Wednesday, October 13, 2010

Stupid Is, As Stupid Does

Gold today surprised everyone and no one. After yesterday's non-event and FED minutes reading, Gold resumed it's now relentless march higher.

It was amusing yesterday morning listening to and reading all the blah-blah prior to the release of the Fed minutes. You'd think Moses was about to come down from the mountain. As if what was in these "notes" was any secret. The Fed has to inflate the money supply or die. It's that simple. Either the Fed buys the Treasury's debt or the country defaults on it. Gold knows this and is reacting accordingly. Toss in the mushrooming "forclosuregate" story, and Gold is the "go to" asset without a doubt.

After a brief pennant consolidation on the chart, Gold broke higher last evening at 1352. Moving through 1365 this morning, Gold left the station for the next $100 journey higher to 1450. Silver broke in tandem and roared higher today, clearing 24 in after hours trading this afternoon. Stunning performances.

Those looking to short these Precious Metals markets should look for a new vocation. It's suicide in this environment. Either be in the market, or out of it. The short side is not worth the risk. However, as we said last week, the markets are moving into a much more volatile arena up here, and "air pockets" in the markets are to be expected...trying to time these pockets is a fools game. Taking a little money off the table if you are a trader long the market is wise, but the risk now is that you will be out of the markets when they make their moves higher. The dip/air pockets are going to be relatively shallow, and not worth trying to catch on the down side here. If you must trade, keep 1/3 of your funds in the market long at all times, and trade with the rest.

A $1450s target in Gold translates into a $26s target for Silver. At this time it might be safe to say that Silver is "off the chain"...hang on for the ride. However, I would not be surprised to see a pause here in Silver at around $24.15-25 as Gold nears 1380. But a run to the next round numbers at $25 and $1400 would not shock me either. Crazy, I know.

News flash: Fed declares it MUST create inflation!
by Larry Edelson
In yesterday’s release of its September Federal Open Market Committee minutes, the Fed officially announced that …

“Unless … underlying inflation moved back toward a level consistent with the Committee’s mandate, they would consider
it appropriate to take action soon.”

The Fed is considering “… possible steps to affect inflation expectations” and “targeting a path for the level of nominal GDP.”

That’s Fed-speak for a MANDATE TO CREATE INFLATION — with lots more money printing, and many more purchases of Treasury bonds, mortgage bonds, corporate bonds, commercial paper, even possibly equities or real estate!

No wonder the dollar is crashing toward new,
all-time lows against ALL major currencies!

Instantly after the Fed’s meeting notes were released, the dollar started plunging again — to fresh record lows against the Swiss franc … to nearly a new 15-year low against the Japanese yen … and another record low against the Australian dollar.

The dollar even fell to a 13-year low against the Thai baht!

Indeed, right now, as I pen this update …

The dollar is a mere THREE-TENTHS of ONE PERCENT away from making all-time RECORD lows against ALL major currencies!

The long and short of what's happening with silver
By Chris Mack
Things appear to have changed in silver trading with the bullion banks nearing a position where they may have lost control of the markets.


During the bull market in silver that began in 2001, a pattern of trading similar to the "Martingale Betting Strategy" emerged in which 8 trading institutions sold short increasingly larger amounts of contracts into rallies until their sales volumes overwhelmed the market into a freefall. After the freefall they then repurchased those short positions at a profit and the rally process began again. This process of taking money from precious metals investors has been well documented by analysts such as Ted Butler, David Morgan, and others. The strategy was so successful that some futures traders began to front run the banks on their own using tactics such as the COT report and other sentiment indicators. As a result of their actions it has been argued that these large short positions have suppressed the price of silver by a multiple of itself. This may be proven sooner than many expected.


Over the last 6 weeks all was going according to plan. Silver rallied and the commercial banks shorted an ever larger amount of contracts as the open interest swelled to the point at which most silver analysts were expecting a correction. In the last 2 weeks silver rose by nearly $2 dollars and most were expecting to see an even larger commercial short position reflected in the COT report. Instead, the commercials actually covered 2297 contracts, and bought an additional 989 long contracts during the week of September 28th to October 5th when the price of silver rose by $1. The covering was down at what appeared to be a short term top to many.


While it can be speculated on how short covering could impact the market, a short squeeze could feed upon itself as it attracts capital. In five trading days of buying a net 3,286 contracts the price of silver rose by $1. However the commercial banks are still a net 62,127 contracts short so at that linear rate it would take them 94 trading days to cover with a silver price of roughly $117. The resulting losses would be around $15 billion. Of course markets aren't linear and after the second or third week of covering traders would begin to purposefully front run and squeeze the commercial shorts so it is unlikely that the positions could be covered that low or if at all.


