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Monday, January 31, 2011

Gold World News Flash

Gold World News Flash

GIABO – The globe wakes up – and soon Silver will be seen as the global currency of the global revolution – and the easiest way to put JP Morgan out of business

Posted: 30 Jan 2011 06:42 PM PST

Richard Daughty on the Fiscal and Monetary Insanity of the Whole Freakin' World

Posted: 30 Jan 2011 06:36 PM PST

Sunday, January 30, 2011 – with Anthony Wile The Daily Bell is pleased to present an exclusive interview with Richard Daughty (left). Introduction: Richard Daughty, the Mogambo Metals and Money Guru, describes himself as "the angriest guy in economics." No doubt this is because a genuine belief in Austrian hard-money economics leads him to question the moves, rationale and even, sometimes, the sanity of the financial officers, institutional investors and central bankers about whom he writes. In Swahili, Mogambo apparently means "big gorilla" – and Richard is certainly a big gorilla among the hard-money publishing set – providing at least portions of his Mogambo Guru report to many of the 'Net's most prestigious hard-money sites and top magazines and newspapers as well – including Barron's and the Wall Street Journal. He is also a partner and COO for Smith Consultant Group, serving the financial and medical communities. Prior to jo...


Who is Draining GLD ?

Posted: 30 Jan 2011 06:00 PM PST

Gold price in Arab States

Posted: 30 Jan 2011 05:30 PM PST

5 Stages of the Awakening

Posted: 30 Jan 2011 05:12 PM PST

(snippet)
The Elite give us the illusion of freedom but control all of the choices. The Elite give us the choice of 500 cable stations, yet the same message comes from all of the channels. They give us aisles and aisles of food, yet 90% of it is just corn and soy byproducts. They give us the choice of hundreds of political candidates, yet nothing changes because both sides are bought and paid for by the Elite. They give you the choice of investments of stocks, bonds, and real estate but when this all goes down, you will see that it is all apart of the same illusion of the dollar. This of course is controlled by the Elite. If you do not think independently for yourself, you cannot help but to be controlled, whether you know it or not.
Every aspect of your life is monitored, regulated, taxed and controlled, not for your betterment, but for betterment of others. To do most high paying jobs requires a certification or a license.  Most "assets" you have or own out right are not your own.  (Try not paying your property taxes on a home you own out right and I will show you the real owner is.)  All of your communications are monitored and recorded.  Now the Federal government wants these records to be kept indefinitely.  Think you own your 401k?  Try getting your money out.  You want to do anything to your home?  You better get permission from the homeowner association or the local zoning board.  All of these examples, plus many, many more have nothing to do with making your life better.  They exist to create power, profit and a parasitic life for another.
"Until they became conscious they will never rebel and until after they have rebelled they cannot become conscious." — George Orwell (1984)

More Here..

Where Are Markets Heading To?


"Something" Happened: What The GDP Report Means

Posted: 30 Jan 2011 04:17 PM PST


This article originally appeared in The Daily Capitalist.

Readers will recall that I had noticed that "something was happening" in the economy. After several years of ultra-bearish reporting, I reported that at the very least the economy was not declining further and that perhaps a bottom was forming which would indicate positive news for the economy. I cautiously reported that a "trend" to recovery was not yet evident but that indeed, something was happening. I noted that almost none of my bearish peers seemed to note this trend.

Much of this positive news is a result of quantitative easing (QE) and is not real.

Today's GDP report showing a 3.2% gain for Q4 2010 was more positive than I had anticipated, but it is trending in the right direction. In my November article I anticipated GDP would continue to be "flat" in Q3 and Q4. While I was mostly accurate with Q3, I underestimated Q4. Understand that these are preliminary numbers, and the revision on February 25 may be different, positively or negatively.

There are huge caveats to this GDP report which gives it a mirage effect, as I noted yesterday. But first let's examine the numbers.

Real personal consumption expenditures increased 4.4 percent in the fourth quarter, compared with an increase of 2.4 percent in the third.

 

Durable goods increased 21.6 percent, compared with an increase of 7.6 percent.

 

Nondurable goods increased 5.0 percent, compared with an increase of 2.5 percent.  Services increased 1.7 percent, compared with an increase of 1.6 percent.

 

Real nonresidential fixed investment increased 4.4 percent in the fourth quarter, compared with an increase of 10.0 percent in the third.

 

Equipment and software increased 5.8 percent, compared with an increase of 15.4 percent.

 

Real exports of goods and services increased 8.5 percent in the fourth quarter, compared with an increase of 6.8 percent in the third.

 

Real imports of goods and services decreased 13.6 percent, in contrast to an increase of 16.8 percent.

 

The change in real private inventories subtracted 3.7 percentage points from the fourth-quarter change in real GDP after adding 1.61 percentage points to the third-quarter change.  Private businesses increased inventories $7.2 billion in the fourth quarter, following increases of $121.4 billion in the third quarter and $68.8 billion in the second.

 

Real final sales of domestic product -- GDP less change in private inventories -- increased 7.1 percent in the fourth quarter, compared with an increase of 0.9 percent in the third.

 

Current-dollar personal income increased $128.3 billion (4.1 percent) in the fourth quarter, compared with an increase of $75.7 billion (2.4 percent) in the third.

 

Disposable personal income increased $99.6 billion (3.5 percent) in the fourth quarter, compared with an increase of $47.1 billion (1.7 percent) in the third.

 

Real disposable personal income increased 1.7 percent, compared with an increase of 0.9 percent.

 

The personal saving rate -- saving as a percentage of disposable personal income -- was 5.4 percent in the fourth quarter, compared with 5.9 percent in the third.

 

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.7 percent for the year.

 

Excluding food and energy prices, the price index for gross domestic purchases increased 1.3 percent for the year.

The bottom line here is that consumer spending was up (4.4%), the biggest increase since Q1 2006, and imports were down 13.6%. Annualized, GDP was up 2.9% in 2010. Core prices were +1.3% for the year.

There are are several important caveats to note while interpreting GDP. The first is that it is a fictional assessment of the economy. It tries to measure aggregate output through spending which results in a meaningless statistic. I do not wish to get into this point as an abstract discussion of economic theory, but for those who are interested, here is an excellent distillation of an explanation of this idea.

The other fact to consider is that if all GDP measures is spending, then an increase in the money supply by the Fed would increase spending. Again, since fiat money cannot be a source of wealth, a rise in GDP as a result of Fed money "printing" cannot be a real economic gain. If it were, then Zimbabwe would be the richest country in the world.

But, the significance of GDP cannot be overlooked since it what the Fed looks at the determine monetary policy.

That aside, what can we take away from GDP?

1. Most of the increase in GDP is the result of QE1 and QE2 monetary stimulus. Ultimately the Fed will "print" $2.2 trillion and pump it into the economy. That has one initial destination: Wall Street.

2. Most of the increase in the stock markets is a result of QE. The increase in company bottom lines is a result of efficiencies, but exporters have had the best returns.

3. A declining dollar has lifted exports and inhibited imports. The dollar has been on a slide since June 2010 which makes US exports cheaper and thus more attractive to foreign customers. The cause of this is QE.

4. The concept that imports are bad and exports are good is false. History has shown that with the rise of imports (since the early 1980s) that the economy has not collapsed, but rather has benefited from trade. This is one of the fallacies of the economic concepts behind GDP. Thus, the decrease in imports and increase in exports will not be a real economic positive. (I am working on a major article on free trade.)

5. Spending is coming mostly from wealthier Americans, not the middle-class. Wage growth has been stagnant, real disposable personal income expanded a modest 1.4% for the year, and the personal savings rate continues to be historically high (5.4%). It appears that increases in wealth has come mostly from debt reduction, not the stock market.

6. Recent (post 2010) spending data is down.

7. Inventory was a drag on GDP, down 3.7% for the quarter. This was a "surprise." This is the biggest decline in 22 years according to David Rosenberg. This is significant: if consumer spending continues to drop off, one wonders what will happen to the manufacturing sector. The latest durable goods report was a -2.5% in December.

There continue to be the factors that act as a drag the economy. These are serious headwinds to a recovery.

  • Unemployment remains high at 9.4% (16.7% on the broader U-6 scale). The recent report of initial jobless claims went up 51,000 last week to 454,000. I don't see much that would result in strong employment growth. This is one of the drivers of the Fed's QE policy: the more unemployment remains high, the more money they will pump into the economy.

  • Real savings, the capital accumulated and saved from the profit or wages of productive enterprises, still appears to be deficient since production is not expanding sufficiently to expand employment. Banks and individuals continue to deleverage, and lending is still weak, further evidence of a lack of real savings.

  • The Fed is inflating. The True Money Supply (Austrian theory) is up 10% the past six months and 15.2% the past three. This increase was measured before the impact of QE2. This monetary inflation will act as a drag on the economy as it eats up savings and capital.

  • Home prices continue their slide according to the recent Case-Shiller report. In addition, the shadow inventory hangover is high: last year 2.8 million homeowners received default notices. More are anticipated this year. Commercial real estate is still declining and those foreclosures will continue to impact the ability of local and regional banks to lend.

  • The deficit is anticipated to be $1.5 trillion this year. This is starting to have an impact on Treasury rates: they have been going up, making it likely that the deficit will increase further.

The bottom line is that we are seeing monetary inflation and it is impacting prices. Real savings is still in short supply and that is inhibiting growth. Spending will not revive the economy, but an inflated money supply will give the impression of economic improvement, but it will be an ephemera. It will further negatively impact real savings. I would expect similar GDP numbers in Q1 2011, perhaps a bit weaker (wait until the revised Q4 come out to see if I'm right). Unemployment will remain high. This is a recipe for stagflation.

This GDP report is much ado about not much.

Goldman On What Happens To Oil As Egypt Contagion Flares

Posted: 30 Jan 2011 03:46 PM PST


A week after Zero Hedge first speculated what may happen to oil prices should the Suez Canal be shut down, Goldman arrives on the scene... And as expected, to Goldman it is all (mostly) priced in - the risk of contagion to Saudi is zero. After all, rich people never revolt... And things must always evolve according to what only Goldman Sachs has foreseen.

From Goldman's Jeffrey Currie:

Mass political protest spread from Tunisia to Egypt this past week, which raised concerns that the political instability may spread further and even into the energy-rich nations in the Gulf. Although commodity prices rose sharply, this rise in prices reflects concerns over political contagion and not direct physical disruptions as the impact on commodity fundamentals remains contained for now.

Recent events can impact commodity fundamentals via three channels

Although commodity fundamentals remain undisrupted, we see three channels that drive fundamental risks: 1) the risk of a disruption of commodity shipping routes posed by a further deterioration of conditions in Egypt, 2) the risk posed to crude oil supply should the political instability spread to the major producing countries in the region, which we view as unlikely given GCC affluence, and 3) the risk posed to agricultural demand should regional governments escalate imports of agricultural commodities in an effort to ensure local food supplies to avoid political unrest.

Oil impact determined by political and financial contagion risk


Ironically, while the impact on the crude oil market will likely be determined by whether or not the political contagion can be contained, the impact on the agricultural markets will likely be determined by the extent of the effort to contain the political contagion, with greater efforts likely leading to higher agricultural prices. Although we see the risk of political contagion as relatively low in the more affluent countries, financial contagion has already spread to these regions, raising the cost of oil production. Further, if these countries feel compelled to increase  spending in the face of greater political pressure, it could lead to a rise in the oil price required to balance budgets in these countries.

Should political contagion risk ease, the oil market is vulnerable to a near-term but temporary correction

Net, we see the current political crisis as raising near-term risk to agricultural prices. For oil, should the political crisis spread to the oil producing countries of the Middle East, it would certainly send prices sharply higher. However, we see this risk as low at this stage, and current fundamentals suggest that Brent is vulnerable to a near-term price correction should concerns over political contagion ease. But a correction would likely be temporary, as we maintain end-of-year target of $105/bbl.

Some more trite details:

This past week mass political protest spread from Tunisia to Egypt, which raised concerns that the political instability may spread further across North Africa and even into the energy-rich nations in the Gulf. In commodity markets, Brent crude oil  prices rose to just shy of $100/bbl ($99.74/bbl), agriculture prices jumped to new highs and gold prices rebounded sharply, reflecting concerns over political contagion as the direct physical impact on commodity fundamentals remains isolated and contained for now.

In fact, wheat prices traded off on Friday afternoon, as the negative demand effects from the 84 million populous and number one wheat importer Egypt are beginning to outweigh the risks of increased hoarding as the political contagion spreads. In contrast to the political contagion risk, which remains highly uncertain, we believe that physical commodity fundamental risk can be summarized into the following three channels:

Choke point disruptions. Should the crisis be contained to Egypt, the main commodity market impact will likely be a logistical one. Around 8 percent of world seaborne trade moves through the Suez Canal, and between oil tankers moving through the canal and oil flowing through the SUMED pipeline, roughly 2.0 million b/d or 2.5 percent of world oil production moves through Egypt. At this time, there has been no reported disruption to either the Suez Canal or the SUMED pipeline, which are interestingly running at much lower capacity utilization rates as most of the OPEC production cuts to Europe were concentrated through these routes. If the Suez Canal is disrupted, supplies would simply go around the Cape of Good Hope, which would add 15 days to the transportation time and modestly lengthen the supply chain.

Energy supply disruptions. In the oil market, the main risk is that of political instability spreading to Middle Eastern oil producers, such as Saudi Arabia. Egypt’s consumption and production are roughly balanced, creating little impact on oil supplies from the instability there. However, given the high level of affluence in the Gulf region, we see the probability of political contagion as relatively low. Instead, the focus should be on financial contagion, which is already happening in the CDS and equity markets, driving up funding costs and discouraging future investment in oil and gas in the region.

