beware of a “full-blown depression will have on public finances” for its effect. He was alarmed that the British Govt could make the crisis worse by the current practice of forcing banks into lending under political pressure, when they should not, a climax of bad policy.
More blame is given to Gordon Brown, this by former prime minister John Major. See his article entitled “Who's to Blame? Look in the Mirror, Mr Brown” (CLICK HERE). Major accuses Brown of squandering the entire economic gains and relinquishing the strategy of the past. In a scathing diatribe, he lists his charges and accusations, assigning much of the blame on Brown. This goes beyond partisan politics, and is specific. Major said, “[Brown] was culpable for the domestic circumstances that contribute to our dire economic plight. Who ignored the debt spiral as it built up? Who weakened regulation and allowed Northern Rock to offer 125 per cent mortgages? Who diminished Bank of England control over our banking system? Who wrecked final salary pensions with a £5 billion/year tax levy? Who ignored the risks of the house price and equity boom? A glance in the mirror shows him the culprit. The Prime Minister admits to none of this but asserts that our present woes are due entirely to ‘an international crisis begun in America.’ He repeats this mantra so often that he may have come to believe it. But no one else should. A large part of the crisis now engulfing us is home grown in the Treasury and No10 [Downing Street]. The UK would be facing recession and a house price collapse without any international dimension. New Labour has as much financial blood on its hands as any erring banker on either side of the Atlantic. Last year, at the Mansion House, the Prime Minister spoke of ‘an era that history will record as the beginning of a new golden age for the City of London.’ Nemesis must have smirked. Within months there was the first run on a UK bank for 100 years, and the collapse of Northern Rock. Since then, the taxpayer has been called upon repeatedly to rescue our once secure banking system... For 11 years Mr Brown has claimed personal credit for the economy that Labour inherited but the Conservatives created.” Ouch, straight to the heart!! But from my perspective, ‘TOLD YOU SO’ comes.
Dire warnings also came from the Bank of England’s Financial Stability Report. They estimated global credit crisis losses could reach $2.8 trillion, a silly lowball number. It said “Risks in the financial system clearly remain. Over time, against a backdrop of an economic downturn, banks will need to adjust their balance sheets and funding models, weaning themselves off current exceptional levels of official support. Lending growth will take time to recover.” To date, the British Treasury has invested £37 billion in British banks. John Grieve, deputy governor of the Bank for Financial Stability continued the concern. He said, “The instability in the global financial system in recent weeks has been the most severe in living memory. And with a global economic downturn under way, the financial system remains under strain. But it is better placed as a result of the exceptional package of capital, guaranteed funding and liquidity support.” The bank generally advised that a new system of counter-cyclical capital requirements and ‘macro-prudential tools’ are urgently needed. Big concern was openly stated about forced hedge fund liquidation growing out of control. Some like Ambrose Evans-Pritchard openly ask if Britain is going bankrupt. Yes, it is. The Gilt insurance reached 86 basis points, almost twice what the USTBond insurance costs. Fitch Ratings just released estimates that the fiscal cost of bank bailouts stands at 6.9% of British GDP. The lower British pound sterling exchange rate will only worsen the costs throughout the UK Economy. Conditions are spiraling out of control.
One clear reason for a much deeper UK recession is that lending institutions, just like in the US, are not passing on lower interest rates to home loans, and repayment plans are not happening in volume. The elite in both the US & UK are protecting their bankers, but killing the system in the process. Housing prices are careening downward, while job losses mount in large numbers. A simple move to cut rates does nothing to address insolvency of both banks and households. This basic truism is totally lost on clownish inept US & UK economists and bankers. Both nations built an economy atop a housing bubble, blessed it, and encouraged the debt orgy process, only to see the entire system melt down. THIS WAS FULLY FORECASTED DURING THE LAST 12 TO 18 MONTHS BY THE HAT TRICK LETTER.
◄ A quick few notes from Asia. The Bank of Japan (lackeys to US) cut by 20 bpts down to an ultra-low 0.3% level, the best they can do, showing team support. They made the decision in a split 4 vs 4 vote. Dissenters favored a slightly bigger 25 bpt cut. The move was motivated by stock market losses, a rising yen currency, and consequent export losses. The Land of the Rising Sun has its own extreme challenges, as major corporations across the board have seen notable declines in export trade. Even domestic demand has come down. The Japanese Economy is on track for growth at only 0.1% annually through March 2009 end of fiscal year. In 3Q2008, industrial output fell by 1.2% from Q2, to mark the third straight quarterly decline. Factory production is expected to decline by at least 2% in the October to December quarter this year. In Japan, summer bonuses fell and overtime pay dropped in September from last year, bringing to light the weakness of the economy now recognized as a recession. The Japanese Govt announced in late October a ¥27 trillion (=US$275B) stimulus plan, including expanding tax credits for small businesses, and cash rebates to households.
Last week, the Peoples Bank of China cut interest rates again as their economy has hit the skids and millions of jobs are vanishing. The PBOC reduced its official interest rate by 1.08% points to 5.58%, the biggest single cut since the Asian Financial Crisis in 1997. Expected economic growth at 7.5% is robust by Western standards, but it would represent the slowest economic expansion in China for the last two decades. Look at it this way. The nation needs 7% minimum growth according to Chinese economists so that it can create enough jobs for the 6 million university graduates each year, apart from migration to urban centers. The fourth interest rate cut from the Chinese central bank in the last ten weeks exhibits a certain level of desperation, as it battles serious economic downturn. In recent weeks, a series of riots across central and southern China have mushroomed as angry employees have taken to the streets.
Lastly, Taiwan and South Korea joined the effort by cutting interest rates. Sherman Chan is an analyst at Economy.com in Australia. He praised Asian central banks for their assertiveness but sounded a cautionary note, when he said, “Excessive loosening could backfire by sparking fears about the soundness of the economy and financial system. This would be a concern especially to emerging economies, whose appeal to investors has already weakened amid rising risk aversion.” The painful impact of rescue measures was illustrated the latest foreign reserves report released by the South Korea Govt. The SKorean foreign reserves, which used to be the sixth largest in the world, were reduced by a record amount in October to the lowest level in almost three years. Funds were drawn down by authorities designed to inject billions of dollars into their banking system in an intervention to support their won currency. They wanted to avert a repeat of the 1998 financial crisis that had sent them on the verge of default, called the Asian Meltdown or Asian Contagion
GOLD INVESTMENT REPORT
PRECIOUS METAL & ENERGY PRICES
STOCK INDEX ANALYSIS
* Introductory Update
* Desperation Hits Central Banks
* Final Defense of the USDollar
* Upcoming Attack of COMEX Gold & Silver
* Investment Implications
HAT TRICK LETTER
Jim Willie CB,
26 November 2008
Look to the website public homepage for notification of posted reports, my Town Crier, on the Sundays nearest the 8th & 15th (http://www.GoldenJackass.com/main5.html). Note that credit card billing shows “2CheckOut.com” or simply “Jim Willie” on transactions. If you do not receive direct email notices on Hat Trick Letter report postings, then I apologize. Each month, they are sent out using the user database list. Occasionally they might be blocked at your receiving end by spam filters. Do not wait for such emails. Check the public website homepage.
“It is a dubious business. It is not clear what will happen to the dollar” – Vladimir Putin
“You can always use cash, which is just as good as money.” – Lawrence Yogi Berra (former New York Yankee baseball idiot savant… as we have seen, US$ as cash legal tender is certainly not money, but rather denominated debt posing as money, the cause of a disaster)
“I am tired of the mushroom treatment, where we are kept in the dark and fed a steady diet of bovine fecal matter.” – Mark Haines of CNBC (in reference to the Paulson TARP Fund mgmt)
“Unless you become more watchful in your States and check this spirit of monopoly and thirst for exclusive privileges, you will in the end find that the most important powers of Government have been given or bartered away, and the control of your dearest interests have been passed into the hands of these corporations.” – Andrew Jackson, 1837
INTRODUCTORY UPDATE
◄ Be sure not to miss the spectacular conjunction of planets and the moon in the southwest sky. That is for those in the Northern Hemisphere, sorry Australians and New Zealanders. Venus will converge with Jupiter, with nearly equal magnitude in brightness. When they are close in a few more days, the moon will enter the picture as a crescent in a spectacular display. For the description of the highly unusual event, check the NASA website (CLICK HERE). One could regard this event as an omen for a COMEX gold default, a stretch, but a legitimate one.
MANY BRIEF ITEMS FEATURED IN DECEMBER MACRO ECONOMIC REPORT.
◄ On 20 May 2008, Bloomberg News reporter Mark Pittman filed a Freedom of Information Act request (FOIA) with the Federal Reserve asking for detailed information relevant to whom the central bank was giving these massive loans and precisely what securities these firms were posting as collateral.
◄ A guy who goes by the name of Mr Mortgage is astute in analyzing banks and balance sheets. He makes two major points. First, he believes Czar Paulson scrapped the $125 billion TARProgram, and confiscated funds, because huge additional bank losses are imminent from prime mortgages. Second, he points out that the Level-2 assets are of larger magnitude than subprimes, 9x larger than subprimes, and have similar default rates as the subprimes. Of the 25 companies he studied, their total assets were $14.6 Trillion. A breakdown shows Level 1 assets totaled $1.3 Trillion, Level 3 assets were only $802 Billion, but Level 2 Assets were $7.3 TRILLION! A disaster continues, just like subprimes.
◄ The US banking system remains busted and insolvent. Of the $6.84 trillion in US bank deposits, their total cash is only $273.7 billion. That is a rock bottom 4.0% cash versus deposits. The rest of the assets are tucked away in off balance sheet acid accounts, imploding commercial real estate deals, Alt-A loan portfolios, Fannie Mae & Freddie Mac bonds, and many revolving debt charades. Commercial banks and investment banks leveraged at 30-1 or more. Many loans simply cannot be paid back.
◄ The commercial mortgage market is in turmoil. Regard this as a direct consequence of the TARP abuse and confiscation. The troubled assets are now ten times more troubled. The ABX chart of AAA-rated subprime mortgage bonds tells the story. The most severe fallout in the bond market from criminal TARP management has been here in commercial MBS arena. Its spreads for AAA-rated bonds are up by 300 basis points in two weeks, and up 450 bpts since May. The iShares Real Estate Fund (IYR) is falling off a cliff. IYR is comprised of America's largest commercial property owners and operators.
◄ The spread or risk premium on 10-year USTreasury credit default swaps hit record wide levels last week, prompted by concerns over bank and carmaker rescues. At risk is USGovt creditworthiness. Ten-year U.S. Treasury CDSwap edged up to 49.8 basis points, according to CMA DataVision. Five-year Treasury CDS grew to 43.5 basis points. The risk premiums have nearly doubled from levels seen two months ago after the collapse of Lehman Brothers. Prior to the financial crisis, default risk premiums on U.S. government debt had been running in the low-to-mid single digit basis points. The British Govt debt, called Gilts, has an even worse CDSwap rate at 86 basis points, on par with Portugal. The French CDS rate is a little above the US, but the German is marginally lower than the US.
◄ In a related tangent, the 30-year USTreasury swap spread turned negative last week, and has remained dancing into negative ground in a bizarre manner. The swap contract trades floating rate for a fixed rate, and pays a price to do so. This implies investors are somehow reckoning that they are more likely to be redeemed on their bond investments by a private counter-party than by the government itself! Yet another Third World symptom.
◄ Gerald Celente of Trends Research Institute forecasts decline of the USEconomy into an ‘undeveloped’ status, with continued job loss, end of Christmas retail phenomenon, and greater challenge in time to put food on the table than gifts under the tree. See his YouTube interview (CLICK HERE). This fellow is not to be taken lightly, as he owns a great track record. He even expects a revolution by the masses against the elite who have stolen their life savings, all by the year 2012. Three other perspectives are offered, by Dmitry Orlov, Michel Chossudovsky, and Jim Kunstler to be provided in detail next month.
◄ Mohammed El-Erian is a bright man, formerly of Harvard University endowment fund management, now at PIMCO. He believes: The USFed doing a lot with the money market, the asset-backed commercial paper market, and Treasury Bond repos. We have a crisis of the system, as a redefinition of the long-term market landscape is underway. Stockholders are the most vulnerable in this environment, since they are positioned as the most junior within the capital structure. A flight to liquidity is occurring, not a flight to quality or a flight to safety, as a global phenomenon takes place toward vast liquidations. US bank officials are making big errors by attacking problems locally, as in spot by spot, as opposed to treating the problems in an aggregate fashion, from a systemic point of view.
◄ The Asia Pacific Economic Co-operation met in Lima Peru in mid-November, one more opportunity for small and large Asian economies to vent anger at the leaders of the corrupt US financial system. A clash occurred between US president Bush and Chinese president Hu Jintao over the global financial crisis. Hu Jintao called for tougher regulation of the world financial system and Bush pressed for free markets. World trade was the set agenda topic, but the division between the US and China undermined any unity. Bush issued a passionate plea for the world to retain its faith in free and open markets, despite the ravages of the global financial crisis. The Chinese president countered with a call for ‘a new international financial order’ including better regulations to prevent a repeat of the devastating collapse of credit and stock markets. This call echoes the call from Germany at the G-20 Meeting (see the USDollar section). The speeches from these two leaders at the 21-member APEC summit hosted by Peru brought into the open simmering resentment from developing nations against the US, which is widely seen to have triggered the crisis through inadequate regulation of its credit markets.
◄ Several comments on the Obama Cabinet, the economic team, and announced programs will come in more detail in the next report. The same insider syndicate players occupy key posts. Expect nothing to change for the stranglehold that the four crime syndicates exert on the United States. Programs will come to help people, but at great cost and a very late arrival.
◄ Sunday November 23 marked the commemoration of the JFKennedy assassination. Banksters are well aware that he threatened the Federal Reserve system. Perhaps someday, history can have a new chapter written, so the people can understand what Kennedy tried to do to remove the central bank stranglehold from the American people, the threats he ignored, and the real reason why he was murdered. Soviets had no role in his death, but banksters did.
◄ ### ML-Implode is a fine intrepid website managed by Aaron Krowne, which began by tracking failed lending institutions, and now banks and hedge funds. It is under attack by a group that launders payments from sellers to borrowers through various intermediaries (including native American tribes!). They create the false impression of a downpayment, to meet the FHA 3.5% requirement. The practice, known as ‘seller-funded downpayment assistance’ was outlawed as of October 1 by legislation. However a movement has come via a new bill (HR 6694) to reinstate the practice. The new bill creates in effect a new category of 100% subprime lending BACKED DIRECTLY BY THE TAXPAYER, from even more lax lending requirements! Help ML-Implode stop them with a donation (CLICK HERE).
DESPERATION HITS CENTRAL BANKS
◄ On October 29, the US Federal Reserve cut by 50 basis points the official Fed Funds rate down to 1.0% flat. THIS WAS A HUGE TRIGGER EVENT. Despite the ultra-low rate, do not expect the USFed to be done cutting rates. They have implicitly held onto their easing bias, having said simply that “downside risks to growth remain.” The USFed statement admitted finally to having absolutely no clue what inflation was or what price stability means, when they said “the inflation outlook remains highly uncertain.” One week later, the entire globe of beleaguered central banks (CB) cut their official interest rates also. It was a parade along a failed path. They coordinated rate cuts on October 8, and again followed the USFed soon after with more cuts. They might have wanted to permit a week to pass in order to throw the FOREX market off balance. The important Euro CB cut by 50 basis points to the 3.25% level, surely in reluctant fashion given their steadfast defiant stance. Trichet of the ECB has lost almost as much credibility as Bernanke of the USFed. The central bank franchise system needs a reform overhaul, a topic not even discussed in most visible expert circles.
The most desperate CBs are clearly England and Switzerland among the majors, but also Australia and New Zealand in the second tier. The Bank of England (BOE) cut by 150 basis points unexpectedly, now at a 3.0% low level, in the face of disaster. The Swiss National Bank cut by 50 bpts with the pack, but on November 20 surprised all by cutting another full 100 bpts down to the ultra-low 0.5% level. They have a hidden purpose. The Reserve Bank of Australia cut by 100 bpts in October and plans to cut again this month. The Reserve Bank of New Zealand cut by 100 bpts in October and also plans further cuts. The Bank of Canada cut by 25 bpts in October and plans another 25 bpt cut in December. The Riksbank of Sweden cut by 50 bpts to 3.75% in October and plans another 25 bpt cut in December or soon afterwards. This pattern will most likely continue for a couple more months.
The interpretations, contained messages, and moral of the story are four-fold:
1) ABSOLUTE CONTAGION: the global economy is suffering from broadly felt toxic shock due to purchases of US bonds, a process that has a few more quarters of severe crisis pathogenesis
2) MONETARY POLICY EXTORTION: the major and secondary CB heads want to cut so that the US$ does not fall versus their own domestic currencies, with deep regret that 0% will be the limit on the downside
3) INFLATION EXPLOSION: global monetary growth has gone ballistic, no longer a priority to control amidst desperation, with all talk about limiting price inflation relegated to mumbling in the corner
4) ENDLESS BAILOUTS & RESCUES: the government sponsored bailouts are nowhere near finished, sure to expand in magnificent style, bound to be an endless parade of patchwork and stimulus with eventual climax of mortgage aid.
The item #4 on endless rescues is the most alarming, since central bankers are out of monetary ammunition, down to rock bottom levels, but have yet to address the mortgage problem at all. Total USGovt bailout costs have reached the exalted $8.5 trillion level. The USGovt has pledged $8.56 trillion in economic bailout for financial institutions so far. Conmen running the rescue programs have left mortgage balance writedowns to voluntary action, with almost zero USGovt subsidies. Mortgage aid in meaningful and necessary terms is actively avoided, since it must come with a price tag up to $2000 billion in the United States alone. The nationalization of the US banking, if not financial system, is highly likely to be followed by an eventual virtual nationalization of the entire mortgage system. Such a decision and desperate socialist action will be the death knell for the USDollar, if it survives to the point when such a program is enacted. The EuroCB and British BOE have more room to cut, and they will, very grudgingly. The item #3 on unbridled monetary inflation is a powerful bull market signal for gold, once asset prices stabilize. Monetary explosion always pushes gold upward in price, but this time much money is directed into a multi-channeled black hole. A fork in the road comes, and my expectation is that officials will take both roads, one directed at households. The item#2 on US$ policy extortion is a crucial aspect of the mutually destructive currency wars, and reveals the strong impact of Competing Currency Devaluation. Foreigners initially wanted to avoid rising domestic currencies. Next they wish to avoid further aggravation to their economies from even lower domestic currency exchange rates, as the queer USDollar rise is based upon US financial failure. A low currency inflicts higher prices upon their economies.
The USFed cut most aggressively, even boasts that it acted first. It had to act first, since it caused the problem with toxic bonds, and the USEconomy has a worse problem to fix by an order of magnitude. My view is that the powerful US ailments are not fixable, since the financial engineering is too deeply rooted and the manufacturing industrial base has been removed in several stages over a 25-year period. The crime syndicates are too deeply rooted into policy making and control of rescue funds. That will not change with any new administration. Besides, the credit derivatives loom like a series of hidden bombs whose fuses intersect in the dark. System continuation is the primary directive, unless they permit the entire United States to go dark. A conclusion can be made.
◄ THE FRANCHISE OF CENTRAL BANKING HAS FAILED, AND GRAND RATE CUTS CONFIRM THIS NOTION EMPHATICALLY!!! THE COLLECTION OF CONCLUSIONS ADDS UP TO ONE POWERFUL FORECAST: GOLD & SILVER PRICES WILL RISE 10-FOLD IN THE NEXT FEW YEARS, ONCE THE CLUTCH IS RELEASED AND THE 10000 RPMS ENGAGE THE ECONOMIC TRANSMISSION TO PRODUCE PRICE SKIDMARKS. Ignore for now the paper price heavy-handed influence, which in my view will suddenly disappear in a volcano of controversy and tumult! Governments will only provide accelerant on the bonfires, hastening the destruction. They are funneling new capital into vast channels extended to failure. They are removing capital from main body of the system. They are agents working directly against capitalism.
