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Thursday, January 27, 2011

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Gold World News Flash 2

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Negative Money Flow Accelerates for GLD

Posted: 27 Jan 2011 03:59 AM PST

Largest one-day reduction in metal holdings since the ETF's inception. Largest weekly and monthly out-flow likely with month-end near. As the open interest for the COMEX gold futures contract plunged as much as 80,000 contracts this week, to just under 500,000 contracts open we are also witness to potentially the strongest one-week and one-month negative money flow for SPDR Gold Shares (NYSE:GLD) since the ETF began trading in 2004. That includes a one-day reduction of 31.3 tonnes reported Tuesday, January 25, down to 1,229.58 tonnes. (The largest one-day reduction yet.)

Will Gold Respond to the Feds Pledge to Keep Printing?

Posted: 27 Jan 2011 01:21 AM PST

Global Macro Notes: The Deflationists Are Still In It To Win It

Posted: 27 Jan 2011 12:04 AM PST

Let's begin with an interesting observation. From the time QE2 was initiated, the $USD is actually higher, not lower.

This is especially curious given that the euro — the major forex counterweight in the $USD index — has not collapsed.

Dial back the clock to November, when many were predicting QE2 as a watershed event. China's ministry of commerce spoke of "continued and drastic US dollar depreciation." The imminent death of the dollar was (and still is) a widespread refrain.

Yet the buck is higher now. What gives?

Something else to consider — a long-term chart of 30-year US Treasury bonds, which have maintained a big picture bull market stance since the year 2000.

Along with the death of the dollar, a quite popular prediction is the ultimate demise of the U.S. bond market. Treasuries have been called a "suicidal" investment. Nassim Taleb at one point opined that "every human" should be short treasuries.

And yet, the long-range uptrend remains intact. Perhaps the reaper is coming, but he's still got some heavy lifting to do. For debt armageddon to hold water as a prophesy, we'll really need to see that long-term trendline decisively broken.

Nor should the demise of the bond market be taken as a foregone conclusion. In fact, some are betting with conviction that USTs are still a good place to be.

Like deflationist Gary Shilling, for example, who offers the following as his top investment strategy for 2011:

1. Buy Treasury Bonds. We're deliberately listing this strategy first not because of nostalgia, although this strategy has worked for us for 29 years on balance, and has been our most profitable investment. Instead, it's because we expect further substantial appreciation with 30-year Treasury bonds, and because so few other investors believe our forecast has any chance of being realized. Fundamentally, we favor Treasury bonds…

—Because we foresee slow economic growth at best in coming quarters and years

—Because the Fed is determined to further reduce interest rates

—Because deflation is looming

—Because long Treasury bonds are attractive to pension funds and life insurers that want to match their long-term liabilities with similar maturity assets

—Because as the U.S. moves ever closer to the slow growth and deflation of Japan, the parallel trends in government bond yields seem likely to persist

—Because Treasurys are the safe haven in a sea of trouble in the Eurozone and elsewhere

—Because China's attempts to cool her economy will probably precipitate a hard landing

—Because the likely price appreciation in Treasurys is in stark contrast to expensive stocks and overblown and vulnerable  commodities, foreign currencies, junk securities and emerging market stocks and bonds. We continue to predict that 30-year Treasurys, "the Long Bond," will rally from its current yield of about 4.4% to 3% with appreciation of around 2.6%. Similarly, a 30-year zero-coupon Treasury would gain 48%. We also expect the 10-year Treasury note yield to drop from the present 3.3% level to 2.0%. but the appreciation would be only 11%, largely because of its shorter maturity.

Takes all kinds to make a market eh?

The point here is not to take sides in the great inflation versus deflation debate. (We are neither bulls nor bears, but Mercenaries. The same applies to economic labels.)

Instead, the takeaway is that the deflationists are still very much "in it to win it."

In spite of all that's happened these past few months, there are still logical (and some would say compelling) arguments as to why deflation is still the dominant force in the world, with inflationary upticks merely a red herring.

In fact, there is a case to be made (as we shall articulate now) that the market-based inflation signals generated these past few months were little more than a giant QE2-related headfake.

On Nov. 4th we posed the question, Is QE Inflation a Self-Fulfilling Prophecy, offering the following food for thought:

A possible logic chain:

1) Widespread belief that QE impact is inflationary leads to
2) Widespread action to protect against dollar debasement, which fuels
3) A persistent rise in the price of [commodities / hard assets], creating
4) A self-reflexive feedback loop reinforcing 1), with the final result of
5) Companies facing significantly higher material input costs, which are
6) Correctly labeled as inflationary! (Or perhaps stagflationary.)

The gist is that whether or not quantitative easing actually had the mechanical effects intended by the Fed – in terms of lowering bond yields – it is quite possible that investor anticipation and interpretation of QE2 effects spurred the most visible results.

Think of this like a "Wall Street placebo." Numerous studies have shown that placebos – inert sugar pills delivered in the guise of medicine – can actually have tangibly positive effects on patient recovery cycles.

And so, in some ways QE2 and the "Bernanke Put" can be viewed as a giant "inflation placebo," convincing investors to move out on the risk curve, further reach for yield, and buy up inflation-favored hard assets.

This, of course, is far from the desired cause and effect… the supposed goal of QE2, if you'll remember, was to keep bond yields low in order to support the economic recovery. But the Federal Reserve failed utterly in this goal. Bond yields went UP, not down – and in fact QE2 may have been directly responsible for this impact as the "inflation placebo" caused investors to move out of treasuries!

Think of it like this:

  • In the minds of investors, QE2 is widely accepted as a market-supportive mechanism with inflationary force. (In otherwords, investors view QE2 as the attendant equivalent of "printing money," whether or not this is true.)
  • As a result of this belief, investors shift their preferences further out on the risk curve. In so doing, they take money out of treasuries and put it into risk assets.
  • Yields rise as a result of this preference shift, with risk appetite facilitating a move out of treasuries (causing forementioned rise) and into more speculative vehicles (copper, energy stocks, etc.)
  • The Fed's stated goal of QE2 – supporting the bond market / keeping yields low – thus actually results in the opposite intended effect!
  • Nobody cares, though, because all parties can claim results-based success. The Bernanke Fed can claim QE2 is a success because the stock market has gone up, and Wall Street can ignore rising bond yields against a backdrop of renewed risk appetite and modestly improving economic conditions (which were already in the pipeline).

Can you see how crazy this is? Independent of tactical decisions as to what to buy or sell next, the above chain of events shows that the Federal Reserve is clueless. In their efforts to appear sober and in control, the Fed ladles calculation upon comedy.

To wit, Bernanke et al don't really know what they are doing, they can't really predict the effects of their mad experiments, and they are happy to take credit for temporarily serendipitous outcomes which, to a large degree, were not intended or expected at all!

And yet these are the mighty financial gate keepers who, with great sobriety and gravitas, assure us they have "100% confidence" (to use a Bernanke phrase)…

Now let's cycle back around to the deflationist case. There is a clear argument here — put forth by us some time ago — that the impact of Quantitative Easing has been mainly psychological. That is to say, it may not have had any of the effects Bernanke expected other than getting investors hot and bothered, increasing risk appetites and "animal spirits."

But "animal spirits" are fickle and can fade – or be crushed under the weight of denied realities once again pressing in…

Consider another very real impact of QE2 (as a result of hard asset resurgence):  What we call "the E.M. Hiking Cycle," i.e. the need for developing countries around the world to hike interest rates, or otherwise hit the brakes, in order to fend off mounting inflation pressures.

(For more here see "Stores of Value, Feedback Loops, and Gresham's Law," and also "Pondering the High Cost of Food.")

A recent Economist piece gives insight into the very real pressures felt:

Outside America, food has a bigger share than energy in consumers' shopping baskets—and thus in inflation too (see chart). In developing countries, rising food prices can be a human as well as an economic disaster. In Asia in early 2008 a spike in the price of rice led to widespread unrest and desperate attempts by governments to secure more supplies. In December in India, for example, food prices rose at an annual rate of 14%, and there has been a run on onions, a dietary staple.

As well as taxing consumers, or worse, dearer commodities push up overall inflation, as the latest numbers from the euro area and Britain show. Although textbooks suggest central banks should "look through" a one-off increase in commodity prices, which provides only a temporary boost to inflation, monetary policymakers fret about second-round effects.

So here we have another interesting phenomena. Loose U.S. monetary policy is effectively exporting inflation to the rest of the world. The Fed is writing off the inflationary impact of that policy — be it psychology-based or otherwise — because "core" inflation statistics do not show up on the American home front.

When it comes to the food and energy tax, American consumers are not yet boiling like the frog in the proverbial pot. (Though this may also be an illusion perpetuated by the hear no evil, see no evil BLS.)

What's apparent now is that, though Bernanke refuses to tighten, emerging markets are doing the tightening for us. Developing world countries in overheated situations are taking the steps that the issuer of the world's reserve currency won't.

And so the system on the whole is undergoing tightening at the margins, which further contributes to creeping deflationary forces…

Now let's turn to the euro. The euro is stronger, even though the euro zone is still in soft crisis, because it's widely perceived (correctly or incorrectly) that:

  • The euro is not going to collapse
  • The ECB (European Central Bank) is run by hawks
  • The Federal Reserve is run by doves

In contrast to the Fed's clearly stated intent to stay loose come hell or highwater, Jean-Claude Trichet (the President of the ECB) is determined to get his disciplinarian on with communiques like this (via the Wall Street Journal):

Inflation fears—fueled by spiraling food, oil and raw material prices—are mounting around the globe, prompting the head of the European Central Bank to signal that it could raise interest rates in the future even though some countries have been weakened by the Continent's debt crisis.

In an interview with The Wall Street Journal ahead of this week's annual meeting of the World Economic Forum in Davos, Switzerland, Jean-Claude Trichet warned that inflation pressures in the euro zone must be watched closely, and urged central bankers everywhere to ensure that higher energy and food prices don't gain a foothold in the global economy.

Mr. Trichet's warning comes at a time when inflation concerns are mounting among investors around the world. Fast-growing emerging markets such as China and Brazil are seeing rising inflation at home, and their demand for globally traded commodities is pushing prices higher elsewhere.

Thus, even though the austerity gleam in Trichet's eye is a little bit scary, the logic du jour says to be bullish on tight euros (and down on loose dollars)…

But how long can this last? The trouble with the eurozone (and now the UK) is that the austerity hawks are playing chicken with the threat of double dip recession (and creeping economic malaise).

Belt tightening is all well and good – the physical equivalent of diet and exercise – if the economy (or economies plural) can handle it.