Hoarding of agriculture products. In the agricultural markets, the main risk is that, in an effort to contain political instability, regional governments will rapidly begin hoarding agricultural products in order to attempt to appease their civilian populations. It is important to remember that the protests in Tunisia began over high food prices, and with agricultural markets expected to remain tight, the acute political pressures generated by rising food prices will likely continue to pose political risks to the region. So far, hoarding of the two key food crops, wheat and rice, has only amounted to 2-3 million tonnes and would need to grow significantly more before we would be concerned.

Ironically, while the impact on the crude oil market will likely be determined by whether or not the political contagion can be contained, the impact on the agricultural markets will likely be determined by the extent of the efforts to contain the political contagion, with greater efforts likely leading to higher agricultural prices. Of course, the extent and type of effort made will likely also have an impact on crude oil prices. Already, borrowing costs to oil producing countries in the region have jumped sharply, raising the cost of oil production. Further, if these countries feel compelled to increase spending in the face of greater political pressure, it could in the near term lead to increased crude oil production in order to raise additional revenues, and in the medium term lead to a rise in the oil price required to balance budgets in these countries.

Net, we see the current political crisis as raising near-term risk to agricultural prices for the key food crops, wheat and rice. However, the wheat market remains amply supplied and in our view this stockpiling will not shift the overall global wheat balance. For oil, should the political crisis spread beyond Egypt to the oil producing countries of the Middle East, it would certainly send prices sharply higher. However, we see this risk as low at this stage, and current fundamentals suggest that the oil market is vulnerable to a near-term price correction should concerns over the potential for political contagion ease.

Not only have Brent crude oil prices moved above our near-term targets, there has also been some evidence that OPEC countries have already begun to bring spare capacity back to the market (see January 24, 2011, Energy Weekly), which further raises the near-term risk of a correction, particularly should production increase further in an effort to generate more revenue to help quell potential political unrest. Supporting this view was Friday's price action, when the call skew for oil increased sharply. However, the fact that the market still favors the put skew after the move underscores how ample levels of inventory may still insulate the world market from these events.

However, the impact of the current financial contagion on funding costs, combined with a potential rise in the breakeven price to balance regional budgets, will likely provide longerterm support to oil prices. Accordingly, any near-term correction would likely be temporary as we maintain our end-of-year oil price target of $105/bbl.

Although the current situation remains highly uncertain and the risks to physical disruptions relatively low, we see three key risks that need to be monitored: political contagion, potential energy supply disruptions and precautionary inventory building of agriculture products driven by increased political concerns, which could kick off broader and more widespread hoarding if security of supply issues become more concerning.

To be sure, Goldman is certain that what happens in a poor Egypt will never happen in a very rich Saudi Arabia. Because rich people never revolt against the status quo: after all just look at America... We'll remind them of this assumption when it collapses in tatters.

We see the risk of political contagion spreading to the GCC as relatively low

The risk of further turbulence and contagion within the broader region could be significant, particularly in its poorer and politically less stable parts. However, similar disturbances in the more affluent Gulf Cooperation Council (GCC) economies, which have relatively stable and popular governments, seem unlikely. The main problem in GCC could potentially be the sectarian fault lines dividing the ruling Sunni majority and the Shiite contingent, particularly in Bahrain and certain parts of Saudi Arabia. However, in our view, this is  unlikely to play a significant destabilizing role, particularly at a time when oil prices remain elevated.

The main reason for this is that the avenue for political unrest to spread is likely through the young, urban poor who identify themselves with the demands and the concerns of the protestors in the neighboring countries, and have been suffering from  poverty, unemployment and a rising cost of living, especially in the context of rising food prices. As a result, the more affluent GCC countries are much less likely to have problems than the less affluent North African countries (see Exhibits 1).



What happens in Egypt will be extremely important for the rest of the region. Egypt has historically served as the vanguard of Arab nationalism and its charismatic and powerful political leaders (from Nasr to Sadat and finally President Mubarak) have  assumed key leadership positions within the Arab World over the past 50 years. Egypt has also been a close ally of Western powers and played an important balancing role in Arab-Israeli relations since late the 1970s.

An update on the Suez and SUMED situation:

The risk of supply disruptions remains limited with future investment being the main risk

The current disruptions in energy supplies are extremely small, which underscores that the real risks are that the political problems spread to one of the large energy producers in the GCC or Algeria and Libya in North Africa. However, it is important to emphasize that even if the problems spread to one of these countries it is not necessarily the case that energy supplies would be disrupted, as history has shown that energy can still flow even under very adverse political conditions. This suggests that ultimately the real risk that current events disrupt supplies is either by discouraging future investment and/or substantially raising the cost of investment, like what is already happening with the sharp rise in regional funding costs. This risk was captured in the equity market on Friday (January 28) as oil companies with exposure to the MENA region sold off while producers without exposure to the region traded up.

The current situation in Egypt underscores how energy can continue to flow even under very adverse political conditions. Even though Egypt does not produce or export a large amount of oil as some of its neighbors do, it is home to the Suez Canal and the SUMED pipeline which between them have nearly 4.5 million b/d of global transportation capacity (see Exhibit 3).

Interestingly, much of this capacity is not currently being used as this is the avenue where much of the OPEC production cuts to Europe have occurred, leaving only about 1.0 million b/d of oil going through the Suez Canal and 1.1 million b/d of oil flowing through the SUMED pipeline in 2009. As of the morning of Sunday, January 30, 2011 however, most of the reports show that 38 vessels versus 47 vessels on Saturday are still going through the canal.


For the relatively small number of vessels that are not going through the canal, they are likely being redirected around the Cape of Good Hope, which adds an additional 6,000 miles to the journey, or 15 days. Although insurance companies may charge higher rates now to go through the canal, this must be weighed against the risk of Somali pirates and the extra cost in transportation. So even with very adverse political conditions in Egypt, the vast majority of energy is still flowing as normal.

Although larger energy producing regions do remain at risk (see Exhibit 4), history suggests that even if political unrest spreads to a region, disruptions are likely to be minimal. For example, even during the most recent war in Iraq, oil supplies were only disrupted for three weeks. In fact, the only two times in recent history when oil supplies were significantly disrupted due to political unrest was in Iran in 1978 and Venezuela in 2002, when the unrest impacted the workers in the oil fields who simply left their positions and/or the country, which required finding and training new workers.

And much more typical sell side behind the curve stuff.

Will Junior Mining Stocks Be THE Investment of 2011?

Posted: 30 Jan 2011 03:16 PM PST

If you think gold and silver as an asset class are severely misunderstood, and they are, then multiply that misunderstanding 10 times, and you will realize the level of misconceptions that exist around junior mining stocks. The typical propaganda disseminated by bankers that surround gold and silver every single year when gold and silver corrections occur dominates the mainstream financial landscape right now. In fact, even though a rapid correction in gold/silver prices and gold/silver mining stocks is normal behavior at least twice a year, for every single year of this 9-year gold and silver bull, every single correction and consolidation phase has elicited chatter from the same financial shills about the end of the precious metals “bubble”. And amazingly every year, the mainstream financial media grants them a platform to spread their disinformation to confuse investors. Last year, when gold dipped from $1,421 an ounce to $1,332 an ounce in just 6 trading ...


Precious Metals and the Dollar's Next Big Move Part II

Posted: 30 Jan 2011 02:46 PM PST

We have seen some exciting moves in the market and with the market sentiment so bullish it should make for a sharp selloff in the coming weeks. Meaning everyone is overly bullish and owns a lot of stocks and commodities ... Read More...



Gold and Silver Are on the Starting Blocks

Posted: 30 Jan 2011 02:43 PM PST

A strange start to the year and a strange end to a volatile week, so we take a whiz across the air waves in order to get a "feel" of whats going on, so this will be a mixed bag of data. Read More...



The 5 Black Swans That Keep Dylan Grice Up At Night... And How To Hedge Against Them All

Posted: 30 Jan 2011 02:43 PM PST


With all the hoopla over Egypt some have forgotten that this is merely a geopolitical event (one of those that absolutely nobody, with a few exceptions, was talking about less a month ago, so in many ways this is a mainstream media black swan which once again exposes the entire punditry for the pseudo-sophist hacks they are), and that the actual mines embedded within the financial system continue to float just below the surface. Below we present the five key fat tail concerns that keep SocGen strategist Dylan Grice up at night, which happen to be: i) long-term deflation, ii) a bond market blow-up, iii) a Chinese hard-landing, iv) an inflation pick-up, and v) an Emerging Markets bubble. Far more importantly, Grice provides the most comprehensive basket of trades to put on as a hedge against all five of these, while also pocketing a premium associated with simple market beta in a world in which the Central Banks continue to successfully defy gravity and economic cycles. For all those who continue to trade as brainless lemmings, seeking comfort in numbers, no matter how wrong the "numbers" of the groupthink herd are, we urge you to establish at least some of the recommended trades in advance of what will inevitably be a greater crash than anything the markets experienced during the depths of the 2008 near-cataclysm.

But before we get into the meat of the piece, we were delighted to find that Zero Hedge is not the only entity that believes that providing traditional annual forward looking forecasts is nothing more than an exercise in vanity (and more oftan than usual, error).

At this time of the year we’re supposed to give our predictions for what’s in store for the year ahead. The problem is I don’t have any. Not because making forecasts is difficult. It isn’t. It’s just pointless. Instead, I suggest getting in touch with our inner Kevin Keegan, the hapless former England football manager who, facing the sack after a bad run of results famously lamented “I know what’s around the corner, I just don’t know where the corner is.” The more people construct portfolios on the assumption that they can see the future, the greater the opportunity for those building portfolios which are robust to the reality that we can’t.

That said, no matter how ridiculous the act of Oracular vanity ends up being, those who charge an arm and a leg for their "financial services" continue to do it, only to be among the first carted out head first when reality is imposed upon them and their blind belief that this time is different and the crowd is actually right. Few are willing to accept and recognize the humility that they really know little if anything about how a non-linear, chaotic system evolves. Which is once again why we believe that Grice is among the best strategists out there: in his attempt to hedge the stupidity of the crowd, he has coined a term that may well be the term that defines 21st century finance and economics: instead of foresight, Grice believes the far more correct term to explain the process of prognostication should be one based on foreblindness.

In financial markets, craziness creates opportunity. It affects only prices, not values. And one of the craziest afflictions I know of is our faith in our ability to see the future. Indeed, there isn?t even an appropriate opposite to the word ?foresight? in the English language. So I'?m going to make one up. And rather than build a portfolio based on the pretence we have foresight, let?s explore some ideas for building one that is robust to our foreblindness.

This is the kind of insight that one will never find from a TBTF "strategist"... And one wonders where all those softdollars go.

So now that we know that unlike the traditional cadre of sell side idiots who are always wrong in the long-run, Grice actually admits that he has no clue what will happen, which is precisely the reason to listen far more carefully to what he has to say. 

Let's dig in:

Here are some things I think are true:

  • developed economy governments are insolvent
  • Japan is the highest risk developed market (DM) to an inflation crisis (though it might be Greece)
  • there is too much debt around
  • China?s economic model is biased towards misallocating resources
  • every country which has industrialized has experienced nasty bumps on the way
  • China and the US are in the early stages of an arms race
  • demographic trends suggest more conflict in the oil rich regions of the world
  • bottlenecks are developing in key commodity markets
  • the only thing central banks are good at is blowing the bubbles that cause the crashes which are used to justify their existence
  • market prices only reflect fair value by accident and in passing
  • most people don?t think these things are important
  • they might be right.

Here are some things I know are true:

  • perceived uncertainty causes emotional discomfort which isn?t conducive to good decision making
  • all the above situations have the potential to cause significant asset price volatility
  • I have no idea when.

What to do? To my mind, the ideal is not to make huge bets on particular events happening because failure of the expected event to materialize will materially endanger your capital. Instead, the ideal is purchase insurance at a price which won?t materially pressure the returns from your core portfolio of investments if the event fail to materialize, but will protect capital from significant impairment if it does.

Is such an ideal attainable? By evaluating insurance and using the same valuation discipline you'?d apply to anything else, I think it is. So what follows is not a list of recommendations here, or even any suggestions. Everyone should do their own homework. What follows is an illustration of why I think the macro research we?ve been doing is relevant and can be used to lower portfolio risk. The insurable risks I'?m most worried about at the moment are:

  • long-term deflation
  • a bond market blow-up
  • a Chinese hard-landing
  • an inflation pick-up
  • an EM bubble

The first thing you?'ll notice is that these aren?t all consistent with one another. It?s difficult to get a Chinese hard landing and an EM bubble at the same time, for example. But internal consistency is overrated. It?s only relevant for point-in-time forecasts, and the assumption underlying this entire exercise is that I haven'?t a clue if/when any of what follows is going to happen. At the risk of repetition, I?'m interested in the possibility of building a profitable portfolio which is robust to my ignorance.

Let's take a look at the five fat tails in detail:

Long-term deflation

Not surprisingly, Grice gives the least amount of weight to the one thing most troubling to such economic disgraces as Ben Bernanke and Paul Krugman. Yet it should not be avoided. After all there are many deflationists out there, who believe that the Fed, which has now clearly telegraphed it is all in on reflating (or after the Fed, the monetary collapse deluge) may actually succumb to what has been ailing Japan for two decades.

According to economists the primary risk faced by economies is that a huge deleveraging spiral becomes self-fulfilling: deleveraging reduces demand, which lowers prices, which further lowers demand, and so on. The idea was first developed by Irvine Fisher in the 1930s to describe the great depression, and has been used to explain the ?First Great Depression? of the 1870s and Japan since the early 1990s.