Lost faith in the US Federal Reserve has entered both the investment chambers and homes in the United States. This is an obvious new consequence to desperate actions resulting in almost nothing toward solution in 16 months. Countless programs by the USFed, countless bailouts, catering to Wall Street, limited capability to foresee a single problem in advance, stupid public statements about containment and inflation expectations, these are the hallmarks of the USFed. Chairman Bernanke has learned the hard way that usage of the printing press is not the boasted solution. He is sending good money after bad, redeeming criminal fraud, endorsing checks for a broken system, acting like a gigantic banking substitute surrogate, and delivering channeled funds into a vast black hole. He is not inflating much of anything!!! His own vice-chairman described his boss as ‘overwhelmed’ by the financial market collapse, whose lesson is that university teaching in economics is pure horse manure, even at Ivy League schools. The poll by the University of Michigan and Reuters revealed by 26% of Americans are ‘A LOT LESS’ confident in the US Federal Reserve than five years ago. Also, another 29% are ‘A LITTLE LESS’ confident in monetary policy markers generally across the globe.
◄ The US Federal Reserve has accomplished a bizarre feat. They have made short-term lending virtually free, but offer a yield over 3% on long-term bonds. So US banks are deeply engaged in a permitted carry trade. US banks borrow short and lend to the USGovt long, and thus exploit the steep USTreasury yield curve. This is yet another distress symptom, a sign of structural breakdown. The US banks are trying to liquefy from this perverse mechanism, using incredible large volumes of money. It is no wonder that the USFed balance sheet has more than doubled since late summer, and has gone out of control, well past $2 trillion in size. What the USGovt is doing in concert is setting bad precedent after bad precedent. The USGovt, backstopped by the USFed, has made numerous bad contracts with failed financial firms, demanding little in the way of reform, demanding little in the way of warrant investments, demanding nothing on limited executive bonuses, demanding little in interest payments on loans, thus shutting out the private sector. No private investor in right mind would step forward to help an ailing industrial or financial firm on the absurd stupid terms established by the USGovt. However, the Citigroup deal might mark a change, since demands were made and met. In return for $322 billion granted, warrants were placed with the USGovt, limits on dividend payouts were made, but no structural reorganization was announced of substance. In one svelte swoop, Citi was given more than the $275 billion to date doled out to AIG in three blocks.
The US leaders generally are perpetuating the failure of companies whose financing structures are not forced to alter to any meaningful degree. Other firms cannot properly compete, and the aided firms have no incentive to change. TO DATE ALL ACTIONS ARE TO INSTITUTIONALIZE FAILURE, IF NOT REWARD CORRUPTION AND FRAUD. Nowhere in the current set of solutions is direction of money into viable promising company formation with strong future prospects. Instead, we are witnessing staggering diversion of money into failed structures, failed management, and corrupt relationships. If a firm is too big to fail, and it fails, and several such giants fall into this category, then systemic reform is needed in order to prevent the assured systemic failure that will come from propping them all up. The failed for a big reason impossible to deny.
The USFed is slowly revealing that it is out of tools and devices, the end of a policy road. It is left with only grand lending channels for swapped bonds. The USFed has essentially become the only big bank in the USEconomy to lend in volume, as the rest are locked down. A record setting 25% of high-powered money, as in bank assets, a provision by the USFed that actually sits idle as excess reserves. The main loans that US banks do these days are overnight lending. The ultra-low USTreasury Bill yields is a clear undeniable testament to US banks parking money in safe locations instead of lending them. Banks have tightened lending standards for consumer loans, home loans, car loans, credit card lines, student loans, and business loans. They see an advantage of near 0% return instead of losing money with yet another bad loan. In the process, money velocity has sharply dropped, typical of a recession. However, in this case, the dead money velocity and near 0% USTBill yield indicate economic disintegration. The United States criticized Japan for suffering a Zero Interest Rate Policy. The only difference now is that the US is stick in ZIRP-land more quickly, and has no trade surplus to assist the process. The US will therefore flail around and risk systemic implosion, USTreasury Bond default, an eventual USDollar discredit, and a sudden thrust into the Third World.
Recall the formula that M*V = P*T, stated as money supply times money velocity equals prices times transactions. A recession means transactions are down. Falling prices are observed. The other side reveals that although money supply has grown, it is wasted in the black hole of Wall Street, as its velocity has also slowed. The USFed is not pushing on a string, as many prefer to say. Instead, the USFed is entangled in its strings, helpless as money goes down the drain.
◄ Slowly the Western economies are becoming a shambles, approaching ruin. Central Europe is in the best shape in my view, but mine is a biased view since a deep respect is held for the astute Bundesbank and the powerful export giant in Germany. They drag along weaklings, while they accommodate demanded if not blackmailed bad central bank policy. The European Union GDP showed minus 0.5% economic growth in 3Q2008, which is quite good considering the climate. Standing still is an accomplishment. The EU GDP calculation contains a fraction of the US fraud. The US GDP is at least 4x to 5x that in decline. The European Commission has hatched a plan that calls for cooperation by EU member governments to jointly combat the growing economic slowdown with a €200 billion (=US$256B) stimulus plan, announced today. The two-year European Economic Recovery Plan calls on the 27 EU governments to contribute with meaningful spending. The proposed stimulus plan would represent 1.5% of the EU gross domestic product. Around €170 billion would come from national governments, the rest from EU funds and the lending arm known as the European Investment Bank. So in Europe, the United States, and England, enormous programs for bank bond swaps and now giant stimulus programs are proposed or in place. Desperation has set in.
The US aggregates are falling off a cliff in unison, all telling the same disastrous story. The comparison can best be characterized as Europe has entered a notable recession, but the US has entered disintegration. Business confidence across several of the major European economies is near record lows. The German IFO index of business climate index is at 85.8, the lowest in 16 years. The German PMI manufacturing index came in at 36.7 for November, down from 42.9 in October, below the 50 level that indicates recession. The paired PMI service index came in at a more steady 46.2, down only a little from 48.3 a year ago. The same PMI indexes across all the EU made similar moves toward reversal. An ugly contrast will be very evident, as Southern Latin nations will experience a much worse recession than Central Europe. As an important footnote, the EU economy, and the UK economy also, need for energy prices (crude oil & natural gas) to remain low, or at least contained. But this produces a backlash effect.
The surprising Swiss National Bank hefty rate cut in my opinion is a cooperative gesture to push down the LIBOR rate almost singlehandedly. Low Swiss rates helped to fuel a large portion of European property loans, especially in Eastern Europe. The oversized cut paves the way for several other central banks to continue their rate cuts down toward 1%, in a global embarrassment to central banking. The Swiss have come a long way in destroying their image as a premier banking center, having compromised in many crucial respects. The biggest compromise in integrity occurred when the Swiss joined the US & UK gold sales game that gutted their central banks of currency collateral, and joined the insane game to permit lending to go to insane levels without proper controls. The two marquee big Swiss banks, Credit Suisse and UBS, are both reeling, fighting for survival amidst massive depositor withdrawals.
◄ England has entered a much more powerful recession than Europe, but not yet a disintegration. The BOE reacted to their own Anglo-style economic disaster, whose dependence had been built atop housing bubble, just like in the United States. They ordered the biggest official interest rate cut in 27 years. What an embarrassment! The 3Q2008 registered GDP growth came in at minus 0.5%, but that figure is grossly exaggerated. Estimates of UK GDP growth in 2009 at minus 1% are laughable. Their GDP will be on the order of minus 3% to 4% next year. The UK jobless rate is the worst in 16 years. Incredibly house sellers have dropped their asking prices by £16,900 in just the last two weeks, a 6.5% annual decline. The market is suddenly removal denial, as a housing spiral heads downward. BOE governor Mervyn King left the door open to a ramp down to 0% in interest rates. King said the central bankers “are prepared to cut the bank rate to whatever level is necessary.” This is an alarming statement, a capitulation.
Kenneth Clark is a highly respected former conservative Chancellor of the Exchequer (finance minister) from 1993 to 1997. He delivered an urgent warning for a “catastrophic crisis [that will be] far worse than anything that has occurred in my lifetime” for England. See the UK Telegraph article, complete with a video (CLICK HERE). As national unemployment reached an 11-year high of 1.82 million, Clarke claimed the number of jobless could soon reach three million. He has called for a temporary cut in Value Added Tax to boost spending. To American readers, that is akin to a national sales tax. Rising unemployment will have a devastating effect on families and lead to more mortgage defaults in his opinion. Clarke slammed Gordon Brown as having received undue credit for his role in attempting to shore up the global economy. He is more to blame for the problem.
Clarke stated, “There will be a very serious recession next year. I think the big problem in 2009 will be the catastrophic fall in consumer spending demand. Spending in shops will get worse. [Unemployment] is going to go up a long way. Whether we will get back to three million again, is one of those slightly morbid questions I really do not know the answer to. But it could get pretty big… The idea that Gordon has saved the world is not true. We still have a major, major crisis in this country, and public finances are in a terrible mess. We are not yet in a state where we can be absolutely certain we are not going to have something close to meltdown next year. You do have to see what can be done with taxes.” He cautioned that Britain has mounting debt, which is unsustainable, but said policymakers should beware of a “full-blown depression will have on public finances” for its effect. He was alarmed that the British Govt could make the crisis worse by the current practice of forcing banks into lending under political pressure, when they should not, a climax of bad policy.
More blame is given to Gordon Brown, this by former prime minister John Major. See his article entitled “Who's to Blame? Look in the Mirror, Mr Brown” (CLICK HERE). Major accuses Brown of squandering the entire economic gains and relinquishing the strategy of the past. In a scathing diatribe, he lists his charges and accusations, assigning much of the blame on Brown. This goes beyond partisan politics, and is specific. Major said, “[Brown] was culpable for the domestic circumstances that contribute to our dire economic plight. Who ignored the debt spiral as it built up? Who weakened regulation and allowed Northern Rock to offer 125 per cent mortgages? Who diminished Bank of England control over our banking system? Who wrecked final salary pensions with a £5 billion/year tax levy? Who ignored the risks of the house price and equity boom? A glance in the mirror shows him the culprit. The Prime Minister admits to none of this but asserts that our present woes are due entirely to ‘an international crisis begun in America.’ He repeats this mantra so often that he may have come to believe it. But no one else should. A large part of the crisis now engulfing us is home grown in the Treasury and No10 [Downing Street]. The UK would be facing recession and a house price collapse without any international dimension. New Labour has as much financial blood on its hands as any erring banker on either side of the Atlantic. Last year, at the Mansion House, the Prime Minister spoke of ‘an era that history will record as the beginning of a new golden age for the City of London.’ Nemesis must have smirked. Within months there was the first run on a UK bank for 100 years, and the collapse of Northern Rock. Since then, the taxpayer has been called upon repeatedly to rescue our once secure banking system... For 11 years Mr Brown has claimed personal credit for the economy that Labour inherited but the Conservatives created.” Ouch, straight to the heart!! But from my perspective, ‘TOLD YOU SO’ comes.
Dire warnings also came from the Bank of England’s Financial Stability Report. They estimated global credit crisis losses could reach $2.8 trillion, a silly lowball number. It said “Risks in the financial system clearly remain. Over time, against a backdrop of an economic downturn, banks will need to adjust their balance sheets and funding models, weaning themselves off current exceptional levels of official support. Lending growth will take time to recover.” To date, the British Treasury has invested £37 billion in British banks. John Grieve, deputy governor of the Bank for Financial Stability continued the concern. He said, “The instability in the global financial system in recent weeks has been the most severe in living memory. And with a global economic downturn under way, the financial system remains under strain. But it is better placed as a result of the exceptional package of capital, guaranteed funding and liquidity support.” The bank generally advised that a new system of counter-cyclical capital requirements and ‘macro-prudential tools’ are urgently needed. Big concern was openly stated about forced hedge fund liquidation growing out of control. Some like Ambrose Evans-Pritchard openly ask if Britain is going bankrupt. Yes, it is. The Gilt insurance reached 86 basis points, almost twice what the USTBond insurance costs. Fitch Ratings just released estimates that the fiscal cost of bank bailouts stands at 6.9% of British GDP. The lower British pound sterling exchange rate will only worsen the costs throughout the UK Economy. Conditions are spiraling out of control.
One clear reason for a much deeper UK recession is that lending institutions, just like in the US, are not passing on lower interest rates to home loans, and repayment plans are not happening in volume. The elite in both the US & UK are protecting their bankers, but killing the system in the process. Housing prices are careening downward, while job losses mount in large numbers. A simple move to cut rates does nothing to address insolvency of both banks and households. This basic truism is totally lost on clownish inept US & UK economists and bankers. Both nations built an economy atop a housing bubble, blessed it, and encouraged the debt orgy process, only to see the entire system melt down. THIS WAS FULLY FORECASTED DURING THE LAST 12 TO 18 MONTHS BY THE HAT TRICK LETTER.
◄ A quick few notes from Asia. The Bank of Japan (lackeys to US) cut by 20 bpts down to an ultra-low 0.3% level, the best they can do, showing team support. They made the decision in a split 4 vs 4 vote. Dissenters favored a slightly bigger 25 bpt cut. The move was motivated by stock market losses, a rising yen currency, and consequent export losses. The Land of the Rising Sun has its own extreme challenges, as major corporations across the board have seen notable declines in export trade. Even domestic demand has come down. The Japanese Economy is on track for growth at only 0.1% annually through March 2009 end of fiscal year. In 3Q2008, industrial output fell by 1.2% from Q2, to mark the third straight quarterly decline. Factory production is expected to decline by at least 2% in the October to December quarter this year. In Japan, summer bonuses fell and overtime pay dropped in September from last year, bringing to light the weakness of the economy now recognized as a recession. The Japanese Govt announced in late October a ¥27 trillion (=US$275B) stimulus plan, including expanding tax credits for small businesses, and cash rebates to households.
Last week, the Peoples Bank of China cut interest rates again as their economy has hit the skids and millions of jobs are vanishing. The PBOC reduced its official interest rate by 1.08% points to 5.58%, the biggest single cut since the Asian Financial Crisis in 1997. Expected economic growth at 7.5% is robust by Western standards, but it would represent the slowest economic expansion in China for the last two decades. Look at it this way. The nation needs 7% minimum growth according to Chinese economists so that it can create enough jobs for the 6 million university graduates each year, apart from migration to urban centers. The fourth interest rate cut from the Chinese central bank in the last ten weeks exhibits a certain level of desperation, as it battles serious economic downturn. In recent weeks, a series of riots across central and southern China have mushroomed as angry employees have taken to the streets.
Lastly, Taiwan and South Korea joined the effort by cutting interest rates. Sherman Chan is an analyst at Economy.com in Australia. He praised Asian central banks for their assertiveness but sounded a cautionary note, when he said, “Excessive loosening could backfire by sparking fears about the soundness of the economy and financial system. This would be a concern especially to emerging economies, whose appeal to investors has already weakened amid rising risk aversion.” The painful impact of rescue measures was illustrated the latest foreign reserves report released by the South Korea Govt. The SKorean foreign reserves, which used to be the sixth largest in the world, were reduced by a record amount in October to the lowest level in almost three years. Funds were drawn down by authorities designed to inject billions of dollars into their banking system in an intervention to support their won currency. They wanted to avert a repeat of the 1998 financial crisis that had sent them on the verge of default, called the Asian Meltdown or Asian Contagion
Last edited by chukars on Thu Nov 27, 2008 3:28 am, edited 2 times in total.
Three things I try to remember.........
1) If God be for me, who shall be against me?
2) God Hath made this day, and I will be Glad and Rejoice in it.
3) I can do all things through Christ, who strengthens me.
1) If God be for me, who shall be against me?
2) God Hath made this day, and I will be Glad and Rejoice in it.
3) I can do all things through Christ, who strengthens me.
My Door Prize!
chukars- Posts: 847
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Re: Jim Willie Snippets Part one subscription
by chukars on Thu Nov 27, 2008 3:22 am
Part 2
My forecast is that the euro will recover, but only after one final retest on the downside. It will likely go below the 120 level, in reaction to rapid and sizeable interest rate cuts. A technical resistance should block the bounce here. Do not expect the Euro CB to match the USFed desperation, but rather to settle no lower than 2.0% on the official rate. The effect of ECB rate cuts will be offset by continued horrendous news on the US financial front, with massive bailouts, rescue plans, and stimulus packages. The EU programs will be an order of magnitude smaller. The euro benefits from a German core and its solid leadership. Widening Euro Note bond spreads with nations like Spain and Italy broadcast that the new Nordic Euro (core euro) is likely to come sooner rather than later. It will separate from the Latin Bloc debt.
◄ My forecast is that the British pound might not decline much more, only because it will match the United States stride for stride with disaster. More official rate cuts are assured, maybe several, as in down to 1%. The UK Economy will suffer from a seemingly endless housing decline, and a difficult stubborn financial and economic crisis. A very strong possibility exists for the United Kingdom to follow the United States into the Third World. The UK lacks an export industry and lacks significant commodity resources. It does have plenty of financial corruption and arrogance, even a modern military, but not enough to support the currency.
◄ Both the Canadian Dollar and Australian Dollar will stabilize, from commodity wealth, and gradual revelation of gigantic Chinese commercial supply contracts. The United States will see reduced Canadian supply, sure to cause a firestorm of political protest from the USGovt. The continued deterioration of the USEconomy and US financial structures will undercut its political clout, removing the potential for the US to resist Chinese encroachment. The Australian central bank cited significant weakness in its major industrial companies. Rory Robertson is an interest rate strategist at Macquarie in Sydney. He said, “A growing number of indicators have fallen off a cliff in October. Indeed, each of the big developed economies now is either in a severe recession or well on the way.” Once China stabilizes, the Aussie Economy will revive. The Canadian Economy will be split in prospects, the western provinces reviving due to Chinese supply contracts, the eastern provinces suffering from US economic and financial disease.
FINAL DEFENSE OF THE USDOLLAR
◄ With little hesitation, a forecast can finally be made that the top in this queer perverse USDollar rally has been established. THE TOP IS IN. The DX index has risen amidst near total destruction of the US financial system and the gradual disintegration of the USEconomy. The top has been seen. A powerful economic recession, eventually taking the form of economic failure and disintegration, will be recognized. Bank failures (an endless skein) and economic failure (worse than recession) will be the keys to the USDollar breakdown. Foreign reserves will be sold in order to pull up their domestic currencies, hurting the US$ clownbuck further. Continued bank failures will do much more damage to the US$ reputation, causing lost faith, and will reveal the need for much more USGovt bailout and rescue. Exploding gargantuan federal deficits will motivate broad US$ selling eventually. The next round of bank losses from commercial mortgages, credit cards, and car loans, combined with a powerful wave of Alt-A and prime mortgage defaults, will lead many to conclude that the US banks cannot recover at all. The USDollar will feel a direct impact. The USGovt bailouts will soon expand even more, as they extend to three key areas: aid to cities and states, aid to major icon corporations like General Motors, and redemption of municipal bonds.
