Tuesday, May 18, 2010

Up Is Down, and Down Is Up

I think Jim Sinclair said it best last evening when he commented for his readers on yesterdays Gold action:

Tomorrow is the first day Greece receives a tranche of emergency funding which of course caused some euro short covering from below 1.2236 to the present 1.2394. Recall I gave you the 121 1/2 to 122 1/2 as support under the break of 126.

The present relationship, although short term, is that gold is moving in the same direction, of the US dollar. That means that as the US dollar falls markets interpret that as a relief of the euro crisis which results in longs taking profits and shorts establishing positions in gold. A softer dollar today as a product of short covering in the euro for very modest technical and fundamental tidbits means temporarily lower gold as the euro crisis has caused a rush to gold by euro holders. That relationship will stop, but the euro must cease first.

As I explained to you in detail, the next target of credit default derivatives after battering the euro is to batter the US dollar.

After the euro is done within a few sessions the relationship between the dollar and gold will return to inverse in a very big way. This I assure you. With more than 50 years in markets you learn a few things about the madness that goes on.


Clearly, the US Dollar's "strength" over the past 30 days can be directly attributed to the weakness in the Euro. This is the underlying fallacy of the rush into Dollars as a "safe-haven". The only other choice currency traders had was Gold, and obviously, many chose Gold over the past 30 days in spite of the Dollars rise.

Gold is now rising in ALL major currencies. This can not be dismissed. However, because Gold has been rising along with the Dollar "recently", it would only stand to reason that as the Dollar begins to roll over as pressure on the Euro eases, Gold would dip in price also. But only temporarily.

The inverse relationship of Gold to the Dollar remains intact, it has only temporarily been skewed by the crisis in the Euro. Note that as the Dollar has risen over the past month, commodities prices in general have fallen, particularly Oil and Copper. Commodities have maintained their inverse relationship to the Dollar. Noteworthy also are the headwinds Silver has faced as it has tried to keep pace with Gold.

Gold is too often regarded as a commodity, and not a currency, and in the past has fallen with the CRB Index as the Dollar has risen. Not so anymore as the currency characteristics of Gold move to the forefront. However as the Dollar "rally" reached blow-off levels this week, Gold came under pressure with all the commodities. The disconnect between the inverse of the Dollar and Gold is about to be reestablished as this false rally in the Dollar receives the hatchet job it much deserves.

In this instance, Silver may pick up the leadership role in the Precious Metals here. I still expect Gold to peak in this Spring upleg near 1300, with Silver hitting new bull-run highs in the low 20s. The Precious Metals typically rest through the month of June into July. It remains to be seen if 2010 will be a "typical year" for the Precious Metals. That matter rests squarely on the misfortunes of the US Dollar going forward from here.

Wholesale prices dip 0.1 percent in April
WASHINGTON (AP) -- Prices at the wholesale level fell in April, reflecting declines in energy and food.

The Labor Department said Tuesday that wholesale prices edged down 0.1 percent last month, the second decline in the past three months. Core inflation, which excludes energy and food, rose 0.2 percent, slightly faster than expected. But over the past year, core prices are up just 1 percent.

The absence of inflation pressures means the Federal Reserve can continue to keep interest rates at record lows to bolster the economic recovery.

The financial news media never fail to amuse me. Today we are lead to believe that inflation at the wholesale level [costs to manufacture] are down. The "headline number" says so. What is amusing is how this month's "core" number is overlooked, and dismissed.

In past inflation reports, a "core" number that is smaller than the "headline" number is often used to dismiss a "worse than expected" headline number. The core number is always used as a "true reflection" [so they say] of inflation because it excludes food and energy costs [because, of course, nobody uses food and energy]. So when the headline number reports high inflation, the core number is trotted forward to make it go away.

This month, core inflation is higher than headline inflation. In other words, excluding food and energy, inflation was UP, not down. But of course, our government spoon fed media does not want to give the public the "impression" that prices are rising, so they use the "least reflective" number in their headline to mislead you into believing the opposite of what's true. This is known as Orwellian Reporting. Up is down, and down is up... see how simple it is.

They then expand on their Orwellian broadcast by throwing in a couple of lines of misdirection to quell any "inflation expectations" the public might have:

"But over the past year, core prices are up just 1 percent.