Paul Krugman says everything has changed because we?re in a liquidity trap. The fear of prolonged deflation is what keeps poor old Ben Bernanke awake at night. And maybe that?s the clue. At our London conference this year, James Montier said that Bernanke  as the worst economist of all time. Now, I?m not sure I agree with James on this one because I can?t make up my mind, sometimes I think it?s the Bernanke, other times I think it?s the Krugman. But usually I think nearly all economists to be the joint worst economists of all time. So I have a lot of sympathy with the idea that if the consensus macroeconomic opinion is worried about something, it probably isn'?t worth worrying about. In fact, if they worry about deflation, I?'m going to worry about inflation.

We couldn't have said it better ourselves.

So how does one trade deflation insurance?

More importantly though, deflation insurance is expensive. The following chart shows the price of 5y 0% US CPI floors to be trading for just under 200bps. The way these floors work is that they provide the owner of the contract with the right to payments equal to the rate of deflation. Since the floors in the chart have a five-year maturity, they entitle the owner to five annual payments. For example, if inflation was -1% in year one, the owner would receive 100bps of the notional value of the contract. If inflation was -1% in year two, he?'d receive another 100bps. And if the rate of deflation remained at -1% for years three, four and five, he?d receive 100bp cashflow for each of those annual payments so that over the life of the contract he?d have received a total cashflow of 500bps. So if you?'re worried by the prospect of CPI deflation, this is the product for you.

And sceptical though I am of the debt deflation hypothesis, Western demographics worry me. Although we don?t know what ageing economies look like, we know that the glimpse into the future provided by Japan isn?t encouraging. So I do take the scenario seriously and would be happy to put the hedge on at the right price. The problem is, I don?t think the price is right. I think this insurance should be sold, not bought.

Chinese Hard Landing

While Grice is obviously far less worried about a systemic deflation scenario arising out of events in the US, what may happen in China is obviously a far riskier proposition, and one that could generate deflation out of the proverbial "Hard Landing." Luckily there is an instrument with some wonderfully convex properties to hedge this...

Albert calls China a ‘freak economy.’ Certainly, running with an investment to GDP ratio of over 50% doesn?'t seem normal. Neither does keeping interest rates at 5% when the economy is growing by 15% in nominal terms each year. Such lax monetary conditions have helped land prices rise by 800% in the last seven years, according to NBER economists. And when you come to think of it, more recent examples of real estate inflation fuelled by negative real interest rates ? Ireland, Spain, the US ? didn?t end too well. Jim Chanos says China is a shortseller ?s dream and that there?s not one company he?s looked at that passes the accounting sniff test. And if Jim Chanos, who built a very successful business around spotting accounting gimmickry says something like that, my guess is he?s right.

Taking a step back though, as far as I?m aware all industrialized countries have experienced financial crashes. It seems a part of the maturing process. Why should China be any different? A credit crisis wouldn?t necessarily mean the end of the China story any more than the panic of 1873 meant the end of America?s, (though US demographic prospects were considerably more favourable at the end of the 18th century than China?s are today ?). For the record, I think the Chinese have a bright future. My son is learning Mandarin. But when I look at the numbers I can?t help but think there?s going to be a crash and that it?s going to be  quite unpleasant. It?s just that my guess as to when it?s going to happen is as good as Kevin Keegan?s.

What happens if and when the inevitable crash happens? One word - Australia. Another word(s): 10x-20x payout.

When it does happen though, the Australian economy will be toast and its government bond yields will collapse. During the panic of 2008, AUD 10y swap rates fell around 3% to 4.40%.

The panic of 2008 was a ?good crisis? for Australia though. A Chinese crash would be more serious.

And you can get pretty attractive odds on AUD rates collapsing. The following chart shows the payout available using AUD receiver swaptions prices with a three-year maturity, based on the 10y swap rate. Effectively, these are put options that pay out when rates fall below the strike price. The prices I?ve used here are from Bloomberg based on the swaptions striking at about 5.5% (i.e. 100bp below the current rate of 6.50%). What'?s interesting is that at current prices, if Australian swaps were to break their 2008 lows, you'?d be making about 10x your premium (for the record, these swaptions are priced at about 120bps, or 40bps per year over three years, which is about the same as the annualized revenue you?'d get if you sold the CPI floors discussed above). If swap rates fell by 300bps ? as they did during the panic of 2008 ? the rate would fall to 3.5% and you'?d make nearly 15x your premium. To repeat the point I made earlier, this isn?'t a recommendation. It?'s just a starting point (my guess is that you'?d find more attractive payouts as you went further out of the money with the strike price, and that  capital structures of Australian banks, property companies and levered resource stocks would be worth looking into too).

Asset Bubbles

Grice provides one of the best and most succinct explanations of bubble mentality we have read to date:

For reasons I won'?t go into now, but which are probably obvious from what I just wrote about China, I think EM is riskier than it seems. I'?m not even sure I feel comfortable valuing EMs yet. So should EMs bubble up, the risk for investors sharing my concern is that they?ll be faced with quite a nasty dilemma: do they buy something they don?t feel sure is cheap because everyone else is and they?'re scared of underperforming, or do they stick to their principles and prepare themselves to take on the business and career risk of underperforming their competitors, seeing clients withdraw their funds, and possibly finding themselves out of work?

And the sad reality is that ultimately nearly everyone gets hurt during a bubble. Sceptics get hurt as it inflates, believers get hurt when it bursts. George Soros says when he sees bubbles he buys them. He?'s been pretty good at selling them at the right time too. But most of us aren?'t so clever.

Regardless of the psychology behind each and every bubble, the good thing is that there is a good way to hedge this risk outright.

One way to hedge the inflation of a bubble, rather than its bursting, is to buy out of the money call options on the equity indices. Calls are usually cheaper than puts ? I think because fear is a more powerful emotion than greed and the tails in equity markets tend to be on the downside. But the following chart shows that that difference (or skew, the difference in implied volatilities between puts and calls) is close to unprecedented highs, at around 4.5 vol points (the chart shows skew for the S&P500 though other equity indices show a similar picture).

In other words, the upside is close to unprecedentedly cheap relative to the downside. If you could get two year call options 30-35% out of the money for 130bps per year you?'d be getting good value (of course you could make this zero cost, or even ?ve cost by selling puts to fund the purchase, and you could do it in such a way that your downside risk would be similar to that of holding stock, but I?'m no derivatives strategist ?- as usual, if you want to talk about this stuff to people who know more than I do, speak to your SG derivatives salesman, or ask me and I?'ll put you in touch).

Hyperinflation

A topic near and dear to many. Luckily, once again, one which can be hedged proximally in a form that generates massive returns should it transpire there where it most needed: no, not the US. Japan. In fact, if Grice is right about Japan, his proposed trade takes the returns generated by Paulson in shorting subprime... And magnifies them by about a million.

Historically, bankrupt governments have used inflation to alleviate their indebtedness. I doubt things will ultimately be different this time. And as regular readers know, I think Japan is the country closest to the edge. All DM governments have the same problems: they?'ve made promises to their electorates which they?re unlikely to be able to keep. But while there?s time for European and US governments to fix the problem, for Japan I think it?s already too late. John Mauldin says the Japanese government debt position is a “bug in search of a windshield”. I agree with him.

I'?ve already written too much this week, so I don?t want to rehash all the stuff I?ve already written on Japan and which regular readers will be familiar with. But if you chart past episodes of extreme inflations with how stock markets behaved during the episodes, you invariably find something similar to what happened to Israel in the 1980s.

In Steven Drobny?'s excellent “Hedge Funds Off the Record” (which I consider a must read ?- almost every interview oozes with profound risk-management wisdom), Steve Leitner talks about buying out of the money call options to hedge against such a hyperinflation. Buying 40,000 strike Nikkei calls with a ten- year maturity, with a payout in a strong currency can be done for around 40bps per year. And to give you an idea of how explosive that asymmetry might be, if Japan was to follow the Israeli experience from here, the Nikkei ?- currently 10,500 would trade at around 60,000,000 (sixty million). So putting even one-tenth of your notional into that kind of hedge would cost 4bp per year (for reference, the Nikkei currently offers in excess of a 2% annual yield, while some JREITS offer in excess of 4% - I'?d argue that 40bp is a bearable burden, and 4bps certainly is).

Bond Market Blow-up

When a few weeks ago we presented Sean Corrigan's chart which we dubbed the Great Regime Change, few put two and two together, and realized the vast trading implications of this chart. And they are profound. As Grice rightfully observes, they stand at the base of nonthing less than the hedge against that most critical of fat-tail events: a bond market blow up, one which is getting increasingly more probable with every single $X0 billion UST bond auctions (the bulk of which is now monetized directly by the Fed).

One obvious way to hedge against a bond market blow-up is to use the swaptions market as we did in the Australian market to hedge a Chinese crash, only this time buying payer swaps, which are effectively call options on rates. But I thought I?'d show you something I think is a bit more interesting: the correlation between the S&P500 and bond yields.

Bonds represent poor value in my opinion, with little margin of safety to protect against the very real risk that governments try to inflate away their debts. But one good reason to continue holding them is that they protect risk asset positions during the '?tails'?. The following chart shows that over the last ten years the correlation has been volatile, but positive: when equities have fallen so have bond yields, offsetting losses in the equity portfolio as bonds benefit during ?risk-off? events.

When inflation expectations were (probably) around zero (before the 1960s) the correlation between bonds and equities was zero too. But look what happened during the 1960s when inflation expectations broke (this was during the Vietnam war, as the Bretton-Woods system was coming under pressure and as the bear market in bonds was getting into full swing). The chart shows that the correlation went negative. When bond yields rose equities fell because government bonds were reflecting the same tensions that were pulling down equity valuations (fear of ever-higher inflation).

As the bond bear market reached its climax in the early 1980s, the correlation remained negative. But as the worm turned, and central banks across the developed world made new and credible commitments t


China Central Bank Advisor Urges Increase In Official Gold And Silver Reserves

Posted: 30 Jan 2011 01:14 PM PST


And so the long anticipated incursion by the PBOC, whose holdings of gold are behind even those of GLD, begins. Bloomberg has just reported, that "China central bank adviser Xia Bin said the country should increase its gold and silver reserves, the Economic Information Daily reported today, citing an interview with Xia." But how can this be: after all China has trillions in USD-denominated reserves, and any indication that it believes these are based on a currency that may actually be impaired will be an act of Mutual Assured Destruction. Well, yes and no. China is merely taking the next defection step in what is already failed Nash equilibrium. The first? The Fed's gross monetization of all US debt. The observant ones will realize that Chinese holdings in November were lower than they were in June of 2009! Who has picked up the slack? Why the Federal Reserve of course. Simply said, the Fed is explicitly making China's creditor status increasingly less relevant. Zero Hedge has long been wondering how much longer China will take this direct defection in what previously had been a stable equilibrium balance in which China provides the US vendor financing, while the US imports China's crap. As the Criminal Reserve is increasingly taking away the leverage that China used to enjoy as Creditor numero uno, it is only a matter of time before China fires back. And it may have just done that.

More from Bloomberg:

China should encourage foreign companies to list in the yuan-denominated market, the report said, citing Xia. The nation should slow the overseas listings of Chinese companies, especially resources related, strategic and monopoly firms, the report said, citing Xia.

For now this is still merely sabre ratling. However, one day soon, a report will come out confirming that the PBOC has purchased anywhere between 10 and 100 tonnes of gold (which it is rumored to be doing now in the form of stealth accumulation). That's when things for the gold shorts, especially those whose massive position shorts have been grandfathered by the C(riminal)FTC, will get ugly.


Why is the gold price going down?

Posted: 30 Jan 2011 01:00 PM PST

Alongside the falling gold price we have watched shareholders in the U.S. gold ETF, SPDR selling nearly 100 tonnes of gold over the last few weeks. The selling of gold has come from the U.S. and mainly seen at the Fixes in London at 10.30 a.m. London time or 3.00 p.m. When shareholders sell their shares the custodian HSBC is tasked with selling the fund's gold holding against these sales.


China Plays Europe Card

Posted: 30 Jan 2011 12:10 PM PST

By Jim Willie CB, Golden Jackass

Subscribe: Hat Trick Letter

Whether Americans and Westerners in general like it or not, the Chinese have become and will remain the key drivers to many economic and financial market developments, progress, and averted wreckage. The intrepid lapdog US press, loyal to the syndicate, is a critical element to maintain distractions. Of course, China must adapt and react to their own stumbles and accidents, assured since for years they have maintained a tight link in monetary policy. Doing so has linked their asset bubble expansion and bust cycle to the deadly one in the United States, and filled their coffers with US$-denominated toxic debt securities. However, China has three advantages over the US that stand out. They have $2.65 trillion in savings, rainy day money in a war chest. They have a vast industrial base, courtesy of the US, the West, and Japan, which donated the technology for the fabled disastrous low-cost solution. They have an expanding middle class. Neither the US, the UK, nor Western Europe has anything remotely similar to these three benefit allowances. It is slowly becoming clear that the US granted the Most Favored Nation status to China in return for massive gold & silver swaps to the USGovt. The Wall Street fraud kings illicitly sold the leased bullion into the market, to sustain the American fiat paper congame, and thus a betrayal to the Chinese.

The Beijing leaders are highly motivated to unseat the Anglo bankers from their perched throne, emboldened by vengeance. The betrayal was to the American people also, since waves of jobs went to China from US shores, since the US sold not only its own Fort Knox gold inventory, but Western Europe's also, then China's to boot. Those who believe the USGovt has any gold reserves at all should donate their cerebrums to science while still alive, a euthanized suicide. The USGovt in all likelihood is in possession of less than zero gold, owing both Europe and China massive amounts. It is the American ticket to the Third World, paved by lost industry, locked by vast debt, assured by broken economic principles blessed by high priest heresy. The US banking leaders still believe the US can revive itself by the flood of more debt and stronger consumer spending, without a clue of what legitimate income means or where it comes from.