The impact to the USDollar will be devastating. Release of the gold price might be one key to the powerful US$ decline. The climax on the USDollar destruction will possibly be the broad deep and magnificent mortgage reduction program, bound to approach $2 trillion in magnitude in my estimation, with formal plans probably being hatched by mid to late 2009. The impact to the USDollar will be to shovel six feet of soil atop a coffin placed in a hole. The asterisk for lost faith and smeared reputation will be continued corruption in the administration of bailouts. Not much is likely to change, as Paulson (from Goldman Sachs pedigree) is replaced by Geithner (from USFed brethren). The loyalty of both men is clearly to the Ruling Elite, to Wall Street titans, and the aristocracy. They are both knee deep in responsibility for the current meltdown failures. Notice the loud decline this week, as the uptrend has been interrupted. Too many bailouts, too many rescues, too much required stimulus, not any visible sign of anything working. No sign of ANY remedy after 16 months of futility. Economic disintegration ahead!
◄ The G-20 Meeting of finance ministers and heads of state from a broad array of nations concluded on the weekend of November 15 with no clear decisions. It was a window dressing meeting, ordered by the lesser creditor nations, accommodated by the United States and other crippled nations. The objective on the US side was to stall and make nice, to take insults, and hope they lose their consensus critical mass. The only clear decision made was to meet in April again. Several initiatives were made, mostly by the Germans, which were politely shuffled aside by the Americans. The calls will be relentless though, and Americans will not be able to dismiss them. In fact, one could say that the Americans, overloaded with corruption, failure, and horrible judgment over the last two decades, were seen much like bulls led to a slaughter, resisting each step but forced to deal with powerful electrically charged cattle prods. The meeting itself was hailed and billed as a Bretton Woods II functional gathering, but in the end it was a clown show with opportunities to dine and insult the US leaders. Many items put on the table were actually Basel I and Basel II concepts. THE ULTIMATE OUTCOME WILL BE FOREIGNERS DENYING CREDIT TO THE UNITED STATES, PERMITTING THE US TO GRADUALLY STARVE OF CAPITAL. The end result will be massive inflation and economic decay.
The movement toward a more multi-polar world beyond US control is obvious and unavoidable. Attempts to obstruct it by the United States will be met with anger, vengeance, and harsh retribution. US criminality in financial matters will not be tolerated anymore. The United States is resisting almost all reform, since that would require the nation to assume the position of DEBTOR nation. The US has been described as gagging on most proposals, and sees the writing on the wall leading to the Third World cellar. That is the residence of debt ridden nations that abused debt and succumbed to debt failure. Outgoing president Bush was thoroughly insulted in many ways, in words delivered in front of other leaders, and by shunned handshakes (CLICK HERE). This administration will go down as the most inept, most corrupt, most warmongering, most failure strewn in modern history. The outcome of the meeting is more directional than substantive. The White House clearly wished to stall the reform movement, since it involved removal of the USDollar from its exalted privileged global currency status, a role thoroughly abused. One source told me that the official White House statement on the G-20 Meeting had been written several weeks ago (CLICK HERE), in a pathetic gesture of ignorance and disrespect.
The unfortunate threat given behind the scenes is for more military violence and attacks of suspicious origin, much like the 911 events, if the rest of the world pushes the US too far, too fast, and tries to put the US in a cage. THIS THREAT IS REAL AND DISCUSSED IN MANY CIRCLES. The United Kingdom quietly stepped outside the power echelon several decades ago, as a baton was passed to its cousin the United States. The current situation is far more dangerous, since both the US and UK are to be removed altogether from the power center. One contact with diverse exposure to information (global clients inside government, banks, commerce) passed on a unique perspective. He said to me, “It all boils down to the creditors being creditors and the debtors being debtors. The Washington Boyz have still some illusions about where their place is and what role they have to play. The financial paper tiger [United States] will crash and burn eventually. The final kill will happen once the global players have removed them from the nuclear trigger, and that will happen before the end of the year.”
The German chancellor Angela Merkel made a solid proposal, one that seemed like a test volley. The Germans proposed a ‘World Risk Map’ to be drawn up of global financial institutions for quick identification of trouble spots. Merkel also proposed the creation of a central body to oversee credit rating agencies, an international register of major loans for greater disclosure, and improved alignment of executive pay scales. The goals are 1) better oversight of hedge funds, 2) more accurate debt security ratings, and 3) tighter controls of insurance companies that would extend to credit derivative contracts and asset backed bonds. The Big 3 debt ratings agencies in the United States, Standard & Poor, Fitch, and Moodys, have been under global criticism for deep corruption and collusion with Wall Street fraud kings. Proposals were made to reform their fee structure, so as to limit conflict of interest. An intriguing proposal was mentioned, one to require rating agencies to actually purchase small tranches of the debt securities they rate, thus rooting in them a vested interest. Vaguely stated management compensation guidelines were discussed, with both bonus (for good work) and malus (for bad work) components. The concepts have broad support in Europe, but are met with hostility by the US financial officials, of course. To alter the status quo would be an attempt to rein in their colossal fraud, which is ongoing. German finance minister Peer Steinbruck was a leading spokesman for reform. The Germans have taken the lead for global finance reform. The German Govt commissioned an expert panel whose findings were part of the reform proposals.
◄ The most significant development at the G-20 summit relates to new prominent role played by the European Union. Most matters related to the IMF will in time be seen as accommodative to the United States, in order to maintain the facade of continuity. The rug will be pulled from under the Americans soon. In fact, the IMF will soon diminish greatly in its role and function, if not rot on the vine, with or without funding. It will eventually, if continued, move to Asia where economic development will remain brisk. The French president Nicolas Sarkozy has been pushing for deep changes to the Intl Monetary Fund, as well as to the global financial system. Russian president Dmitri Medvedev made an agreement with the European Union, apparently in close synch toward both the IMF proposals and global restructuring. The IMF, with benefit of new cash infusion by Japan and potentially more from the Saudis, hopes to become an international Central Bank, according to British prime minister Gordon Brown. Brown is seriously delusional. DREAM ON!! Japanese funding precedes a move of office location to Asia perhaps. Since the IMF is subordinated to the US Treasury, better described as a US weapon, this direction of reform is welcome from an American perspective, since it would permit continued financial dominant abuse. Without a doubt, the G-20 is bound to surpass the G-7 to become the primary forum for summit decisions on the global economy. Creditors rule.
Otmar Issing, chief economist of the Euro Central Bank, spoke openly about reform of the global financial architecture in order to prevent a repeat of the current ruin. Sarkozy called the Russian proposals related to financial, technical, and economic matters similar to those of the EU. The Europeans acted with more unity than at any time in recent memory. They are motivated to install tough regulatory measures that address certain speculation and financial markets turbulence. Both Sarkozy and Medvedev have stressed that concrete progress be made at the Washington Summit. President Medvedev said, “The positions that I have and Nicolas has pretty much coincide. We need an appropriate, adequate response, not just a list of declarations, not just hand-shaking, not just photos. We need a plan of action. We need to insist on having a fully-fledged agenda and reaching very serious decisions. The positions of Russia and the EU on overcoming the global economic crisis are very close. We are not going to create a new Bretton Woods in Washington but we need to make a very serious step in this direction. I am very supportive of the idea of holding another summit after Washington without any serious delays.” Medvedev must be disappointed at the outcome. They are looking past the disastrous Bush Administration, where more astute, more constructive, less aggressive, less corrupt, leaders participate on behalf of the United States are more amenable to urgently needed reform. Recall that just days earlier, Medvedev placed blame for the global financial crisis firmly on the United States and its Western partners in his state of the nation speech in Russia.
The major theme, unavoidable to even the most stubborn or obtuse parties, is urgent reform and concrete modification. Without structural change to the global financial system, it will fail. German leaders have some tough choices to make. They need to part ways with their traditional allies, nations burdened by deep deficits, if not bankruptcy. Economic and political realignment agreed upon in the near-term is sure be temporary, as the entire world shifts toward a new paradigm that is multi-polar. Most people in the US-UK sphere are either ignorant or unwilling to face this reality. For Americans to admit and accept a shove to the Third World, like any other deep debtor nation, is inconceivable. Prepare for precisely such a harsh reality. Hope should give way to preparation. It is unknown whether the Americans fully grasp that the changes will be forced upon them, changes that will essentially lead the US nation into a place of destitute disadvantage with dangerous shifts toward poverty. The US consumer economy consumed its own US capital foundation in the last two decades. The US news networks do an absolutely horrible job to inform the US public and enable preparation. In my view, CNN is the best, but inadequate. They ALL accept the terrorism threat as legitimate. That threat is phony, while the real threat is from within. Focus on the mindset of Americans, the ineptitude of economic counsel, the betrayal by US corporations of US workers, the control of the US press, along with the collective corruption of Wall Street and the USCongress and Cabinet Administrators.
◄ The G-20 Meeting is the visible part of the reform picture. It is the charade, where the US & UK are led to believe they are still in control. They are NOT. Public appearance is maintained, for political purposes. The US & UK are presented as having a final chance to give up global financial power. They will NOT. One should regard the meeting as involved with a patchwork of solutions, more focused on testing the US financial leaders for their link with reality, their willingness to enter debtor nation status, and their level of cooperation. The real activity of substance is behind the scenes. My analysis has called the movement a DOLLAR REVOLT for three years, soon to reach a CLIMAX. If not a final opportunity to work with the new credit masters, then the entire public meeting charade is to distract the Americans and British into a lull, so that they cannot effectively react to the next stage, which is the final ASSAULT that brings valid CHANGE. The USTreasury Bond complex has been mentioned numerous times as the site of an upcoming default. A direct assault could be accomplished, but the decision has been made that the GOLD market is most VULNERABLE to the final assault that causes the tectonic shifts. See the gold section for details.
Various proposals have come from the G-20 Meeting participants, which are made behind closed doors. Much more is discussed and analyzed for practicality than hits the tables at formal meetings, largely posturing photo sessions at best and clown shows at worst. An important proposal has been revealed to make three global currencies, based upon the USDollar, a new Euro, and a new pan-Asian currency (long desired). Each would be declared of equal value, not traded in the floating currency market. Regional currencies would each trade relative to these three anchors held fixed. In my view this is an impractical transitional proposal, floated as a temporary concept in order to maintain stability. However, when the USGovt and US Federal Reserve are creating USDollars and USTBonds at such a fast rate, at an accelerating clip, the notion of a trio global reserve currency structure in a transitional role seems unworkable, if not lunatic, impossible to hold together for more than a few weeks. The political thread is unmistakable, and should be seen by all who wish to see reality. The trio currency structure permits the USDollar to continue at all! Most leaders even in the United States admit that the world monetary system needs to be rebuilt. They might not realize that the USDollar cannot be part of any new system, if the new system is to remain functional. USFed Chairman Bernanke, former chairman Volcker, Treasury Secy czar Paulson, upcoming President Obama, counselor Warren Buffett, and numerous central bank heads around the world all agree that a new system is needed.
◄ Larry Edelson has proposed a simple formula for reform. He claims a fundamental fix is being discussed by G-20 participants, which can be seen in “The G-20’s Secret Debt Solution” (CLICK HERE). His sources tell him that of a plan to lift bank asset values instead of trying with futility to lift values for failed assets. Hard assets must fortify banks, a harsh fact of life.
Edelson wrote: “Behind the scenes, a far more fundamental fix is being discussed, the possible revaluation of gold and the birth of an entirely new monetary system… It would be a strategy designed to ease the burden of ALL debts, by simultaneously devaluing ALL currencies, and re-inflating ALL asset prices… That is what central banks and governments around the world are going to start talking about this weekend, a new financial order that includes new monetary units that helps to wipe clean the world’s debt ledgers. It will not be an easy deal to broker, since the US is the world’s largest debtor. But remember: Debts are now going bad all over the world. So everyone would benefit… Only this time, it will not be just the US that devalues its currency. The world is too interconnected. Instead, the world’s leading countries will propose a simultaneous and universal currency devaluation. This time, they will NOT confiscate gold. There would be riots all over the globe if they even mentioned the ‘C’ word. But they do not have to confiscate gold. Here’s one scenario: They cease all gold sales and instead, raise the current official central bank price of gold from its booked value of $42.22 an ounce, to a price that monetizes a large enough portion of the world’s outstanding debts… And this time, instead of staying with the dollar as a reserve currency, the G-20 issues three new monetary units of exchange, each with equal reserve status. The three currencies will essentially be a new dollar, new euro, and a new pan-Asian currency. The Chinese yuan may survive as a fourth currency, but it will be linked to a basket of the three new currencies. The new fiat monetary units would be worth less than the old ones. For instance, it could take 10 new units of money to buy 1 old dollar or euro.”
Edelson admits numerous practical problems must be overcome, like removal of many currency trading platforms, like outright gifts to depositors and pension funds, like raised income taxes or imposition of a global sales tax, and new systems to protect creditors generally. He suggests that a global currency system is being tossed around that would install what many call a cover clause for the major currencies, backing them in part by gold. Edelson calculates that a 10% cover clause on the amount of currencies floating in the world would now put at least a $5000 base price per ounce of gold. He cites a practical pathway to a global gold standard. He claims that the above concepts are actively being discussed by creditor nations. Beware that the G-7 finance ministers are largely presiding over bankrupt and insolvent banking and financial systems. The extension to G-20 includes the stronger rising creditor nations, who increasingly will be dictating terms of credit. The creditor nations have a longstanding love affair with stable gold. The time is long past for conventional solutions to the increasingly insolvent global banking system. Revolutionary concepts will be imposed by choice or force. The topsy turvy twist is pure revolution! Ron Paul pitched in with an interview, stressing the untenable nature of the current system, which screams for profound change (CLICK HERE).
Edelson followed up a week later to counter constructive criticism. Here are his thoughts. Bernanke has spoken publicly about the precedent of using exchange rate policy against deflation, meaning currency reform. Central banks soon must consider the entire set of rules. Asset revaluation upward puts banks into solvency quickly. George Soros mentions a role of Special Drawing Rights to be used as a benchmark of value. Such an idea must eventually involve gold, a stable entity, since the SDR must be anchored. Implicitly, the reduced value placed upon gold in the last several months has coincided with the bank insolvency death threat. SO GOLD MUST RISE IN ORDER TO LIFT BANKS INTO SOLVENCY, in a stroke that would send a message that banking systems must have a tangible foundation besides debt. Wages would rise, just like after 1934. The entire system could enjoy a gigantic lift to bank assets, thus putting the banking system into a solvent condition. The system could turn on a dime, reject the deflation path, and embark on the inflation path again. The system might possibly be able to avert ongoing hyper-inflation, since anchors would be put in place. Debtors would be given an advantage, as their balances would be fixed, but assets and wages would rise.
My personal viewpoint is that the above is workable, but the US must first be humbled by a dismantlement of the COMEX gold mechanism that supports the USDollar veil of value. More daunting, the US might also need to suffer a loss of its USTBond powerful counterfeit mechanism, which has destroyed the usury price system (cost of money). This milestone event would prepare the crime syndicates for a mental conditioning to accept reform, or see their tables vanish. As long as the current system that links the USDollar to the USTBond to the gold price continues, no motive for reform is remotely feasible. So bank insolvency is not enough to force deep reform and structural change. Only when fraudulent defense systems are broken, can change occur. The solutions to date are bond swaps, bailout rescues, government backstops, and outright USGovt nationalizations. These are mere bandages, band-aids, tourniquets, stitches, and paint jobs atop dressings. By increasing the money supply, officials are only handling symptoms of a broader problem with short-term measures.
◄ The lack of foundation for the USDollar becomes a central point when bailout funds are seen as a potential endless source, and erroneously without cost. Jim Sinclair has a personal website with much useful information (CLICK HERE). His website usually contains a rich mixture of relevant article references and analyses on the topic of gold and currencies, extended to credit markets and obscure topics like credit derivatives and how they figure into the current crisis. Over last weekend, he made another stark statement, when he wrote, “This international financial crisis is now out of control, as the world asks if the USA has two presidents, one president, or no president at all. It would appear that Paulson is in financial control with Bernanke as his second. I warned you by personal email long before the statement was proven totally correct that THIS IS IT. That was followed by THIS IS IT, AND IT IS NOW. Many people laughed it off. [again to state] This is it, and it is now. Now it is out of control. Now we enter the Collapse of Confidence period. Then we begin the Weimar Experience. It has all hit the fan, and still the absolute majority have no clue. The OTC derivative dealers broke the system into millions of pieces of glass. This broken glass cannot be put back together.”
Sinclair is more specific about the USDollar, when he recently wrote, “The argument that there are more problems in the central European area than in the US fails on comparison of the financial industry between the two and the much smaller amount of over the counter derivatives held. The fact that the Federal Reserve is financing the bailout of central European countries via swap arrangements with other central banks and the IMF brings all the planet’s problems back to the US dollar in time.” By an order of magnitude, the USDollar is the deadest of currencies, thus my description of its rally as a Dollar Death Dance. See the article by that name from late October (CLICK HERE).
◄ The USDollar rally is beyond perverse. The USEconomy is collapsing. The US banks are suffering continued reductions in capital core. Job loss is reaching climax levels. Corporate failures are in the news every day. On October 29, the USFed took the Fed Funds rate down to 1.0%, which is a sign of a USDollar to be trashed. Huge icon firms, if not icon people, are in danger of failure and bankruptcy. Yet the USDollar rises in the exchange rate, which confuses many people. False explanations are common by the US networks and Wall Street propaganda mouthpieces. They claim that Europe, Asia, and emerging economies have worse problems. What utter nonsense! The United Kingdom shares the broad disaster sweeping the US. Europe suffers from weaker export customers and the disasters in southern nations, largely from Mediterranean housing bubbles having busted. Emerging economies suffer from lower commodity prices and a shrinking customer base for supply lines to developed economies. The United States suffers from total implosion, and gradual systemic disintegration, multiple crime syndicates, theft of USGovt sponsored aid programs, resulting in economic collapse that is slowly being recognized.
Some people believe that large sums of money seek the safety of the US$ haven, but those amounts might total tens of billion$, maybe a little more. We hear constantly of half the hedge funds under assault with several hundred liquidations in ruin. Once upon a time, 9000 hedge funds operated with $1.6 trillion in managed investments. So big numbers are involved, and price changes in numerous commodities have come down hard. News stories report that tens of trillion$ in Credit Default Swap redemption payouts have been handled. They are handled on a net basis, but still big numbers are involved. Confirmations are widespread about speculative trade closeouts and Credit Default Swap payouts, after failure of an asset backed bond. Lehman Brothers was the latest big CDSwap payout. A personal contact involved in international contracts and consulting has shared information concerning numerous multi-billion$ exits of money and investments from the United States. Money is being repatriated back to Europe and Asia, as implosion is expected within the United States, or at least that risk in the US. Another contact with numerous connections mentioned that he knew of a few Russians moving several $billion into the USDollar for safety reasons. If one looks at ratios in magnitude and the closed spec trades and CDSwap payouts, they seem to vastly overwhelm the movement of funds that might seek US$ safe haven. Those who believe foreign money is flocking to US shores, in full respect to US tradition, are seriously deluded. Most foreign money moving into US$ denomination is doing so temporarily, like in Russia, China, and Brazil, for instance. When events have run their course, an ugly powerful selloff in the USDollar and USTreasury Bond comes. Worse, a structural shift will be ordered, probably not agreed upon, that will reduce the US$ and USTBond from high standing.
◄ Great emphasis should be given to the USDollar Swap Facility installed by the USFed, which in clear undeniable desperation tried to flood the world with USDollars. Their motive has two parts, one visible, one hidden. VISIBLE: They wanted to aid the foreign central banks, so as to assist in bank failures, corporate failure,s bond failures, and credit derivative payouts. They urgently avoided massive defaults and tremendous fallout from corporate failures and financial firm counter-party failure. HIDDEN: They also wanted to flood the world with USDollars so as to ensure that the globe continues to be invested in the US$ hegemony system. They also want to prepare the system so that it is in synch with a reflation initiative, which preserves the US$ as global reserve currency. By working hard to promote and effectively create the USTreasury Bond as a safe haven, the USDollar is thereby preserved, so they think. Two errors come that must be corrected. The USTBond is not a safe haven, but rather a liquidity pool acting like a haven. The USTBond is enjoying a stampede, but its price structure is deeply flawed from excess supply.