Unfortunately, those of you who were hoping for a correction to accumulate more silver may not get it here as a price reset may be on the horizon.

Should U.S. say it's selling gold before world learns it's long gone?
CHRIS POWELL, Secretary/TreasurerGold Anti-Trust Action Committee Inc.
Dear Friend of GATA and Gold:

Today's Financial Times carries an essay by former Federal Reserve economist and former assistant U.S. Treasury Secretary Edwin M. Truman headlined "America Should Open Its Vaults and Sell Gold." For years Truman has been turning up at the center of the gold price suppression scheme, but GATA and its supporters might agree with him in principle on this one, insofar as getting central banks out of the gold business is the first step toward a free market in gold.

Of course these days free markets are the last thing that Western central banks want, central banking's main objective lately being to prevent any markets from occurring anywhere. So Truman's objective here may be quite different from what it seems.

That is, Truman may be floating an idea for the cover story needed to conceal the disappearance of the U.S. gold reserve.

America should open its vaults and sell gold
By Edwin Truman
Gold is back in the news. Its price is soaring in what some analysts say is a reflection of a weak economy and a lack of confidence in government policies. Naturally, investors are looking at a new sure thing in the expectation that prices will continue upward. My advice to the US government, however, is that this may be the best time – to sell. Doing so would help President Barack Obama and Congress reduce indebtedness, at little cost.

It is an article of faith in bullion markets that the US will be the last country to dispose of its gold stock. For 30 years it has had a no-net-sales policy for reasons ranging from resistance by US gold-producing interests to concerns about the international monetary system. That assumption may remain plausible. Yet the administration has an obligation to re-examine its policy.

The market price of gold has risen for more than a decade propelled by low interest rates, the hype of the bullion dealers (holding large inventories) and no doubt the normal amount of fraud and misinformation accompanying asset price bubbles. The Financial Times has reported that the precious metals industry expects the price to increase by a further 11 per cent over the next year.

Meanwhile, the US Treasury holds 261.5m fine troy ounces of gold. The government has been sitting on it since the Great Depression, receiving no return. At the current market price of $1,300 per ounce, the US gold stock is worth $340bn. The Treasury secretary, with the approval of the president, has the power to sell (and buy) gold on terms that the secretary considers most beneficial to the public interest. Revenues from sales must be used to reduce the national debt.

If the US were to sell its entire gold stock at the current market price, it would reduce the gross government debt by 2¼ per cent of gross domestic product. (US net government debt would decline by essentially the same amount because the US gold stock, listed as an asset on the balance sheet, is valued at only $42.22 an ounce.) Based on the average interest cost from 2005 to 2008, this reduction in debt would trim the budget deficit by $15bn annually. Thus, the Obama administration would be doing something about the US fiscal debt and deficit without reducing near-term support for the ailing economy.

This proposal has other benefits too. First, the US would be obeying the maxim to buy low and sell high. Second, it would be performing a socially useful function. Demand for gold exceeds normal production, driving up the price. To the extent that the gold craze is being fed by concern (rational or irrational) about government policies, public welfare would be enhanced by giving citizens something tangible to hang around their necks or place in safe deposit boxes. Third, if the price is a bubble, as seems likely, the sooner it is burst the better for the average investor.

Some people point to possible costs. Aside from political pressures from those who want to protect the value of their holdings, above or below ground, two principal arguments are made against US gold sales. The first is that they would disrupt the market. But the US can be cautious in its sales, avoiding disruption of the sales programmes of other countries, as it has in the past. There is little risk. In recent years, sales under the Central Bank Gold Agreement have dwindled, and some other central banks are buying gold. (The US is not a party to the agreement.) Also the International Monetary Fund has completed more than three-quarters of its own planned sales of 403.3 metric tons.

Another counter argument is that the US should hold on to its stock in anticipation of a return – by itself alone or with other nations – to a monetary system based on gold. But returning to the gold standard would reinstate a system associated with unstable prices, wages, output and employment. It has not existed for a century; and will not make a comeback. Official discussions of the reform of the international monetary system do not include any advocates of a return to gold, and the IMF articles of agreement prohibit it. The sooner thoughts of such a return are laid to rest, the better. A related argument is to keep the US gold stock as a “rainy day” precaution. But after the recent economic and financial crisis and with the prospect of misery for several more years, how much more rain must pour before the US acts?