But if the unduly sick and weak economy can't handle it, the risk of zealous austerity focus is a rapid worsening of conditions as economic output falls faster than debt is cut back, making the relative burden of existing debt that much greater. (This is the dreaded "downward spiral" that can lead to deflation and depression.)

In other words, Trichet et al run the risk of emulating the FDR administration circa 1937, when a round of premature fiscal tightening sent the post-depression economy back into the crapper.

And this "1937″ scenario may actually be what's playing out in Britain now, as evidenced by the "shock" announcement in which a 0.5% GDP contraction was recorded for Q42010, rather than the expected 0.5% rise. Via the Financial Times:

Sterling put in its worst performance for a month, dropping over two cents against the dollar and hitting a 10-week low against the euro after figures revealed a surprise contraction in the UK economy.

Data showed that British fourth-quarter gross domestic product fell by 0.5 per cent, confounding expectations for a rise of 0.5 per cent and way below even the most pessimistic of analysts' forecasts.

The news raised the prospect of a double-dip recession in the UK economy and dented expectations that the Bank of England would raise interest rates in the near future.

Britain's shock was a body blow to the austerity-minded conservative government, which must now contend with the horrible combination of rising inflation and contracting economic activity.

As with the (potentially) misguided hawks of europe, it's looking like harsh austerity medicine is too strong for the frail constitution of the UK patient.

So where does this end? If Britain and various eurozone periphery countries continue to experience debilitating economic contraction, to the point where fiscal belt-tightening acts like a noose around the neck of the respective recoveries in question, the final result will be some form of emergency monetization – coupled with severe declines in the value of the euro and the British pound – and the one-time hawks will look like chastened fools, as rampant inflation is ultimately tolerated for the sake of saving the system.

This, finally, brings us to perhaps the largest reason why the deflationists are still "in it to win it"… the economic recovery process is still extremely fragile, and thus vulnerable to further shock.

  • The U.S. economy is mending itself ever so slowly, but this trend can be derailed by a sufficiently weighty crisis event.
  • The economies of Europe are extremely fragile — and prone to austerity-worsened setback as Britain's GDP contraction shows.
  • It is not clear how various emerging market economies will respond to aggressive hiking cycles and other measures to crack down on food and energy induced inflation.
  • The bubble-wracked Chinese economy, meanwhile, is vulnerable to policy shock as a result of internal inflation pressures threatening to rage out of control.

Also to keep in mind: The deflationist stance, defiant in the face of rising commodities, is that the recent rise in hard assets and risk assets in general has been more due to a QE2 "inflation placebo" effect than anything else – and in which case can be reversed by a sufficiently rude jolt to the sysetm.

And so perhaps the strongest justification for being a U.S. bond bull, and a deflationist at the core, is the conviction that some major economic dislocation in the next six to twelve months could deal this tepid, cosmetically superficial U.S. recovery a blow that it struggles mightily to recover from… in which case monetary velocity could again plummet, the "inflation placebo" effect could evaporate, and the $USD and long bonds catch renewed flight-to-safety bids as newly horrified investors disgorge their risk asset holdings and the global economic engine "seizes up" once again.

Not a pretty picture. But a scenario worth considering…

Once again, the deflationist scenario is by no means guaranteed to come about. But the case is certainly plausible, and in the eyes of some compelling.

It really comes back to the question "What odds of crisis" – housing double dip, China hard landing, periphery implosion, muni-bond meltdown etc – which takes us back to our main "Twelve Major Risks for 2011" observation, namely that you can't bank on any one specific crisis occurring in the medium term, but you can note there are enough land mines out there to make the odds of exploding one significantly high (perhaps 50% or better).

How to respond to this breathtakingly uncertain environment, in which rosy scenarios and disaster scenarios plausibly exist side by side?

Perhaps unsurprisingly, our solution is to be vigilant and flexible – and to trade. As a matter of habit and methodology we continue to assess new developments as they unfold (rather than being rigid in our preconceived notions), all the while running a relatively "balanced book" of attractive longs and shorts, and above all letting price action be our guide.

JS

Richard Russell on a surprising bullish sign for gold

Posted: 27 Jan 2011 12:00 AM PST

From Richard Russell on 321gold:

... Gold has risen a fantastic ten years in succession. Gold, of late, has been receiving a lot of interest and publicity and advertising. Gold is probably overdue for a correction in this ongoing bull market. Analysts are talking about "gold correcting down to 1200 or even 1000." However, I believe that the more important picture is that the gold bull market has much further to go on the upside.

I've been reading the McClellan Market report for years. It's one of the better and more intelligent reports that I read. McClellan does a good deal of research on cycles, and I must say some of their cycle studies work out quite well.

McClellan has discovered that there's a cycle low for gold roughly every 12.5 months. The cycle lows have run as follows...

Read full article (with chart)...

More from Richard Russell:

Richard Russell on the most important investing rule today

Richard Russell: The most profitable gold rally is yet to come

Richard Russell: Forget everything you've heard about a gold bubble

Watch out for these "Black Swans"

Posted: 26 Jan 2011 11:50 PM PST

From OilPrice.com:

It is not my intention to ruin your day. But I may well do that if you read this piece.

While traders pile on their longs with reckless abandon, and retail flows into equity mutual funds turn positive for the first time in two years, I am hearing a rising tide of negativity from the jungle telegraph.

There are "black swans" circling out there everywhere, and the risk is that they alight upon us in great unexpected flocks, like a scene out of Alfred Hitchcock’s classic film, The Birds.

Let me give you a list of things that can go wrong this year:

* The 10-year Treasury bond spikes to 5% and money gets expensive.

* Crude soars to $120 a barrel and gasoline rises to...

Read full article...

More on stocks:

Six big signs the market could plunge soon

How top analyst Gary Shilling is investing today

Trader alert: Gold and stocks could be on the verge of a "severe" correction

China is barrelling toward a massive financial crisis

Posted: 26 Jan 2011 11:41 PM PST

From Bloomberg:

Global investors are bracing for the end of China's relentless economic growth, with 45% saying they expect a financial crisis there within five years.

An additional 40% anticipate a Chinese crisis after 2016, according to a quarterly poll of 1,000 Bloomberg customers who are investors, traders or analysts. Only 7% are confident China will indefinitely escape turmoil.

"There is no doubt that China is in the midst of a speculative credit-driven bubble that cannot be sustained," says Stanislav Panis, a currency strategist at TRIM Broker in Bratislava, Slovakia, and a participant in the Bloomberg Global Poll, which was conducted Jan. 21-24. Panis likens the expected fallout to the aftermath of the U.S. subprime-mortgage meltdown.

On Jan. 20, China's National Bureau of Statistics reported that the economy grew 10.3% in 2010, the fastest pace in three years and up from 9.2% a year earlier. Gross domestic product rose to 39.8 trillion yuan ($6 trillion).

Any Chinese financial emergency would reverberate around the world. The total value of the country's exports and imports last year was $3 trillion, with about 13% of that trade between China and the U.S. As of November, China also held $896 billion in U.S. Treasuries. The trade and investment links between the two nations were underlined with Chinese President Hu Jintao's visit last week to the White House for meetings with President Barack Obama.

Worried Neighbors

Investors' concern contrasts with Chinese government statements on the outlook for the economy, which is poised to overtake Japan as the world's second biggest. The Politburo said last month that the nation had a "sound base" for stable and fast growth in 2011 after consolidating its recovery.

In an interview in Davos yesterday, Li Daokui, an academic adviser to the central bank, said he doesn't expect any "hard landing" and the economy may expand about 9.5% this year.

Fifty-three% of poll respondents say they believe China is a bubble, while 42% disagree. China's neighbors are the most concerned: 60% of Asia-based respondents identified a bubble in the world's second-largest economy.

Worries center on the danger that investment, which surged almost 24% in 2010, may be producing empty apartment blocks and unneeded factories.

'Major Dislocations'

Jonathan Sadowsky, chief investment officer at Vaca Creek Asset Management in San Francisco, says he is "exceptionally worried" that the Chinese would eventually face "major dislocations within their banking system."

Chinese authorities also raised interest rates twice in the fourth quarter in a bid to choke off inflation, a sensitive political issue since the 1989 Tiananmen Square protests, which followed uncontrolled price increases. Food prices last year rose 7.2%, according to the National Bureau of statistics.

Haroon Shaikh, an investment manager with GAM London Ltd., cited "rapid wage inflation" and soaring property prices as the financial markets' chief concern.

Li said rising real estate prices are the "biggest danger" to the Chinese economy, in an interview with Bloomberg News in Davos, Switzerland. The People's Bank of China should "gradually increase rates in the first and second quarter," Li said.

Since peaking on Nov. 8 at 3159.51, the Shanghai Composite Index has slid about 14%. "The market is right to be nervous," Michael Pettis, a finance professor at Peking University's Guanghua School of Management, wrote in his Jan. 26 financial newsletter.

Worst Market

Some investors remain unbowed. "China can continue to grow over 10% for the better part of the next five years," said Ardavan Mobasheri, head of AIG Global Economics in New York.

Still, the poll found other signs of mounting investor caution toward China, where three decades of market-oriented reform has obliterated a legacy of Maoist impoverishment.

Asked to identify the worst market for investment over the next year, 20% of poll respondents say China versus 11% in the last poll in November. Almost half of those polled -- 48% -- say a significant slowing of growth was very or fairly likely within the next two years.

Michael Martin, senior vice president of MDAvantage Insurance Company of New Jersey, says the Chinese government "has executed brilliantly" in managing the economy. The government's capacity will be tested as the economy grows and becomes more complex, he says.

Export Reliance

Chinese officials have said they intend to wean the economy off its reliance upon exports, the source of trade tensions with the U.S., in favor of greater domestic consumption.

Peter Hurst, a broker with Sterling International Brokers in London, says he's concerned China will struggle to complete the transition.

"Yes, there are 1.3 billion people in China," he says. "But are they rich enough to become consumers?"

If China stumbles, the global economy will feel the impact, says Suresh Raghavan, chief investment officer for Raghavan Financial Inc. in Houston. "If the PBOC is successful at lowering growth rates to 7%, it will still feel like a recession for a lot of people around the world," he says.

Political Stability

Most poll respondents remained confident of the Chinese government's ability to fend off demands for greater political liberalization. Just 1% expect a political crisis within the next year and 27% expect one within the next two to five years.

And by a 60% to 30% margin, those surveyed say President Hu's policies were favorable to investors. Hu tied with German Chancellor Angela Merkel for the poll's top spot.

"The Chinese politicians are ab

A fact about gold that most investors are missing

Posted: 26 Jan 2011 11:31 PM PST

From Frank Holmes of U.S. Global Investors:

Gold is a volatile asset class. This is why we tell investors to put no more than 5%-10% of their portfolio in gold, and split that among the bullion itself and those companies tasked with exploring for and producing gold.