Before delving deeper into this important thesis topic, a comment is in order regarding President Obama's State of the Union address and his plan. As forecasted by the Jackass on repeated past occasions, the entirety of the sacrifice to reduce the USGovt budget will come from the domestic, non-defense, non-security side. Aid to businesses and households and dedication to infrastructure will be removed. The higher priority war machine will be preserved. He called it non-security measures, implying the sacred nature of the security of the nation. Ironically, the security of the nation has been put in peril from unspeakable banker fraud, abandonment of industry, and neglect of infrastructure, not to mention the continued ignorance toward capital formation and dutiful embrace of a consumption mindset. The Obama Admin will remain committed to gutting America, undercutting the middle class, and feeding the deterioration of the USEconomy. He will assure a reduced domestic blood supply and food intake. Expect more empty talk of clean energy and jobs. The greatest potential for spending cuts are from the defense budget, for which the USGovt spends more than the rest of the world combined. A vast array of military bases, embassies place on foreign soil, and weapons projects will be preserved. The maintenance of the foreign threat will be steadfastly maintained. The ethics of drone weapons, regeneration of enemies, destabilization of governments, and the absent economic multiplier effect from defense/offense spending will all conspire to weaken the United States in ways that our leaders seem incapable of understanding. They promote the Fascist Business Model, the very same that has contributed to the wreckage of the nation. The victims are economic growth, rule of contract law, sanctity of private property, and truth. The legitimate threat to the nation comes from its internal situation and the impunity of large scale financial crimes. When reference is made to a Sputnik moment for the United States, try not to laugh. A deeply indebted nation with spiraling deficits latched at the hip to a currency besieged by monetary inflation cannot afford any grand initiative, especially when its highest national priority is war. Survival will soon escalate to a higher priority.

OVERVIEW OF THE CHINA-EUROPE CARD

The Chinese are well along a full court press to secure Gold bullion and dominate in the next phase of the global chess game that will span the next decade or more. With the expansion in the European Dollar Swap Window by the Chinese, the Euro currency has risen impressively. No benefit to Gold has been realized despite the USDollar slide in the last month. One must suspect the Chinese are busy as yellow jacket bees dumping USTreasury Bonds. But also, the Chinese might have suspended some of their Gold & Silver purchases. They might have actually drained for a time the COMEX gold inventory, and await its replenishment. Enter the BIS after midnight from the loading dock. Beijing leaders might be anticipating a high volume Gold bullion purchase flow from the back door in Europe. Refer to EuroBonds bought at discount using the Dollar Swap Window, converted eventually to Gold. My guess is the harlot Intl Monetary Fund will facilitate the Gold conversion, from the EU member nation central banks associated with PIGS nations. If inadequate supply of Gold is a problem with PIGS nations, perhaps some gold swap contracts can be enabled with the help of the Bank For Intl Settlements in Switzerland. But those swaps would seal the PIGS nation fates, since they would hand over industrial, commercial, and other collateral, assuring banker elite ownership of whatever keys to the kingdom are left. Therefore, Gold is vulnerable to hits during the time China takes its foot off the accelerator pedal. China has found a way to purchase high volumes of Gold bullion at a discount. The discount is essentially the EuroBond sovereign debt discount under distress, which might be in the 10% to 20% range. So the PIGS debt will be rescued for a while, but with forfeit of their central bank gold, or borrowed gold.

TRADE AS GEOPOLITICAL LEVER

The last several decades have revealed some sordid bilateral contracts, critical deals like what was made with the Saudis. The USGovt pledged to protect the House of Saud and their kingdom, helped along by massive USMilitary weapon sales. The Saudis in turn would demand payment for crude oil in USDollar terms exclusively. The entire Persian Gulf has toed the line on US$ oil sales ever since, even other OPEC players like Nigeria and Indonesia. A difficult balancing act has been required, and still is required, to keep the peace and minimize the friction between Arab nations and the headquarters of the multi-faceted syndicate helm that has controlled the USGovt with tight reins for nine years and four months. The USGovt prefers to enforce and sustain its global domination with heavy handed banker tactics, financial market rigging games, export of crippling acidic debt, usage of the World Bank and IMF tools, and numerous clever devious nasty methods in the shadows best not described. Lately, a chief US export has been price inflation, most evident in food prices, courtesy of the QE2 program by the USFed. In the last decade, the chief export was toxic debt securities. The Chinese have a different approach, one that might have been more prevalent in the United States half a century ago. They have made 180 trade deals across the world, the exact number exaggerated. They do not place military personnel on foreign soil. They do not lace foreign banking systems with toxic debt. They establish multi-faceted contracts that involve the build-out of port facilities, railroad lines, schools, hospitals, and community living centers. They ignore ugly government facts of life like what exist in West Africa. They operate a sophisticated guerrilla economic warfare in sharp contrast to what the US does. The Chinese build partnerships, not without some friction, while the Americans ignite violent conflicts and demand that allies take sides, while extorting bank ruin, living above their means. The source of the ignition events is kept well under wraps. The ultimate motives of the Chinese is likewise kept rather quiet.

DOLLAR SWAP WINDOW

The most important factor to bear upon the financial markets globally in the last several months, the greatest change agent, in my view, is the creation of the Dollar Swap Windows by China. They are being erected in Europe. Their focus is on the PIGS nation sovereign debt. The debt of Greece, then Portugal, finally Spain very recently, and later inexorably Italy have found and will find a major buyer in China. They will buy PIGS debt at discount. They will win favor across the continent. They will gain advantages not well publicly mentioned. They will cut off geopolitical opposition in extremely subtle manner. They will open up the pathways for greater technology transfer. They will offer a semblance of stability to the currency markets in turmoil. They will spread their global presence, if not dominance. They will work some backdoor deals with motives to secure large volumes of gold bullion at discount. They will solicit more cooperation from previously devoted Anglo tools like the Intl Monetary Fund, and perhaps turn the IMF itself into a Chinese agent. They will possibly pave the way to a mild colonization movement, perhaps having already chosen Southern Spain over Southern California. The Mexican Civil War might have frightened them off any plan to send a million Chinese to North America, equal in intensity to the realization of rising hostility and trade war with the USGovt. Somehow friction with Basque Separatists and detente with Andora versus Spain seems tame compared to roving gangs of Mexican drug lord lieutenants ready to dole out violence on US soil, whose battle lines are drawn by tribal history far more than the US press reports. The systemic failure of Mexico was forecasted in the Hat Trick Letter in the summer 2007, with timing expected for some climax events and recognition in mid-2010, a correct forecast. The USGovt has gone from assisting China in economic and industrial development to blaming them for the depleted US condition. The bigger problem is obviously the deeply entrenched domestic devotion to asset bubbles and colossal bank fraud, run in parallel with the absurd destructive consumption mindset.

HIDDEN EURO IMPACT

So the Dollar Swap Window has been constructed, with expansion a certainty. The Chinese will have an opportunity to dump a big batch of USTreasury Bonds on a regular basis. My full expectation is that the Chinese will sell far more USTBonds than they purchase PIGS nation sovereign debt. In other words, they are building a dumping ground. Key parts of the equation are that the Europeans have been promised a willing buyer (although with ulterior motive) in the Chinese for PIGS sovereign debt. The Germans are sick & tired, fed up to the gills, in supporting the Southern Europe welfare system which identifies the broken element of the faulty European Union. Its foundation had cracks from the start, more than the Jackass recognized admittedly in past years. The Europeans have been promised some important support for the embattled Euro currency. Every time the Greek crisis made the news in past months, the Euro currency sold off with gusto. No more! A strong broad plank of support for the Euro has been provided by China. They are selling their USTBonds and buying EuroBonds with PIGS brand markers. The Euro currency has risen from a January 10th low of 129 all the way to almost 137 in this month alone. The rise has occurred despite the ongoing saga of PIGS debt distress. The Portuguese sovereign debt has been shored up by Chinese promises of purchase. The Irish Govt debt is a totally different animal. They accepted and swallowed the lethal IMF poison pill, cut their budget, and seen enormous deficits spiral out of control as their economy craters. They have resorted to monetary inflation approaching Weimar style as proof of the disastrous error in decisions. Translated to US size difference terms, Ireland has expanded their Euro money supply the equivalent of the US doing so by $12 trillion, all in the space of three months on the Emerald Isle centered in Dublin. They are not keeping Dublin tidy!

The financial news reports fail to mention the China card. They fail to mention that China is exchanging USTBonds for Euros in order to purchase EuroBonds with PIGS skin labels. They fail to mention that large Chinese hands are supporting the Euro currency. My belief is that the news media does not wish to stress the expansion of Chinese influence. For a century, or perhaps three centuries, the cultural and heritage linkage between Europe and the United States has been firm and solid. A grand Chinese wedge has been inserted, not so much between Central Europe and Southern Europe as between Europe and the United States. China will be crucial in casting the Southern nations aside from the European core. They will become wards of China, even for exploit. The Dollar Swap Window constructed by China has actually isolated the USGovt in serious ways. Relief to PIGS EuroBonds is obvious. The numerous other effects are not, and those effects are not in the news. They are main elements of the Hat Trick Gold & Currency Report, and have been for several months. The expansion to Spain was a forecast made in November and December, with confirmation coming by denials in Madrid.

Something unique and unusual has happened in the last three weeks. The Euro currency has risen noticeably from 129 to 137, but the Gold price has fallen from $1385 to $1335 per ounce. For almost a full decade, the correlation between the US$ DX index and the Gold price has been in the minus 70% neighborhood. What has happened in the last month has been a gigantic outlier. It is not just significant with umpteen standard deviations above the norm. It is in the wrong direction. My best guess is that the Chinese have temporarily halted their usage of the COMEX avenue for gold acquisition. They have permitted the corrupted COMEX to push down the gold price, using its fraudulent paper mechanisms. They have given free rein for the Wall Street maestros to lower the gold price for any IMF deal to secure European gold bullion in exchange for EuroBonds. Most gold & silver contracts are settled in cash anyway these days, since the COMEX does not have much precious metal in its possession. Imagine the day coming before too many months when gold & silver can be traded in contracts at the COMEX with no gold or silver metal exchanging hands. That day is coming, along with ruin of the GLD and SLV defaults, ruin, deep discounts in share price versus the metal price, and investor lawsuits. As for the Gold & Silver price, they will rise when the Chinese decide to resume buying. Right now, their attention is diverted to EU gold bought at deep discount, and in volume. As usual, they are thinking at least 20 years ahead. The Gold & Silver price will rise soon enough for the patient minded. The physical market wrests control always, as the mid-term forces take over.

OBTAINING GERMAN TECHNOLOGY

Germany is grateful that a new benefactor has come to Southern Europe. No longer does the German Govt feel burdened by the welfare enforced by the European Union dictum. The Germans are exhausted from $300 billion in annual welfare support of a deadbeat set of children in Portugal, Italy, Greece, and Spain. Over the last ten years, the drain of German wealth has been $3 trillion in total. A German banker has kept me up to date on the details. He frequently mentions that it is not a matter of willingness for the Germans to continue to support the broken nations of Southern Europe, complete with their grand deficits and inefficient economies, and greatly different work ethic, and their preference for song and dance and wine. The Germans are NOT CAPABLE of the continued drain of $300 billion per year, since the cost has turned into a nightmare burden.

In return for the outsized Chinese relief of PIGS debt, the Germans have offered key exports in technology. The main items are machine tools, telecommunications, construction equipment, and cars. Germany is the technology leader in Europe, with no close second competitor. France is a distant second. The German Economy is not a war economy, as they possess world class technology for domestic purposes. In the early part of the last 2000 decade, the technology transfer was significant from Japan to China. It enabled a great leap for Chinese industry. In many instances, the installed Japanese technology, like with machine tools and sophisticated manufacturing floor control systems, the Chinese leapfrogged the US easily. Enter the current phase, where the Germans are working with the Chinese in major deals. My view is that the Eastern Alliance, whose participants are Germany, Russia, China, and the Persian Gulf states, has many components not easily seen. They are working on the New Nordic Euro currency, complete with a gold component, in order to establish a replacement for global banking and commerce. It could become a new global reserve currency, all in time. Expect the alliance to include commitments for vast Russian resources, vast German technology, vast Chinese bank reserves, and guarantees of vast Arab oil supply. The Dollar Swap Window is an important component to the advancement of the Eastern Alliance, in which the US and UK are not players. They are shut out.

ISOLATE USGOVT IN TRADE WAR

A significant hidden effect for the Dollar Swap Window has been the interruption of the trade war alliance encouraged and solicited by the USGovt. Evidence was clear at the most recent G-20 Meeting of finance ministers. The USGovt attempted to find wider support for hostility against China. They all fell of deaf ears. The American delegation was embarrassed, isolated, and stunned. With the Chinese acting as chief debt benefactor in Europe, with the Chinese forging Asian, Arab, South American alliances, nobody joined the adolescent US chatter to confront and combat China. The USGovt is increasingly isolated in its trade war against Beijing. The great trade war will be bilateral, with perhaps no other allies at the side of either nation. Witness the battle for global control and leadership. A great transition is in progress, as the global leader mantle passes from West to East, from the US hands to Chinese hands. The US is expert at creating enemies. As the Islamics fade in perceived threat, enter the Chinese who "stole" the US jobs and "sit on" vast hoard of money from "ill-gotten trade surpluses" in great ongoing accumulation. The ugly truth is that 60% to 65% of Chinese trade surplus from 2004 to 2008 was derived from US and Western corporations having expanded on Chinese soil with factories, fully endorsed by USGovt and Western Govts, often with direct support of ministries. The Europeans are courting the Chinese, and that is big news. China is playing the Europe card at the geopolitical table. Maybe the numerous NATO military bases will eventually fly Chinese flags and be converted to commercial supply transport usage.