Two major pricing problems are soon to show profound challenges for USTreasury auctions. The process has already resulted in extremely unfavorable auctions in the last ten days, lousy outcomes. Both are value problems, distorted high, making newly issued USTBonds unattractive to foreigners. 1) The USDollar is artificially high in value. That renders USTBonds as high in value from its US$ denomination, apart from bond principal tied to bond yield. Given the vulnerable condition of all things US-linked, a high currency value is a joke, and a deterrent to foreigners in any USTreasury auction. 2) The flood into USTreasury Bonds comes from pursuit of USGovt guarantee, when bonds of all types are suffering valuation decline. Thus the USTBill yields are all under 1%, which translates to extraordinarily high bond principal price. So foreigners must bid on new USTreasury auctions at a high US$ and a high bond principal. THEY WILL NOT SHOW UP, and thus force the US Dept Treasury to monetize. That means the printing press will start working overdrive, and the rest of the world will realize it. That spells doom for the USDollar, from absurd ridiculous catastrophic supply.
In flooding the world by means of the USDollar Swap Facility, the US bankers have tried to protect their deeply flawed dollar franchise. Notice the adjusted monetary base, which has skyrocketed. John Williams of Shadow Govt Statistics (SGS) reports that US bank system solvency has been somewhat relieved. Total depository reserves surged over the two weeks ending November 19 from $415.7 billion to $652.9 billion, a 15-fold jump from August the monthly average of $44.6 billion only. SGS also reports the St Louis Fed adjusted monetary base continued its explosive growth. Versus the previous two-week period, the measure grew at a 19.1% rate. The annual growth rate has risen to 75.5% from 48.2% in early November. One must be careful to interpret this as pure monetary inflation in an unbridled fashion. Surely, money is added to the system, but at a time when a colossal amount of valuation is lost from bond assets, not to mention housing assets. New money offsets killed asset value.
◄ In the last couple months, my analysis had forecasted a rise in the long-term USTreasury Bond yield. That call so far is in error. The USTNote 10-year bond yield is down to 3.0%, helped in large part by the recent strong declines (crash) in the stock market. The Dow Jones Industrial index had broken the critical support 8000 level convincingly for a time. To be sure, USEconomic recession grows worse, as company failures and job loss are echoed by big falls in consumer spending, business investment, and overall sentiment. The cynic might believe that stocks were taken down to enable USTBond financing, which is always a firm possibility. Eventually a rise in long-term USTBonds will come, but clearly not until a climax of liquidations occurs. My forecast under-estimated the degree of hedge fund liquidation, which seems now likely to continue a while longer. Instead of expecting the USTBill yield to continue hovering near zero on the short-term bonds, it seems more likely of some highly disruptive events to take place.
WE ARE WORKING TOWARD A NASTY CLIMAX OF HISTORIC PROPORTIONS. NOTICE THAT THE TREASURY BILL HAS AN ARTIFICIALLY HIGH PRICE, WITH STAGGERING LARGER EXPECTED SUPPLY, WHICH IS BACKWARDS. NOTICE THAT GOLD HAS AN ARTIFICIALLY LOW PRICE ON THE PAPER CONTRACTS, WITH STAGGERING HUGE PHYSICAL DEMAND, WHICH IS ALSO BACKWARDS. The USTreasurys, given the staggering high volume, should be valued lower. The gold bullion, with its staggering high demand, should be valued higher. Something must break, and break soon. For a good brief analysis of the low USTreasury yields, see an article by Brad Setser entitled “Not a Good Sign: Treasury Once Again Can Borrow For Free” (CLICK HERE).
Regard these two anomalies as temporary distress symptoms of ***-backward price mechanisms. The natural tendencies of man, full of human emotions like vengeance and retribution, will soon be unleashed to correct the PHONY HIGH USTBILL PRICE AND PHONY LOW GOLD PRICE. All kinds of key evidence of COMEX default in December is coming, discussed in the next section.
◄ The Chinese are committed to USTreasury Bonds. They might have shed much of their USAgency Mortgage Bonds, but picked up the USGovt-backed variety. In all, foreigners have dumped roughly $120 billion in USAgency Bonds since July 2008. However, the Chinese not only hold a mountain of USTBonds, but they likely added considerably in the last two months. They are busy holding back their yuan currency from a rise that would worsen the economic pain by lifting prices. The latest Treasury Intl Capital Report (TIC) reveals China became the number one holder of USTreasurys in September. David Rosenberg of Morgan Stanley surmises that they are the major force behind the parabolic rise in the USTBond holdings at the USFed. The staggering sums involved in this debt accumulation are far beyond what can ever be repaid without a significant devaluation of the USDollar.
The Chinese accumulation of USTBonds should be viewed in a different context beyond investment. THE CHINESE ARE PLANNING TO CONVERT USTBONDS INTO HARD ASSETS. THEY ARE PREPARING TO MAKE HISTORICALLY UNPRECEDENTED CONTRACT AGREEMENTS TO PURCHASE CORPORATIONS, INDUSTRIAL PLANTS, COMMERCIAL BUILDINGS, BANKS, PORT FACILITIES, RETAIL CHAINS, AND AN ENORMOUS PORTFOLIO OF RESIDENTIAL PROPERTIES. This could prepare the way for the colonization described in the September report, if they convert to tens of thousands of residential properties. Such USTBond ownership could possibly precede and force a USTreasury Bond default. Such USTBond conversion could possibly settle a USTreasury Bond default. The Chinese have already completed enormous contracts for Canadian supplies, diverting some usually destined for US customers. These are extraordinary times. Think in extraordinary ways.
My forecast is that the euro will recover, but only after one final retest on the downside. It will likely go below the 120 level, in reaction to rapid and sizeable interest rate cuts. A technical resistance should block the bounce here. Do not expect the Euro CB to match the USFed desperation, but rather to settle no lower than 2.0% on the official rate. The effect of ECB rate cuts will be offset by continued horrendous news on the US financial front, with massive bailouts, rescue plans, and stimulus packages. The EU programs will be an order of magnitude smaller. The euro benefits from a German core and its solid leadership. Widening Euro Note bond spreads with nations like Spain and Italy broadcast that the new Nordic Euro (core euro) is likely to come sooner rather than later. It will separate from the Latin Bloc debt.
◄ My forecast is that the British pound might not decline much more, only because it will match the United States stride for stride with disaster. More official rate cuts are assured, maybe several, as in down to 1%. The UK Economy will suffer from a seemingly endless housing decline, and a difficult stubborn financial and economic crisis. A very strong possibility exists for the United Kingdom to follow the United States into the Third World. The UK lacks an export industry and lacks significant commodity resources. It does have plenty of financial corruption and arrogance, even a modern military, but not enough to support the currency.
◄ Both the Canadian Dollar and Australian Dollar will stabilize, from commodity wealth, and gradual revelation of gigantic Chinese commercial supply contracts. The United States will see reduced Canadian supply, sure to cause a firestorm of political protest from the USGovt. The continued deterioration of the USEconomy and US financial structures will undercut its political clout, removing the potential for the US to resist Chinese encroachment. The Australian central bank cited significant weakness in its major industrial companies. Rory Robertson is an interest rate strategist at Macquarie in Sydney. He said, “A growing number of indicators have fallen off a cliff in October. Indeed, each of the big developed economies now is either in a severe recession or well on the way.” Once China stabilizes, the Aussie Economy will revive. The Canadian Economy will be split in prospects, the western provinces reviving due to Chinese supply contracts, the eastern provinces suffering from US economic and financial disease.
FINAL DEFENSE OF THE USDOLLAR
◄ With little hesitation, a forecast can finally be made that the top in this queer perverse USDollar rally has been established. THE TOP IS IN. The DX index has risen amidst near total destruction of the US financial system and the gradual disintegration of the USEconomy. The top has been seen. A powerful economic recession, eventually taking the form of economic failure and disintegration, will be recognized. Bank failures (an endless skein) and economic failure (worse than recession) will be the keys to the USDollar breakdown. Foreign reserves will be sold in order to pull up their domestic currencies, hurting the US$ clownbuck further. Continued bank failures will do much more damage to the US$ reputation, causing lost faith, and will reveal the need for much more USGovt bailout and rescue. Exploding gargantuan federal deficits will motivate broad US$ selling eventually. The next round of bank losses from commercial mortgages, credit cards, and car loans, combined with a powerful wave of Alt-A and prime mortgage defaults, will lead many to conclude that the US banks cannot recover at all. The USDollar will feel a direct impact. The USGovt bailouts will soon expand even more, as they extend to three key areas: aid to cities and states, aid to major icon corporations like General Motors, and redemption of municipal bonds.
The impact to the USDollar will be devastating. Release of the gold price might be one key to the powerful US$ decline. The climax on the USDollar destruction will possibly be the broad deep and magnificent mortgage reduction program, bound to approach $2 trillion in magnitude in my estimation, with formal plans probably being hatched by mid to late 2009. The impact to the USDollar will be to shovel six feet of soil atop a coffin placed in a hole. The asterisk for lost faith and smeared reputation will be continued corruption in the administration of bailouts. Not much is likely to change, as Paulson (from Goldman Sachs pedigree) is replaced by Geithner (from USFed brethren). The loyalty of both men is clearly to the Ruling Elite, to Wall Street titans, and the aristocracy. They are both knee deep in responsibility for the current meltdown failures. Notice the loud decline this week, as the uptrend has been interrupted. Too many bailouts, too many rescues, too much required stimulus, not any visible sign of anything working. No sign of ANY remedy after 16 months of futility. Economic disintegration ahead!
◄ The G-20 Meeting of finance ministers and heads of state from a broad array of nations concluded on the weekend of November 15 with no clear decisions. It was a window dressing meeting, ordered by the lesser creditor nations, accommodated by the United States and other crippled nations. The objective on the US side was to stall and make nice, to take insults, and hope they lose their consensus critical mass. The only clear decision made was to meet in April again. Several initiatives were made, mostly by the Germans, which were politely shuffled aside by the Americans. The calls will be relentless though, and Americans will not be able to dismiss them. In fact, one could say that the Americans, overloaded with corruption, failure, and horrible judgment over the last two decades, were seen much like bulls led to a slaughter, resisting each step but forced to deal with powerful electrically charged cattle prods. The meeting itself was hailed and billed as a Bretton Woods II functional gathering, but in the end it was a clown show with opportunities to dine and insult the US leaders. Many items put on the table were actually Basel I and Basel II concepts. THE ULTIMATE OUTCOME WILL BE FOREIGNERS DENYING CREDIT TO THE UNITED STATES, PERMITTING THE US TO GRADUALLY STARVE OF CAPITAL. The end result will be massive inflation and economic decay.
The movement toward a more multi-polar world beyond US control is obvious and unavoidable. Attempts to obstruct it by the United States will be met with anger, vengeance, and harsh retribution. US criminality in financial matters will not be tolerated anymore. The United States is resisting almost all reform, since that would require the nation to assume the position of DEBTOR nation. The US has been described as gagging on most proposals, and sees the writing on the wall leading to the Third World cellar. That is the residence of debt ridden nations that abused debt and succumbed to debt failure. Outgoing president Bush was thoroughly insulted in many ways, in words delivered in front of other leaders, and by shunned handshakes (CLICK HERE). This administration will go down as the most inept, most corrupt, most warmongering, most failure strewn in modern history. The outcome of the meeting is more directional than substantive. The White House clearly wished to stall the reform movement, since it involved removal of the USDollar from its exalted privileged global currency status, a role thoroughly abused. One source told me that the official White House statement on the G-20 Meeting had been written several weeks ago (CLICK HERE), in a pathetic gesture of ignorance and disrespect.
The unfortunate threat given behind the scenes is for more military violence and attacks of suspicious origin, much like the 911 events, if the rest of the world pushes the US too far, too fast, and tries to put the US in a cage. THIS THREAT IS REAL AND DISCUSSED IN MANY CIRCLES. The United Kingdom quietly stepped outside the power echelon several decades ago, as a baton was passed to its cousin the United States. The current situation is far more dangerous, since both the US and UK are to be removed altogether from the power center. One contact with diverse exposure to information (global clients inside government, banks, commerce) passed on a unique perspective. He said to me, “It all boils down to the creditors being creditors and the debtors being debtors. The Washington Boyz have still some illusions about where their place is and what role they have to play. The financial paper tiger [United States] will crash and burn eventually. The final kill will happen once the global players have removed them from the nuclear trigger, and that will happen before the end of the year.”
The German chancellor Angela Merkel made a solid proposal, one that seemed like a test volley. The Germans proposed a ‘World Risk Map’ to be drawn up of global financial institutions for quick identification of trouble spots. Merkel also proposed the creation of a central body to oversee credit rating agencies, an international register of major loans for greater disclosure, and improved alignment of executive pay scales. The goals are 1) better oversight of hedge funds, 2) more accurate debt security ratings, and 3) tighter controls of insurance companies that would extend to credit derivative contracts and asset backed bonds. The Big 3 debt ratings agencies in the United States, Standard & Poor, Fitch, and Moodys, have been under global criticism for deep corruption and collusion with Wall Street fraud kings. Proposals were made to reform their fee structure, so as to limit conflict of interest. An intriguing proposal was mentioned, one to require rating agencies to actually purchase small tranches of the debt securities they rate, thus rooting in them a vested interest. Vaguely stated management compensation guidelines were discussed, with both bonus (for good work) and malus (for bad work) components. The concepts have broad support in Europe, but are met with hostility by the US financial officials, of course. To alter the status quo would be an attempt to rein in their colossal fraud, which is ongoing. German finance minister Peer Steinbruck was a leading spokesman for reform. The Germans have taken the lead for global finance reform. The German Govt commissioned an expert panel whose findings were part of the reform proposals.
◄ The most significant development at the G-20 summit relates to new prominent role played by the European Union. Most matters related to the IMF will in time be seen as accommodative to the United States, in order to maintain the facade of continuity. The rug will be pulled from under the Americans soon. In fact, the IMF will soon diminish greatly in its role and function, if not rot on the vine, with or without funding. It will eventually, if continued, move to Asia where economic development will remain brisk. The French president Nicolas Sarkozy has been pushing for deep changes to the Intl Monetary Fund, as well as to the global financial system. Russian president Dmitri Medvedev made an agreement with the European Union, apparently in close synch toward both the IMF proposals and global restructuring. The IMF, with benefit of new cash infusion by Japan and potentially more from the Saudis, hopes to become an international Central Bank, according to British prime minister Gordon Brown. Brown is seriously delusional. DREAM ON!! Japanese funding precedes a move of office location to Asia perhaps. Since the IMF is subordinated to the US Treasury, better described as a US weapon, this direction of reform is welcome from an American perspective, since it would permit continued financial dominant abuse. Without a doubt, the G-20 is bound to surpass the G-7 to become the primary forum for summit decisions on the global economy. Creditors rule.
Otmar Issing, chief economist of the Euro Central Bank, spoke openly about reform of the global financial architecture in order to prevent a repeat of the current ruin. Sarkozy called the Russian proposals related to financial, technical, and economic matters similar to those of the EU. The Europeans acted with more unity than at any time in recent memory. They are motivated to install tough regulatory measures that address certain speculation and financial markets turbulence. Both Sarkozy and Medvedev have stressed that concrete progress be made at the Washington Summit. President Medvedev said, “The positions that I have and Nicolas has pretty much coincide. We need an appropriate, adequate response, not just a list of declarations, not just hand-shaking, not just photos. We need a plan of action. We need to insist on having a fully-fledged agenda and reaching very serious decisions. The positions of Russia and the EU on overcoming the global economic crisis are very close. We are not going to create a new Bretton Woods in Washington but we need to make a very serious step in this direction. I am very supportive of the idea of holding another summit after Washington without any serious delays.” Medvedev must be disappointed at the outcome. They are looking past the disastrous Bush Administration, where more astute, more constructive, less aggressive, less corrupt, leaders participate on behalf of the United States are more amenable to urgently needed reform. Recall that just days earlier, Medvedev placed blame for the global financial crisis firmly on the United States and its Western partners in his state of the nation speech in Russia.
The major theme, unavoidable to even the most stubborn or obtuse parties, is urgent reform and concrete modification. Without structural change to the global financial system, it will fail. German leaders have some tough choices to make. They need to part ways with their traditional allies, nations burdened by deep deficits, if not bankruptcy. Economic and political realignment agreed upon in the near-term is sure be temporary, as the entire world shifts toward a new paradigm that is multi-polar. Most people in the US-UK sphere are either ignorant or unwilling to face this reality. For Americans to admit and accept a shove to the Third World, like any other deep debtor nation, is inconceivable. Prepare for precisely such a harsh reality. Hope should give way to preparation. It is unknown whether the Americans fully grasp that the changes will be forced upon them, changes that will essentially lead the US nation into a place of destitute disadvantage with dangerous shifts toward poverty. The US consumer economy consumed its own US capital foundation in the last two decades. The US news networks do an absolutely horrible job to inform the US public and enable preparation. In my view, CNN is the best, but inadequate. They ALL accept the terrorism threat as legitimate. That threat is phony, while the real threat is from within. Focus on the mindset of Americans, the ineptitude of economic counsel, the betrayal by US corporations of US workers, the control of the US press, along with the collective corruption of Wall Street and the USCongress and Cabinet Administrators.
◄ The G-20 Meeting is the visible part of the reform picture. It is the charade, where the US & UK are led to believe they are still in control. They are NOT. Public appearance is maintained, for political purposes. The US & UK are presented as having a final chance to give up global financial power. They will NOT. One should regard the meeting as involved with a patchwork of solutions, more focused on testing the US financial leaders for their link with reality, their willingness to enter debtor nation status, and their level of cooperation. The real activity of substance is behind the scenes. My analysis has called the movement a DOLLAR REVOLT for three years, soon to reach a CLIMAX. If not a final opportunity to work with the new credit masters, then the entire public meeting charade is to distract the Americans and British into a lull, so that they cannot effectively react to the next stage, which is the final ASSAULT that brings valid CHANGE. The USTreasury Bond complex has been mentioned numerous times as the site of an upcoming default. A direct assault could be accomplished, but the decision has been made that the GOLD market is most VULNERABLE to the final assault that causes the tectonic shifts. See the gold section for details.
Various proposals have come from the G-20 Meeting participants, which are made behind closed doors. Much more is discussed and analyzed for practicality than hits the tables at formal meetings, largely posturing photo sessions at best and clown shows at worst. An important proposal has been revealed to make three global currencies, based upon the USDollar, a new Euro, and a new pan-Asian currency (long desired). Each would be declared of equal value, not traded in the floating currency market. Regional currencies would each trade relative to these three anchors held fixed. In my view this is an impractical transitional proposal, floated as a temporary concept in order to maintain stability. However, when the USGovt and US Federal Reserve are creating USDollars and USTBonds at such a fast rate, at an accelerating clip, the notion of a trio global reserve currency structure in a transitional role seems unworkable, if not lunatic, impossible to hold together for more than a few weeks. The political thread is unmistakable, and should be seen by all who wish to see reality. The trio currency structure permits the USDollar to continue at all! Most leaders even in the United States admit that the world monetary system needs to be rebuilt. They might not realize that the USDollar cannot be part of any new system, if the new system is to remain functional. USFed Chairman Bernanke, former chairman Volcker, Treasury Secy czar Paulson, upcoming President Obama, counselor Warren Buffett, and numerous central bank heads around the world all agree that a new system is needed.