However, when compared to other commodities last year, gold looks relatively calm. This chart from the World Gold Council (WGC) shows the annualized daily volatility for selected commodities such as copper, silver, tin and others.

As you can see, gold was the second-least volatile of the group behind livestock. In fact, the annualized daily volatility for metals like zinc, palladium, lead, and nickel were more than twice that of gold.

Gold's annualized volatility came in at 16.1% in 2010, down from 21.4% in 2009. Last year's volatility is on par with that of the past 20 years, where gold’s annualized volatility has averaged 15.8%, according to the World Gold Council (WGC). The annualized figures for the S&P Goldman Sachs Commodity Index and crude oil were 20.84% and 28.4%, respectively...

Read full article...

More on gold:

Casey Research: Why gold is falling today

Why you should be prepared for a gold price collapse

WARNING: Traveling with gold just became much more dangerous

Home Values Still Declining

Posted: 26 Jan 2011 09:56 PM PST

The severity of the housing collapse is neatly captured in this graph. Other than in a few markets, there are no signs the decline has ended. The social implications of these declines should not be underestimated. Nor should their effect on banks where these financial institutions are obtaining reported profits by reducing loan loss reserves. [...]

Silver is the Investment of the Next Decade: Eric Sprott

Posted: 26 Jan 2011 08:34 PM PST

Strong Gold Demand Was Broad-Based During 2010: World Gold Council.  U.S. 2011 budget deficit to rise by $500 billion. U.S. housing prices continue to crash. New home sales lowest in 47 years...and much more.

¤ Yesterday in Gold and Silver

Gold didn't do much during early Far East trading on Wednesday...and was up maybe five bucks shortly after the London open...and held that until noon their time before rolling over.  Gold hit it its absolute low of the day [$1,324.20 spot] just a few minutes after 11:00 a.m. Eastern time.  From that point, the whole tenor of the market changed...and gold moved quietly and firmly higher...closing almost on its high of the day, which was $1,3458.10 spot.

Silver rose in fits and starts during Wednesday's trading session...and by lunchtime in London, the price was up about two bits.  From there, the price rolled over, just like gold's...and silver's low price of the day [$26.68 spot] occurred at some point between 11:00 a.m. and 12 noon eastern time.  Silver then caught a bid minutes after 11:30 a.m. Eastern...and away went the price to the upside, with the high coming at 4:15 p.m. at $27.69 spot.  From that point, silver traded sideways for the rest of the New York session.

Of the four precious metals, gold's increase was the smallest...up 1.00%.  Silver was up 2.75%...platinum was up 1.51%...and palladium was up a chunky 4.23%.

There was a slight negative bias to the world's reserve currency...but nothing that influenced the price of the precious metals.

  

Despite the fact that gold dipped into negative territory early during the New York trading session, the shares managed to stay in the black until the big rally of the day got underway.  The shares began to pull away from unchanged for the final time about 11:20 a.m. Eastern...and barely looked back.  And, by the time that New York trading came to an end at 4:15 p.m...the HUI was up a whopping 3.90%.  The silver shares...especially the junior silver producers...were smokin' hot.  Unless this is the biggest fake-out of all time, I'd say that the lows for this move are now in.

  

The CME Delivery Report showed that 9 gold and 53 silver contracts were posted for delivery on Friday.  In silver, it was mostly JPMorgan as issuer and Prudential as stopper.  The link to the 'action' is here.

For a change, there was no report from either GLD or SLV yesterday...and the U.S. Mint was had no sales report for the fourth day running.

However, over at the Comex-approved warehouses, it was a different story.  There was activity in all four warehouses...and the net change for Tuesday was a withdrawal of 134,851 troy ounces of silver.  The link to the action, which is worth a brief look, is here.

The big drop in gold open interest that happened on Monday, is still the talk of the town.  As I said in this column yesterday, silver analyst Ted Butler would have something to say about it...and here's what it was..."The latest strange occurrence was the sharp drop in gold open interest on Monday, when over 80,000 contracts suddenly disappeared.  Making the historic drop even more notable was that most of the decline was centered on the more deferred months with very little trading volume reported to support the liquidation.  In fact, over the past week, while silver spreads changed in price dramatically, gold spreads didn't budge at all."

"I've read the early commentary and inquired of those in the know for an explanation for the sudden liquidation of these gold spreads and I would like to offer my own.  As I wrote recently, I had written privately to some high officials at the CFTC back in early November, warning them of the inordinate amount of spread positions in Comex silver and gold futures.  I warned them that in a silver shortage, the large number of spreads could come to cause severe financial pressure on the clearinghouse system should we move into a pronounced backwardation in silver. [That backwardation has not actually occurred yet, but the dramatic silver spread move over the past week gives a strong suggestion that it might.]"

"I also wrote to these CFTC officials [strictly on a good citizen basis] that while backwardation was less likely in gold, given the improbability of a physical gold shortage, the large amount of gold spreads open on the Comex had to be largely uneconomic in nature and that the CFTC should jawbone the traders holding these uneconomic spreads to close them out.  I can't say that the CFTC took my advice and asked those spread traders to liquidate, but then again I can't say that the CFTC didn't take my advice, either.  What I can say for certain is that the question of whether these gold spreads were uneconomic in nature appears to have been settled.  For such large quantities of spreads to be suddenly closed out with virtually no impact on gold spread pricing [unlike in silver] would indicate they were uneconomic and phony to begin with. As a reminder, I have long contended that the presence of phony spreads in large quantities has the effect of severely understating the true concentration on the part of the manipulators."

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¤ Critical Reads

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Second wave of housing bust hammers more cities

I have quite a few stories for you to pick through today.  The first one is about the continuing U.S. housing crash...and is from reader Scott Pluschau.  It's an AP story posted over at finance.yahoo.com...and is headlined "Second wave of housing bust hammers more cities".  Home values are dwindling in nearly every American market. Prices fell in November in all but one of the 20 cities in the Standard & Poor's/Case-Shiller index released Tuesday. Eight of those markets hit their lowest point since the housing bubble burst.  It's a depressing read...and the link is here.

View full GSD edition

New-home sales in 2010 fall to lowest in 47 years

The next item is a real estate-related story that I ripped out of this morning's King Report.  The headline reads "New-home sales in 2010 fall to lowest in 47 years"...and it's posted over at finance.yahoo.com.  Sales for all of 2010 totaled 321,000...a drop of 14.4 percent from the 375,000 homes sold in 2009, the Commerce Department said Wednesday. It was the fifth consecutive year that sales have declined after hitting record highs for the five previous years when the housing market was booming.  The link to the story is here.

View full GSD edition

Merrill paying $10M to settle SEC fraud charges

Scott dug up a second story at the same website...and it's another AP offering.  This one's headlined "Merrill paying $10M to settle SEC fraud charges".  Ten million bucks, considering how much money that Merrill probably made from this, is basically a licensing fee.  The link is here.

View full GSD edition

Too Much Information

Here's a story that reader Roy Stephens sent me that I came to close to deleting before I even checked it out...and I'm sure glad that I didn't.  This is simply amazing...and a must read by all.  It's a video clip posted over at WABC that's headlined "Too Much Information".  Technology is one thing...but this is entirely different...and, once again, I must urge you to watch this from one end to the other.  It only runs 3:11 from start to finish...and the link is here.  I wasn't just amazed...I was totally blown away.  You will be, too!  Watch it!!!

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CBO's Revised Budget Sees 2011 Deficit Rising By $500 Billion To $1.5 Trillion; $4 Trillion In Deficit Through 2013 Guarantees QE3+

Reader 'David from California' sent this zerohedge.com piece my way yesterday.  The 2011 U.S. budget deficit just rose by $500 billion yesterday.  The headline reads "CBO's Revised Budget Sees 2011 Deficit Rising By $500 Billion To $1.5 Trillion; $4 Trillion In Deficit Through 2013 Guarantees QE3+".  Watch them melt the printing presses down to pay for it all...and the link is here.

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As Bankers Kill Off Mark-To-Market For Good, Former FDIC Chairman Gloats

Here's another zerohedge.com story.  This one is from reader U.D.  It appears that 'mark-to-market' has been officially buried for all time in the United States...so there's no way that any U.S. financial institution's true value can ever be computed.  The headline reads "As Bankers Kill Off Mark-To-Market For Good, Former FDIC Chairman Gloats".  This story is definitely worth your time...and the link is here.

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Finance Board Seizes Nassau County

Reader 'David from California' has got two more stories for us today...and the first one is an eye-opener.  It's posted over at businessinsider.com...and the headline reads "Finance Board Seizes Nassau County".  For those reader that don't know Nassau County, it's one of the wealthiest counties in the United States...and the link is here.

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Rand Paul Reintroduces Audit The Fed Bill, DeMint And Vitter Co-Sponsors

David's last contribution to today's column is another piece posted over at zerohedge.com...and the headline says it all..."Rand Paul Reintroduces Audit The Fed Bill, DeMint And Vitter Co-Sponsors".  It's a very short read, which I feel is worth your time...and the link is here.

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CBO’s Revised Budget Sees 2011 Deficit Rising By $500 Billion To $1.5 Trillion

Posted: 26 Jan 2011 07:02 PM PST

No surprise: the projected deficit just went up by another half a trillion: "For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP." This is up from $1.07 trillion: a very small margin of error there. But don't worry – like true Keynesians the CBO expects that future deficits will have no choice but to go down: "The deficits in CBO's baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021. Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law." So between 2010′s $1.3 trillion, 2011 $1.5 trillion, and 2012′s revised $1.1 trillion, we have $3.9 trillion just in deficit costs to plug. And as Zero Hedge has repeatedly demonstrated the actual debt to be issued is usually about 33% higher than the deficit funding need, meaning that over the next 3 years the US will need to issue about $5 trillion in debt. Which means further debt monetization is guaranteed as foreign investors have now fully withdrawn and the Fed is all alone in gobbling up every dollar in gross issuance. QE3 is guaranteed and we are stunned that the market continues not to realize this.

From the release:

The United States faces daunting economic and budgetary challenges. The economy has struggled to recover from the recent recession, which was triggered by a large decline in house prices and a financial crisis—events unlike anything this country has seen since the Great Depression. During the recovery, the pace of growth in the nation's output has been anemic compared with that during most other recoveries since World War II, and the unemployment rate has remained quite high.