The hypocrisy is thick. However, the incessant annoying shallow charges of currency manipulation ring hollow when the US Federal Reserve announced the Quantitative Easing #2. They hypocrisy was extra thick, since the USFed had heralded an end to the 0% monetary policy. The Exit Strategy was followed by monetary inflation, US style, mimicking as best they could the Weimar program 70 years ago. The hypocrisy was doubly thick since the first QE round was promised to be the only round. It was followed by QE2, as forecasted by the Jackass all last year. Expect a QE3 later this year, to rescue states and muni bonds, but only after government pension obligations are abandoned and smashed. In the process, the United States has become isolated. Numerous trade deals exclude the USGovt and USEconomy. The new perverse grand trade partners for the United States are war continuation, war expansion, and a deep embrace of the Printing Pre$$, the monetary inflation machinery. As USTreasury Bond creditors have stepped away, the USFed has entered with powerful demand from printed USDollars, all done electronically, boasted at zero cost. In my view, the cost is infinite, with broad capital destruction and economic disintegration.

BACKDOOR GOLD PURCHASE

Word is gradually leaking out that the Chinese have a powerful ulterior motive to purchase EuroBonds, not so much out of altruism, not even so much out of global expansion of influence. THE CHINESE WISH TO CONVERT DISCOUNTED EUROBONDS TO SECURE HUGE VOLUMES OF EUROPEAN GOLD. The Beijing leaders must for instance have a plan to convert a fixed percentage of EuroBonds to gold bullion, even a cut deal with European leaders and bankers, arranged carefully in advance. They wish to replace the gold bullion possibly swindled by the USGovt. Any USGovt gold leases to European nations from past years might be repaid directly to the Chinese, to close out the lease contracts. The acquisition will NOT be front page news, will NOT be discussed by European leaders, and will NOT be publicly debated. The choice for PIGS nations has been and will continue to be default on sovereign debt or to cut deals with China that buy time. Since Germany has let it be known that their credit line is cut off, China has filled the void. But Beijing leaders are crafty. They have very likely secured deals whereby the IMF harlot will facilitate huge gold bullion sales to China with the EuroBond securities. The IMF has run past cover in lease close-outs from the USGovt, complete with grand deceptions. The key to unmask the lease close-out deals is that the IMF never identified buyers. There were none often. A sale without a buyer is an end to a short trade after the passage of years in time. Without some promised conversion to gold, China would not have cut the deals. It is the quiet underpin. The common denominator in the great majority of Chinese deals forged worldwide in the last decade is the secured supply line of hard assets, like commodities. They also have a preference for port facilities. Energy supplies, mineral wealth, and foodstuffs are the main objective of the numerous Chinese trade deals, which increasingly involve establishment of currency swap facilities and conversion systems. See Brazil and Russia, which do not bother to use the USDollar in trade settlement. In the future, look for commodity deals that supply China with fresh water.

Expect this trend to increase to the point that eventually the Chinese Yuan (renminbi) is a global currency with full convertibility. Later, it might serve as global reserve currency. What gives it the edge in such a role is its rise, compared to the USDollar's decline. The next decade will see the Redback (Yuan) more and the Greenback (US$) less in banks worldwide, and in trade settlement. The extreme wild card in the entire equation is eventually colonization by the Chinese elite. If they aid in government debt purchase, then hold title to property, while providing supply lines to a wide range of consumer products (someday cars too), what would prevent them from


Why Gold and Silver Have Declined

Posted: 30 Jan 2011 12:00 PM PST

By Rob Kirby, Goldseek

Kirbyanalytics subscribers received the following fast blast [in blue] appended below late Tuesday night, Jan. 25, 2011:

The Thompson Reuters CRB index weighting has not changed since 2005.  However, virtually all other commodities related indexes do rebalance in early Jan of every year.  For instance the $CCI consists of 17 commodity constituents – with 5.88 % of the index allotted to each commodity.  It rebalances in early Jan. every year.

Silver's RABID TEAR [out performance] last year ensured that it would be "cut back" to conform to its intended 5.88 % weight.

Other commodities indexes do the SAME THING.

Big Banks know this – they run or manage most of these index funds.

Index funds dominate the trading universe more today than at any time in our financial history.

Silver and gold are being PUNISHED – in a macro sense – in early Jan – from a commodity index re-weighting point of view – PRECISELY because they outperformed so much last year.  This explains why silver is getting creamed so much more than gold – it way outperformed gold on a relative basis last year.

It's my understanding that this rebalancing window effectively closes with the expiration of Jan. Options [Wed].

If I'm correct in my thinking / analysis – this sell off is likely done and we are going to SCREAM HIGHER in both gold and silver

Why I believe I'm right?

We have just experienced a MASSIVE RECORD reduction in gold open interest reported Tuesday, Jan. 25, 2011 when COMEX gold open interest dropped 81,752 contracts to 498,998.  The silver open interest drop, down 5368 contracts to 128,228 was very large, but nothing like what happened in the gold pit. Apparently – the biggest one day drop in gold O/I prior to day was 28 thousand and change back in Nov. 2009

This tells me that the BIG BANKS [the guys who are naked short all the gold] used their fore knowledge of this rebalancing [forced selling] to cover a good chunk of their massive shorts – most likely because they KNOW they are not going to get an opportunity like this again. Basically, the banks have told us they KNOW they are screwed with their short positions – and are trying to minimize the damage.

Nothing could be more bullish for metals.

If I'm correct in my thinking, metals prices should go UP in a significant way – imminently.

The COT report on Friday should validate what I am saying here – reflecting a VERY LARGE reduction in commercial shorts.

The Sales That Led To the Price Decline Were Forced and Anticipated

The most nauseating element of what has occurred is how conflicted BIG BANKS have "gamed" [or front run, perhaps?] their clients: Article continued….

Chris Powell: And was Jerusalem builded here?

Posted: 30 Jan 2011 10:57 AM PST

Remarks by Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
The Cheviot Asset Management Sound Money Conference
The Guildhall, London
Thursday, January 27, 2011

Most Americans will believe almost anything if it's said with a British accent. I'm not here to ask you to return the favor, but rather to consider some evidence, to be receptive to questions, and to start asking some questions of your own.

In September 2009 Jim Rickards, director of market intelligence for the Omnis consulting firm in Virginia, was interviewed about the currency markets on the cable television network CNBC. Rickards remarked: "When you own gold you're fighting every central bank in the world."

That's because gold is a currency that competes with government currencies and has a powerful influence on interest rates and the value of government bonds. This was documented in an academic study published in 1988 in the Journal of Political Economy by Lawrence Summers, then professor of economics at Harvard, future U.S. treasury secretary, and Robert Barsky, professor of economics at the University of Michigan -- a study titled "Gibson's Paradox and the Gold Standard":

http://www.gata.org/files/gibson.pdf

This close correlation among gold, interest rates, and government bond values is why central banks long have tried to control -- usually suppress -- the price of gold. Gold is the ticket out of the central banking system, the escape from coercive central bank and government power.

... Dispatch continues below ...


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As an independent currency, a currency to which investors can resort when they are dissatisfied with government currencies, gold carries the enormous power to discipline governments, to call them to account for their inflation of the money supply and to warn the world against it. Because gold is the vehicle of escape from the central bank system, the manipulation of the gold market is the manipulation that makes possible all other market manipulation by government.

Of course what Jim Rickards said about gold was no surprise to my organization, the Gold Anti-Trust Action Committee. To the contrary, what Rickards said has been our premise for most of our 12 years, and we have documented it extensively. But while the gold price suppression scheme is a hard fact of history, it is seldom mentioned in polite company in the financial world. So it is a thrill for me that everyone here today is being so polite.

How have central banks tried to suppress the price of gold?

The gold price suppression scheme was undertaken openly by governments for a long time prior to 1971.

That's what the gold standard was about -- governments fixing the price of gold to a precise value in their currencies, a price at which governments would exchange their currencies for gold, currencies backed by gold.

Though the gold standard was abandoned during World War I, restored briefly in the 1920s, and then abandoned again during the Great Depression, that was not the end of government efforts to control the gold price. Throughout the 1960s the United States, Great Britain, and some of their allies attempted to hold the price at $35 per ounce in a public arrangement of the dishoarding of U.S. gold reserves. This arrangement was known as the London Gold Pool.

As monetary inflation rose sharply, the London Gold Pool was overwhelmed by gold demand and was shut down abruptly in April 1968. Three years later, in 1971, the United States repudiated the remaining convertibility of the dollar into gold -- convertibility for government treasuries that wanted to exchange dollars for gold. At that moment currencies began to float against each other and against gold -- or so the world was told.

In fact since 1971 the gold price suppression scheme has been undertaken largely surreptitiously, seldom acknowledged officially. But sometimes it has been
acknowledged officially, and with a little detective work, still more about the price suppression can be discovered.

You may have heard GATA derided as a "conspiracy theory" organization. We are not that at all. To the contrary, we examine the public record, produce documentation, question public officials, publicize their most interesting answers, or their most interesting refusals to answer, and sometimes litigate to get information. I'd like to review some of the public record with you.


The official records

The gold price suppression scheme was a matter of public record in January 1995, when the general counsel of the U.S. Federal Reserve Board, J. Virgil Mattingly, told the Federal Open Market Committee, according to the committee's minutes, that the U.S. Treasury Department's Exchange Stabilization Fund had undertaken gold swaps. Gold swaps are exchanges of gold allowing one central bank to intervene in the gold market on behalf of another central bank, potentially giving anonymity to the central bank that wants to undertake the intervention. The 1995 Federal Open Market Committee minutes in which Mattingly acknowledges gold swaps are still posted at the Fed's Internet site:

http://www.federalreserve.gov/monetarypolicy/files/FOMC19950201meeting.p...

The gold price suppression scheme was again a matter of public record in July 1998, six months before GATA was formed, when Federal Reserve Chairman Alan Greenspan told Congress: "Central banks stand ready to lease gold in increasing quantities should the price rise." That is, Greenspan contradicted the usual central bank explanation for leasing gold -- supposedly to earn a little interest on a dead asset -- and admitted that gold leasing is all about suppressing the price. Greenspan's admission is still posted at the Fed's Internet site:

http://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm

Incidentally, while gold advocates love to cite Greenspan's testimony from 1998 because of its reference to gold leasing, that testimony was mainly about something else, for which it is far more important. For with that testimony Greenspan persuaded Congress not to regulate the sort of financial derivatives that lately have devastated the world financial system.

The Washington Agreement on Gold, made by the European central banks in 1999, was another admission -- no, a proclamation -- that central banks were working together to control the gold price. The central banks in the Washington Agreement claimed that, by restricting their gold sales and leasing, they meant to prevent the gold price from falling too hard. But even if you believed that explanation, it was still collusive intervention in the gold market. You can find the Washington Agreement and its successor agreements at the World Gold Council's Internet site:

http://www.reserveasset.gold.org/central_bank_agreements/cbga1/

Barrick Gold, then the largest gold-mining company in the world, confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003. That is when Barrick filed a motion to dismiss Blanchard & Co.'s anti-trust lawsuit against Barrick and its bullion banker, JPMorganChase, for rigging the gold market.

Barrick's motion claimed that in borrowing gold from central banks and selling it, the mining company had become the agent of the central banks in the gold market, and, as the agent of the central banks, Barrick should share their sovereign immunity and be exempt from suit. Barrick's confession to the gold price suppression scheme is posted at GATA's Internet site:

http://www.gata.org/files/BarrickConfessionMotionToDismiss.pdf

The Reserve Bank of Australia confessed to the gold price suppression scheme in its annual report for 2003. "Foreign currency reserve assets and gold," the Reserve Bank's report said, "are held primarily to support intervention in the foreign exchange market." The Reserve Bank's report is still posted at its Internet site:

http://www.rba.gov.au/publications/annual-reports/rba/2003/pdf/2003-repo...

Maybe the most brazen admission of the Western central bank scheme to suppress the gold price was made by the head of the monetary and economic department of the Bank for International Settlements, William S. White, in a speech to a BIS conference in Basel, Switzerland, in June 2005.

There are five main purposes of central bank cooperation, White announced, and one of them is "the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful." White's speech is posted at GATA's Internet site:

http://www.gata.org/node/4279

Two years ago a remarkable 16-page memorandum was found in the archive of the late Federal Reserve Chairman William McChesney Martin. The memorandum is dated April 5, 1961, and is titled "U.S. Foreign Exchange Operations: Needs and Methods." It is a detailed plan of surreptitious intervention to rig the currency and gold markets to support the dollar and to conceal, obscure, or falsify U.S. government records and reports so that the rigging might not be discovered. Amazingly, this plan for rigging the currency and gold markets remains on the Internet site of the Federal Reserve Bank of St. Louis:

http://fraser.stlouisfed.org/docs/historical/martin/23_06_19610405.pdf

In August 2009 the international journalist and provocateur Max Keiser reported an interview he had with the Bundesbank, Germany's central bank, in which he was told that all of Germany's gold reserves were held in New York. That interview is posted at the YouTube Internet site:

http://www.youtube.com/watch?v=EzVhzoAqMhU

Some people saw the Bundesbank's admission as a suggestion that Germany's gold had become the tool of the U.S. government. GATA consultant Rob Kirby of Kirby Analytics in Toronto then pressed the Bundesbank for clarification. The Bundesbank quickly replied to Kirby by e-mail with a denial of Keiser's report, but the denial was actually pretty much a confirmation:

http://www.gata.org/node/7713

"The Deutsche Bundesbank," the reply said, "keeps a large part of its gold holdings in its own vaults in Germany, while some of its gold is also stored with the central banks located at major gold trading centers. This," the Bundesbank continued, "has historical and market-related reasons, the gold having been transferred to the Bundesbank at these trading centers. Moreover, the Bundesbank needs to hold gold at the various trading centers in order to conduct its gold activities."