◄ Larry Edelson has proposed a simple formula for reform. He claims a fundamental fix is being discussed by G-20 participants, which can be seen in “The G-20’s Secret Debt Solution” (CLICK HERE). His sources tell him that of a plan to lift bank asset values instead of trying with futility to lift values for failed assets. Hard assets must fortify banks, a harsh fact of life.
Edelson wrote: “Behind the scenes, a far more fundamental fix is being discussed, the possible revaluation of gold and the birth of an entirely new monetary system… It would be a strategy designed to ease the burden of ALL debts, by simultaneously devaluing ALL currencies, and re-inflating ALL asset prices… That is what central banks and governments around the world are going to start talking about this weekend, a new financial order that includes new monetary units that helps to wipe clean the world’s debt ledgers. It will not be an easy deal to broker, since the US is the world’s largest debtor. But remember: Debts are now going bad all over the world. So everyone would benefit… Only this time, it will not be just the US that devalues its currency. The world is too interconnected. Instead, the world’s leading countries will propose a simultaneous and universal currency devaluation. This time, they will NOT confiscate gold. There would be riots all over the globe if they even mentioned the ‘C’ word. But they do not have to confiscate gold. Here’s one scenario: They cease all gold sales and instead, raise the current official central bank price of gold from its booked value of $42.22 an ounce, to a price that monetizes a large enough portion of the world’s outstanding debts… And this time, instead of staying with the dollar as a reserve currency, the G-20 issues three new monetary units of exchange, each with equal reserve status. The three currencies will essentially be a new dollar, new euro, and a new pan-Asian currency. The Chinese yuan may survive as a fourth currency, but it will be linked to a basket of the three new currencies. The new fiat monetary units would be worth less than the old ones. For instance, it could take 10 new units of money to buy 1 old dollar or euro.”
Edelson admits numerous practical problems must be overcome, like removal of many currency trading platforms, like outright gifts to depositors and pension funds, like raised income taxes or imposition of a global sales tax, and new systems to protect creditors generally. He suggests that a global currency system is being tossed around that would install what many call a cover clause for the major currencies, backing them in part by gold. Edelson calculates that a 10% cover clause on the amount of currencies floating in the world would now put at least a $5000 base price per ounce of gold. He cites a practical pathway to a global gold standard. He claims that the above concepts are actively being discussed by creditor nations. Beware that the G-7 finance ministers are largely presiding over bankrupt and insolvent banking and financial systems. The extension to G-20 includes the stronger rising creditor nations, who increasingly will be dictating terms of credit. The creditor nations have a longstanding love affair with stable gold. The time is long past for conventional solutions to the increasingly insolvent global banking system. Revolutionary concepts will be imposed by choice or force. The topsy turvy twist is pure revolution! Ron Paul pitched in with an interview, stressing the untenable nature of the current system, which screams for profound change (CLICK HERE).
Edelson followed up a week later to counter constructive criticism. Here are his thoughts. Bernanke has spoken publicly about the precedent of using exchange rate policy against deflation, meaning currency reform. Central banks soon must consider the entire set of rules. Asset revaluation upward puts banks into solvency quickly. George Soros mentions a role of Special Drawing Rights to be used as a benchmark of value. Such an idea must eventually involve gold, a stable entity, since the SDR must be anchored. Implicitly, the reduced value placed upon gold in the last several months has coincided with the bank insolvency death threat. SO GOLD MUST RISE IN ORDER TO LIFT BANKS INTO SOLVENCY, in a stroke that would send a message that banking systems must have a tangible foundation besides debt. Wages would rise, just like after 1934. The entire system could enjoy a gigantic lift to bank assets, thus putting the banking system into a solvent condition. The system could turn on a dime, reject the deflation path, and embark on the inflation path again. The system might possibly be able to avert ongoing hyper-inflation, since anchors would be put in place. Debtors would be given an advantage, as their balances would be fixed, but assets and wages would rise.
My personal viewpoint is that the above is workable, but the US must first be humbled by a dismantlement of the COMEX gold mechanism that supports the USDollar veil of value. More daunting, the US might also need to suffer a loss of its USTBond powerful counterfeit mechanism, which has destroyed the usury price system (cost of money). This milestone event would prepare the crime syndicates for a mental conditioning to accept reform, or see their tables vanish. As long as the current system that links the USDollar to the USTBond to the gold price continues, no motive for reform is remotely feasible. So bank insolvency is not enough to force deep reform and structural change. Only when fraudulent defense systems are broken, can change occur. The solutions to date are bond swaps, bailout rescues, government backstops, and outright USGovt nationalizations. These are mere bandages, band-aids, tourniquets, stitches, and paint jobs atop dressings. By increasing the money supply, officials are only handling symptoms of a broader problem with short-term measures.
◄ The lack of foundation for the USDollar becomes a central point when bailout funds are seen as a potential endless source, and erroneously without cost. Jim Sinclair has a personal website with much useful information (CLICK HERE). His website usually contains a rich mixture of relevant article references and analyses on the topic of gold and currencies, extended to credit markets and obscure topics like credit derivatives and how they figure into the current crisis. Over last weekend, he made another stark statement, when he wrote, “This international financial crisis is now out of control, as the world asks if the USA has two presidents, one president, or no president at all. It would appear that Paulson is in financial control with Bernanke as his second. I warned you by personal email long before the statement was proven totally correct that THIS IS IT. That was followed by THIS IS IT, AND IT IS NOW. Many people laughed it off. [again to state] This is it, and it is now. Now it is out of control. Now we enter the Collapse of Confidence period. Then we begin the Weimar Experience. It has all hit the fan, and still the absolute majority have no clue. The OTC derivative dealers broke the system into millions of pieces of glass. This broken glass cannot be put back together.”
Sinclair is more specific about the USDollar, when he recently wrote, “The argument that there are more problems in the central European area than in the US fails on comparison of the financial industry between the two and the much smaller amount of over the counter derivatives held. The fact that the Federal Reserve is financing the bailout of central European countries via swap arrangements with other central banks and the IMF brings all the planet’s problems back to the US dollar in time.” By an order of magnitude, the USDollar is the deadest of currencies, thus my description of its rally as a Dollar Death Dance. See the article by that name from late October (CLICK HERE).
◄ The USDollar rally is beyond perverse. The USEconomy is collapsing. The US banks are suffering continued reductions in capital core. Job loss is reaching climax levels. Corporate failures are in the news every day. On October 29, the USFed took the Fed Funds rate down to 1.0%, which is a sign of a USDollar to be trashed. Huge icon firms, if not icon people, are in danger of failure and bankruptcy. Yet the USDollar rises in the exchange rate, which confuses many people. False explanations are common by the US networks and Wall Street propaganda mouthpieces. They claim that Europe, Asia, and emerging economies have worse problems. What utter nonsense! The United Kingdom shares the broad disaster sweeping the US. Europe suffers from weaker export customers and the disasters in southern nations, largely from Mediterranean housing bubbles having busted. Emerging economies suffer from lower commodity prices and a shrinking customer base for supply lines to developed economies. The United States suffers from total implosion, and gradual systemic disintegration, multiple crime syndicates, theft of USGovt sponsored aid programs, resulting in economic collapse that is slowly being recognized.
Some people believe that large sums of money seek the safety of the US$ haven, but those amounts might total tens of billion$, maybe a little more. We hear constantly of half the hedge funds under assault with several hundred liquidations in ruin. Once upon a time, 9000 hedge funds operated with $1.6 trillion in managed investments. So big numbers are involved, and price changes in numerous commodities have come down hard. News stories report that tens of trillion$ in Credit Default Swap redemption payouts have been handled. They are handled on a net basis, but still big numbers are involved. Confirmations are widespread about speculative trade closeouts and Credit Default Swap payouts, after failure of an asset backed bond. Lehman Brothers was the latest big CDSwap payout. A personal contact involved in international contracts and consulting has shared information concerning numerous multi-billion$ exits of money and investments from the United States. Money is being repatriated back to Europe and Asia, as implosion is expected within the United States, or at least that risk in the US. Another contact with numerous connections mentioned that he knew of a few Russians moving several $billion into the USDollar for safety reasons. If one looks at ratios in magnitude and the closed spec trades and CDSwap payouts, they seem to vastly overwhelm the movement of funds that might seek US$ safe haven. Those who believe foreign money is flocking to US shores, in full respect to US tradition, are seriously deluded. Most foreign money moving into US$ denomination is doing so temporarily, like in Russia, China, and Brazil, for instance. When events have run their course, an ugly powerful selloff in the USDollar and USTreasury Bond comes. Worse, a structural shift will be ordered, probably not agreed upon, that will reduce the US$ and USTBond from high standing.
◄ Great emphasis should be given to the USDollar Swap Facility installed by the USFed, which in clear undeniable desperation tried to flood the world with USDollars. Their motive has two parts, one visible, one hidden. VISIBLE: They wanted to aid the foreign central banks, so as to assist in bank failures, corporate failure,s bond failures, and credit derivative payouts. They urgently avoided massive defaults and tremendous fallout from corporate failures and financial firm counter-party failure. HIDDEN: They also wanted to flood the world with USDollars so as to ensure that the globe continues to be invested in the US$ hegemony system. They also want to prepare the system so that it is in synch with a reflation initiative, which preserves the US$ as global reserve currency. By working hard to promote and effectively create the USTreasury Bond as a safe haven, the USDollar is thereby preserved, so they think. Two errors come that must be corrected. The USTBond is not a safe haven, but rather a liquidity pool acting like a haven. The USTBond is enjoying a stampede, but its price structure is deeply flawed from excess supply.
Two major pricing problems are soon to show profound challenges for USTreasury auctions. The process has already resulted in extremely unfavorable auctions in the last ten days, lousy outcomes. Both are value problems, distorted high, making newly issued USTBonds unattractive to foreigners. 1) The USDollar is artificially high in value. That renders USTBonds as high in value from its US$ denomination, apart from bond principal tied to bond yield. Given the vulnerable condition of all things US-linked, a high currency value is a joke, and a deterrent to foreigners in any USTreasury auction. 2) The flood into USTreasury Bonds comes from pursuit of USGovt guarantee, when bonds of all types are suffering valuation decline. Thus the USTBill yields are all under 1%, which translates to extraordinarily high bond principal price. So foreigners must bid on new USTreasury auctions at a high US$ and a high bond principal. THEY WILL NOT SHOW UP, and thus force the US Dept Treasury to monetize. That means the printing press will start working overdrive, and the rest of the world will realize it. That spells doom for the USDollar, from absurd ridiculous catastrophic supply.
In flooding the world by means of the USDollar Swap Facility, the US bankers have tried to protect their deeply flawed dollar franchise. Notice the adjusted monetary base, which has skyrocketed. John Williams of Shadow Govt Statistics (SGS) reports that US bank system solvency has been somewhat relieved. Total depository reserves surged over the two weeks ending November 19 from $415.7 billion to $652.9 billion, a 15-fold jump from August the monthly average of $44.6 billion only. SGS also reports the St Louis Fed adjusted monetary base continued its explosive growth. Versus the previous two-week period, the measure grew at a 19.1% rate. The annual growth rate has risen to 75.5% from 48.2% in early November. One must be careful to interpret this as pure monetary inflation in an unbridled fashion. Surely, money is added to the system, but at a time when a colossal amount of valuation is lost from bond assets, not to mention housing assets. New money offsets killed asset value.
◄ In the last couple months, my analysis had forecasted a rise in the long-term USTreasury Bond yield. That call so far is in error. The USTNote 10-year bond yield is down to 3.0%, helped in large part by the recent strong declines (crash) in the stock market. The Dow Jones Industrial index had broken the critical support 8000 level convincingly for a time. To be sure, USEconomic recession grows worse, as company failures and job loss are echoed by big falls in consumer spending, business investment, and overall sentiment. The cynic might believe that stocks were taken down to enable USTBond financing, which is always a firm possibility. Eventually a rise in long-term USTBonds will come, but clearly not until a climax of liquidations occurs. My forecast under-estimated the degree of hedge fund liquidation, which seems now likely to continue a while longer. Instead of expecting the USTBill yield to continue hovering near zero on the short-term bonds, it seems more likely of some highly disruptive events to take place.
WE ARE WORKING TOWARD A NASTY CLIMAX OF HISTORIC PROPORTIONS. NOTICE THAT THE TREASURY BILL HAS AN ARTIFICIALLY HIGH PRICE, WITH STAGGERING LARGER EXPECTED SUPPLY, WHICH IS BACKWARDS. NOTICE THAT GOLD HAS AN ARTIFICIALLY LOW PRICE ON THE PAPER CONTRACTS, WITH STAGGERING HUGE PHYSICAL DEMAND, WHICH IS ALSO BACKWARDS. The USTreasurys, given the staggering high volume, should be valued lower. The gold bullion, with its staggering high demand, should be valued higher. Something must break, and break soon. For a good brief analysis of the low USTreasury yields, see an article by Brad Setser entitled “Not a Good Sign: Treasury Once Again Can Borrow For Free” (CLICK HERE).
Regard these two anomalies as temporary distress symptoms of ***-backward price mechanisms. The natural tendencies of man, full of human emotions like vengeance and retribution, will soon be unleashed to correct the PHONY HIGH USTBILL PRICE AND PHONY LOW GOLD PRICE. All kinds of key evidence of COMEX default in December is coming, discussed in the next section.
◄ The Chinese are committed to USTreasury Bonds. They might have shed much of their USAgency Mortgage Bonds, but picked up the USGovt-backed variety. In all, foreigners have dumped roughly $120 billion in USAgency Bonds since July 2008. However, the Chinese not only hold a mountain of USTBonds, but they likely added considerably in the last two months. They are busy holding back their yuan currency from a rise that would worsen the economic pain by lifting prices. The latest Treasury Intl Capital Report (TIC) reveals China became the number one holder of USTreasurys in September. David Rosenberg of Morgan Stanley surmises that they are the major force behind the parabolic rise in the USTBond holdings at the USFed. The staggering sums involved in this debt accumulation are far beyond what can ever be repaid without a significant devaluation of the USDollar.
The Chinese accumulation of USTBonds should be viewed in a different context beyond investment. THE CHINESE ARE PLANNING TO CONVERT USTBONDS INTO HARD ASSETS. THEY ARE PREPARING TO MAKE HISTORICALLY UNPRECEDENTED CONTRACT AGREEMENTS TO PURCHASE CORPORATIONS, INDUSTRIAL PLANTS, COMMERCIAL BUILDINGS, BANKS, PORT FACILITIES, RETAIL CHAINS, AND AN ENORMOUS PORTFOLIO OF RESIDENTIAL PROPERTIES. This could prepare the way for the colonization described in the September report, if they convert to tens of thousands of residential properties. Such USTBond ownership could possibly precede and force a USTreasury Bond default. Such USTBond conversion could possibly settle a USTreasury Bond default. The Chinese have already completed enormous contracts for Canadian supplies, diverting some usually destined for US customers. These are extraordinary times. Think in extraordinary ways.
Three things I try to remember.........
1) If God be for me, who shall be against me?
2) God Hath made this day, and I will be Glad and Rejoice in it.
3) I can do all things through Christ, who strengthens me.
1) If God be for me, who shall be against me?
2) God Hath made this day, and I will be Glad and Rejoice in it.
3) I can do all things through Christ, who strengthens me.
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chukars- Posts: 847
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Re: Jim Willie Snippets Part one subscription
by chukars on Thu Nov 27, 2008 3:24 am
Part 3
The Chinese must be extremely uncomfortable with such huge US$-based bond holdings. Efficient methods do exist that retain a reasonable amount of ‘value’ contained in dollars stashed. Notice the comment to follow about the British having dumped USTreasurys at distressed discounts. One well-informed contact wrote a note saying, “You need to look at it from the Chinese point of view. They are not expecting to be repaid. They will simply convert the IOUs into hard assets in the ground in the United States. Call it a debt equity conversion. It will be the deal of the century for the Chinese. They will share the loot with Germany, Russia, Japan, and the Arabs. The Brits have already sold their USTreasuries for pennies on the dollar to the other creditors. I wonder after which spot the surrender agreement will be named. Versailles is already taken. They might name it the Contract From Iron Mountain.” My choice is the Mojave Desert Transaction.
Something very big is lurking and working behind the scenes. China must anticipate a significant decline in the USDollar exchange rate. That could explain why they why would purchase up to 4000 tons of gold to add to their massive foreign reserves. One contact strongly suspects that China has been included in some counterfeit USTBond agreement. The USGovt gives them more USTBonds than they purchase, which covers some upcoming losses. This is not so outrageous a hatched concept, given all the illegal events and magnificent failures in the last several months. JPMorgan has been counterfeiting USTBonds for years with impunity, even approval.
◄ At a recent Reuters Global Finance Summit, former Goldman Sachs chairman John Whitehead offered his opinion. He served as Ronald Reagan's Deputy Secretary of State in the Reagan Administration, and also as chairman of the New York Fed. He believes the problems in the United States will take years and will burn trillions of US$ in bailouts, rescues, and stimulus packages. He said, “[I see] nothing but large increases in the deficit… I think it would be worse than the depression... Before I go to sleep at night, I wonder if tomorrow is the day Moodys and S&P will announce a downgrade of USGovt bonds… [Worse conditions will come because] the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government. Both parties favored a number of new programs, all very costly, and all done by the government.” He sounds responsible, but seems to overlook that the printing press and pure USTreasury Bond monetization is much more likely deployed avenue than tax hikes. The brunt will be felt upon the USDollar, resulting possibly a USTBond default.
UPCOMING ATTACK OF COMEX GOLD & SILVER
◄ The OMEN for a powerful shift in the gold market in my playful mind was the very real earthquake on November 18 here in Costa Rica, a clear signal from the financial gods. It was no minor tremor, measured at 6.0 on the Richter scale. The tremor confirmed the tectonic shifts to come to the gold market without question. It shook me two inches to the left, then two inches to the right, paused two seconds, then repeated four or five times, leaving me to feel swung from a medium sized tree, as my roof was intact. This was the biggest earthquake in my life, but bear in mind that it never included a California residence. King Priam of Troy would have been much clearer in interpreted deity signs if he lived in San Jose Costa Rica, when he made his ill-fated decisions to hold onto Helen and bring the Trojan Horse into his protected city. Numerous stories testify in aggregate to a severe tightening of the physical market, certain to put pressure on the corrupt paper market managed by the COMEX and NYMEX.
My personal wish is for a pathetic power play by the bankrupt desperados running central banks, to confiscate gold metal. LET THEM TRY. The maneuver would like be executed by the IMF or the World Bank, each of which is legless and soon homeless. Such a desperate tactic would be viewed as a flameout. It would prompt Russians and Asians into action immediately, led in secret by strong forces in Central Europe. Recall from the September atypical reports that foreign creditors are frustrated by the large interwoven US-based crime syndicates. Most are involved with counterfeiting. Foreigner creditors apparently do not believe they can extract the syndicates from the US financial structure and USEconomy. So they will are prepared to kill the economy in order to kill the syndicates. The US people, although clueless as to what lies at the root of their crippled system, deserve to have a safe environment in which to work and save, but they might suffer the indignity of losing a large slice of their life’s savings. If the USGovt and US corporations cannot provide a safe workable environment, then foreigners might do so, but not before a series of defaults occurs to change the nation. Price inflation in hyper-drive will be a coincident outcome.
