Wednesday, October 29, 2008

The Volcano Stirs To Life

Today's Fed rate cut appears to have been a DUD. In the final 12 minutes of trading — from today's post-rate-cut high to the closing bell — the almighty Dow Index nosedived by an alarming 372 points! It was quite a sight to behold. Gold lost $1 a minute in that decent, falling from 761 to 749 in those ghastly 12 minutes.

Gold, along with Silver quickly recovered after the markets closed, and at 9PM est, both are trading higher with Gold at 766 and Silver at 10.06. Are the metals out of the woods yet? I wouldn't get too excited just yet, but smoke has been sighted at the top of this volcano. Gold must break above 776.55 to have a chance at establishing the recent low as an interim bottom. Silver must break above 10.50 to establish the recent low [hell hole] as an interim bottom.

The markets in general REMAIN highly volatile and unpredictable. Gold and Silver have been VERY oversold down here and are due for a rally. On the flip side, the Dollar is VERY overbought and due for a correction. A dollar correction to at least the 81.50 area appears to have been set in motion. This correction in the Dollar "could" propel Gold and Silver towards our targets of 835 Gold and 11.73 Silver. Should all reach these levels by mid-November, reversals would be likely prior to a rally into the end of the month. Should this afternoons late crash in the Dow carry over into further downside near term, expect the Dollar to quickly regain traction, and Gold and Silver to remain in a funk down here.

Why Gold Might Soar Over the Next Four Weeks
Whether or not you acknowledge past efforts by the U.S. government with other governments, central banks and private trading partners to suppress the gold spot price, events coming to pass in the next four weeks could create overwhelming pressure causing much higher gold prices.

Last Friday, the Taiwan government announced that it had completely liquidated its holdings of Fannie Mae, Freddie Mac and Ginnie Mae bonds. If a long-time ally of the United States is willing to admit that it is bailing out of dollar-denominated debt, will other nations continue to show restraint?

Last Friday and Saturday, leaders from 43 Asian and European nations met in Beijing to discuss the global financial crisis. The United States was specifically excluded from this meeting.

- The TOCOM, the Tokyo Commodities Exchange, provides daily reports of trading positions for major traders. Goldman Sachs and six other firms had huge short gold positions in early 2006. Goldman Sachs and these others have been continuously reducing their short positions. Late last week, Goldman Sachs TOCOM gold position turned into a net long of 370 contracts. The other large short sellers as a group are in their lowest short position in the past 30 months. These companies now have less incentive to want to hold down gold prices.

- There is a significant effort underway by would-be gold and silver buyers, dismayed by the current high premiums for physical gold and silver to purchase December COMEX contracts and ask for physical delivery of the 100-ounce gold and 1,000-ounce silver ingots. Since the COMEX only has a tiny coverage of physical metal for its outstanding contracts, there is a growing risk that the COMEX gold and silver contracts may default. If this occurs, the COMEX allows contracts to be settled for cash rather than gold or silver. If defaults occur, the spot prices for physical gold and silver will soar instantly.

- AIG, America's largest insurance company and beneficiary of over $100 billion in government liquidity over the past six weeks, is still at great risk of financial collapse. From a high of $63.68 per share within the past year, the stock settled at $1.35 on Oct. 27. AIG is widely regarded as holding the largest number of gold and silver derivatives (especially silver) of any company in the world. If it fails, the counterparties on these derivatives contracts could be forced to quickly acquire large quantities of gold and silver to minimize their financial losses.

It would only take one or a few of these events to get out of control for the prices of gold and silver to explode.

The U.S. government and its partners are pulling as many strings as it can to try to hold down prices. A large number of 400-ounce gold bars have been appearing on the market with markings that indicate that they may either be coming from the U.S. Treasury or International Monetary Fund reserves. The IMF is not yet authorized to sell any gold, but apparently can lease gold without restriction. If it becomes public knowledge that the U.S. or the IMF is sneaking gold onto the market to help hold down prices, the news will actually have the opposite effect because it would represent an admission that the U.S. dollar deserves to be worth much less than it is today.

Economic Deflation in Gold Terms and the U.S. Dollar Collapse
Right now, everyone is buying dollars and US treasuries based on the idea of price deflation in terms of dollars. Here are a couple of headlines evidencing this thinking:

Deflation Monster Coming as Credit Losses Far Exceed Capital Injections

U.S. Dollar Has Entered a Multi-year Bull Market

(The US dollar in a "Multi-year Bull Market"? That must the most over-optimistic, out-of-this-world thing I have heard this year.)

I would like to point out that the stock and credit market would already have crashed several times this year to a much greater degree if not for the constant stream of interventions by the fed and treasury. In other words, the results of this housing and credit collapse have already diverged from what happened during the Great Depression due to the creations of trillions of dollars through money printing and government guarantees. While trying to prevent a 1929-style crash, the fed has vastly increased the supply of dollars in relations to the world's limited supply of gold. The dollar's rally due to deflation fears these last three months is therefore based on a false premise.