The Bundesbank did not specify those "gold activities" and those "trading centers." But those "activities" can mean only that the Bundesbank is or recently has been surreptitiously active in the gold market, perhaps at the behest of others -- like the United States, the custodian of German gold.

A few weeks ago the German journalist Lars Schall, at GATA's urging, pressed the Bundesbank for clarification about the German gold reserves, and particularly about whether the Bundesbank had undertaken gold swaps with any U.S. government agency. Schall sent the Bundesbank 13 questions. But the Bundesbank brushed him off, even as it seemed to acknowledge meddling surreptitiously in the gold market:

http://www.gata.org/node/9363

The Bundesbank replied:

"In managing foreign reserves, the Bundesbank fulfils one of its mandated tasks as an integral part of the European System of Central Banks. We trust you will understand that we are not able to divulge any further information regarding this activity. Particularly with respect to the confidential nature of information about where gold holdings are kept, we are unable to go into any greater detail concerning exact locations and the quantities stored at each of these. Likewise, owing to the strategic nature of the activity, we are not at liberty to provide you with more detailed information about gold transactions."

In 2009 a New York financial market professional and student of history, Geoffrey Batt, posted at the Zero Hedge Internet site three declassified U.S. government documents involving the gold market.

The first was a long cable dated March 6, 1968, sent by someone named Deming at the U.S. Embassy in Paris to the State Department in Washington. It has been posted at the Zero Hedge Internet site:

http://www.zerohedge.com/article/declassified-state-dept-data-highlights...

The cable described the strains on the London Gold Pool, the gold-dishoarding mechanism established by the U.S. Treasury and the Bank of England to hold the gold price to the official price of $35 per ounce. The London Gold Pool was to last only six months longer.

The cable is a detailed speculation on what would have to be done to control the gold price and particularly to convince investors "that there is no point anymore in speculating on an increase in the price of gold" and "to establish beyond doubt" that the world financial system "is immune to gold losses" by central banks.

The cable recommended creation of a "new reserve asset" with "gold-like qualities" to replace gold and prevent gold from gaining value. To accomplish this, the cable proposed "monthly or quarterly reshuffles" of gold reserves among central banks -- what the cable called a "reshuffle club" that would apply gold where market intervention seemed most necessary.

Of course these "reshuffles" sound very much like the central bank gold swaps and leases of recent years.

The idea, the cable says, is for the central banks "to remain the masters of gold."

Also disclosed in 2009 by Zero Hedge's Geoffrey Batt was a memorandum from the Central Intelligence Agency dated December 4, 1968, several months after the collapse of the London Gold Pool. This too has been posted at the Zero Hedge Internet site:

http://www.zerohedge.com/article/cia-chimes-gold-control-highlights-hist...

The CIA memo said that to keep the dollar strong and prevent "a major outflow of gold," U.S. strategy would be:

"-- To isolate official from private gold markets by obtaining a pledge from central banks that they will neither buy nor sell gold except to each other."

And:

"-- To bring South Africa to sell its current production of gold in the private market, and thus keep the private price down."

The third declassified U.S. government document published by Geoffrey Batt at Zero Hedge in 2009 may be the most interesting, because it was written on June 3, 1975, four years after the last bit of official fixed convertibility of the dollar and gold had been eliminated and the world had been told that currencies henceforth would float against each other and against gold and that gold would be free-trading.

The document is a seven-page memorandum from Federal Reserve Board Chairman Arthur Burns to President Gerald Ford. It is all about controlling the gold price through foreign policy and defeating any free market for gold. It has been posted at GATA's Internet site:

http://www.gata.org/files/FedArthurBurnsOnGold-6-03-1975.pdf

Burns tells the president: "I have a secret understanding in writing with the Bundesbank, concurred in by Mr. Schmidt" -- that's Helmut Schmidt, West Germany's chancellor at the time -- "that Germany will not buy gold, either from the market or from another government, at a price above the official price of $42.22 per ounce."

Burns adds, "I am convinced that by far the best position for us to take at this time is to resist arrangements that provide wide latitude for central banks and governments to purchase gold at a market-related price."

While the Burns memo is consistent with the long-established interest of central banks in controlling the gold price, it was written 36 years ago.

But there is a contemporaneous admission of U.S. government intervention in the gold market. It has come out of GATA's long Freedom of Information Act struggle with the U.S. Treasury Department and Federal Reserve for information about the U.S. gold reserves and gold swaps, information that has been denied to GATA on the grounds that it would compromise certain private proprietary interests. (Of course such a denial, a denial based on private proprietary interests, is in itself a suggestion that the U.S. gold reserve has been placed, at least partly, in private hands.)

Responding to President Obama's declaration, soon after his inauguration, that the federal government would be more open, GATA renewed its informational requests to the Fed and the Treasury. These requests concentrated on gold swaps.

Of course both requests were denied again. But through its Washington lawyer, William J. Olson (http://www.lawandfreedom.com), GATA brought an appeal of the Fed's denial, and this appeal was directed to a full member of the Fed's Board of Governors, Kevin M. Warsh, formerly a member of the President's Working Group on Financial Markets, nicknamed the Plunge Protection Team. Warsh denied GATA's appeal but in his letter to our lawyer he let slip some stunning information:

http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf

Warsh wrote: "In connection with your appeal, I have confirmed that the information withheld under Exemption 4" -- that's Exemption 4 of the Freedom of Information Act -- "consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you."

So there it is: The Federal Reserve today -- right now -- has gold swap arrangements with "foreign banks," and the public and the markets must not be permitted to know about them.

Eight years ago Fed Chairman Alan Greenspan and the general counsel of the Federal Open Market Committee, Virgil Mattingly, vigorously denied to GATA, through two U.S. senators who had inquired of the Fed on our behalf, that the Fed had gold swap arrangements, even though FOMC minutes from 1995 quote Mattingly as saying the U.S. has engaged in gold swaps:

http://www.gata.org/node/1181

But now the Fed has admitted such arrangements, if only inadvertently.

GATA subsequently sued the Fed in U.S. District Court for the District of Columbia to gain access to the documents involved. That suit is pending.


Central banks are out of control

There is a reason for the Fed's insistence that the public and the markets must not know what the Fed is doing in the gold market.

It is because, as the documents compiled and publicized by GATA suggest, suppressing or controlling the gold price is part of the general surreptitious rigging of the currency, bond, and commodity markets by the U.S. and allied governments; because this market rigging is the foremos


REGRESSION TO THE MEAN

Posted: 30 Jan 2011 10:24 AM PST

By Toby Connor, Gold Scents
All markets are subject to the forces of regression. Newton's basic laws of motion; Action and reaction.

At current levels both the S&P and Nasdaq 100 are stretched further above the 200 day moving average that virtually any other time in the last 10 years.

Not surprisingly the further a market stretches in one direction the harder it snaps back in the other once the forces of regression gets its hooks into the market.

The Fed is exacerbating this process with their constant meddling in the markets.

The flood of liquidity unleashed by Greenspan and Bernanke from 2002 to 2007 in the vain attempt to abort the bear market was directly responsible for creating the conditions that led to the market crash of 08/09.

The rally last April was pushed much higher than it would normally have risen by the forces unleashed during QE1. The end result; the correction when it finally came was much more severe than it would have been normally, even including a mini-crash in May.

QE2 has now driven the market even further above the mean than in April. Unless the law of action and reaction has been repealed we should soon see an extreme regression to the mean event .

I believe the Fed has put into place the conditions that will bring about the end of this cyclical bull market and usher in the next leg down in the secular bear.

During the next 3 months we should see the dollar begin to collapse down into the 3 year cycle low unleashing the currency crisis we've been expecting. This will drive a massive surge in inflationary pressure that will poison the fragile recovery and send the global economy back down into the next recession. A recession that should be much worse than the last one as it will begin with economic conditions much weaker than in `07.

The last time the Fed did this it produced a brief period of prosperity by creating a real estate and credit bubble. We all know how that ended. This time I expect the party to last two years tops, which means this cyclical bull should top by March. In their ill fated attempt to get something for nothing the Fed is going to cause a currency crisis and a massive surge in global inflation.

The price we will all pay when the house of cards comes crashing down again will be multiples more expensive than last time.

Toby Connor

GoldScents

A financial blog primarily focused on the analysis of the secular gold bull market.

If you would like to be added to the email list that receives notice of new posts to GoldScents, or have questions, email Toby.

‘Fear and Love Make Gold Strong’

Posted: 30 Jan 2011 10:24 AM PST

The Daily Reckoning

For the BIG GOLD annual gold forecast survey published in January, Jeff Clark surveyed seven gold experts and nine top economists and fund managers, along with Doug Casey himself, to provide their best insight on what to expect in 2011 and how to invest.

One expert he interviewed was Frank Holmes, head of US Global Investors, which manages 13 no-load mutual funds, many of them recognized for consistently high performance by Lipper Fund Awards. Last year, Frank's Gold & Precious Metals fund returned 36.8% – more than triple the Dow – and the World Precious Minerals fund gained 45.4%, outgunning the S&P almost four-fold.

Read on for Frank's thoughts on gold and precious metals stocks…

BIG GOLD: Gold was up 30% in 2010; to what do you attribute its rise?

Frank Holmes: Investors have to look at gold demand as both the fear trade and the love trade. What most media focus on is the negativity of government policies to drive gold prices. I characterize this as the fear trade — deficit spending and negative real interest rates for the G7 countries.

More significant is the love trade – where more than 60% of the world's population is in emerging countries averaging over 6% GPD growth and 8% rising personal income, and they believe in giving gold as a gift for birthdays, weddings, religious holidays, etc. This love trade is entrenched, and it is not going away.

Fears over the European debt crises were a big driver of gold in the first half of the year, as investors bought both gold and the dollar for safety. However, by mid-year, the dollar started to break down as smoldering budget woes in the US began to reignite concerns over the fiscal situation here.

Gold got a second lift by October as both the fear and love trade showed up together. We had the season of Diwali lights in India and we had QEII, so gold went to new highs. By year end almost all the gains made by the dollar were eroded away, while gold finished the year with a respectable rise of 29.5%.

BG: What forces will move gold this year? And what's your price projection for 2011?

FH: US equity strategists are way too complacent and so are risk measures such as the VIX, which is back to pre-Lehman lows despite government debt levels at even higher levels. The broad view is that there will be no inflation in the US, as labor markets are slack, with 10% unemployment; however, rising commodity prices, which are controlled by international demand, will remain strong.

A second wild card will be whether the German public will go along with the "transfer society" concept. European woes are not over.

Third, US lawmakers will have a bitter potion to swallow, as the vote on raising the US debt ceiling will be a rallying point for the Tea Party this year. And if inflation, such as rising oil prices, starts to sap spending, wages in the US may have to rise, and then the cat would be out of the bag.

It's been a great ten years for gold, which was fully justified due to the explosion in consumer credit and debt, but gold may still have a very important role to play going forward. I believe in the next five years the price of gold will double from current levels, and that means it has the potential to have a 15% annual compounded rate of return.

BG: How volatile do you expect gold to be?

FH: What is really key in understanding and managing expectations in the capital markets is that over any 12-month period, it is a non-event for gold to go plus or minus 15% in a year. This happens 68% of the time. The stocks of gold producers can go plus or minus 40% over any 12-month period, so they have greater risk but can also provide substantial returns. It is thus important to respect and look at volatility as an opportunity.

BG: Gold stocks as a group did not outperform gold in 2010 – does that change in 2011? And if the broader markets sell off, do gold stocks fall along with them or trade on their own?

FH: Actually, 2010 may have been a turning point, as major gold-producing companies, measured by the Gold Bugs Index (HUI), gained 34.1%. This hopefully has reversed the trend of the last couple years where bullion outperformed the stock. Junior gold mining companies, on average, returned roughly twice the gain of gold bullion, but some of those names were fairly silver rich, and we know how well silver did last year.

In the scenario of a market sell-off, gold stocks are still equities and can get pulled down with any surge towards liquidity. However, the price action since the 2008 credit crises showed us that gold stocks did very well for investors relative to the broader markets. In addition, while those of us in the gold business are very close to the story, there are a lot of people that are still coming around to investments in the precious metals sector.

When one looks at what has been some of the best-performing stocks over the last 10 years, gold and gold stocks may very well trade on their own as a preferred asset class.

BG: Silver was up 81.9% in 2010, but is still below its 1980 nominal high. What's your outlook for silver in 2011?

FH: Silver may have gotten ahead of itself a bit. In the coin market, for instance, it is not uncommon to see certain gold coins sell for a 30% premium to the spot price, but in the last quarter we saw some collectable silver coins with asking prices as much as a 300% premium.

Silver does offer exceptional leverage to gold, almost 2 to 1. Right now, while it looks like the economy is getting stronger, silver could continue to benefit from a pick-up in industrial uses.

BG: What's your best advice for precious metal investors in 2011?

FH: Investors should consider buying gold as insurance. We recommend having about 10% of their portfolio in gold and gold stocks, and rebalancing every year.