For the federal government, the sharply lower revenues and elevated spending deriving from the financial turmoil and severe drop in economic activity—combined with the costs of various policies implemented in response to those conditions and an imbalance between revenues and spending that predated the recession—have caused budget deficits to surge in the past two years. The deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product (GDP), the largest since 1945—representing 10.0 percent and 8.9 percent of the nation's output, respectively.

For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP. The deficits in CBO's baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021. Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law.

The Economic Outlook

Although recent actions by U.S. policymakers should help support further gains in real (inflation-adjusted) GDP in 2011, production and employment are likely to stay well below the economy's potential for a number of years. CBO expects that economic growth will remain moderate this year and next. As measured by the change from the fourth quarter of the previous year, real GDP is projected to increase by 3.1 percent this year and by 2.8 percent next year. That forecast reflects CBO's expectation of continued strong growth in business investment, improvements in both residential investment and net exports, and modest increases in consumer spending. It also includes the impact of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (referred to in this report as the 2010 tax act), enacted in December, which provides a short-term boost to the economy by reducing some taxes, extending unemployment benefits, and delaying an increase in taxes that would otherwise have occurred in 2011. CBO projects that inflation will remain very low in 2011 and 2012, reflecting the large amount of unused resources in the economy, and will average no more than 2.0 percent a year between 2013 and 2016.

The recovery in employment has been slowed not only by the moderate growth in output in the past year and a half but also by structural changes in the labor market, such as a mismatch between the requirements of available jobs and the skills of job seekers, that have hindered the reemployment of workers who have lost their job. Payroll employment, which declined by 7.3 million during the recent recession, gained a mere 70,000 jobs (or 0.06 percent), on net, between June 2009 and December 2010. (By contrast, in the first 18 months of past recoveries, employment rose by an average of 4.4 percent.) Consequently, the rate of unemployment has fallen by only a small amount: After climbing to 10.1 percent of the labor force during 2009, the unemployment rate declined only to 9.4 percent by December 2010. Other measures of labor market conditions suggest even more slack than does the unemployment rate. For example, almost 9 million workers who have wanted full-time work in the past two years have been employed only part time.

As the recovery continues, the economy will add roughly 2.5 million jobs per year over the 2011–2016 period, CBO estimates. However, even with significant increases in the number of jobs, a substantial reduction in the unemployment rate will take some time. CBO projects that the unemployment rate will gradually fall in the near term, to 9.2 percent in the fourth quarter of 2011, 8.2 percent in the fourth quarter of 2012, and 7.4 percent at the end of 2013. Only by 2016, in CBO's forecast, does it reach 5.3 percent, close to the agency's estimate of the natural rate of unemployment (the rate of unemployment arising from all sources except fluctuations in aggregate demand, which CBO now estimates to be 5.2 percent).

For the period beyond 2016, CBO's economic projections are based on trends in the factors that underlie potential output, including the labor force, capital accumulation, and productivity. The projections therefore do not explicitly incorporate fluctuations resulting from the business cycle. In CBO's projections, growth of real GDP averages 2.4 percent annually from 2017 to 2021, a pace that matches the growth of potential GDP over those years. The unemployment rate averages 5.2 percent in that same period.

The Budget Outlook

The recovery now under way might be expected to lessen the budget imbalance in 2011 by increasing tax revenues and decreasing spending for certain income-support programs, such as unemployment compensation. However, revenue growth will be restrained by the slow and tentative pace of the recovery and by the 2010 tax act.

Moreover, outlays for many programs are projected to continue to grow and more than offset the decreases in spending (for unemployment compensation, for example) yielded by improving economic conditions.

The resulting federal budget deficit of nearly $1.5 trillion projected for this year will equal 9.8 percent of GDP, a share that is nearly 1 percentage point higher than the shortfall recorded last year and almost equal to the deficit posted in 2009, which at 10.0 percent of GDP was the highest in nearly 65 years.

By CBO's estimates, federal revenues in 2011 will be $123 billion (or 6 percent) more than the total revenues recorded two years ago, in 2009. The continued slow improvement in economic conditions is anticipated to boost revenues from individual income taxes, corporate taxes, and other sources by nearly $200 billion between those two years; however, revenues from social insurance taxes are projected to decline by more than $70 billion relative to their level two years ago, mostly as a result of a one-year reduction in payroll taxes included in the 2010 tax act.

Spending, for the most part, has been growing faster than revenues. Programs related to the federal government's response to the problems in the housing and financial markets are an exception; outlays recorded for the Troubled Asset Relief Program (TARP), for example, will decrease by $176 billion from 2009 to 2011, CBO projects. But if current laws remain unchanged, federal outlays other than those for the TARP are projected to be $366 billion (or 11 percent) higher in 2011 than they were in 2009.

According to CBO's projections, mandatory spending excluding outlays for the TARP will increase by $191 billion (or 10 percent) between 2009 and 2011. Significant growth in many areas—in particular, for Social Security, Medicare, and Medicaid—is expected to be offset only partially by reductions in outlays for other programs, primarily for Fannie Mae, Freddie Mac, and deposit insurance. Discretionary spending will increase by an estimated $137 billion over the two-year period; about one-third of that increase stems from funding provided by the American Recovery and Reinvestment Act of 2009 (ARRA). In addition, outlays for net interest will rise by an estimated $38 billion from 2009 to 2011, mostly because of substantial increases in borrowing.

Under current law, CBO projects, budget deficits will drop markedly over the next few years—to $1.1 trillion in 2012, $704 billion in 2013, and $533 billion in 2014. Relative to the size of the economy, those deficits represent 7.0 percent of GDP in 2012, 4.3 percent in 2013, and 3.1 percent in 2014. From 2015 through 2021, the deficits in the baseline projections range from 2.9 percent to 3.4 percent of GDP.

The deficits that will accumulate under current law will push federal debt held by the public to significantly higher levels. Just two years ago, debt held by the public was less than $6 trillion, or about 40 percent of GDP; at the end of fiscal year 2010, such debt was roughly $9 trillion, or 62 percent of GDP, and by the end of 2021, it is projected to climb to $18 trillion, or 77 percent of GDP. With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket over the next decade. CBO projects that the government's annual spending on net interest will more than double between 2011 and 2021 as a share of GDP, increasing from 1.5 percent to 3.3 percent.

CBO's baseline projections are not intended to be a forecast of future budgetary outcomes; rather, they serve as a neutral benchmark that legislators and others can use to assess the potential effects of policy decisions. Consequently, they incorporate the assumption that current laws governing taxes and spending will remain unchanged. In particular, the baseline projections in this report are based on the following assumptions:

  • Sharp reductions in Medicare's payment rates for physicians' services take effect as scheduled at the end of 2011;
  • Extensions of unemployment compensation, the one-year reduction in the payroll tax, and the two-year extension of provisions designed to limit the reach of the alternative minimum tax all expire as scheduled at the end of 2011;
  • Other provisions of the 2010 tax act, including extensions of lower tax rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and ARRA, expire as scheduled at the end of 2012; and
  • Funding for discretionary spending increases with inflation rather than at the considerably faster pace seen over the dozen years leading up to the recent recession.

The projected deficits over the latter part of the coming decade are much smaller relative to GDP than is the current deficit, mostly because, under those assumptions and with a continuing economic expansion, revenues as a share of GDP are projected to rise steadily—from about 15 percent of GDP in 2011 to 21 percent by 2021.

As a result, the baseline projections understate the budget deficits that would arise if many policies currently in place were extended, rather than allowed to expire as scheduled under current law. For example, if most of the provisions in the 2010 tax act that were originally enacted in 2001, 2003, and 2009 or that modified estate and gift taxation were extended (rather than allowed to expire on December 31, 2012), and the alternative minimum tax was indexed for inflation, annual revenues would average about 18 percent of GDP through 2021 (which is equal to their 40-year average), rather than the 19.9 percent shown in CBO's baseline projections. If Medicare's payment rates for physicians' services were held constant as well, then deficits from 2012 through 2021 would average about 6 percent of GDP, compared with 3.6 percent in the baseline. By 2021, the budget deficit would be about double the baseline projection, and with cumulative deficits totaling nearly $12 trillion over the 2012–2021 period, debt held by the public would reach 97 percent of GDP, the highest level since 1946.

Beyond the 10-year projection period, further increases in federal debt relative to the nation's output almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending as a percentage of GDP well above that in recent decades. Specifically, spending on the government's major mandatory health care programs—Medicare, Medicaid, the Children's Health Insurance Program, and health insurance subsidies to be provided through insurance exchanges—along with Social Security will increase from roughly 10 percent of GDP in 2011 to about 16 percent over the next 25 years. If revenues stay close to their average share of GDP for the past 40 years, that rise in spending will lead to rapidly growing budget deficits and surging federal debt. To prevent debt from becoming unsupportable, policymakers will have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue some combination of those two approaches.

Full report summary (pdf)

And entire soon to be re-re-re-revised document (pdf)

The Gold Standard in Britain 1778-1844

Posted: 26 Jan 2011 05:06 PM PST

Richard Russel : Get out of your dollar assets NOW !

Posted: 26 Jan 2011 05:00 PM PST

The Legend of Chief Namekagons Lost Silver Mine

Posted: 26 Jan 2011 04:30 PM PST

You Say You Want a Revolution…

Posted: 26 Jan 2011 03:29 PM PST

Mercenary Links Roundup for Wednesday, Jan 26 (below the jump).

01-26 Wednesday

Will the Arab revolutions spread?
Anwar Ibrahim: Will Tunisia Be the First Domino?