◄ Powerful foreign entities are preparing a massive major assault on the US financial corruption, at key spots. All signs seem to point to the gold futures contracts traded with deep and longstanding corruption at the COMEX and NYMEX. Two corrupt centers of trading are better than one. The COMEX is a division of the New York Mercantile Exchange. A highly leveraged sequence is soon to be unleashed, one that should bring back thoughts of asymmetric attack. The Iraqi War has countless reports of costly $5M and $20M equipment ruined by $200 bombs, sometimes home-made and triggered by a cellphone. Something big comes to the gold market! If successful, and private information indicates extremely big players are involved, severe damage will be done to the USDollar. Their goal is to kill the COMEX gold market, the key location for gold price suppression. Major Russian, Chinese, Arab, and European bankers and billionaires are angry beyond words. The key here and now is COMEX December gold futures contracts. North American investment houses have also targeting them for key failure event. However, with the Bank For Intl Settlements in Switzerland, and numerous multi-billionaires residing in what many call Old Europe, and over a century of banking power reminiscent in Switzerland, look for the main thrust to come from Central Europe.
With newly energized Russia & China building their gold treasures, with Arabs turning from distrusted Western paper and more toward gold & silver, look for the new players to offer support to the primary thrust attacks. If successful, it will be a defining moment in US financial history. These players will demand physical delivery from COMEX, and not take NO for an answer, with promises to expose the corrupt COMEX managers. The first delivery notice for the December gold contract is given on November 28. Recall that Russians and Arabs each have suffered severe damage from the crude oil price and petro revenues. The futures contract games conducted by US price systems and Wall Street tactics used against hedge funds are largely responsible. They are angry. Furthermore, Russians and Arabs own a large amount of acquired gold, whose value is also pushed down by corrupt US paper mechanisms. Europe is sick of the new global bankers being corrupt in open ways. Russians and Arabs are sick of having US failures thrust on their home soil. Both Putin and Medvedev have made public photo opportunities to display their gold.
One veteran sage gold trader sent me a few messages lately, saying that in December the COMEX will break with fractures, but in 1Q2009 the COMEX will fail in full glory, with grand press publicity, grotesque details released, and likely criminal prosecutions. The words “brutal, without mercy” were used. Powerful global players wish to rid the financial arena of the corrupt American financial criminals, who have done more to destroy the current system than any group in modern history, with impunity and under full protection by the current USGovt leaders of both political parties. He has ties to Europe, Russia, Asia, and the Persian Gulf. He wrote, “A brutal trap has been set for the COMEX and JPM/Chase guys. Even the Federal Reserve will not be able to step in and smooth things over. You will see asymmetric warfare in the financial markets. There will be no prisoners taken. It is a battle for all or nothing. The power players [in New York and WashDC] are done, and some of them already have a notion of what is coming to them. Some have tried to change sides and were told to get back where they came from and wait to be executed. No more negotiations. It is outright war now and there will be very little left standing once this is all over. You will see a lot of guys committing suicide to escape what is expected. The markets and Mother Nature are going to rule royally and without mercy from hereon forward… There will be collapse of the United States. However, it will be quite different from what people think how it will unfold. The US will be put to sleep by the creditor nations in an elegant but brutal manner.” Wow! This source has strong credibility, having laid out a timetable of events in August that almost all come to pass, from Lehman to AIG to Fannie Mae, and great disstress to other firms like Merrill Lynch, events that came to pass at a turning point in September. The dates were laid out exactly, the players depicted by industry. In my mind, images come of a giant put to sleep via ether gas with its prized printing press still humming and burning up in smoke, with nothing but wreckage in the picture. This is the American tragedy, the ultimate outcome to inflation engineering gone totally amok.
Old Europe is set to make a final kill of the USDollar, using its vulnerable under-belly, GOLD. Also, the Vancouver crowd is in on the party, adding pressure. Word has it that Sprott Asset Mgmt intends to mount a sizeable thrust for gold delivery at the COMEX. The Sprott funds are worth in the range of $1 billion under management, with around 33% in cash. They have ammunition to mount a COMEX assault with over $300 million in cash. Surely, not all of it will be devoted to the effort. Players like Sprott in Canada are piling on, the movement fully clear. My bet is on Switzerland and the Bank For Intl Settlements being the major thrust, but take your pick among the many big players.
◄ Veteran warhorse Max Keiser, inventor of the virtual specialist technology, has a video worth watching. See the Max Keiser video (CLICK HERE). He discusses the upcoming COMEX default for the December gold futures contract. He believes that in its wake, the gold price will rise suddenly to $2000 per ounce, perhaps in a single day. The main impetus in his view for the breakdown is pressure exerted by Russia. He describes their motive. Russia is very angry over the oil price, down 60% from its peak, driven largely by liquidations from Wall Street targeting of hedge funds. Russia regards the paper game to be out of control. Russia has suffered from both reduced energy revenues from export sales, and notable currency decline in their ruble exchange rate. Financial markets, banks, and corporations have suffered in Russia as a result, prompting a severe reaction by Putin and Medvedev. Furthermore, Russia is also extremely angry over the Georgian Osettia events in late August. The truth, far from the US press network and USGovt reports, is that the USMilitary with Israeli Military support attacked Russia, but were quickly rebuffed. The USGovt tried to enlist German support against Russia, but only pushed Germany deeper into the Russian camp. War crimes and atrocities were blamed on Russia, which has appealed to world tribunals with volumes of evidence in order to make the case of the USMilitary being responsible. Thus another motive for the concerted effort to bust the COMEX gold futures. At one point over a week ago, there were 161,000 references on google to the ‘COMEX default’ keywords.
◄ Almost a parenthetic comment, a footnote, but a symbolic spear tossed at the fortress by a mere man, there is Bob Coleman. The fellow runs a rising gold & silver vaulting service in Idaho. He has begun to take delivery from the COMEX. Under his watchful eye, he related the process of gold delivery to a friend of mine. He said of Coleman’s effort, “It was a huge hassle to get delivery, and he had to ride COMEX hard. They did not say he could not take delivery, but obviously they were not pleased. They were basically forced to say he could do it ‘provided he followed the regulations.’ I guess much to their surprise, he pressed on. The delivery by armored car was done in a very sloppy and amateurish way. The truck was late, the gold was not properly situated. The palette broke and gold ended up strewn about the inside of the truck. It was as if they had never done it before, or maybe were hoping to discourage, or did not have the resources and conventions set up right to do it. BUT HE DID GET THE GOLD, 20 CONTRACTS WORTH.” This all sounds like a Mickey Mouse carnival game, intentionally run amok or organized by Keystone Cops. Coleman believes much is fishy with the COMEX, and a contract default is coming soon. He does not rule out December as the time it occurs. The entire process will go electronic next year for fulfillment of delivery, so says Coleman. He expects worse chicanery then.
◄ First Notice for December gold contract delivery is Nov 28th. So if a person is long on the 29th, it probably means delivery is desired. So keep an eye on the spread of December over February in price, as well as the open interest in December gold after the 28th. If a problem arises for the COMEX, it would first show up as the December contract going to a premium above February. Right now the Dec gold is at 808.5 versus at 811.3 for Feb gold. However, the open prices last Friday November 21, the day in which gold rose by over $40 across the board, the spread was almost $7, but shrunk to less than $1 by that Friday close. The key lies in the Open Interest, which for gold is collapsing in aggregate. But the December OI is holding up at relatively high levels. The interpretation from Mr Market, who is a distant cousin of Mother Economic Nature, is “The paper gold market is flawed, and people want no part of it. What physical becomes available is being grabbed immediately.”
Here are the changes. Since November 21, in three days, the December Open Interest has come down from 98080 to 34498, cut by more than half. This is still a very high level, given that first notice is in two days (holiday weekend). The more important item is that the February Open Interest has surged in three days from 89568 to 141197. Contracts have shifted to a follow-up February battleground. Look for signs of fracture in December, but full rupture next February.
◄ Something is already brewing in the gold & silver markets, like a preliminary jumpstep. The price move starting on Friday November 21 through Wednesday Nov 26 has been relatively large, but not enough to impress who recall 1000 for gold and 20 for silver. Gold has risen in the last four days thru Wed Nov 26 from 746 to 820.5, a 10.0% move. Silver has risen in the last four days thru Wed Nov 26 from 8.97 to 10.30, a 14.8% move. These are hefty moves, in anticipation of an event, but also in response to yet more USFed bond backstops and USGovt stimulus plans. The press has reported the move last Friday as investment in safe haven, after the USGovt bailout parade has appeared to lose control. The bailouts are soon expected to extend broadly into the overall mainstream economy. The Big3 Carmakers are not the end of the process outside the financial sector, but rather the beginning. The financial sector continues to fall into a crater of its own making. The $322 billion bailout of Citigroup has added a powerful push to the FOREX market selloff of the USDollar, with direct gold & silver impact. The FOREX market must begin to realize either that the US is dying a slow death or that the USGovt bailouts will actually be endless. They might see absolutely no bottom in sight. My $2 to $3 trillion estimate for ultimate bailout costs made in mid-2007 does not look so silly anymore. Sadly, my firm belief is that this stated estimate is still quite low. The credit derivatives owned by AIG and Fannie Mae, fully backstopped by the USGovt have yet to fully register.
NEVER CONFUSE PHYSICAL GOLD & SILVER PRICES WITH THE CORRUPT COMEX PAPER PRICES, WHICH HAVE FULLY DISCONNECTED FROM REALITY. The Supply & Demand equation has been totally ruined for physical precious metals, as a result of undue paper influence from the COMEX. Therefore the COMEX must be destroyed, that simple! The paper market was intended to serve as price discovery and hedge mechanism. It has turned into a vile suppression tool and corrupt arena. When people ask about the gold price or silver price, ask back “Which one, the real market or artificial one?” in reply. The strong move in the last few days is a prelude of what is to come, either a merge of the paper price toward the physical price, or a total removal of the paper price as the forward market is temporarily removed by force. Some severe dislocations are coming soon, like in the next two to three months. The result will be a discontinuity in the gold & silver prices, which will bring big sudden jumps, not smooth movements.
◄ The paper gold price finally has seen a rise in the 10-day moving average, which has also turned upward. Most of the 340-point rise since August 2007 has been eliminated, while a better rounded bottom has formed. The gold price next needs to rise above the shorter-term moving averages, and to lift above the upper trendline rail. Notice the highly promising MACD crossover, which will deliver a billboard message to technical traders to buy. A COMEX default event will render this chart as meaningless.
◄ The paper silver price has begun to see a flattening in the 10-day moving average, soon to turn upward. Much more technical damage has been done than gold, while a better rounded bottom has also begun to form. The silver price next needs to rise toward the shorter-term moving averages, but first to lift above the upper trendline rail. Notice the highly promising MACD crossover, which will deliver a billboard message to technical traders to buy. A COMEX default event will render this chart as meaningless. The gold/silver ratio is at 78 today. It had been stable at 50 for many months, versus a historical 15-20 range. Silver is currently selling below the cost of production!!!
A silver trader has passed word on that for SURE at least 11,000 silver December contracts are set to take delivery, which is 55 million ounces. This is despite a 50% drop in Open Interest in just two days. The OI posted on 18 November 2008 was 91,850 contracts, compared to 145k contracts in July 2008. Usually, a heavy decline in OI accompanies a bottom in price.
◄ Dave Morgan has injected an excellent point about silver production. He points that “fully 70% of silver is produced as a result of mining other metals, mostly base metals. Copper mining, for example, is responsible for 28% of the silver mined in 2007. Lead/Zinc mining yielded 32% of the silver mined in 2007. Finally, gold mining brought about 10% of the silver mined, again in 2007. All data is from GFMS World Silver Survey 2008, page 31. The point is, with the current low prices for all of the base metals, many companies that produce them are slowing, closing, or stopping projects. The result is obvious: the overall production of silver from base metal and even gold mining is going to be reduced because of current economic conditions.” See his article entitled with fanfare “Silver Production Falls by 70%” (CLICK HERE). Notice the price chart of the GYX index, which constitutes numerous base industrial metals. With lower prices come fewer projects, and silver is a common byproduct in output.
◄ The Saudis are buying gold, and silver, and platinum. They are stocking up on precious metals in a significant manner. The Gulf News item mentioned $3.5 billion of gold purchased in two weeks, citing local industry sources (CLICK HERE for article). The Saudi nation, counting both government and royalty, has substantially increased its gold holdings. Their stock market is in turmoil. Their property market is in turmoil. Construction projects are being stalled, if not canceled. Petro revenues are down over 60% since the summer. Money is flocking into safe haven. The article simply referred to safe haven pursuit and perceived bargain prices. My private sources tell me that the size of the total precious metal purchase is an order of magnitude greater than $3.5 billion, if platinum is included, “enough to make your head spin.” The source claims that the Persian Gulf nations are preparing a pathway for opening a globally recognized gold exchange. It will be either in Dubai or Abu Dhabi.
The Dubai Multi-Commodities Center has formally announced plans to launch an exchange traded fund (ETF) for silver. The launch date is planned for December. Arab demand for silver has surged since March, not coincidentally when Bear Stearns was killed off. Arabs were suckered into Wall Street firm investments, all soured, all ruined. They have contributed next to nothing since then in capital infusion and balance sheet repair. The Prince Alwaleed bin Talal contribution to Citigroup this week is an exception. They prefer gold & silver. Bob Chapman wrote, “What may be happening here is that the OPEC nations, and possibly also Russia, are setting up a counter-balance against the collapse of oil prices. You may recall from past issues that we discussed at length how we thought that sovereign wealth funds in oil-rich nations were tweaking gold and silver upward every time oil was smashed by the Illuminist manipulators. The message was, you leave oil alone, or we will send gold and silver to the moon and expose your destruction of the US economy by killing the canaries in the coal mines, thus ringing the gold and silver alarm bells loud and clear.”
◄ China is giving strong signals that it will shift massive foreign reserves into gold, as well as other commodities. They already stockpile huge supplies of crude oil and metal ore. They openly have expressed concern, if not alarm, over ballooning USGovt deficits. The US deficits are growing out of control, and are projected to exceed $1000 billion this year. Beijing is reported to be on course to shift its asset allocation more toward gold reserves, after concluding that USTreasury Bonds are put at high risk of heavy dilution. Chinese leaders see an obvious trend toward overloaded printing press new money creation (to undermine the USDollar) or toward huge debt issuance (to undermine the bonds). In either event, or both, the value of USTBonds is expected to be under severe pressure. China holds only a reported 600 metric tonnes of gold, worth under $14 billion. Tanrich Futures senior VP Colleen Chow Yin-shan expects the Beijing gold reserves to rise to a level between 3000 and 4000 tonnes, a gain by 5x to 6x.
Foreigners see this direction of debt burden as obvious, but Americans see it as just an expedient solution. The Chinese have to date succumbed to the deep USTreasury market liquidity, as a spot to direct their massive $30 to $40 billion monthly capital flow. China is expected to expand its strategic reserves into commodities during the current economic downturn and financial upheaval. “It is the right time to increase the gold reserves, as the price is about US$710 to US$720 per ounce,” said Wan Guoli, vice secretary general of the China Gold Association. In order to prevent sudden distortions, China will continue to buy USTBonds. They will just purchase less of them, as in diversify the portfolio of reserves. Some analysts interpret the Chinese announcement as a removal of the Chinese bid for USTBonds. Not so! They have too big a surplus, even in the downturn.
◄ The Iranians are switching foreign reserves into gold, so as to stay clear of problems created by sanctions pushed by the United States (CLICK HERE for article). Iran faces two problems, one from United Nations and US sanctions and banker obstacles across North America and Europe. It is unclear to what extent European banks are cooperating with US dictums. The Europeans might offer the USGovt lip service. The second problem is the sharp drop in the crude oil price, cutting down revenues. Iran, the world’s fourth largest oil producer, is troubled by sanctions over its disputed nuclear program. Iran made windfall gains from its crude exports at higher prices this year. In April its foreign exchange reserves were estimated at about $80 billion. Iranian officials in July denied reports that their banks were moving funds from Europe. One report suggested that $75 billion had been withdrawn and converted into gold or placed in Asian banks, because of a threat of tightening sanctions. More likely, a good portion of that sum was devoted to gold bullion purchase.
That is a lot of gold! Who could it be that Iran is buying gold from? My theory is simple and hard to dispute. In the last decade, Iran and Russia have joined in numerous large scale deals. Russia has supplied Iran with massive nuclear development programs, including sophisticated and diverse expensive equipment. Russia is also involved with Iran in the funding of gigantic energy projects, specifically pertaining to natural gas. It is my belief that the two nations have extended their commerce to financial banking collateral. The former Soviet Republics are proving instrumental in the Iran-Russia deals, like with gold supply. Russia has many times more gold than they openly admit. How do you spell Krzygystan? This tiny nation, with a severe challenge to spell city names and lakes in easy terms, is already a key broker for natural gas sales from Turkmenistan, the third largest natgas producer in the world.
◄ Hugo Chavez once more has played nasty games with North American firms. Venezuela plans to build large scale mines at its giant gold deposits with Russian cooperation. The new plans constitute an abandonment of Crystallex, even a likely expropriation, as the permit process has been held up on the prized Las Cristinas project for environmental reasons. Typical Chavez tactics, this time with vague reference to the betrayed Crystallex, whose relationship has been rescinded. The Cristinas property contains one of the biggest gold deposits in all of Latin America. A grand accord with the Russian mining company Rusoro was made firm into a contract, whose signing took place with a Russian delegation. Rusoro will operate both the Cristinas and Brisas projects, according to Venezuelan mining minister Rodolfo Sanz. Again in vague terms, Rusoro will have full access to both projects. North American mining firms are slowly being weeded out, as Hecla sold out at heavy loss its Venezuelan subsidiaries to Rusoro. Chavez is regarded as speeding up mine development in response to a severe decline in the crude oil price, and consequent hits to revenues.
◄ Australian gold output is set to record its lowest annual gold production in 20 years. Production in 3Q2008 rose slightly from the previous quarter, with output totaling 56 tonnes, according to an industry report. It was the third lowest quarterly production figure in 20 years. The rapidly declining Australian currency has spurred strong demand for gold, the ultimate hedge for both financial turmoil and price inflation. The Aussie Dollar is down over 35% since early July, but has seemed to find a bottom with some volatility. Down Under, investor demand has been huge, all but overwhelming producers of gold for investors such as the Perth Mint. The September quarter was a mixed one for individual miners with several reporting strong results while others were shut down. Failed firms included GBS Gold Australia and Mercator Gold. An industry representative provided a summary, “The low-cost producers are making excellent profits, but those at the high end of the cost curve are battling. Some of the miners and some of the explorers with limited cash resources are vulnerable. Commodities such as iron ore, base metals, and coal are dependent on industrial demand but gold can always be sold. Gold projects can be developed relatively quickly and as gold is a high-value, low-volume product, it does not require expensive transport and port facilities.” Just like South Africa, the national gold industry is in turmoil and disarray, down in output sharply. Shortage of gold supply in the face of fast rising (but frustrated) demand has only way out for achieving equilibrium, HIGHER PRICE.
◄ The challenge faced by bank officials will be to reflate the economy even as desired, to proceed with money flowing into its credit centers, and to exploit how current loans can be paid back with cheaper future money. Gold will thrive in this environment, since a climax of a disaster, or a climax of produced price inflation will benefit gold enormously. Both scenarios are very favorable to gold and silver prices. Besides, a default at the COMEX for both gold and silver seem highly likely, with cracks forming in December, and outright highly publicized defaults suffered in 1Q2009. Gold is positioned from strength in crisis and protection amidst inflation to win with either outcome.
Scenario A: The USEconomy suffers a strong recession. Many distribution lines are interrupted. Job losses continue into the millions. Many retail chains close down. These are already in progress. So imagine for the scenario that they all worsen. Commodity and material prices stabilize, and maybe rise. A big myth is out there, that claims commodity prices are down since the basic demand is down from a recession. That is only partly true. Prices are down predominantly since the USDollar has artificially enjoyed a prop from the financial markets, on liquidity of speculation and redemption of credit derivatives. Hedge fund contracts in commodities are being liquidated in droves. As those processes slow, the USDollar will seek its proper value. Look for the USDollar to go 30% lower to start. Prices will then rise for things like food and gasoline and utility bills. Under this scenario, where the USEconomy suffers mightily, even becomes something of a wasteland, the USDollar might be replaced. Under this destruction scenario, with or without that replacement (forced in shame), gold will be a refuge of stored value, as industry falters and debt collapses further. Any news of COMEX gold default, or even lost integrity could easily result in a stampede into gold.