Two stocks that we like at current prices are Randgold (GOLD) and Silvercorp (SVM). Both companies focus on high-quality ore deposits that will be economic at prices substantially below current spot prices.

In Randgold's case, their share price has fallen about 20% since the presidential elections in the Ivory Coast became locked in a stalemate. The company's Tongon mine is their newest project and is currently being commissioned, but news flow has been slow and hasn't drawn much attention. Look to see this issue resolved over the next couple of months.

Silvercorp is one of the few companies that has successfully navigated in China, and our models indicate there is much more upside available from these assets than where the stock is currently priced. SVM also has a very attractive relative valuation to its North American peers, where in some cases we have seen 5% of their market capitalization turn over fairly consistently everyday over the last month – those shareholders are obviously not around for the long term.

Regards,

Jeff Clark
for The Daily Reckoning

'Fear and Love Make Gold Strong' originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

More articles from The Daily Reckoning….

‘Miners Challenge’ Entering the Home-Stretch

Posted: 30 Jan 2011 10:24 AM PST

By Jeff Nielson, Bullion Bulls Canada

For those readers who have been following the SilverGoldBull Miners Challenge since it began in October, things are finally starting to get "interesting".

As everyone knows, the latest round of banker bullion-bashing has caused a pull-back in the sector – with signs toward the end of the week that we have finally found a bottom following this latest "ambush". At the same time, with the end of January near (and a short month ahead), we are now 2/3 of the way through our contest.

Not unexpectedly, the pull-back in the miners has caused the standings to tighten. While Clint009's pick (South American Silver) is still in the lead (+ 187.50%), his margin has shrunk – while some of the other "contenders" flip-flop their positions. Marcocruces' pick (Great Panther Silver) has slipped to 3rd position (+ 116.67%), while BringTheGold's entry (Arian Silver) has surged into 2nd place (+ 143.33%).

In case there are newer readers who don't know what all the "fuss" is about, here is a review of the contest. Members were asked to choose the gold or silver miner whom they expected to perform the best (in percentage terms) over the contest period (Oct/10 – Mar/11). But they certainly aren't doing this just for the "glory".

Our generous contest sponsor, SilverGoldBull.com has made things interesting by donating gold bullion prizes to be awarded to our winners, as follows:

1st prize: (1) 1-oz gold coin

2nd prize: (1) ½-oz gold coin

3rd prize: (1) ¼-oz gold coin

Halfway leader:  (1) ¼-oz gold coin

Alert readers will note that over our contest period the silver miners have been giving the gold miners a good "spanking", with all three of our leaders coming from the silver sector. This has much less to do with "underperformance" by the gold miners, and much more to do with the fact that not only has silver outperformed gold over recent months, but prior to that, valuations for the silver miners were certainly stingier than for the gold miners.

As the silver miners "catch up" to the gold miners in terms of their relative value, this sets the stage for a much more interesting cycle in the market in the months ahead – as gold and silver prices appear set to rebound, while the relative parity between the miners makes it a toss-up as to which half of the precious metals sector will put in the strongest performance over the next few months.

For those readers/members who missed out on our first Miners Challenge, rest assured that we plan on repeating our contest this fall – so don't miss out on your next opportunity to "bring home the gold" by picking the best-performing miner. Those in the contest should check our forum for the latest (full) contest standings – which have been updated regularly courtesy of another one of our members.

With 2/3 of the contest now completed, we would like to thank all of those members who participated, and thank SilverGoldBull.com (once again) for their continued sponsorship of our member contests (and a "thank you" to SilverCaper for your regular updates of the standings).

Full list of contestants, and their picks:

More articles from Bullion Bulls Canada….

Investing in Gold and Silver for the Long Haul

Posted: 30 Jan 2011 10:22 AM PST

By The Mogambo Guru

Chris Mayer was quoted in the 5 Minute Forecast newsletter as having noted that "If history is any guide, inflation will likely get much worse."

Being the kind of guy who goes absolutely insane about inflation in prices, you can imagine the effect this had on me, although with a modest touch of understatement, he does not take things to the logical conclusion, namely that "We're Freaking Doomed (WFD), you morons! And now everyone is going to see what happens after an excessive creation of money has distorted the economy, little by little over the decades, into a grotesque, corrupt, cancerous, incestuous economy feeding on government spending that, in the local, state and federal aggregate, now comprises an outrageous 50 percent of all spending in The Whole Freaking County (TWFC), and yet the Federal Reserve keeps creating more and more so that the federal government can borrow more and more and thus spend more and more!"

I would suggest, of course, that he would finish up with, "And now I, Chris Mayer, speaking both for myself and The 5-minute Forecast, and everyone on the planet who has not lost his or her freaking mind, the only logical thing to do is to follow the sage advice of The Mighty Mogambo (TMM) to buy gold and silver, gold and silver, gold and silver, more and more and more until they are stashed in huge piles all over the house and you are stubbing your toes on them all the damned time, costing you as much in doctor bills as the silver goes up in price, which means (with certain simplifying assumptions yet yielding 3-decimal place precision) you have reached maximum utility!"

This is Very, Very Good (VVG) advice, and provides a good place to finally stop buying gold and silver, as taking the next step is the path to insanity, which starts when you find yourself getting peevish about your inability to get a permit to construct a lousy combination precious-metals vault and oil storage facility in your backyard, using land acquired all around my house by buying out the neighbors who thought they were so smart not to buy gold and silver when I told them, "Buy gold and silver, you morons, when the evil Federal Reserve is creating So Freaking Much Money (SFMM), or one day you will regret it, and I one day I will buy your stupid houses for pennies on the dollar and kick you out, just before bulldozing your homes to rubble and having it hauled away so that every trace of you and your 'no gold or silver for me' stupidity is gone forever! Wiped out! Hahahaha! Morons!"

Well, apparently everyone has heard of my Strident Mogambo Advice (SMA) to buy gold, silver and oil equities, and it doesn't even rate a raised eyebrow anymore, as proved when Mr. Mayer went blithely on "Everyone seems to know the US inflationary story of the 1970s. The official inflation rate hit nearly 14% by 1980."

I am stopped from going ballistic about such horrors of inflation only because the rate of inflation is worse in other countries, where, Mr. Mayer goes on, "it was worse. In the UK, inflation topped out at 27%; in Japan, 30%." Yikes!

I used the word "Yikes!" in the sense of "ancient history" since, as far as most people are concerned, 1980 was 31 years ago, which was before most people were born, and which is all a sorry result of the aftermath of 1971, which is 9 years earlier, when the dollar's last tenuous tether to gold was severed by Nixon, allowing dollars to be created "at will" by a whore Federal Reserve, which they were, which is why debt soared and there has been constant inflation in prices and now we are all ruined.

Here is where I forsake the use of, "Yikes!" to use the words, "We're Freaking Doomed!" in the sense of "current events," because if inflation in 1980 was 14%, what is the inflation rate when a reader of Chris Mayer's commented, "He may have cited the Wells Fargo forecast of 4% increase in food prices, but between packaging size reductions and slight price increases, we're currently running between a 10-15% increase on core grocery items."

And it gets worse than that, as the reader goes on, "Add that with the upward trend in energy prices, you're slowly barking up a tree that's 15-20% higher than what we started with a year ago"!!

Perhaps the link between the creation of money and inflation does not impress you, the casual reader who has wandered across the MoGu newsletter by accident, and who wonders if there is something of any significance or interest beneath the dull veneer of my poor writing and weirdly recurring thinly-disguised threats against the Federal Reserve as revenge for creating their so much excess money that it creates inflation in prices which makes life Very, Very Tough (VVT) for the poor.

If so, let me bring you up to speed: 15-20% inflation is enough to destroy you and everything, and everybody, you love, and your best bets are to get a lot of gold and a lot of silver, which is automatically proved, in a metaphysical, mystical way, in that "best bets" are anagrams, and "silver and livers" are anagrams, and if there is one thing you can't live without, it's a liver!

Okay, I admit that I am stretching it with this "silver and livers" thing, but after all the other thousands of reasons to buy gold and silver that I have used over the years to convince people to get up off of their fat, stupid butts to go out and buy gold and silver, I am simply out of ideas.

I am desperate for some new reason to buy gold and silver beyond the first 3,000 reasons, although, fortunately, as far as buying them is concerned, easy is easy is easy, and no more need be said of its ease, expect for, perhaps, "Whee! This investing stuff is easy!"

The Mogambo Guru
for The Daily Reckoning

Investing in Gold and Silver for the Long Haul originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."


FOFOA: Who is draining GLD? Probably giants who want metal

Posted: 30 Jan 2011 10:22 AM PST

1:20a GMT Sunday, January 30, 2011

Dear Friend of GATA and Gold:

Blogger FOFOA yesterday offered some brilliant observations about the gold exchange-traded fund GLD — foremost among them that, far from being negative for gold, the liquidation of large amounts of GLD shares on any particular day is likely actually an indication of vast demand for gold by "giants" in amounts so large that they can be obtained only by converting GLD shares to metal. FOFOA quotes financial letter writer Lance Lewis' stunning observation that large disgorgements of GLD shares have corresponded closely with important gold price lows that have quickly been reversed. FOFOA's commentary is headlined "Who Is Draining GLD?" and you can find it at his blog here:

http://fofoa.blogspot.com/2011/01/who-is-draining-gld.html

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

Help keep GATA going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:

http://www.gata.org

To contribute to GATA, please visit:

http://www.gata.org/node/16

Kitco News reports on GATA's lawsuit seeking Fed's gold records

Posted: 30 Jan 2011 10:22 AM PST

8p GMT Saturday, January 29, 2011

Dear Friend of GATA and Gold:

Kitco News reports this weekend about GATA's lawsuit against the Federal Reserve in U.S. District Court for the District of Columbia, which seeks access to the Fed's gold records. You can find the story here:

http://www.kitco.com/reports/KitcoNews20110128CT_focus.html

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

Help keep GATA going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:

http://www.gata.org

To contribute to GATA, please visit:

http://www.gata.org/node/16

Silver futures trading has nothing to do with metal's real price, Sprott says

Posted: 30 Jan 2011 10:22 AM PST

7:37p GMT Saturday, January 29, 2011

Dear Friend of GATA and Gold (and Silver):

Interviewed by King World News this week, Sprott Asset Management CEO Eric Sprott discusses, among many things, the silver shortage, worldwide food shortages and inflation, and the likely massive gold offtake caused by millions of new retail gold accounts at banks in China. Regarding silver, Sprott says "99.9 percent" of daily silver futures trading has nothing to do with the physical market. The interview is about 18 minutes long and you can listen to it at King World News here:

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/1/29_Eric_…

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

Help keep GATA going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:

http://www.gata.org

To contribute to GATA, please visit:

http://www.gata.org/node/16

Gold Bull Market Remains Intact: Is Cycle Low Imminent?

Posted: 30 Jan 2011 10:21 AM PST

prieur du plessis Prieur du Plessis submits:

In what is probably an overdue correction after a star performance (+29.6%) during 2010, gold bullion has declined by 6.0% since the turn of the year. However, with the turmoil in Egypt as catalyst, the yellow metal sharply reversed course on Friday from an intraday low of $1,308.10 to close the week at $1,335.40.

The question that invariably comes to mind is whether we have seen the worst of gold’s decline. A few comments from Richard Russell, author of the Dow Theory Letters, regarding cycles are of particular interest.

Read more »

Got Gold Report – Spread Traders Exit Silver Too

Posted: 30 Jan 2011 09:41 AM PST

Somehow we are reminded of the scene in one of the Jurassic Park movies where Samuel L. Jackson's character utters the defining line of the movie while about to flip a switch that represented temporary safety in a collapsing overly-complex system designed to separate humans from genetically re-engineered, very carnivorous, very deadly dinosaurs. "Hold onto your butts," the chain smoking systems analyst said. (Short Youtube video clip of that scene here.) (http://www.youtube.com/watch?v=T9uuPza41Uw)


Gold Market Update

Posted: 30 Jan 2011 07:44 AM PST

A rare and exceptional opportunity has just presented itself to enter this Precious Metals bullmarket at very favorable prices for gold, silver and especially for Precious Metals stocks - right at an intermediate bottom. Read More...



Silver Market Update

Posted: 30 Jan 2011 07:43 AM PST

Last weekend's Silver Market update turned out to be pretty much correct as while silver did drop to new lows for this correction it ended the week with a strong blast of upside energy that is believed to mark a reversal to the upside. Read More...



Quantitative Easing and Relative Asset Performance From 2008: Gold, Silver, SP 500, US Dollar

Posted: 30 Jan 2011 07:36 AM PST


This posting includes an audio/video/photo media file: Download Now

Gold and Silver alert: traders at JPM and other Wall St. firms instructed by Fed/Treasury to attack PM's – HARD ON MONDAY – to try and boost dollar and reduce food/energy prices – as inflation fueled revolts go global – and regimes

Posted: 30 Jan 2011 06:52 AM PST

Citigroup – The Last Recourse Against Runaway Inflation? A Commensurately Greater Jump In The Dollar Share this:


Citigroup - The Last Recourse Against Runaway Inflation? A Commensurately Greater Jump In The Dollar

Posted: 30 Jan 2011 06:34 AM PST


Citi's head of FX, Steven Englander, has some contrarian observations on the fate of the US dollar, which a more nuanced read may even indicate a slightly conspiratorial bent, namely that in order to cut the surging global inflation dead in its tracks (alas, too late for the regimes of Tunisia and Egypt), the dollar will have to surge even more. To wit: "If the world’s inflation problem is primarily derived from rising commodity and food prices, it is very likely that a stronger USD will help mitigate this inflation quickly and efficiently. There is a well established relationship between USD strength and weaker commodity prices." Of course, with the Printing Dutchman at the helm, what hope is there for a sustainable strong USD thesis: "The problem is that there does not appear to be a market driver for USD strength." Yet this could very well be the contrarian trade going forward as the G-20 looks aghast at events in Africa and realizes that the "last case" scenario just seems that much more credible. If this happens and there a concerted effort to reincarnate the dollar, look for the EURUSD to plunge, and all USDXXX pairs to surge in the following days, especially as the carry funding shorts realize that they will once again, just like in late 2008, be the sacrificial lambs at the altar of "Kicking the can down the road one last time"-dom. Quote Englander: "During a similar high commodity price episode in mid-2008, we saw some evidence of high reserves growth, which is unusual when the private sector is buying dollars. Moreover, then as now, market macro investor positions appeared to be long commodities. While it would be unusual for reserve managers to buy USD for inflation stabilization reasons, as a quick solution to a major problem it may be more effective than most."