Dow Moves Past 12,000 for First Time Since 2008 – NYTimes.com
Wall Street hits highs on commodities, techs after Fed | Reuters

Low-tax states attract budget-conscious Americans | Reuters

Martin Wolf: Why China hates loving the dollar
Euro Trades Near Two-Month High on Prospect German Inflation Will Quicken

China Moves to Slow Soaring Housing Prices – NYTimes.com
Wage Inflation Rampant In China As More Provinces Plan Salary Hikes
Wal-Mart Fined In China For Deceptive Price Practices To Mask Inflation

China Will Face Crisis Within 5 Years, 45% of Investors Say
Growth optimism powers Shanghai gains
Chinese Firms Set Sights on U.S. Investments – WSJ.com
Setting the Pace With Toughness – NYTimes.com

UK economy: a warning for the world?
George Soros says UK risks slipping back into recession – Telegraph
Mervyn King: standard of living to plunge at fastest rate since 1920s

Inflation, Food Prices Top Davos Agendas – WSJ.com
Davos elites see global economic shift East, South

Commodities' Drop: Bearish Portent for Stocks? – Barrons.com
Global Tactical Asset Allocation Q1 Update: Commodities | zero hedge
Wheat Poised for Longest Winning Streak Since 2007 on Imports
Gold investors pull back after blistering rally
Exxon Comes Up Dry on Deepwater Wells Near Brazil – WSJ.com

Glencore IPO Could Lead to More Deals – WSJ.com
Africa Rising: Mining Fight Shows Pressures on Multinationals

Uneven Global Growth Bedevils CEOs – WSJ.com
Executives Skeptical Obama Can Deliver – WSJ.com
Geithner: 'Level Playing Field' Key in Tax Revamp – WSJ.com

Marc Faber Compares Obama To A Prostitute, Goes Long Treasurys

Profit Slips as Boeing Delivers Fewer Plans – NYTimes.com
Toyota recalls 1.7 million cars for fuel leaks – Yahoo! Finance

Fed Pushes On With $600 Billion Stimulus on Slow Growth – Bloomberg
Fed stays cautious on recovery, focused on jobless | Reuters
Fed Votes to Maintain Bond-Buying Program – NYTimes.com
The Fed's Magic Show Appears to Be Over – WSJ.com

New U.S. Home Sales Rise More Than Forecast as West Surges – Bloomberg
Homes sales at 8-month high; loan demand dives | Reuters
Real Estate News: Big Spenders Buoy Bay Area's Housing Market – WSJ.com

CBO: this year's budget deficit to hit $1.5T – Yahoo! News
Lehman files new plan for repaying creditors | Reuters
Accounting Board Backs Off 'Mark to Market' Push – WSJ.com

Russia Plans Sovereign Fund to Lure Foreign Cash – Bloomberg
Russian and European Officials Clash Over Gas Pipeline Plans

Shoppers Buy Quality at Lululemon, Victoria's Secret – Bloomberg
Netflix: Romance, or momentum stock horror flick? | Reuters

Two Former Galleon Employees Plead Guilty – WSJ.com
Stanford Judged Incompetent to Stand Trial – WSJ.com

This is the web right now – The Oatmeal

Scientists Find Substance That Could Improve Memory – WSJ.com
Worry Grows About Aging Doctors' Fitness to Practice – NYTimes.com

Nabokov Theory on Polyommatus Blue Butterflies Is Vindicated
The Long Pull of Noodle Making – NYTimes.com
Anheuser Uses Facebook for Super Bowl Buzz – WSJ.com
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Why Gold and Silver Have Declined by Rob Kirby

Posted: 26 Jan 2011 02:46 PM PST

http://news.goldseek.com/GoldSeek/1296112020.php

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 dropped81,752 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:




Think the banks don't anticipate and plan for such things? Read this admittedly dated article – you'll get the idea - and then ask yourself again:

Beware, commodity index rebalancing ahead
Posted by Izabella Kaminska on Jan 05, 2009 15:34.
The major commodity indices rebalance their respective asset weightings once a year (or occasionally more) — and with that comes a mass dose of buying and selling. The 2009 rebalancing is expected to start sometime this week.
Luckily, JP Morgan has produced its best guess of how the 2009 reweightings of the DJ AIGCI and the S&P GSCI indices will impact the market……
In financial terms, we expect the rebalancing to have the greatest impact in gold, COMEX copper, crude oil, gold, and live cattle. We estimate that the rebalancing of the two indices is expected to result in $877 million of selling in gold, $699 million of buying in COMEX copper, $528 million of selling in live cattle, and $523 million of buying in crude oil.



Everyone should take note how the graphs aboveclearly demonstrate how Algorithms completely control intra-day trade. The banks control / operate these algorithmic trading models. They are also the "market makers" in these commodities.

We can CLEARLY see how the banks – knowing they have customers who MUST SELL – collude / conspire and "pull their bids" in the Globex / Access market when liquidity is thinnest in the 24 hour global trading cycle.

Then they "scalp" their captive clients – covering their own ill-advised, manipulative, reckless short positions.

The MASSIVE reduction in open interest, mentioned above, confirm that this is indeed EXACTLY what happened.

This, ladies and gentlemen, also happens to explain HOW institutions like J.P. Morgan and Goldman Sachs can operate derivatives books in the 50 - 75 TRILLION range and NEVER, EVER SUFFER SIGNIFICANT LOSSES ON THEIR POSITIONS.

What's Different This Time

What is SO DIFFERENT about this reversal in commodities prices, should my analysis prove correct, is that the BIG BANKS – owing to this record reduction in Open Interest – appear to have CAPITULATED to some extent – and as this rally gathers steam – I doubt they are going to be "stopping" the rise with another round of indiscriminate NAKED selling – as they have done so many times in the past.

It is sickening and brutal that clueless, quasi mainstream commentators make claims like, "if prices have gone up many fold over the years, how could prices be suppressed?" Another mainstream financial hack I spoke with in recent days regarding the CLEAR signs of market manipulation made this foolish statement:

"Now if you are asking me is it possible that the system is gamed in some way - straight up my friend - yes. I have always said that the markets - including gold - are like playing poker in a road house. You know that if they have to they are going to deal from a stacked deck - your job is get out of there with your winnings and not catch a beating in the parking lot."

Where is the outrage? Why is it that people don't get it? This conduct is ILLEGAL and is a violation of COMMODITIES LAW:
The U.S. Commodity Futures Trading Commission (CFTC) is an independent agency of the United States government.
The Commodity Exchange Act (CEA), 7 U.S.C. § 1 et seq., prohibits fraudulent conduct in the trading of futures contracts. In 1974, Congress amended the Act to create a more comprehensive regulatory framework for the trading of futures contracts and created the Commodity Futures Trading Commission, replacing the Commodity Exchange Authority. The stated mission of the CFTC is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets.
So Where is the CFTC?

Our capital markets are ALL trading in accordance with predetermined, algorithmically controlled outcomes – set by the U.S. Federal Reserve in collusion with the U.S. Treasury Department and executed by the big derivatives trading banks – principally, J.P. Morgan, Goldman Sachs, Citibank, Bank of America and Morgan Stanley.

These banks have "enablers" - principally the Commodities Futures Trading Commission [CFTC]. The individuals at the CFTC who are derelict in their duties to regulate the markets are, Gary Gensler, Chairman, Bart Chilton, Commissioner, Michael Dunn, Commissioner, Jill Sommers, Commissioner, Scott O'Malia, Commissioner.

These are the people who are robbing us ALL – blind.

Shut Down The Federal Reserve, Break Up The Big Banks And 16 Other Ideas Barack Obama Could Have Proposed If He Actually Wanted To Fix The Economy

Posted: 26 Jan 2011 02:18 PM PST

How do we fix the economy?  That is a question that tens of millions of Americans are asking right now.  Republicans are harshly criticizing the empty economic proposals being put forward by Barack Obama and the Democrats, but the Republicans don't seem to have any real solutions either.  There is talk of cutting taxes a little bit more, reducing federal spending a little bit and getting rid of a few useless federal regulations but doing any of those things would essentially be like spitting into Niagara Falls - the effect would not really be noticeable at all.  As this column has documented over and over and over, the economic and financial problems that we are facing are so enormous that radical solutions are needed.  In essence, what we need is not an "economic bandage" or two - what we need is major reconstructive surgery.  If dramatic action is not taken, our economy is going to completely collapse.

Is anything that Barack Obama is currently proposing going to help fix the economy?  No, of course not.  As I wrote about the other day, Obama's address to the nation was packed with empty promises and a whole lot of inspirational nonsense.  There were no real solutions to the very real problems we are facing.

So is there anything that we could do to actually start fixing things?

Yes, but the solutions are radical.  They would cause quite a bit of chaos.  They would not be easy for people to accept.

But the truth is that our economy and our financial system have terminal cancer.  If something radical is not done quickly we are going to lose the patient.

The following are 16 ideas that Barack Obama could have proposed if he actually wanted to fix the economy....

#1 We Must Shut Down The Federal Reserve

If you are not willing to accept this, you may as well not read the rest of the solutions.  The truth is that the U.S. government will never be able to solve the national debt problem until the Federal Reserve is shut down.  The U.S. government should nationalize all Federal Reserve assets and start issuing currency that is completely and totally debt-free.

Under such a system, it is conceivable that U.S. budget deficits could be eliminated entirely and that over time the entire U.S. government debt could be retired.

One of the biggest threats of going to such a system would be inflation, but remember, the United States has only had a major, ongoing problem with inflation since the Federal Reserve was created back in 1913.  The U.S. dollar has lost well over 95 percent of its value since the Federal Reserve was created, and so it is hard to imagine that we would do even worse without the Federal Reserve.

In any event, it is the fundamental right of any sovereign nation to be able to issue and control its own currency.  This right was given to the U.S. government by the U.S. Constitution and it is time for the U.S. government to reclaim that right.

#2 We Must End Trade With All Nations That Allow Their Citizens To Be Paid Slave Labor Wages Or That Do Not Respect Basic Human Rights

This would dramatically reduce the "outsourcing" of our jobs and our industries almost overnight.  The truth is that it was never a good idea to put American workers in direct competition with hundreds of millions of workers that are making slave labor wages on the other side of the globe.

Trading with nations that have a similar wage structure to ours and that respect basic human rights (Canada, for example) is a very good thing.  However, all of the "free trade" agreements that politicians from both parties have been pushing down our throats for decades are literally wrecking the U.S. economy.

Since 2001, over 42,000 factories have been shut down in the United States.  This proposal would go a long way towards stopping the bleeding, and if some of these countries are willing to raise their wage levels significantly then we would be able to resume trade with them in the future on a much more level playing field.

#3 We Must Radically Reduce The Size Of The Federal Government

Our big, fat government is a big, fat drain on our economy.  We have millions of paper pushers that don't contribute much of anything of real value.

Not only that, but some of the things that the U.S. government wastes money on are absolutely mind blowing.  There is a reason why our founders insisted that we have a very limited government.  It is time to get back to those principles.

The Congressional Budget Office is projecting that the U.S. government budget deficit for this year will be nearly $1.5 trillion.

Talk about ridiculous!

I estimate that we could easily cut the size of government in half without hampering how effective it is.

We could start by abolishing the Department of Education.  After that, there are several dozen other government agencies and institutions which are worthy candidates for elimination.

#4 We Must Provide Temporary Jobs For The American People During The Economic Transition

If the Federal Reserve is shut down and the size of the federal government is cut in half, it would cause quite a bit of economic chaos.  During this transition it will be important to help people survive.

Instead of just passing out a bunch of handouts, a better alternative would be getting the American people working on something constructive.

During this time, the U.S. government could use all of the untapped labor of the unemployed to build massive infrastructure projects.

According to the American Society of Civil Engineers, we need to spend approximately $2.2 trillion on infrastructure repairs and upgrades just to bring our existing infrastructure up to "good condition".