Jim Sinclair - Great Impetus to the Bullish Side of the Market
Eric King,
With news coming today out of the Financial Times and Edwin Truman that the US should sell its gold reserves, I thought it important for King World News to interview the legendary Jim Sinclair to get his reaction. There are certain times in this business where the great ones are needed to comment on a story. True to his form, Sinclair broke this situation down in a way that no other could....
October 12, 2010

Jim Sinclair:

The important thing is to remember that if you get two back to back bullish articles in the Financial Times, you are going to get a reaction.”

“As long as the FT gets some outspoken maniac to defile gold, it is going orders of magnitude higher. All of us in the gold community hope he gets interviewed once a week.”

“God help us if we ever got three back to back bullish articles in the Financial Times, it would probably finish us off.”

“The FT has been the absolute best indicator for gold, and once again it has given great impetus to the bullish side of the market.”

Jim’s father was Bert Seligman. Bert was business partners with legendary trader Jesse Livermore. Bert and Jesse were arguably the two greatest traders in history. Having worked closely with his father for so many years, Jim wound up becoming famous for his own trading acumen. Jim even called the precise high of the gold market in 1980 with deadly precision.

With that being said, Sinclair had these final comments for professionals who trade the gold market, “Traders should buy FT bearish and sell FT bullish. May they ever keep up their reputation.”

Jim Rickards - Last Gasp of the Fiat Money Regime[MUST READ]
Eric King,

In yesterday’s FT piece from Edwin Truman, he suggested America sell all of its gold, and listed reasons as to why gold was in a bubble. King World News reached out to Jim Rickards to get his thoughts, after yesterday speaking with the legendary Jim Sinclair regarding the same subject. Jim Rickards put together this piece exclusively for the KWN blog which deconstructs the arguments in the FT article from Edwin Truman with remarkable precision.
October 13, 2010

A Message to Garcia

By James G. Rickards

October 13 (King World News) - One of the most famous and widely published essays of all time was A Message to Garcia by E. Hubbard. Written in 1899, it recounts the effort of the President of the United States to reach out to a foreign insurgent who was incommunicado. For this mission impossible, the President relied on U.S. Army Lieutenant Andrew S. Rowan who delivered the message against enormous odds but without hesitation and with complete loyalty and devotion to duty.

Lt. Rowan, meet Ted Truman.

Today’s FT carries a column entitled “America should open its vaults and sell gold” by Edwin “Ted” Truman of the Peterson Institute. Truman’s thesis, in a nutshell, is that the gold price is a bubble and the U.S. Treasury should take advantage of this by selling “high” and using the proceeds to reduce the national debt by about 2.25% of GDP. Furthermore, the interest savings on the debt reduction would amount to about $15 billion annually thus helping reduce our deficit even more. And the appeal of Truman’s idea goes even further because the gold sales would give anxious citizens, “…something to hang around their necks…” How thoughtful.

The intellectual flaws in Truman’s piece are too numerous to review in detail but here are a few highlights: He says that the price action in gold is driven by the “…hype of the bullion dealers (holding large inventories)…” Really? My wholesale bullion dealer constantly complains about shortages and occasionally puts his best customers on allocation because he’s short of supply. Truman also says that the market is accompanied by “…the normal amount of fraud and misinformation accompanying asset price bubbles…”. Apart from a few sleazy coin dealers, the only fraud and misinformation I’ve seen comes from the Treasury and the Fed who refuse to allow a proper audit of official holdings and who cover-up and deny their gold discussions held at BIS and other nearly impenetrable venues. More to the point, the price action does not reveal a bubble in gold, it shows the collapse of the paper dollar. The issue here is understanding the importance of the numerarie or unit of account. If you make the dollar the numerarie, and think in terms of “dollars per ounce” then the price action may look to some like a bubble. But if you make gold the numerarie and think about how many ounces your get for a single dollar (now about 0.00075; was 0.00400 in 1999) you can see that the real problem is the dollar is rapidly shrinking to a vanishing point.

Truman’s idea that gold sales and debt reduction would reduce U.S. interest expense by $15 billion per year is the kind of nonsense one gets from static, linear analysis. In dynamic, nonlinear analysis, such gold sales would so undermine confidence in the dollar as to cause a skyrocketing of interest rates and an explosion of the U.S. deficit easily submerging the savings that Truman posits. Truman says that the gold standard was associated with “…unstable, prices, output and employment…”. If by unstable, he means cyclical, yes that’s true (and necessary) but gold was also associated with some of the longest and strongest periods of sustained real growth in U.S. history from 1865 to 1912 until gold’s function was derailed by the creation of the Fed in 1913. Truman says the U.S. “…has been sitting on [gold] since the Great Depression, receiving no return…” Actually, gold went from $20.67 per ounce to $1,350 per ounce in that time period; seems like a 6,500% return to me.