Full must read note from Citi, which may explain why Goldman suddenly high tailed it out of its 1.40 tactical EURUSD target without hitting it and just two days after the revision.

 


Jim?s Mailbox

Posted: 30 Jan 2011 05:55 AM PST

View the original post at jsmineset.com... January 30, 2011 09:47 AM Jim Sinclair's Commentary CIGA Pedro clearly outlines how the demise of the dollar is the demise of much more. Greenspan gave away more than anyone knows. Gold is your only insurance policy against things we cannot control regardless of the wild fluctuation of the price. We must be our own central bank. Inflation Inflation Everywhere and Not a Drop to Drink At last, the doubters have nowhere to hide. The world is starkly revealed as an interconnected political economy force, and not as a disparate grouping of various nations, some authoritarian, some choosing democratically agreed upon policies, creating policy choice and thereby shaping of political outcome. Greece, Ireland, Tunisia, and now, the fulcrum of the Arab world, Egypt, stand as testimony. They are countries caught up in the machinations of a monetary policy to debase the world’s reserve currency. All "he" wanted was some inflation, a little inf...


Is Gold's Golden Era Over?

Posted: 30 Jan 2011 05:36 AM PST

David Hunkar submits:

Gold prices surged 1.8% to close at $1,340.70 an ounce Friday as investors sought the safety of the yellow metal. Despite the slight fall in gold prices so far this year, gold has had an incredible run in recent years.

An article in The Wall Street Journal takes a bearish view on gold suggesting that gold’s golden era may be over.


Complete Story »


Jim's Mailbox

Posted: 30 Jan 2011 04:47 AM PST

Jim Sinclair's Commentary

CIGA Pedro clearly outlines how the demise of the dollar is the demise of much more. Greenspan gave away more than anyone knows.

Gold is your only insurance policy against things we cannot control regardless of the wild fluctuation of the price. We must be our own central bank.

Inflation Inflation Everywhere and Not a Drop to Drink

At last, the doubters have nowhere to hide. The world is starkly revealed as an interconnected political economy force, and not as a disparate grouping of various nations, some authoritarian, some choosing democratically agreed upon policies, creating policy choice and thereby shaping of political outcome. Greece, Ireland, Tunisia, and now, the fulcrum of the Arab world, Egypt, stand as testimony. They are countries caught up in the machinations of a monetary policy to debase the world's reserve currency.

All "he" wanted was some inflation, a little inflation to get America and the west out of the deflationary spiral caused by the failure of financial instruments (a.k.a. OTC Derivatives) and un-payable government debt – but he can't get it. Everywhere it rages, but the place he wants it – home. So it erupts in global food prices and manifests itself in the attempts to bail out stone dead banks on the backs of the marginal economic player – post-destruction of the middle class. Most of the world has no savings to get through difficult times. Most of the world cannot "hedge" inflationary outcomes. Those outcomes appear quickly and change realities violently. The inflationary reality is their reality – the difference between starvation and survival. The result? Global upheaval, leading to where, we are not sure… but probably nowhere nice. Think American monetary policy was a uniquely sovereign, American affair? Think again. You are watching QE II live on television. American monetary policy and the global "race to debase" is that raging crowd you see on the television from Ireland to Greece and Egypt. It is that nascent force which Chinese leaders awake in terror, wondering what a billion plus people might do if faced with stark choices. If you can't make the connection between the monetary policy and the political reality, you need to change the causal way you look at the world.

Nations hold dollars in reserve to meet the demands of running an economy. When debasement takes place, the marginal economic player gets hit first. This is what we see now. But there is another, geo-political aspect many are missing. The western attempts to control multiple political outcomes and a global geo-political/military order rests on the ability to finance and control that order. When the money gets degraded, the ability to finance that order goes with it. Degradation of currency inhibits foreign force projection, both militarily and politically. Nobody in Egypt believes America is capable of controlling political outcomes, as they did from Suez to Mubarak. That era has passed. It passed with the Shah of Iran, and the death of the widely despised (in Egypt) Anwar Sadat. The Mubarak intermezzo is over. In the Arab world, what happens in Egypt doesn't stay in Egypt. The potential for "regime change" in Saudi Arabia is growing. Now we find that the financial necessity for Dollar debasement wasn't as politically benign as people in Washington thought. Instability rages across a region that could usher in an era of global conflict.

People say, "be careful what you wish for" when you talk about the end of western hegemony, but while the political hegemony is dying by the hour, the monetary hegemony is currently intact and its results are evident. When those results swing full circle and return to the west, currency upheaval will be guaranteed. Global system breakdown, which made its debut in 2008 is now back for its main act. Money printing didn't quite work out the way it was supposed to. This time, a rush to the security of Treasury instruments is unlikely to be the fallback position for global capital that now sees Fed monetary policy as a destructive boomerang cutting inflationary swathes across the planet… en route to its place of origin.

CIGA Pedro

 

Greetings Jim,

Gold closed slightly lower this week, reacting sharply off of the lower boundary of the uptrend from late 2008.

clip_image001

We are now 26 weeks into the intermediate-term cycle following the low on July 30. Ninety percent of all Intermediate-Term Cycle Lows (ITCL) form within 23 weeks of the previous low, so Cycle Analysis (CA) indicates that the latest ITCL is imminent and could occur at any time.

clip_image002

Additionally, the short-term cycle is currently within the window during which the next Short-Term Cycle Low (STCL) is likely to occur, and the setup for a confirmed STCL signal was generated on Friday as both of our CA price oscillators experienced bullish crossovers.

clip_image003

The trigger for confirming this STCL signal would be a daily close above $1,346. A confirmed STCL next week would significantly increase the likelihood of the ITCL occurring as well, and a synchronized short-term and intermediate-term low would forecast a move up to new all-time highs during the next 2 to 3 months.

Best,
CIGA Erik
Prometheus Market Insight
http://www.prometheusmi.com

International Forecaster January 2011 (#9) - Gold, Silver, Economy + More

Posted: 30 Jan 2011 04:41 AM PST

The US welfare state rumbles on and in some sectors of business it is being encouraged. We have to assume this attitude is based on more and increasing profits. Needless to say, it is cloaked in language that refers to the poor suffering people. The economy in the US and in many other countries is being run by and for major corporate interests. It is called corporatist fascism. Not many truthfully call it that, but that is what it is. We have government paid for and controlled by wealthy corporatist interest. In America you have $14 trillion in short-term debt and $105 billion in long-term commitments. Then there is the off budget items, such as wars and occupations that adds considerably to this debt, all attuned to keep the welfare state running. Both parties refuse to cut much of anything, although the Republicans say they will. We are skeptical after watching the tax bill become an $862 billion pork stimulus package. Discretionary spending is where the cuts will probably occur if there are any.


Valentines Day budget massacre timed to coincide with populist revolution in America

Posted: 30 Jan 2011 04:40 AM PST

Obama to Send Multitrillion-Dollar Budget to Congress Feb. 14 MK: The regime change express – starting in Reykjavik, rolling through Ireland and Greece – cutting through Tunis and Cairo should be arriving in D.C. just about then. Share this:


Gold and Silver Opportunity Before Blast Off

Posted: 30 Jan 2011 04:29 AM PST

A rare and exceptional opportunity has just presented itself to enter this Precious Metals bullmarket at very favorable prices for gold, silver and especially for Precious Metals stocks - right at an intermediate bottom. That is what our latest studies indicate. While gold dropped a little lower last week than expected in the last update, it has arrived in an area of strong support above its rising 200-day moving average in a deeply oversold condition, as we can see on its 8-month chart below. Thus it is interesting to observe that a bullish candlestick pattern, known as a "Piercing Pattern", appeared on its chart on Thursday and Friday, which frequently signifies a reversal.


Protestations

Posted: 30 Jan 2011 04:26 AM PST

Gold raged back on Friday and ended the week down only 0.53%. So far the correction is quite shallow and the turmoil in Egypt sparked a rally Friday which I'm not so sure is warranted at this time. The rally took Gold back above the $1,325 area which is good, but it was stopped at the downtrend line, which is bad. I think that this correction needs to be deeper and at least test the 200 day moving average at $1,280. At least that is what I hope to see.


Silver Reversal to the Upside About to Squeeze Shorts

Posted: 30 Jan 2011 04:15 AM PST

Last weekend`s Silver Market update turned out to be pretty much correct as while silver did drop to new lows for this correction it ended the week with a strong blast of upside energy that is believed to mark a reversal to the upside.


Gold Reacts to Egypt Riots

Posted: 30 Jan 2011 03:53 AM PST

Riots on Thursday, gold moves lower.  Riots on Friday, gold moves higher.  Is there rhyme and reason here?  Thursday the students rioted.  Friday the Muslim Brotherhood joined in the riots.  Yes, there was a difference.  Now it’s a wait and see what the outcome will be to better guess what next for gold.


Precious Metals - Week of 1.30.11

Posted: 30 Jan 2011 02:45 AM PST

FOFOA: Who is Draining GLD? Probably Giants Who Want Metal GATA (30 Jan 11) Germany Promised U.S. in 1967 Not to Convert Dollars to Gold GATA (29 Jan 11) Huge U.S. Gold Position Liquidated by Fund-WSJ Reuters (28 Jan 11) Gold Daily and Silver Weekly Charts - Potential Intermediate Bottom in Gold Jesse's Café Américain (28 Jan 11)


Ron and Rand Paul Tag Team Fed With Audit Legislation

Posted: 30 Jan 2011 01:30 AM PST

Dr. Ron Paul (R-TX) is back at it, reintroducing legislation in the House to audit the Fed. However, not only is he taking this bull by the horns as newly-appointed chair of the Subcommittee on Domestic Monetary Policy (which includes responsibility for Fed oversight), but he's now got a new ally in his son, Senator Rand Paul (R-KY), who has at the same time also introduced a Senate version of Fed-audit legislation.

According to the Wall Street Journal:

"'We must take a critical look at the Fed's monetary policy decisions, discount window operations, and a host of other things, with a real audit–and not just pay lip-service to the idea of an audit,' Sen. Paul said in a statement. 'It is more crucial than ever that we have real transparency at our own central bank.'

"Sen. Paul said the bill would eliminate the current audit restrictions placed on the Government Accountability Office and mandate a complete audit of the Federal Reserve by a deadline. Sen. Paul joined the Senate as a freshman lawmaker in January. His father, Rep. Paul, has been in the House since 1997 and previously was a member of Congress in the 1970s and 1980s.

"Rep. Paul introduced legislation calling for the same audit of the Fed on the House side, which is similar to legislation that he has pushed for as a House lawmaker. As part of the financial regulatory overhaul, Rep. Paul wanted to give congress the power to audit the fed's interest rate decisions. But the measure never made it in the final version of the bill."

The original legislation did receive early support from some other members of Congress, but at the time never managed to garner the full attention it deserved as part of the also controversial financial regulation behemoth. After going through that legislative process any remnant of his initial bill was essentially declawed. Odds are both Pauls will keep as intense a spotlight on the issue as they can, and for as long as they have that ability. You can read more details in the Wall Street Journal's coverage of Rand and Ron Paul introducing twin Fed-audit bills.

Best,

Rocky Vega,
The Daily Reckoning

Ron and Rand Paul Tag Team Fed With Audit Legislation originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."


Rising Debt and Manipulation of the Gold Market

Posted: 29 Jan 2011 11:15 PM PST

The US welfare state rumbles on and in some sectors of business it is being encouraged. We have to assume this attitude is based on more and increasing profits. Needless to say, it is cloaked in language that refers to the poor suffering people. The economy in the US and in many other countries is being run by and for major corporate interests.


Friday’s Panic in the Stock Market S&P 500 and Gold Futures

Posted: 29 Jan 2011 10:59 PM PST

Mr. Market has thrown traders a few curve balls lately as precious metals and crude oil have been selling off while the U.S. Dollar Index futures were consolidating. Additionally, the volatility index has been very choppy and was indicating that we could be seeing a potential change in the underlying trend with regards to future price action. In previous articles that I have proffered, I was warning about a likely correction in gold and equities as prices were extremely overbought and both asset classes were due for pullbacks.


Buying Gold and Silver on Leverage vs. Physical Ownership

Posted: 29 Jan 2011 08:09 PM PST

Doug Eberhardt submits:

When it comes to investing in gold and silver, depending on which advertisement you respond to, the sales person will typically push investors towards the product they can make the most money. This tactic is true no matter what industry is involved. Whether it is an insurance salesmen pushing high commission annuities or the financial adivsor pushing illiquid REITs that pay a hefty 6% commission, there is an incentive for the sales person to try and make as much money as possible.

Of course this isn't always the case, but one should be aware of what an advisor makes in commissions and what alternative investments may better suit the investor.


Complete Story »


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