Scenario B: The vast Reflation Initiative succeeds. Somewhere the maestros and wizards succeed in engineering a revival of systemic price inflation, as is their newfound goal. They avert total darkness. The destruction of the USEconomy is not seen, except that hidden is the detrimental effect of price inflation. Wages might rise a little, but not enough. Asset prices like in the stock market improve, but not enough to keep pace with inflation. Corporations avert bankruptcy, but their profit margins are still damaged. The ultimate hedge against the systemic price inflation will be gold. This trend will continue, even as credit derivative accidents occur from higher rates. Massive price inflation will be the plan, the goal, the intention. INFLATE OR DIE will become the mantra on a global scale. The rise in the gold price, the longstanding time-honored inflation hedge, will be tolerated as a system ill. The entire world is extremely likely to join in the inflation hedge.
◄ A new twist is due to emerge soon. Foreign economies are being damaged by their own falling currencies, causing price inflation domestically. Their financial markets are being damaged also by this decline, as valuations suffer from an outside perspective. Foreigners will soon realize that it is in the best interest for their nations to use their vast FOREX and USTBond reserves, to bring down their domestic currencies in exchange rate. That is one primary purpose of collecting reserves, to defend the system. They must enter the race of being among the initial group to use their USTBonds, to use their USAgency Mortgage Bonds, or suffer huge loss later. China has announced usage of US$-based bonds in a stimulus plan of gigantic proportions like over $500 billion, the smart choice. They are the first group to wise up to reality. USE THE USTBOND HOARD OR LOSE IT. Soon the USGovt debt will suffer severe reductions in value, when supply hits the bond market, when formal downgrades occur, or when the global liquidation no longer favors the USDollar.
◄ Gold has been poorly promoted, even by its most ardent supporters. For instance, Peter Schiff of Euro Pacific claims the USDollar has no value, but gold does, in response to claims of gold being a dead asset. The time has come to point out that the foundation for a house or building has no value, except that the entire structure rests atop it and all functions occur within the structure. We are witnessing the system stripping down the banking system foundation, only to find it has none. GOLD WOULD PROVIDE FIRM BANKING SYSTEM FOUNDATION, EVEN IF ONLY A SMALL COVER CLAUSE. The corrections to house valuations and bank balance sheets will continue without end, precisely because gold has not served as firm foundation in the last few decades. NO FOUNDATION EXISTS, which sounds silly to some, but not to those who survive powerful storms. The US printing press can quickly put more loose material atop the absent foundation, only to see it vanish in the storm as well. Notice that the Citigroup market value now stands at much less than the USGovt infusion in recent months, and less than Saudi cash infusions several months ago.
INVESTMENT IMPLICATIONS
◄ Long-term risk of severe technical breakdown for S&P500 stock index. The entire 2002 to 2007 bull market has been eradicated. The US stock market is at risk of seeing the entire bull market gain since 1995 wiped out as well. Such an event would be near catastrophe, and require a massive concerted Reflation Initiative, where price inflation would be pursued at almost any cost. Expect repeated tests of the critical support at 800 level. The Powerz are desperate to prevent the breakdown, which would have implications to pension funds, personal retirement accounts, and the image of the nation. The Plunge Protection Team will be forced into extra duty, and divert much of their syndicate funds. However, the market almost always prevails. If the recession extends for another few quarters, which is highly likely, a near guarantee, expect an S&P500 breakdown of up to another 30% when the USEconomy enters an accelerated decline over several quarters.
◄ The GOLD/OIL ratio is looking really good, small consolation, but interesting signal. The mining stocks depend on two major factors: a favorable funding environment for both projects and investment, and a favorable cost/benefit ratio. The gold ratio to oil is an excellent measure of the benefit of output to the cost of production. It has turned favorable in very impressive manner. The gold ratio to natural gas has turned favorable also, more in tune with actual field costs.
◄ With the upcoming explosion in the gold & silver prices, investment implications are thorny to forecast. First the negatives. Lending capital and venture capital are scarce. Some mining firms will go bust from lack of funds, not lack of viable projects. Banks are in deep trouble, short of money to lend. Wealthy individuals are under assault from numerous fronts, such as hedge funds, bond holdings, business failures, and more. On the bright side, the large cap mining firms will likely jettison in price very soon. They probably will not anticipate any jump in the gold or silver prices, since what comes is a massive dislocation event causing a discontinuity in price. Big money will seek liquidity in big mining stocks, hoping to acquire large positions without pushing the share price up unduly. The jump in large cap mining stocks will be muted somewhat if energy prices jump with gold. Strong junior mining firms will jump also in price, in particular those with some production, rather than firms burning through remaining capital. The desperate juniors will be grabbed at cheap bargain prices in acquisitions by the majors, who will have fresh war chests of funds. Those war chests will be supplied by higher share prices (used as currency to acquire) and by any forward production sold into the market. Other juniors will resist the desperate need to be acquired, thus permitting the market to bid up their stocks. Look for the large cap mining firms to exploit the situation and gain cheap properties at 50% to 70% discounts. It will be a very unfair episode. But it will be the beginning of a new powerful wave. The uncertainty sure to surface will be how long the process takes as confusion is sorted out. A default at the COMEX will cause chaos, as this market intermediary might actually vanish. One should expect several smaller markets to replace it. COMEX is corrupt to the core, a monolith to commemorate the deepest of US corruption. Satellite exchanges would better serve the industry.
◄ Two important reminders must be made regarding ugly scummy aspects of the precious metals mining firm backdrop. These concepts were mentioned early in 2008, but are worth repeating. Jim Sinclair, with reluctance at first, but then later seemingly with permission, answered a tough question at the March 2008 PDAC conference in Toronto. He revealed the identity of the party who is long in futures contracts versus the mammoth mountain of illegal short positions that have suppressed the gold & silver prices for several years. The Carlyle Group is counter-party against JPMorgan and Goldman Sachs, the revered crime syndicate dynamic duo. The Carlyle Group is composed of a collection of some of the most powerful former heads of state, ambassadors, corporate executives, lobbyists, defense contractors, US Congressional committee heads, and other groups that have become symbolic of all evil in the US financial system. Carlyle is long, and can take delivery of the gold, if any exists. If a COMEX default occurs, they will be bigtime losers. So they will work to resist, until a time comes when the trucks can be loaded for their cheap gold purchases.
The second item is very controversial. Rumor has circulated that Barrick Gold has supplied mammoth investment money for hedge funds to suppress Canadian junior mining firm stock values. Recall that when originally American Barrick, this ugly scummy corporation began not with mining experts and geology professionals, but with bankers from Wall Street. They filled their board of directors with illluminaries like George Bush Sr, whose only expertise with hard assets relates to military weaponry and narcotics. So financial gurus teamed with political retirees to form a company whose unexpressed purpose was to knock down the gold price with forward sales at multiple volumes of their potential production. Rumor has it that Barrick has enabled hedge funds to engage in large scale spread trades, where they buy (go long) bigger firms like Newmont or Kinross or Glamis or AngloGold and sell (go short) tiny explorers in the junior mining group. At a later date the majors, including Barrick also, plan to acquire the many juniors mining firms for a ridiculous corrupted cheap price.
Thanks to the following for charts: StockCharts, Financial Times, Wall Street Journal, Northern Trust, Business Week, CIBC Bank, Merrill Lynch, Shadow Govt Statistics
The Chinese must be extremely uncomfortable with such huge US$-based bond holdings. Efficient methods do exist that retain a reasonable amount of ‘value’ contained in dollars stashed. Notice the comment to follow about the British having dumped USTreasurys at distressed discounts. One well-informed contact wrote a note saying, “You need to look at it from the Chinese point of view. They are not expecting to be repaid. They will simply convert the IOUs into hard assets in the ground in the United States. Call it a debt equity conversion. It will be the deal of the century for the Chinese. They will share the loot with Germany, Russia, Japan, and the Arabs. The Brits have already sold their USTreasuries for pennies on the dollar to the other creditors. I wonder after which spot the surrender agreement will be named. Versailles is already taken. They might name it the Contract From Iron Mountain.” My choice is the Mojave Desert Transaction.
Something very big is lurking and working behind the scenes. China must anticipate a significant decline in the USDollar exchange rate. That could explain why they why would purchase up to 4000 tons of gold to add to their massive foreign reserves. One contact strongly suspects that China has been included in some counterfeit USTBond agreement. The USGovt gives them more USTBonds than they purchase, which covers some upcoming losses. This is not so outrageous a hatched concept, given all the illegal events and magnificent failures in the last several months. JPMorgan has been counterfeiting USTBonds for years with impunity, even approval.
◄ At a recent Reuters Global Finance Summit, former Goldman Sachs chairman John Whitehead offered his opinion. He served as Ronald Reagan's Deputy Secretary of State in the Reagan Administration, and also as chairman of the New York Fed. He believes the problems in the United States will take years and will burn trillions of US$ in bailouts, rescues, and stimulus packages. He said, “[I see] nothing but large increases in the deficit… I think it would be worse than the depression... Before I go to sleep at night, I wonder if tomorrow is the day Moodys and S&P will announce a downgrade of USGovt bonds… [Worse conditions will come because] the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government. Both parties favored a number of new programs, all very costly, and all done by the government.” He sounds responsible, but seems to overlook that the printing press and pure USTreasury Bond monetization is much more likely deployed avenue than tax hikes. The brunt will be felt upon the USDollar, resulting possibly a USTBond default.
UPCOMING ATTACK OF COMEX GOLD & SILVER
◄ The OMEN for a powerful shift in the gold market in my playful mind was the very real earthquake on November 18 here in Costa Rica, a clear signal from the financial gods. It was no minor tremor, measured at 6.0 on the Richter scale. The tremor confirmed the tectonic shifts to come to the gold market without question. It shook me two inches to the left, then two inches to the right, paused two seconds, then repeated four or five times, leaving me to feel swung from a medium sized tree, as my roof was intact. This was the biggest earthquake in my life, but bear in mind that it never included a California residence. King Priam of Troy would have been much clearer in interpreted deity signs if he lived in San Jose Costa Rica, when he made his ill-fated decisions to hold onto Helen and bring the Trojan Horse into his protected city. Numerous stories testify in aggregate to a severe tightening of the physical market, certain to put pressure on the corrupt paper market managed by the COMEX and NYMEX.
My personal wish is for a pathetic power play by the bankrupt desperados running central banks, to confiscate gold metal. LET THEM TRY. The maneuver would like be executed by the IMF or the World Bank, each of which is legless and soon homeless. Such a desperate tactic would be viewed as a flameout. It would prompt Russians and Asians into action immediately, led in secret by strong forces in Central Europe. Recall from the September atypical reports that foreign creditors are frustrated by the large interwoven US-based crime syndicates. Most are involved with counterfeiting. Foreigner creditors apparently do not believe they can extract the syndicates from the US financial structure and USEconomy. So they will are prepared to kill the economy in order to kill the syndicates. The US people, although clueless as to what lies at the root of their crippled system, deserve to have a safe environment in which to work and save, but they might suffer the indignity of losing a large slice of their life’s savings. If the USGovt and US corporations cannot provide a safe workable environment, then foreigners might do so, but not before a series of defaults occurs to change the nation. Price inflation in hyper-drive will be a coincident outcome.
◄ Powerful foreign entities are preparing a massive major assault on the US financial corruption, at key spots. All signs seem to point to the gold futures contracts traded with deep and longstanding corruption at the COMEX and NYMEX. Two corrupt centers of trading are better than one. The COMEX is a division of the New York Mercantile Exchange. A highly leveraged sequence is soon to be unleashed, one that should bring back thoughts of asymmetric attack. The Iraqi War has countless reports of costly $5M and $20M equipment ruined by $200 bombs, sometimes home-made and triggered by a cellphone. Something big comes to the gold market! If successful, and private information indicates extremely big players are involved, severe damage will be done to the USDollar. Their goal is to kill the COMEX gold market, the key location for gold price suppression. Major Russian, Chinese, Arab, and European bankers and billionaires are angry beyond words. The key here and now is COMEX December gold futures contracts. North American investment houses have also targeting them for key failure event. However, with the Bank For Intl Settlements in Switzerland, and numerous multi-billionaires residing in what many call Old Europe, and over a century of banking power reminiscent in Switzerland, look for the main thrust to come from Central Europe.
With newly energized Russia & China building their gold treasures, with Arabs turning from distrusted Western paper and more toward gold & silver, look for the new players to offer support to the primary thrust attacks. If successful, it will be a defining moment in US financial history. These players will demand physical delivery from COMEX, and not take NO for an answer, with promises to expose the corrupt COMEX managers. The first delivery notice for the December gold contract is given on November 28. Recall that Russians and Arabs each have suffered severe damage from the crude oil price and petro revenues. The futures contract games conducted by US price systems and Wall Street tactics used against hedge funds are largely responsible. They are angry. Furthermore, Russians and Arabs own a large amount of acquired gold, whose value is also pushed down by corrupt US paper mechanisms. Europe is sick of the new global bankers being corrupt in open ways. Russians and Arabs are sick of having US failures thrust on their home soil. Both Putin and Medvedev have made public photo opportunities to display their gold.
One veteran sage gold trader sent me a few messages lately, saying that in December the COMEX will break with fractures, but in 1Q2009 the COMEX will fail in full glory, with grand press publicity, grotesque details released, and likely criminal prosecutions. The words “brutal, without mercy” were used. Powerful global players wish to rid the financial arena of the corrupt American financial criminals, who have done more to destroy the current system than any group in modern history, with impunity and under full protection by the current USGovt leaders of both political parties. He has ties to Europe, Russia, Asia, and the Persian Gulf. He wrote, “A brutal trap has been set for the COMEX and JPM/Chase guys. Even the Federal Reserve will not be able to step in and smooth things over. You will see asymmetric warfare in the financial markets. There will be no prisoners taken. It is a battle for all or nothing. The power players [in New York and WashDC] are done, and some of them already have a notion of what is coming to them. Some have tried to change sides and were told to get back where they came from and wait to be executed. No more negotiations. It is outright war now and there will be very little left standing once this is all over. You will see a lot of guys committing suicide to escape what is expected. The markets and Mother Nature are going to rule royally and without mercy from hereon forward… There will be collapse of the United States. However, it will be quite different from what people think how it will unfold. The US will be put to sleep by the creditor nations in an elegant but brutal manner.” Wow! This source has strong credibility, having laid out a timetable of events in August that almost all come to pass, from Lehman to AIG to Fannie Mae, and great disstress to other firms like Merrill Lynch, events that came to pass at a turning point in September. The dates were laid out exactly, the players depicted by industry. In my mind, images come of a giant put to sleep via ether gas with its prized printing press still humming and burning up in smoke, with nothing but wreckage in the picture. This is the American tragedy, the ultimate outcome to inflation engineering gone totally amok.
Old Europe is set to make a final kill of the USDollar, using its vulnerable under-belly, GOLD. Also, the Vancouver crowd is in on the party, adding pressure. Word has it that Sprott Asset Mgmt intends to mount a sizeable thrust for gold delivery at the COMEX. The Sprott funds are worth in the range of $1 billion under management, with around 33% in cash. They have ammunition to mount a COMEX assault with over $300 million in cash. Surely, not all of it will be devoted to the effort. Players like Sprott in Canada are piling on, the movement fully clear. My bet is on Switzerland and the Bank For Intl Settlements being the major thrust, but take your pick among the many big players.
◄ Veteran warhorse Max Keiser, inventor of the virtual specialist technology, has a video worth watching. See the Max Keiser video (CLICK HERE). He discusses the upcoming COMEX default for the December gold futures contract. He believes that in its wake, the gold price will rise suddenly to $2000 per ounce, perhaps in a single day. The main impetus in his view for the breakdown is pressure exerted by Russia. He describes their motive. Russia is very angry over the oil price, down 60% from its peak, driven largely by liquidations from Wall Street targeting of hedge funds. Russia regards the paper game to be out of control. Russia has suffered from both reduced energy revenues from export sales, and notable currency decline in their ruble exchange rate. Financial markets, banks, and corporations have suffered in Russia as a result, prompting a severe reaction by Putin and Medvedev. Furthermore, Russia is also extremely angry over the Georgian Osettia events in late August. The truth, far from the US press network and USGovt reports, is that the USMilitary with Israeli Military support attacked Russia, but were quickly rebuffed. The USGovt tried to enlist German support against Russia, but only pushed Germany deeper into the Russian camp. War crimes and atrocities were blamed on Russia, which has appealed to world tribunals with volumes of evidence in order to make the case of the USMilitary being responsible. Thus another motive for the concerted effort to bust the COMEX gold futures. At one point over a week ago, there were 161,000 references on google to the ‘COMEX default’ keywords.
◄ Almost a parenthetic comment, a footnote, but a symbolic spear tossed at the fortress by a mere man, there is Bob Coleman. The fellow runs a rising gold & silver vaulting service in Idaho. He has begun to take delivery from the COMEX. Under his watchful eye, he related the process of gold delivery to a friend of mine. He said of Coleman’s effort, “It was a huge hassle to get delivery, and he had to ride COMEX hard. They did not say he could not take delivery, but obviously they were not pleased. They were basically forced to say he could do it ‘provided he followed the regulations.’ I guess much to their surprise, he pressed on. The delivery by armored car was done in a very sloppy and amateurish way. The truck was late, the gold was not properly situated. The palette broke and gold ended up strewn about the inside of the truck. It was as if they had never done it before, or maybe were hoping to discourage, or did not have the resources and conventions set up right to do it. BUT HE DID GET THE GOLD, 20 CONTRACTS WORTH.” This all sounds like a Mickey Mouse carnival game, intentionally run amok or organized by Keystone Cops. Coleman believes much is fishy with the COMEX, and a contract default is coming soon. He does not rule out December as the time it occurs. The entire process will go electronic next year for fulfillment of delivery, so says Coleman. He expects worse chicanery then.
◄ First Notice for December gold contract delivery is Nov 28th. So if a person is long on the 29th, it probably means delivery is desired. So keep an eye on the spread of December over February in price, as well as the open interest in December gold after the 28th. If a problem arises for the COMEX, it would first show up as the December contract going to a premium above February. Right now the Dec gold is at 808.5 versus at 811.3 for Feb gold. However, the open prices last Friday November 21, the day in which gold rose by over $40 across the board, the spread was almost $7, but shrunk to less than $1 by that Friday close. The key lies in the Open Interest, which for gold is collapsing in aggregate. But the December OI is holding up at relatively high levels. The interpretation from Mr Market, who is a distant cousin of Mother Economic Nature, is “The paper gold market is flawed, and people want no part of it. What physical becomes available is being grabbed immediately.”
Here are the changes. Since November 21, in three days, the December Open Interest has come down from 98080 to 34498, cut by more than half. This is still a very high level, given that first notice is in two days (holiday weekend). The more important item is that the February Open Interest has surged in three days from 89568 to 141197. Contracts have shifted to a follow-up February battleground. Look for signs of fracture in December, but full rupture next February.