So there is certainly a lot to do.

These jobs would just be temporary until new manufacturing facilities are set up and jobs in private industry are plentiful again.

Having the American people produce something of value is better than just handing them endless unemployment checks.

#5 We Must Ban All Short Selling

When you allow greedy individuals the opportunity to make lots of money by betting against the U.S. economy, it gives those individuals an incentive to make sure that those bets pay off.

Yes, this proposal is controversial, but it just makes sense.  If people want to make money, it should be because a company is doing well and not because someone is failing.

#6 We Must Ban Virtually All Derivatives

Once upon a time, derivatives were for hedging risk, but that is not what they are primarily being used for anymore.

Now derivatives are being used to bet on almost anything that you can possibly imagine.

Our financial markets have been turned into a gigantic financial casino.

The derivatives bubble is somewhere in the neighborhood of one quadrillion dollars and it could burst at any moment.

These weapons of financial mass destruction must be banned.

#7 We Must Break Up The Big Wall Street Banks

The big Wall Street banks have far too much power and far too much control.  They have come to dominate our entire financial system.

In a capitalist system, too much power concentrated in too few hands is not a good thing.  The corruption that has gone on at many of these institutions is absolutely unbelievable.

These banks need to be broken up into much smaller pieces for the good of our country.

#8 We Must Initiate A Massive Law Enforcement Crackdown On Our Financial Markets

As noted above, the corruption that has been going on down on Wall Street has been absolutely sickening.  We need a massive law enforcement crackdown on all of this fraud in order to restore faith in the financial system.

Just one small example of this corruption happened during the recent housing crash.  Goldman Sachs sold mortgage-related securities that were absolute junk to trusting clients at vastly overinflated prices and then made huge profits betting against those exact same securities.

So do you think that Goldman Sachs or any of the other major players on Wall Street will ever receive more than a slap on the wrist for all the things that have gone on in recent years?

Of course they won't - unless the American people start demanding it.

#9 We Must Order U.S. Oil Companies To Use Untapped Oil Reserves In The United States And We Must Aggressively Develop Alternative Energy Sources

Right now, the price of oil is pushing up towards 100 dollars a barrel.  If oil passes that mark, it is going to put tremendous inflationary pressure on the entire global economy.

Sadly, there is no need for such a high price for oil.  There are vast, vast reserves of oil that are virtually untapped inside the United States.  These are mostly in the western states and up in Alaska.  We have enough to supply very cheap oil to the entire country for decades.

The U.S. government needs to order these oil companies to quit playing games and to start pumping this oil.

However, it is undeniable that we also need to develop alternative energy sources.  In fact, we should set up a "Manhattan Project"-style team to aggressively pursue this goal.

In the past, U.S. oil and car companies have blatantly repressed alternative energy projects.  The U.S. government should tell U.S. corporate executives that if they ever even think of doing such a thing again that they will be locked away so fast that it will make their heads swim.

#10 We Must Stop Paying Farmers Not To Grow Food

Instead of paying farmers not to grow food, we need to find ways to encourage them to grow as much food as possible.  A horrible global food crisis is coming and we are going to need huge stockpiles of everything.

#11 We Must Secure The U.S. border With Mexico

Illegal immigration costs the U.S. economy tens of billions of dollars (conservatively) every single year.  We need to secure the border and make sure that all of our immigrants are coming through the "front door".

#12 We Must Shut Down The IRS

Did you know that the United States has only had an income tax for less than 100 years?  For most of our history, the U.S. government got along just fine without taxing personal income.

The IRS is massive waste of time, energy and resources.  There are many alternatives that could easily replace the income tax and the ridiculous tax code that we have right now.

For example, a flat tax or a national sales tax could both potentially work, although both have their problems.

Personally, I am convinced that we could have a system that would not require any taxation of income by the U.S. government whatsoever.

Just imagine how much time, how much energy and how many resources would be saved!

#13 We Must Slash Red Tape And The Miles Of Ridiculous Regulations

In the United States today, you almost have to be insane to start up a new business.  When you consider all sources of taxation, U.S. businesses face one of the highest overall levels of taxation in the entire world.  Not only that, but U.S. businesses face miles and miles of absolutely ridiculous regulations and red tape.

As I wrote about in a previous article, if you want to do business in the United States today, you better be prepared for a regulatory nightmare....

If you plan to start a business in America today, you better get a hold of a good lawyer.  In fact, if you want to be safe, you better get a small army of lawyers.  You are going to need an expert on the federal regulations that apply to your business, you are going to need an expert on the state regulations that apply to your business and you are going to need an expert on the local regulations that apply to your business.

There are going to literally be thousands of regulations that apply to any business started inside the United States today.  There is no way that you will ever be able to learn them all.  Not only that, but the truth is that your lawyers will only be aware of a small fraction of them.

Until the regulatory environment in this country dramatically changes, companies are going to continue to be motivated to leave the United States.

#14 We Must Conduct A Massive Law Enforcement Crackdown On The Health Care Industry

It should not cost $30,000 for a one day stay in the hospital in this country.

The truth is that the American people are being ripped off big time.

We need to conduct a massive law enforcement crackdown on all the big hospitals and all the big health care companies.

We need to conduct a massive law enforcement crackdown on all the big health insurance companies.

We need to conduct a massive law enforcement crackdown on all the big pharmaceutical companies.

We also need massive medical malpractice reform.

Not only that, we also should end the monopoly of the AMA immediately.  We need to reintroduce honest, legitimate competition back into the medical system.

In addition, we need to make sure that natural health practitioners are able to compete on a fair and equal basis in this country.

As I have written about previously, the health care industry in the United States has become all about making as much money as possible.

That must change.

#15 We Must Stop Trying To Police The World

We will always need a very strong military force, but it is absolutely ridiculous that we have troops stationed in approximately 130 different countries today.

This is a tremendous drain on our national resources and we are spread way too thin militarily.  It is about time that many off these other countries started protecting themselves for a while.

#16 We Must Pull Out Of The United Nations And We Must Dramatically Reduce Foreign Aid

The United Nations is a massive waste of time, energy and resources.  We should have pulled the plug on that ridiculous globalist organization long before now.

In addition, we need to dramatically cut back on foreign aid until we get our own house in order.  We should only help the most desperate nations until we get our own economy back on track.

#17 We Must End All Of The Ridiculous Police State Measures Which Are Chasing Tourists Away From Our Soil

Tourism is a very, very important industry to the United States.  But today, all of the incredibly intrusive police state measures that the past few administrations have introduced are chasing millions of tourists away and are ruining our national reputation.

For example, there are many cultures around the globe where it would be unthinkable to have anonymous security goons feel up the private areas of women and children before they are allowed to get on an airplane.  Rather than put up with such nonsense, millions of tourists are simply going to choose to spend their money somewhere else.

#18 We Must Seize The Assets Of The Ultra-Wealthy Individuals And International Banks That Have Been Committing Fraud Against The U.S. Government For Decades

Once the Federal Reserve is shut down, it will be important to hold those that have been defrauding the U.S. government responsible.  Once a full audit of the Federal Reserve is conducted and evidence of criminal activity is uncovered, those involved should be arrested and all of their assets should be seized and frozen pending trial.

If the things that have been going on inside the Federal Reserve are ever fully exposed, it will make the whole Bernie Madoff scandal look like a nickel and dime operation.

But that is why there has never been a full, comprehensive audit of the Federal Reserve since it was created back in 1913.  The American people are not supposed to see what happens inside that institution.

Unfortunately, even though economic times are a little rough, things are still good enough that the vast majority of Americans are not ready to start demanding the kind of radical changes listed above.

Not only that, but the kind of radical changes listed above would be fought against by the establishment every step of the way.  Those with money and power are not going to step aside just because "justice" demands it.

What is probably going to happen is that the "establishment politicians" that the establishment has bought and paid for are just going to continue to propose half-baked solutions to our problems as this country continues to tumble towards economic oblivion.

So what do all of you readers think?  Is there hope that someday we will see some real economic solutions implemented in this country?

The China Correlation

Posted: 26 Jan 2011 01:33 PM PST

--Buckle up Australia. You're along for the ride in a high stakes game of chicken. We've written about inflation chicken before. To sum up: the premise is that Ben Bernanke is using interest rates to force China to revalue its currency and surrender its low wage advantage over the rest of the world.

--Of course maybe that's not Bernanke's intention at all. He has other issues, like the solvency of the U.S. banking system. But if Bernanke is the leading general in the global currency war, he's inflicting serious damage. Food riots have led to regime instability in the Middle East and North Africa. Egypt is the latest example.

--But the real target is China. And the situation has changed a bit since we first wrote about it. The simple question is who can tolerate the effects of inflation the most? In the U.S., the Bernanke Fed's monetary campaign against its own currency (the U.S. dollar) has led a bogus stock market rebound and a furious rally in industrial metals and grains prices.

--What the Chinese really need is a wall to keep out all those Federal Reserve Notes. Instead, you've seen increased signs that Chinese authorities are getting a bit panicky about reigning in Chinese lending to prevent further inflation. The China Business News reports state-owned banks in China have made over A$182.81 billion in loans so far this January. That's 15% of the total for all of last year and twice the amount of money banks lent in January.

--So what, you say?

--The State has ordered banks to hike lending rates by 10–45%, according to some media outlets.  "Particularly worrying," reports Reuters "are China's property prices. Housing prices in major cities soared by more than a fifth last year, private research showed in January, raising doubts about the effectiveness of tightening measures announced during 2010." China is losing the war against inflation (it has a traitor in its ranks with a currency peg that guarantees growth in the money supply).

--But enough about policies and bubbles. Is the stock market telling you anything useful about what's happening in China? It could be! The chart below tells your editor that China's inflation problem is going to become Australia's commodity problem. That is, a credit slowdown in China is bearish for Chinese stocks and the economy, and thus bearish for Aussie companies that export to China.

sc.png

--Far be it for us to take over the role of chartist from our resident expert, Murray Dawes. But Murray is on holiday in Tasmania today. So we'll have a crack. The chart shows China's Shanghai exchange leading Australia's All Ordinaries by about five months. Why about five months?

--Chinese stocks bottomed in November of 2008—a full five months before the S&P 500 and the All Ords. Those indices were reacting to the Bernanke Fed's inflationist policies. For whatever reason, China anticipated/led that move (worth thinking about).

--But you can also see that Shanghai's rally lasted just about eight months and has since failed to make a new high. The market fell in April of last year, bottomed in July, and peaked in November. Since then, it's been downhill skiing.

--For most of last year the two benchmarks were well correlated. The only real divergence is that since October, Chinese stocks have priced in something bearish and Australian stocks have not. At least not yet. Could it happen soon?