The absence of inflation pressures means the Federal Reserve can continue to keep interest rates at record lows to bolster the economic recovery."

Core prices may be up "just" 1 percent, but wholesale price are up 5.5%...and that folks is inflationary. The Fed isn't keeping interest rates low to bolster the economy, if that were true the economy would be roaring along at a breakneck pace. The Fed is keeping interest rates low for ONLY one reason: To keep the borrowing costs on $13 TRILLION of debt low.

The Fed is desperate to get some inflation into the financial system. It is the ONLY way they can hope to make a dent in the federal governments expanding debt burden. This debt can NEVER be repaid, but it can be inflated away by devaluing the currency.

The Fed and Treasury are facing a very serious problem hidden within this $13 TRILLION debt mountain. 40% of that debt is financed for one year or less. The Treasury holds the biggest adjustable rate loan in the history of the planet. Rolling over 40% of $13 TRILLION annually will get VERY expensive to finance if/when interest rates start to rise. By making excuses for the Fed to keep interest rates low because "core" inflation is just 1%, the illusion that America can easily "manage" her debt is perpetuated to a gullible public.

In essence, the Fed has to keep inflation expectations low, in the hopes that this will keep interest rates low, so that the Treasury can keep it's borrowing costs low. This charade can not last too much longer. America's ever expanding debt will see to that.

Do you see now why today's PPI report is so amusing. The financial press dodges the truth and perpetuates a myth all in three paragraphs. The sad part is how so many people believe the reporting. It's also amusing that one of Greece's overriding debt issues is that it has so much "short maturity" debt to roll over, and it can no longer afford the costs to roll over that debt. This is primarily why the EU and IMF had to bailout Greece. It's not so amusing when one stops to consider, who is going to bail out the USA?

US faces one of biggest budget crunches in world – IMF
By Edmund Conway
Earlier this week, the Bank of England Governor, Mervyn King, irked US authorities by pointing out that even the world’s economic superpower has a major fiscal problem -“even the United States, the world’s largest economy, has a very large fiscal deficit” were his words. They were rather vague, but by happy coincidence the International Monetary Fund has chosen to flesh out the issue today. Unfortunately this is a rather long post with a few chunky tables, but it is worth spending a bit of time with – the IMF analysis is fascinating.

"Gold Is Increasingly Being Viewed As A Currency Of Its Own"
By David Rosenberg
Here’s the deal on gold. When we had the post-Lehman collapse, gold fell from $900 to $720 an ounce but it still managed to outperform other commodities and rise in many other currencies
, outside the U.S. dollar. That post-Lehman collapse phase was a giant margin call where investors sold their winners, like precious metals, and on top that, there was insatiable appetite for dollars from the global banking system caught short of greenbacks.

What is happening today is truly fascinating. Gold has broken out to the upside even as the U.S. dollar has done likewise on the back of a renewed flight-to-safety bid. What this means, of course, is that gold has managed to hit new highs even as, (i) the U.S. dollar has risen, which means gold is breaking out against all major currencies; and, (ii) other industrial commodities, such as oil and copper, have slumped from their recent highs. So what this all means is that gold is no longer being considered as part of a resource complex that is outperforming the segment but is increasingly being viewed as a currency of its own.

Moreover, with the growth rate of fiat currencies globally being met with a skeptical eye by investors, especially now that we know that if the ECB, of all central banks, can engage in debt monetization (those clinging to the belief that this was modeled after the Bundesbank have been clearly duped), the one thing we do know about gold is that most of it is already above ground and that production peaked a decade ago. In other words, investors have more faith in what the shape and direction of the supply curve for bullion looks like relative to individual country money supply growth. This is why deflation is good for gold — the reflationary efforts provide a big boost. Even without the interventionist efforts to monetize the debts, as long as policy rates are near-zero, gold leasing rates will do likewise.

While FDR fixed the dollar price of gold in the 1930s, we know that bullion doubled in Sterling terms during that deflationary cycle. Gold is a hedge against instability of all kinds — don’t think for a second that deflation does not engender instability whether it be financial, economic or political. To be sure, gold is also a hedge against inflation — but that is going to come much, much later and will be the icing on the cake.