Truman says that the gold standard “…has not existed for a century…”. This is highly revealing. In fact, the U.S. went off domestic gold convertibility 76 years ago, within living memory to many, and only went off international gold convertibility 39 years ago. But if Truman dates the end of the gold standard not from 1971 or 1933 but from the creation of the Fed in 1913 then he’s right; it has been a century. That tells you something about how establishment intellectuals like Truman view the real purpose of the Fed regardless of the existence of any formal systemic role for gold. Nevertheless, gold is not quite the musty relic Truman would like it to be although it is true that an entire generation of finance scholars have come of age since 1971 with no formal analytic training in gold.

We could go on but you get the point. No amount of analysis will reach the right conclusion if you get the paradigm wrong. Truman’s paradigm is anchored in a perpetually sound fiat dollar and he is intellectually unable to see the world any other way. Sadly, he’s not alone.

This leads me to Truman’s most revealing remark of all. He writes, “Official discussions of the reform of the international monetary system do not include any advocates of a return to gold…” (emphasis added). The problem with this observation is that he is almost certainly right. And this is scary. I have maintained for some time that the return to gold is inevitable and the only issue is whether it would happen through a rigorous and studied process led by the United States or by a chaotic process in which the United States is caught off guard to its disadvantage. Learning from an insider like Truman that none of the power elite are thinking seriously about gold increases the odds that the dollar dénouement will be chaotic not orderly.

The reaction of the gold community and various bloggers to Truman’s op-ed was swift and predictable. He was ridiculed as espousing the “dumbest idea we have ever heard” by Others were simply incredulous and assumed that Truman must have wandered onto the FT op-ed pages after decades alone on a deserted island. While I might not disagree with zerohedge, there is one problem with this response. Ted Truman is not a nobody. He’s one of the most seasoned, experienced and highly respected international monetary experts in the world. His academic, government, scholarly and think-tank credentials are nonpareil. He speaks to finance ministers, sovereign wealth funds, IMF officials, and Wall Street CEO’s on a daily basis. Importantly, he was a staff economist to the FOMC. I have personally worked with many of his colleagues at the Peterson Institute on matters relating to international finance and national security and they are uniformly of the highest intellectual calibre and operate with a truly warm and collegial demeanor.

And that is the point. Ted Truman is not a fringe figure or a minor intellectual; he is a giant in the field. He is not just close to the establishment. He is the establishment. An op-ed by Truman appearing one day after the IMF semi-annual meeting ended with no effective solutions on the currency wars is no coincidence. It is a metaphorical Message to Garcia, to the gold insurgents, from the President and the powers that be. It is price suppression without having to engage in actual sales. It is a warning to gold bugs that they may get crushed. It is meant to induce fear into those newly interested in gold that it’s a rough game with no holds barred. It is a show of bravado by the fiat money crowd. But it is also a sign of desperation; the last gasp of the ancien régime of fiat money. If a smart guy like Ted Truman is reduced to the old canard about gold being good only for hanging around your neck, then what else is there to say? The intellectual opponents of gold are now as exhausted as the mines.

Yale Ph.D., And Former Fed Member Tells Obama To Pull A "Gordon Brown" And Sell All Of America's Gold
by Tyler Durden
Edwin Truman, a senior fellow in the Peterson Institute, who is of course a former Fed member, and of course a Yale Ph.D., writes in the FT, suggesting the brilliant idea that it is high time for the US to sell its gold. In other words do precisely what Gordon Brown did a few thousand percent ago, and now has to defend against allegations he did so merely to protect the LBMA cartel which was on the verge of being margin called into oblivion. And even if one ignores the fact for a minute that there has not "really" been an audit of the US gold holdings in who knows how long, who is to say that Goldman, of all people, may not be right and gold will be at $1,700 in a year? Or Dylan Grice for that matter, and it will be about 10 times higher. One thing is certain: converting real hard asset value into paper to patch up 2.25% of government debt as a % of GDP is easily the dumbest idea we have ever heard. Especially, since as we disclosed yesterday, the Fed will have to force Congress to increase its deficit, and thus debt funding needs, simply so that there are enough Treasuries for the Fed to monetize. We hope Mr. Truman is in the contention for next year's economic and peace Nobel prizes, because with articles such as this he has certainly proven he belongs to that unique category of brilliant economists that only Princeton, Yale and Harvard can produce.


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