--Our old friend Dr. Marc Faber gave a rip-roaring interview to Bloomberg news in which he pointed out that most emerging markets have failed to make new highs from their November/December levels. He expects a 20–30% correction in emerging markets and says U.S. equities and Treasuries (in the very short term, as in 10 days and 2–3 months) will outperform emerging market stocks.

--By the way, Faber says U.S. stocks will lose less than emerging market stocks. This is what he means by out-performance. It's a relative return. They will do less bad, but not well.

--What does this mean for Australian stocks? Well, you could argue that local matters are a bigger influence on stock prices. After all, the flood levy will act as a tax on consumers at some level and will keep the federal budget in deficit longer than expected. But wage and price pressures will keep rising for a variety of reasons.  In other words, domestic factors are also arguing for a hit to stock prices.

--Lead-footed Ben Bernanke could care less that he's exporting political volatility with his weak dollar policy. After all, QEII has managed to keep mortgage rates relatively low and stock prices high. Banks have repaired quarterly earnings, although they've ignored major renovations to their balance sheet structure. Americans have yet to experience the same food and fuel pain easy money has dished out elsewhere on the planet.

--The best way to win a game of chicken is not to not be in the car at all. But Australia's stock market doesn't have this choice. The economy is tied to resources and China's demand for them. And the capital markets are tied to America's fiscal and monetary lead. Buckle up.

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Gold and silver rise with FOMC announcement/CBO adjusts budget deficit to 1.5 trillion dollars

Posted: 26 Jan 2011 10:36 AM PST

Dreaming of a Balanced Budget

Posted: 26 Jan 2011 10:35 AM PST

Well, the president gave a bum speech. Full of empty phrases. Hollow words. It was deep space for real ideas; there was nothing there...

And yet, he gave it so sincerely...you almost felt sorry for him. He would have made such a good college president or undertaker. Sad to see him waste his talents in politics.

We were disappointed, too, that he didn't use any of our ideas. Don't expect a balanced budget for this year...or any year of this president's administration. Instead, he'll add 75% to the nation's official national debt - three times more than all the presidents who came before him put together.

Now, that's an achievement. Something to be proud of. Something he can put on his tombstone.

Here Lies Barack H. Obama. America's 44th president.

He bankrupted the US government.

And he could have achieved greatness. We had a dream about it. After the State of the Union address, we imagined a different speech:

"My fellow Americans, I know this is a go-along, get-along town. Everybody gets something. If you're well connected you get a lot. If you're not so well connected, you get less. Well, I'm not going along anymore. Instead, I'm going to change the rules...so that everyone has a fair chance of getting along.

"I propose to get rid of the phony dollar and re-introduce the real dollar. The dollar will be henceforth exchangeable at the rate of $1,500 per ounce. No questions asked. You give us $1,500 dollars; we'll give you an ounce of gold.

"And the US government budget will be balanced. We'll spend what we collect in taxes. Not a penny more.

"Of course, if you gentlemen and ladies want to raise taxes, I'll let you explain why to the voters..."

Whoa. With those two reforms he could save America from bankruptcy...and put the whole world economy back on solid footing.

And if he wanted to make the US economy the world's top performing economy he could go even further:

"I'm also introducing a flat 10% rate. I don't care how you earned your money. I don't care if you're a citizen or an alien from outer space. If you live in the US, you send me a postcard. Tell us how much you earned last year, and send us 10% of it."

Can you imagine? There would be a renaissance...a boom...a revival...like you've never seen.

Not that there wouldn't be problems. Big problems, even. But at least there wouldn't be any problem with the dollar...or the US public finances.

But it was only a dream, wasn't it? And a waste of time. It's never going to happen. We'll explain why, below. Tonight, we're going back to dreaming about women. It's more fun.

Stocks were flat yesterday. Gold dropped $12.

Gold is dipping. How deep will the dip dip? We don't know. But people who try to time the gold market almost never do well. They get out to avoid the dips. Then, gold shoots up again. The speculators are out of luck. They can't bring themselves to buy back in at a higher price. So they miss the explosive final stage of the bull market.

What to do about it? Don't speculate. Buy gold as a way to save money. Then, think of it as you would a collectible...or an heirloom. Don't worry about the price. Just hold on. By 2015, you'll probably be able to use a few ounces to buy a new house.

But remember this: there will also be a time when it makes sense to sell gold. When you can buy all the Dow stocks for a single ounce of gold...it's time to get out of gold and back into stocks. Right now, the Dow is a little under 12,000. And an ounce of gold is only $1,335. Our guess is that the Dow will collapse to under 5,000...while the price of gold soars to over 4,000. Get ready!

When? Hey, you're asking too much from a free e-letter. Just stay tuned.

And more thoughts...

There are two legs to American household wealth - jobs and housing. Here's the latest on housing from The New York Times:

The long-predicted double-dip in housing has begun, with cities across the country falling to their lowest point in many years, data released Tuesday showed.

Prices in 20 major metropolitan areas fell 1 percent in November from October, according to the Standard & Poor's Case-Shiller Home Price Index. The index is only 3.3 percent above the low it reached in April 2009 and has fallen fell 1.6 percent from a year ago.

Prices in Atlanta and Chicago fell more than 7 percent, exceeding even the drops in the perennially troubled Detroit and Las Vegas.

Housing is still going down. If you don't mind, we'll repeat what we said yesterday:

"House prices expected to decline for a fifth successive year," says The Financial Times.

Foreclosures are rising and will continue to rise until March of 2012, according to the projections in the FT, wiping out possibly trillions more in household wealth. Sales are at a 13-year low.

Houses are Americans' most important asset. And the average house is down about 25% since 2006. But that's in terms of dollars. In terms of gold, the loss is over 60%.

Okay... Well, it looks like households are hopping on one leg. Now, let's look at the good leg, employment.

Whoa... What's this?

WASHINGTON (AP) - The unemployment rate rose in 20 states last month as employers in most states shed jobs.

The Labor Department says the unemployment rate rose in 20 states and fell in 15. It was unchanged in another 15 states. That's nearly the same as in November, when the rate rose in 21 states, fell in 15 and was the same in 14.

The report is evidence that the job market is barely improving even as the economy grows. Most economists expect hiring to pick up this year, although the unemployment rate will likely remain high.

Employers in most states didn't add any net new jobs last month. The number of jobs on employer payrolls fell in 35 states in December, the department said. Only 15 states reported gains. Layoffs have slowed dramatically in the past year, but hiring has yet to pick up.

This s not good news. Two gimpy legs. Household wealth is going to fall down.

But what do you expect? This is a Great Correction, isn't it?

If you listen to the financial media, the State of the Union, or the stock market you'll get a very different impression. Or just re-read the article above. It says "...the job market is barely improving." In fact, it's not improving at all. It's getting worse. The population is growing. If employers don't add new jobs, it means more people out of work.

Housing? Same story. It's not "barely improving." Houses are still losing value.

We could ask sarcastically: "So, where's the recovery?"

But why bother? You know as well as we do that there is no recovery. And there's not going to be a recovery.

Instead, the economy has to move on...to something new. If the financial and political authorities suddenly came to their senses, we could imagine that a couple of rough years of bankruptcies and losses would be followed by a long period of new growth.

But we weren't born yesterday. This is not a dream. It's reality. And if our new theory is correct, the authorities are not going to come to their senses. Because they're paid not to. Ben Bernanke has to believe his crackpot activism will pay off. Otherwise, he'd have to renounce the whole project...and admit that he's been a fool. He'd also be out of a job - because neither the bankers nor the politicians would allow the chips to fall where they may. Hey - they own those chips!

But couldn't the feds all get a Ron Paul makeover and come to see that their interventions were actually making thing worse - by adding even more debt and delaying the necessary adjustments?

Nope. Not gonna happen. Remember, a government is the result of natural selection, not rational thought. Its primary objective is to survive. And it does so by protecting its niche - at all cost.

Peter Orzag, writing in The Financial Times:

Most fundamentally it is difficult to see how the medium-term federal deficit can be reduced to sustainable levels without additional tax revenues from those earning less than $250,000 a year. And yet it is equally difficult to see the political system embracing that reality without being forced to do so by the bond market.

The feds cannot suddenly stop rigging the system for the benefit of their favored groups and supporters. A flesh-eating dinosaur can't suddenly become a vegetarian.

The elite, the privileged, the parasites and the zombies are the feds' base of power. Lose them and the government is out of business.

Regards,

Bill Bonner.
for The Daily Reckoning Australia

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Time to Buy Gold Stocks…Again

Posted: 26 Jan 2011 10:35 AM PST

It's time to buy gold stocks. Top-down "macro" analysis indicates that the bull market in gold stocks still has a long way to go. And bottom- up analysis tells me that gold stocks are cheap.

Buying opportunities in this asset class will be rare, simply because so many institutional investor portfolios remain hugely underweight gold. These investors will keep looking to add exposure to gold because of the dismal state of the private credit markets, government debts and central banks. Western central banks are trashing their own currencies at unprecedented rates, while Eastern central banks are slowly tightening policy and accumulating gold bullion.

If current trends in government spending and central banking continue, gold could soar to multiples of its current price. If, under these conditions, central banks continue to inflate, then a hyperinflationary destruction of the monetary system is almost certain. But rather than a total wipeout of the system, I expect we'll eventually see the end (not a reversal) of quantitative easing programs and a re-pegging of the dollar to gold at much higher gold prices.

But that won't happen in a day. Inflationary forces need to gather some momentum first.

What might that process look like? Well, let's say that the Fed doubles the size of its balance sheet yet again, all while the market's expectation of future inflation steadily rises. The selling pressure on Treasuries would steadily grow, undermining the value of the Treasuries already sitting on the Fed's balance sheet. On a mark-to-market basis, the equity on the Fed's balance sheet would become negative - by several hundreds of billions of dollars.

Are we to expect, at that point, that the Fed would start to unwind its Treasury portfolio, selling it back into the hands of the public at much lower prices? If so, such selling of Treasuries (a reversal of QE) would lock in hundreds of billions of losses, requiring taxpayers to recapitalize the Fed (although not if Congressman Ron Paul has enough political influence).

Plus, from a technical perspective, the act of dumping Treasuries into an already panicked market would at least temporarily drive prices down (and yields up) even further. Finally, in such an environment a few years out, the $16-18 trillion in US national debt (at that point), which has a short duration, would have to be refinanced at much higher rates. That would put the US government budget in a position similar to that facing the Greek government in 2010: it would have to choose between:

1) Defaulting/restructuring;

2) Totally inflating the value of the debt away or;

3) Crushing the private sector economy by sucking incredible amounts of taxes and fees out of it, simply to pay interest on the national debt.