◄ Something is already brewing in the gold & silver markets, like a preliminary jumpstep. The price move starting on Friday November 21 through Wednesday Nov 26 has been relatively large, but not enough to impress who recall 1000 for gold and 20 for silver. Gold has risen in the last four days thru Wed Nov 26 from 746 to 820.5, a 10.0% move. Silver has risen in the last four days thru Wed Nov 26 from 8.97 to 10.30, a 14.8% move. These are hefty moves, in anticipation of an event, but also in response to yet more USFed bond backstops and USGovt stimulus plans. The press has reported the move last Friday as investment in safe haven, after the USGovt bailout parade has appeared to lose control. The bailouts are soon expected to extend broadly into the overall mainstream economy. The Big3 Carmakers are not the end of the process outside the financial sector, but rather the beginning. The financial sector continues to fall into a crater of its own making. The $322 billion bailout of Citigroup has added a powerful push to the FOREX market selloff of the USDollar, with direct gold & silver impact. The FOREX market must begin to realize either that the US is dying a slow death or that the USGovt bailouts will actually be endless. They might see absolutely no bottom in sight. My $2 to $3 trillion estimate for ultimate bailout costs made in mid-2007 does not look so silly anymore. Sadly, my firm belief is that this stated estimate is still quite low. The credit derivatives owned by AIG and Fannie Mae, fully backstopped by the USGovt have yet to fully register.
NEVER CONFUSE PHYSICAL GOLD & SILVER PRICES WITH THE CORRUPT COMEX PAPER PRICES, WHICH HAVE FULLY DISCONNECTED FROM REALITY. The Supply & Demand equation has been totally ruined for physical precious metals, as a result of undue paper influence from the COMEX. Therefore the COMEX must be destroyed, that simple! The paper market was intended to serve as price discovery and hedge mechanism. It has turned into a vile suppression tool and corrupt arena. When people ask about the gold price or silver price, ask back “Which one, the real market or artificial one?” in reply. The strong move in the last few days is a prelude of what is to come, either a merge of the paper price toward the physical price, or a total removal of the paper price as the forward market is temporarily removed by force. Some severe dislocations are coming soon, like in the next two to three months. The result will be a discontinuity in the gold & silver prices, which will bring big sudden jumps, not smooth movements.
◄ The paper gold price finally has seen a rise in the 10-day moving average, which has also turned upward. Most of the 340-point rise since August 2007 has been eliminated, while a better rounded bottom has formed. The gold price next needs to rise above the shorter-term moving averages, and to lift above the upper trendline rail. Notice the highly promising MACD crossover, which will deliver a billboard message to technical traders to buy. A COMEX default event will render this chart as meaningless.
◄ The paper silver price has begun to see a flattening in the 10-day moving average, soon to turn upward. Much more technical damage has been done than gold, while a better rounded bottom has also begun to form. The silver price next needs to rise toward the shorter-term moving averages, but first to lift above the upper trendline rail. Notice the highly promising MACD crossover, which will deliver a billboard message to technical traders to buy. A COMEX default event will render this chart as meaningless. The gold/silver ratio is at 78 today. It had been stable at 50 for many months, versus a historical 15-20 range. Silver is currently selling below the cost of production!!!
A silver trader has passed word on that for SURE at least 11,000 silver December contracts are set to take delivery, which is 55 million ounces. This is despite a 50% drop in Open Interest in just two days. The OI posted on 18 November 2008 was 91,850 contracts, compared to 145k contracts in July 2008. Usually, a heavy decline in OI accompanies a bottom in price.
◄ Dave Morgan has injected an excellent point about silver production. He points that “fully 70% of silver is produced as a result of mining other metals, mostly base metals. Copper mining, for example, is responsible for 28% of the silver mined in 2007. Lead/Zinc mining yielded 32% of the silver mined in 2007. Finally, gold mining brought about 10% of the silver mined, again in 2007. All data is from GFMS World Silver Survey 2008, page 31. The point is, with the current low prices for all of the base metals, many companies that produce them are slowing, closing, or stopping projects. The result is obvious: the overall production of silver from base metal and even gold mining is going to be reduced because of current economic conditions.” See his article entitled with fanfare “Silver Production Falls by 70%” (CLICK HERE). Notice the price chart of the GYX index, which constitutes numerous base industrial metals. With lower prices come fewer projects, and silver is a common byproduct in output.
◄ The Saudis are buying gold, and silver, and platinum. They are stocking up on precious metals in a significant manner. The Gulf News item mentioned $3.5 billion of gold purchased in two weeks, citing local industry sources (CLICK HERE for article). The Saudi nation, counting both government and royalty, has substantially increased its gold holdings. Their stock market is in turmoil. Their property market is in turmoil. Construction projects are being stalled, if not canceled. Petro revenues are down over 60% since the summer. Money is flocking into safe haven. The article simply referred to safe haven pursuit and perceived bargain prices. My private sources tell me that the size of the total precious metal purchase is an order of magnitude greater than $3.5 billion, if platinum is included, “enough to make your head spin.” The source claims that the Persian Gulf nations are preparing a pathway for opening a globally recognized gold exchange. It will be either in Dubai or Abu Dhabi.
The Dubai Multi-Commodities Center has formally announced plans to launch an exchange traded fund (ETF) for silver. The launch date is planned for December. Arab demand for silver has surged since March, not coincidentally when Bear Stearns was killed off. Arabs were suckered into Wall Street firm investments, all soured, all ruined. They have contributed next to nothing since then in capital infusion and balance sheet repair. The Prince Alwaleed bin Talal contribution to Citigroup this week is an exception. They prefer gold & silver. Bob Chapman wrote, “What may be happening here is that the OPEC nations, and possibly also Russia, are setting up a counter-balance against the collapse of oil prices. You may recall from past issues that we discussed at length how we thought that sovereign wealth funds in oil-rich nations were tweaking gold and silver upward every time oil was smashed by the Illuminist manipulators. The message was, you leave oil alone, or we will send gold and silver to the moon and expose your destruction of the US economy by killing the canaries in the coal mines, thus ringing the gold and silver alarm bells loud and clear.”
◄ China is giving strong signals that it will shift massive foreign reserves into gold, as well as other commodities. They already stockpile huge supplies of crude oil and metal ore. They openly have expressed concern, if not alarm, over ballooning USGovt deficits. The US deficits are growing out of control, and are projected to exceed $1000 billion this year. Beijing is reported to be on course to shift its asset allocation more toward gold reserves, after concluding that USTreasury Bonds are put at high risk of heavy dilution. Chinese leaders see an obvious trend toward overloaded printing press new money creation (to undermine the USDollar) or toward huge debt issuance (to undermine the bonds). In either event, or both, the value of USTBonds is expected to be under severe pressure. China holds only a reported 600 metric tonnes of gold, worth under $14 billion. Tanrich Futures senior VP Colleen Chow Yin-shan expects the Beijing gold reserves to rise to a level between 3000 and 4000 tonnes, a gain by 5x to 6x.
Foreigners see this direction of debt burden as obvious, but Americans see it as just an expedient solution. The Chinese have to date succumbed to the deep USTreasury market liquidity, as a spot to direct their massive $30 to $40 billion monthly capital flow. China is expected to expand its strategic reserves into commodities during the current economic downturn and financial upheaval. “It is the right time to increase the gold reserves, as the price is about US$710 to US$720 per ounce,” said Wan Guoli, vice secretary general of the China Gold Association. In order to prevent sudden distortions, China will continue to buy USTBonds. They will just purchase less of them, as in diversify the portfolio of reserves. Some analysts interpret the Chinese announcement as a removal of the Chinese bid for USTBonds. Not so! They have too big a surplus, even in the downturn.
◄ The Iranians are switching foreign reserves into gold, so as to stay clear of problems created by sanctions pushed by the United States (CLICK HERE for article). Iran faces two problems, one from United Nations and US sanctions and banker obstacles across North America and Europe. It is unclear to what extent European banks are cooperating with US dictums. The Europeans might offer the USGovt lip service. The second problem is the sharp drop in the crude oil price, cutting down revenues. Iran, the world’s fourth largest oil producer, is troubled by sanctions over its disputed nuclear program. Iran made windfall gains from its crude exports at higher prices this year. In April its foreign exchange reserves were estimated at about $80 billion. Iranian officials in July denied reports that their banks were moving funds from Europe. One report suggested that $75 billion had been withdrawn and converted into gold or placed in Asian banks, because of a threat of tightening sanctions. More likely, a good portion of that sum was devoted to gold bullion purchase.
That is a lot of gold! Who could it be that Iran is buying gold from? My theory is simple and hard to dispute. In the last decade, Iran and Russia have joined in numerous large scale deals. Russia has supplied Iran with massive nuclear development programs, including sophisticated and diverse expensive equipment. Russia is also involved with Iran in the funding of gigantic energy projects, specifically pertaining to natural gas. It is my belief that the two nations have extended their commerce to financial banking collateral. The former Soviet Republics are proving instrumental in the Iran-Russia deals, like with gold supply. Russia has many times more gold than they openly admit. How do you spell Krzygystan? This tiny nation, with a severe challenge to spell city names and lakes in easy terms, is already a key broker for natural gas sales from Turkmenistan, the third largest natgas producer in the world.
◄ Hugo Chavez once more has played nasty games with North American firms. Venezuela plans to build large scale mines at its giant gold deposits with Russian cooperation. The new plans constitute an abandonment of Crystallex, even a likely expropriation, as the permit process has been held up on the prized Las Cristinas project for environmental reasons. Typical Chavez tactics, this time with vague reference to the betrayed Crystallex, whose relationship has been rescinded. The Cristinas property contains one of the biggest gold deposits in all of Latin America. A grand accord with the Russian mining company Rusoro was made firm into a contract, whose signing took place with a Russian delegation. Rusoro will operate both the Cristinas and Brisas projects, according to Venezuelan mining minister Rodolfo Sanz. Again in vague terms, Rusoro will have full access to both projects. North American mining firms are slowly being weeded out, as Hecla sold out at heavy loss its Venezuelan subsidiaries to Rusoro. Chavez is regarded as speeding up mine development in response to a severe decline in the crude oil price, and consequent hits to revenues.
◄ Australian gold output is set to record its lowest annual gold production in 20 years. Production in 3Q2008 rose slightly from the previous quarter, with output totaling 56 tonnes, according to an industry report. It was the third lowest quarterly production figure in 20 years. The rapidly declining Australian currency has spurred strong demand for gold, the ultimate hedge for both financial turmoil and price inflation. The Aussie Dollar is down over 35% since early July, but has seemed to find a bottom with some volatility. Down Under, investor demand has been huge, all but overwhelming producers of gold for investors such as the Perth Mint. The September quarter was a mixed one for individual miners with several reporting strong results while others were shut down. Failed firms included GBS Gold Australia and Mercator Gold. An industry representative provided a summary, “The low-cost producers are making excellent profits, but those at the high end of the cost curve are battling. Some of the miners and some of the explorers with limited cash resources are vulnerable. Commodities such as iron ore, base metals, and coal are dependent on industrial demand but gold can always be sold. Gold projects can be developed relatively quickly and as gold is a high-value, low-volume product, it does not require expensive transport and port facilities.” Just like South Africa, the national gold industry is in turmoil and disarray, down in output sharply. Shortage of gold supply in the face of fast rising (but frustrated) demand has only way out for achieving equilibrium, HIGHER PRICE.
◄ The challenge faced by bank officials will be to reflate the economy even as desired, to proceed with money flowing into its credit centers, and to exploit how current loans can be paid back with cheaper future money. Gold will thrive in this environment, since a climax of a disaster, or a climax of produced price inflation will benefit gold enormously. Both scenarios are very favorable to gold and silver prices. Besides, a default at the COMEX for both gold and silver seem highly likely, with cracks forming in December, and outright highly publicized defaults suffered in 1Q2009. Gold is positioned from strength in crisis and protection amidst inflation to win with either outcome.
Scenario A: The USEconomy suffers a strong recession. Many distribution lines are interrupted. Job losses continue into the millions. Many retail chains close down. These are already in progress. So imagine for the scenario that they all worsen. Commodity and material prices stabilize, and maybe rise. A big myth is out there, that claims commodity prices are down since the basic demand is down from a recession. That is only partly true. Prices are down predominantly since the USDollar has artificially enjoyed a prop from the financial markets, on liquidity of speculation and redemption of credit derivatives. Hedge fund contracts in commodities are being liquidated in droves. As those processes slow, the USDollar will seek its proper value. Look for the USDollar to go 30% lower to start. Prices will then rise for things like food and gasoline and utility bills. Under this scenario, where the USEconomy suffers mightily, even becomes something of a wasteland, the USDollar might be replaced. Under this destruction scenario, with or without that replacement (forced in shame), gold will be a refuge of stored value, as industry falters and debt collapses further. Any news of COMEX gold default, or even lost integrity could easily result in a stampede into gold.
Scenario B: The vast Reflation Initiative succeeds. Somewhere the maestros and wizards succeed in engineering a revival of systemic price inflation, as is their newfound goal. They avert total darkness. The destruction of the USEconomy is not seen, except that hidden is the detrimental effect of price inflation. Wages might rise a little, but not enough. Asset prices like in the stock market improve, but not enough to keep pace with inflation. Corporations avert bankruptcy, but their profit margins are still damaged. The ultimate hedge against the systemic price inflation will be gold. This trend will continue, even as credit derivative accidents occur from higher rates. Massive price inflation will be the plan, the goal, the intention. INFLATE OR DIE will become the mantra on a global scale. The rise in the gold price, the longstanding time-honored inflation hedge, will be tolerated as a system ill. The entire world is extremely likely to join in the inflation hedge.
◄ A new twist is due to emerge soon. Foreign economies are being damaged by their own falling currencies, causing price inflation domestically. Their financial markets are being damaged also by this decline, as valuations suffer from an outside perspective. Foreigners will soon realize that it is in the best interest for their nations to use their vast FOREX and USTBond reserves, to bring down their domestic currencies in exchange rate. That is one primary purpose of collecting reserves, to defend the system. They must enter the race of being among the initial group to use their USTBonds, to use their USAgency Mortgage Bonds, or suffer huge loss later. China has announced usage of US$-based bonds in a stimulus plan of gigantic proportions like over $500 billion, the smart choice. They are the first group to wise up to reality. USE THE USTBOND HOARD OR LOSE IT. Soon the USGovt debt will suffer severe reductions in value, when supply hits the bond market, when formal downgrades occur, or when the global liquidation no longer favors the USDollar.
◄ Gold has been poorly promoted, even by its most ardent supporters. For instance, Peter Schiff of Euro Pacific claims the USDollar has no value, but gold does, in response to claims of gold being a dead asset. The time has come to point out that the foundation for a house or building has no value, except that the entire structure rests atop it and all functions occur within the structure. We are witnessing the system stripping down the banking system foundation, only to find it has none. GOLD WOULD PROVIDE FIRM BANKING SYSTEM FOUNDATION, EVEN IF ONLY A SMALL COVER CLAUSE. The corrections to house valuations and bank balance sheets will continue without end, precisely because gold has not served as firm foundation in the last few decades. NO FOUNDATION EXISTS, which sounds silly to some, but not to those who survive powerful storms. The US printing press can quickly put more loose material atop the absent foundation, only to see it vanish in the storm as well. Notice that the Citigroup market value now stands at much less than the USGovt infusion in recent months, and less than Saudi cash infusions several months ago.
INVESTMENT IMPLICATIONS
◄ Long-term risk of severe technical breakdown for S&P500 stock index. The entire 2002 to 2007 bull market has been eradicated. The US stock market is at risk of seeing the entire bull market gain since 1995 wiped out as well. Such an event would be near catastrophe, and require a massive concerted Reflation Initiative, where price inflation would be pursued at almost any cost. Expect repeated tests of the critical support at 800 level. The Powerz are desperate to prevent the breakdown, which would have implications to pension funds, personal retirement accounts, and the image of the nation. The Plunge Protection Team will be forced into extra duty, and divert much of their syndicate funds. However, the market almost always prevails. If the recession extends for another few quarters, which is highly likely, a near guarantee, expect an S&P500 breakdown of up to another 30% when the USEconomy enters an accelerated decline over several quarters.
◄ The GOLD/OIL ratio is looking really good, small consolation, but interesting signal. The mining stocks depend on two major factors: a favorable funding environment for both projects and investment, and a favorable cost/benefit ratio. The gold ratio to oil is an excellent measure of the benefit of output to the cost of production. It has turned favorable in very impressive manner. The gold ratio to natural gas has turned favorable also, more in tune with actual field costs.
◄ With the upcoming explosion in the gold & silver prices, investment implications are thorny to forecast. First the negatives. Lending capital and venture capital are scarce. Some mining firms will go bust from lack of funds, not lack of viable projects. Banks are in deep trouble, short of money to lend. Wealthy individuals are under assault from numerous fronts, such as hedge funds, bond holdings, business failures, and more. On the bright side, the large cap mining firms will likely jettison in price very soon. They probably will not anticipate any jump in the gold or silver prices, since what comes is a massive dislocation event causing a discontinuity in price. Big money will seek liquidity in big mining stocks, hoping to acquire large positions without pushing the share price up unduly. The jump in large cap mining stocks will be muted somewhat if energy prices jump with gold. Strong junior mining firms will jump also in price, in particular those with some production, rather than firms burning through remaining capital. The desperate juniors will be grabbed at cheap bargain prices in acquisitions by the majors, who will have fresh war chests of funds. Those war chests will be supplied by higher share prices (used as currency to acquire) and by any forward production sold into the market. Other juniors will resist the desperate need to be acquired, thus permitting the market to bid up their stocks. Look for the large cap mining firms to exploit the situation and gain cheap properties at 50% to 70% discounts. It will be a very unfair episode. But it will be the beginning of a new powerful wave. The uncertainty sure to surface will be how long the process takes as confusion is sorted out. A default at the COMEX will cause chaos, as this market intermediary might actually vanish. One should expect several smaller markets to replace it. COMEX is corrupt to the core, a monolith to commemorate the deepest of US corruption. Satellite exchanges would better serve the industry.
◄ Two important reminders must be made regarding ugly scummy aspects of the precious metals mining firm backdrop. These concepts were mentioned early in 2008, but are worth repeating. Jim Sinclair, with reluctance at first, but then later seemingly with permission, answered a tough question at the March 2008 PDAC conference in Toronto. He revealed the identity of the party who is long in futures contracts versus the mammoth mountain of illegal short positions that have suppressed the gold & silver prices for several years. The Carlyle Group is counter-party against JPMorgan and Goldman Sachs, the revered crime syndicate dynamic duo. The Carlyle Group is composed of a collection of some of the most powerful former heads of state, ambassadors, corporate executives, lobbyists, defense contractors, US Congressional committee heads, and other groups that have become symbolic of all evil in the US financial system. Carlyle is long, and can take delivery of the gold, if any exists. If a COMEX default occurs, they will be bigtime losers. So they will work to resist, until a time comes when the trucks can be loaded for their cheap gold purchases.
The second item is very controversial. Rumor has circulated that Barrick Gold has supplied mammoth investment money for hedge funds to suppress Canadian junior mining firm stock values. Recall that when originally American Barrick, this ugly scummy corporation began not with mining experts and geology professionals, but with bankers from Wall Street. They filled their board of directors with illluminaries like George Bush Sr, whose only expertise with hard assets relates to military weaponry and narcotics. So financial gurus teamed with political retirees to form a company whose unexpressed purpose was to knock down the gold price with forward sales at multiple volumes of their potential production. Rumor has it that Barrick has enabled hedge funds to engage in large scale spread trades, where they buy (go long) bigger firms like Newmont or Kinross or Glamis or AngloGold and sell (go short) tiny explorers in the junior mining group. At a later date the majors, including Barrick also, plan to acquire the many juniors mining firms for a ridiculous corrupted cheap price.
Thanks to the following for charts: StockCharts, Financial Times, Wall Street Journal, Northern Trust, Business Week, CIBC Bank, Merrill Lynch, Shadow Govt Statistics
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