The US dollar has already lost its status as the world's reserve currency due to the government's fiscal irresponsibility, especially over the last year. Political and financial leaders around the globe are furious with the US and its financial sector, and they are determined to move away from the dollar. Meanwhile, clever investors who see the writing on the wall are already accumulating physical gold and other precious metal, creating shortages. However, none of these signs are needed to know the dollar time has come. The simple truth is that the value of paper or fiat currencies is determined not only by the quantity in circulation, but also by the financial strength of the government which backs them . The US government is broke and has been living on borrowed time for years (from China mostly). Everyone knows the US is totally insolvent, but they continue to hold dollars because the dollar's collapse is too unimaginable .

With the dollar's collapse being so unthinkable (like the bankruptcy of Lehman), there is no political will to try to prevent it. Worse still, even if the government develops the resolve to save the dollar, it is too late: if the government stops printing/borrowing money and guaranteeing bad debt the US economy will disintegrate (the financial sector is gone in either case).

The dollar will collapse when demand in the physical gold market overwhelms demand in the COMEX. Either there will be defaults on the delivery of gold for futures contracts, or there will be a government intervention limiting the withdrawal of gold. Either of these events will be a "perception changing event" of enormous proportions. After all, who wants to stay in low interest bearing US treasuries (which are financing all the bailouts) when faced with the collapse the currency? The move out of the dollar could be so violent that it brings down the financial system despite all the bailouts to date.

(if you own COMEX gold, either sell it or request delivery and hope you are one of the lucky ones who gets their gold)

The Trial of Gold
They filed into the docket, faces bright and smiley despite the shackles around their arms. The leader of the gang, Mr. Gold, was pushed forward into the defendant’s chair. The rest, including Ms. Silver as well as the members of the resource share clan, Biggie Goldshares, Junior Goldshares and Ms. Silvershares, were manhandled onto the hard bench just behind. Rather than looking discomforted at the treatment or the ugly smells and sounds of the crowded courtroom, they just looked around pleasantly, as if on a church-sponsored outing to the local zoo.

Calling the court to order, the bailiff announced that all should rise for the judge. Shortly thereafter, Judge Market entered from stage left, a stern look in his eye. Approaching the dais, he arranged his robes around him and took his seat before gaveling the court to session.

The trial of Gold had begun.

Plumbing the Depths of Depravity [an absolute MUST READ]
If we look at the fundamental-defying, recent meteoric rise in the U.S. Dollar Index, we can trace its roots to systemic institutional failure brought on by the mortgage-backed-security led implosion of the OTC derivatives complex first signified by the demise of mortgage lender Indy Mac:

What folks need to understand is that the global OTC derivatives market – measured in tens or hundreds of Trillions - is virtually all U.S. Dollar denominated. Its SYSTEMIC failure – which is now occurring – requires U.S. Dollar balances to clear [settle] the trades [bets]. This has created the paradoxical global demand for U.S. Dollars – the currency of a country that is fundamentally bankrupt.

By rationing credit to hedge funds that were naturally levered and “long commodities” [institutions like J.P. Morgan routinely took the other sides of their customers commodities bets, ruining institutions like Nat. Gas player Amaranth] - and propping up the balance sheets of those who were “short commodities” – the Banks - the Federal Reserve led cabal of Central Bankers have ENGINEERED the collapse in commodities prices while creating the illusion that market commentator, Dr. Jim Willie, so aptly described as,
The US Dollar Death Dance.

The engineered collapse of the commodities complex became necessary in the eyes of monetary elites because the rush for tangibles and corresponding repudiation of fiat money was becoming manic – as so CLEARLY evidenced by the emerging shortages of precious metals, gold and silver bullion.

War of Attrition
The spot price of gold as quoted by NYMEX is no longer an accurate representation of the real price at which physical gold bullion is being traded. It is, in fact, a lie.

This is apparent by the great disparity between the availability of gold and the virtual shutting down of all sales operations related to delivery of anything denominated in one ounce units. Buffalos, Krugerrands, Eagles….you name it, you can’t buy ‘em.

The idea of “Futures” was originally established as a mechanism for price discovery, not price determination. Yet this very mechanism, first deployed as way for bankers to capitalize farmers in the spring with a relative degree of certainty as to what the farmer would reap in the fall, has become a tool for the manipulation of the gold market. In creating such huge short positions in the futures market, and driving the price down, the spot price suffers as a result of the physical short created to hedge against a paper long.

It is an elementary simplification to state that a thing is worth what somebody is willing to pay for it.

The fact that bullion dealers are paying and charging premiums to the spot price for gold is clear evidence that the spot price published each day is no longer an accurate representation of the price of gold, and its continuing publication as such must soon be identified as fraudulent, and corrected.

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