Now can you imagine how, in the coming years, gold and gold stocks could launch into hyperbolic rallies? Inflation - as long as the bond market tolerates it - remains the most politically popular way of dealing with unaffordable government debts.

The market's reaction to radical central bank policies is something we don't see discussed very often. Yet this single factor - the reaction to QE - will be the key driver of financial markets in coming years.

Paper currencies rely on confidence, and central bankers only maintain confidence by offering to pay a real rate of interest on deposits. With interest rates currently near zero, the only reason to expect confidence to remain high would be if holders of that currency expected future prices to remain tame.

Only after a widespread repudiation of government paper would central banks re-peg their currencies to gold. They wouldn't do this because they want to. Rather, they would re-peg currencies to gold simply to restore confidence in paper money. Most central bankers like to inflate as much as they deem necessary to fill the "output gaps" in their ivory tower models. The notion that monetizing the federal deficit (QE) can lower the US unemployment rate is so ridiculous that only an academic could dream it up; it demonstrates ignorance about how the US economy functions.

This is a constantly evolving process. But for right now, I see the most likely macro scenario as follows: a steady rally in gold, a sideways stock market (some sectors up, some down) and falling Treasury bonds (rising yields), as more bond investors look ahead to a future of endless US budget deficits and decide to hit the Fed's "QE2" bid.

The Fed's balance sheet will probably double in size again over the next few years, filling up with even more Treasuries. The central banks in China, India and elsewhere are woefully short of gold - and stuffed to the brim with less desirable US dollar assets - so they should continue to trade paper for gold and other real assets at a steady pace.

The current ten-year bull market in gold is very rational; it's a reaction to the explosion in the US money supply plus the explosion in US dollar assets overseas (which are a result of seemingly endless US trade deficits). More than an inflation hedge, gold is a hedge against chaos in the monetary system; people flee to gold when confidence in paper money crashes.

Today's global monetary system remains chaotic, so demand for gold stocks will remain strong...

Twice in the recent past I advised the subscribers of the Strategic Short Report to buy calls on the Market Vectors Gold Miners ETF (GDX)...and I did not neglect to issue profitable "sell" recommendations. Based on the published recommendations the first GDX option trade - from Nov. 2008 to Feb. 2009 - gained about 330%. The second option trade - from April 2009 to Nov. 2009 - gained about 65%. I think it's time to attempt a "hat trick." I suggest buying long-dated call options on GDX.

Gold stocks may not be dirt-cheap like they were in late 2008, but they remain relatively cheap. The nearby chart shows the ratio of the HUI index (a basket of 16 un-hedged gold stocks) to the price of gold. Other than the exceptional low of late 2008, the HUI/gold ratio is as low as it's been since 2003. Furthermore, Gold stocks are as cheap (relative to cash profit margins) as they have been since they bottomed in 2001.

Given these factors, along with the continuing chaos in the sovereign debt markets around the world, I would not be surprised to see the gold price rise into new record. Accordingly, I would not be surprised to see the HUI Index double during the next couple of years.

Regards,

Dan Amoss,
For Daily Reckoning Australia

Editor's Notes: Dan Amoss, CFA, is managing editor for Strategic Short Report. Dan joined Agora Financial from Investment Counselors of Maryland, investment adviser for one of the top small-cap value mutual funds over the past 15 years.

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QE's Quick Effect Quite Ephemeral

Posted: 26 Jan 2011 10:00 AM PST

Wednesday's FOMC announcement-induced price gains in gold evaporated overnight as the yellow metal not only did not manage to overcome overhead resistance levels but fell victim to selling in the wake of rising risk appetite for other assets.

Alka Singh: Equities' Upside Greater than Gold

Posted: 26 Jan 2011 10:00 AM PST

Rodman & Renshaw Senior Analyst Alka Singh says her current objective is to seek out gold and silver producers with growth potential beyond the price appreciation of commodity metals.

Unbacked Money, 40 Years On

Posted: 26 Jan 2011 10:00 AM PST

Two-thousand-eleven sees a big, but so far little-noted ruby anniversary. Expect to hear lots more about it as Aug. 15 draws near. That day will mark 40 years since the United States' government finally stopped redeeming its dollars for gold.

Precious Metals Bounce from Support

Posted: 26 Jan 2011 10:00 AM PST

Gold initially fell on Wednesday, but ended the session $13.53, or 1.02%, higher to settle at $1,345.85, the first gain in five sessions. Prices bounced off support near $1,325, the next key level that bears close watching.

Reviewing Gold Investment in Q4 & 2010

Posted: 26 Jan 2011 10:00 AM PST

The World Gold Council released their excellent quarterly 'Gold Investment Digest.' The research has some interesting facts and important charts and shows that global demand was robust and broad based for both the final quarter and the year.

The Troubling Doubling of Money Supply

Posted: 26 Jan 2011 09:00 AM PST

James Turk of GoldMoney.com says that silver is in backwardation, meaning that, as I understand it, the spot price is higher than the price of the commodity future contract, when the reverse is usually the case, or the reverse is the usual case, I am not sure which.

I am pretty confused because I don't remember and I am too lazy to look it up again, which is because it would be pointless since I have proved that I don't remember it when I look it up, and so I would be wasting my time looking it again up since I have, obviously, determined that it had no immediate use for me in my quest for fast-yet-immense wealth without risk or working.

So, while I don't understand the mechanics of the thing, I am nevertheless impressed with the backwardation of silver futures because it is not just unusual, and it is not for the next month's future, or just for a silver future contract somewhere in the next calendar quarter, but it is in backwardation for a whole year out! A whole year! Wow!

Normally, there are people wanting to know, "What can I do to keep from being completely destroyed by the Federal Reserve creating so much money, which this backwardation thing is probably a part of?"

I always advise people to follow the Dollar-Cost-Averaging method of investing, wherein one merely buys the same dollar amount of silver each month, with the enviable but boring result that it is almost always superior to any other method of investing over the long-term, assuming you are with the trend or, as George Soros is famed for having said, "Identify the trend whose premise is false, and bet against it."

Dollar-cost-averaging is not, alas, something for those whose greed for mountains of undeserved wealth wants – Nay needs! Nay demands! – something with a lot more "kick."

However, taking on a philosophical tone, there are times when, as the saying goes, one "backs up the truck" to take on a load of an investment, or "bets the farm" on an investment, and this may be one of those times because, as Mr. Turk explains, the last time this happened, silver exploded upward by 40 percent in a few weeks!

And even a guy like me, dreaming of the shameless gluttony and self-indulgence made possible by vast wealth, is satisfied with a 40% move in just a few lousy weeks!

And this is the kind of thing that one would expect when the money supply is going up, which is the subject of Michael Pollaro in his "The Contrarian Take" column in Forbes, and which had the headline "Monetary Watch January 2011: Money supply firing on all cylinders?"

First, let me make sure that you know that I am a guy who is absolutely sure of two things: one, that the Austrian Business Cycle Theory is the Only True Economic Theory (OTET), and two, that We're Freaking Doomed (WFD), meaning that if you are not buying gold and silver with a frantic, monomaniacal intensity, then there is something Very, Very Wrong (VVW) with you.

As such, I was instantly enamored when he opens with, "Our monthly Monetary Watch, an Austrian take on where we are on the monetary inflation front and what's next."

Naturally, I hoped that he would ask an opening "teaser" question, like, "Is The Fabulous Mogambo (TFM) right when he says we're freaking doomed?"

Instead, he uses another headline, which you know is a headline because he starts off with "Headline Monetary Aggregates, Where We Are."

To this, I extemporaneously made a joke by saying, "We're right here! Hahaha!"

Well, nobody laughed at my joke, which, upon reflection, I admit is pretty lame, but I was distracted by still being disappointed that Mr. Pollaro didn't mention me or my crackpot opinion.

Anyway, I'm sorry that I didn't put more effort into my joke-making, because what followed is scary enough that it needed a joke to lighten the mood!

He says, "The US money supply aggregates based on the Austrian definition of the money supply, what Austrians call the True Money Supply or TMS, continued their recent surge, in December posting an annualized rate of growth of 38.9% on narrow TMS1 and 24.6% on broad TMS2. That brought the annualized three-month rate of growth on TMS1 and TMS2 to 22.3% and 18.1%, respectively, 8.6 bps and 2.7 bps higher than those posted in the prior month."

Inflation in the money supply of double-digits means at least double-digit inflation in prices!! By the use of the two exclamation points to punctuate that last sentence, you are alerted to the fact that I am so frightened that I am locked in the Mogambo Big Bunkeroo (MBB), waiting for the explosion of price inflation that will result from such outrageous expansion of the money supply.

While I make a quick check to see if I have enough supplies and ammo to last until the bankrupted, starving, desperate people whose money has no purchasing power left have all killed each other and it is safe to come out again into a Brave New World where we can begin again with a gold-standard money, please read ahead to the next part of Mr. Pollaro's horrifying news.

He writes, "Turning to our longer-term twelve-month rate of change metrics – more indicative of the underlying trends – and focusing on our preferred TMS2 measure, we find that TMS2 saw another healthy increase, in December growing at an annualized rate of 9.9%. Not only was this a tick up from November's 9.8%, but we think close enough to 10% to mark December as the 23rd time in the last 24 months that TMS2 posted a twelve-month rate of growth in the double digits."

This kind of double-digit growth in the money supply has been going on for two years? Two years! Two Freaking Years (TFY)! Double-digit growth in the money supply every year for Two Freaking Years (TFY)!

As to what this portends, all I see is terrifying inflationary horror and catastrophe, but Mr. Pollaro is too refined to, like me, run down the street in an adult diaper and a tinfoil hat, screaming his guts out, "We're freaking doomed, you morons!"

Instead, he keeps it on a strictly professional, technical level, and writes, "For new readers of the Monetary Watch, the last time TMS2 saw this kind of string was during the run up to the now infamous housing boom turn credit implosion, a time during which TMS2 saw 36 consecutive months of double digit growth."

So while Mr. Pollaro is too polite and professional to resort to hysterics and name calling, I am not so disposed, and will tell you right to your face that if you are not buying gold and silver, especially since their prices have seen a little dip lately, then you are, indeed, an idiot.

For those who are not idiots, on the other hand, then buying gold and silver is, paradoxically, an idiot's delight, because, "Whee! This investing stuff is easy!"

The Mogambo Guru
for The Daily Reckoning

The Troubling Doubling of Money Supply 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."

Gold and Silver should be following China’s moves into US Banking Industry

Posted: 25 Jan 2011 04:58 PM PST
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