$3,000 gold price “may yet prove conservative"
by Prieur du Plessis
Although gold bullion is both a commodity and currency, it has lately become the world’s currency of choice, i.e. a vote of no confidence in fiat paper. This is evident in the fact that the gold price has not only just made an all-time high in US dollar terms ($1,249 on Friday), but also in just about every other currency one cares to mention.

David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, shares my enthusiasm for the “barbarous relic”, as it was once described. “While I am concerned near-term that gold is overbought and could be ripe for a setback; however, unlike the equity market, bullion is in a secular bull market, which means dips, when they occur, are to be bought. Gold can trade down to $1,130 an ounce and none of the trendlines would be broken,” he said.

Here is the real interesting part of his analysis: “More to the point, secular bull markets usually end in parabolic blow-offs and we are nowhere near that point... And, as we have said in the past, if central banks were ever to be compelled to hold the same share of gold in reserves to back up their respective monetary aggregates, the gold price would rise to $3,000 an ounce.”

Rosenberg concluded: “Believe it or not, $3,000 an ounce on gold may yet prove to be a conservative forecast. If the gold price to world GDP ratio were to ever scale up to the peak three decades ago, it would imply an ultimate peak of $5,300 an ounce. Even better, if the relationship between gold and the M3 money measure where to revert to the 1990 high, gold would move to $5,700 an ounce. A more cautious projection would merely put gold on the same footing as the CPI, and heading back to the previous peaks in this ratio would suggest $2,300 as the peak in gold – only a double from here. Or perhaps the gold price-M1 ratio is one that should be considered and even here gold would go to $3,100 per ounce under the proviso that prior highs get re-established.”

“We Don’t Need Central Banks”
an interview with J.S. Kim
Mr. Kim, in your point of view our current fiat money system does not only belong to the root causes for the financial/economic crisis we’re going through, but also that it is fraudulent per se. Why so?

Well, the reason I believe it’s fraudulent is because our current money system is a system that creates money as debt. If we had no debts in our global monetary system, no money could exist. That’s a fairly ludicrous concept if you think about it. It’s also a system in which central banks are allowed to print money – and when I say “print money” I use this term very loosely, because the predominant amount of money today is created as digital debits and credits. So when we think of fiat money, most people think of paper money, but in reality most paper money doesn’t even exist. It’s just digital credits credited from central bank to regional banks to commercial banks and then to the various creditors and debtors in the system. So there’s virtually zero labour that’s being performed and banks charge consumers interest on this absence of labour. Centuries ago, we used to call that usury and fraud. Today we just accept it as that’s the way the system works.

Do you believe that a gold standard could have worked given the real economic growth?

I don’t see why not. The arguments against a gold standard are mostly propelled by bankers that want the status quo and fraud to continue. There’s nothing about a gold standard that would hold back economic growth. In my opinion a gold standard would keep money honest. If we look at some of the most prominent central bankers in the past, for example, Alan Greenspan – he said a gold standard would set interest rates in the economy on its own at a proper rate and regulate economic growth to contribute to steady growth without the boom-and-bust cycles that we experience every few years. I definitely believe that it could work.

Is actual the “fraudulent monetary system” the problem or rather the “fraudulent money men”?

That’s a very interesting question and I’ve heard arguments on both sides. There are people who say it doesn’t matter if money is sound or unsound if criminals run the system as they do today. I disagree with that. Under a sound monetary system, people will ultimately control the value of money. With the unsound system, that we have today, “the money masters”, “the money men” or whatever you want to call them, they control the value of money.

For example if people look to Bretton Woods and say that it is an example of the gold standard not working, that’s simply not true. Under Bretton Woods, a true gold standard never existed. That’s what happened: the bankers were basically lying to the people about maintaining a true gold standard. France called the US bankers’ bluff in not maintaining the gold standard and that’s why it fell apart. So this is an instance where we had a relatively sound monetary system and even though the bankers were committing fraudulent practices under this system, the people ultimately were still able to control the value of money. That’s why President Nixon had to close the gold window – because the people were forcing the bankers to lose money when they committed fraud. And that’s why the financial oligarchs do not want a sound monetary system because they lose control over the value of money.

1 comment:

  1. that was actually Trader Dan Norcini @ jsmineset. this blog is always one of the best and most informative on PMs, the markets in general and the ongoing economic debacle. thanks and good work, gold harvest/ silver moon.