Watching, Waiting... Wondering

Recall yesterday that in our charts we commented, "with prices here coming from the CRIMEX, failure is always an option". And failure is exactly what we got. How maddening this has become cannot be put into words that do not include expletives. Day after day bad news piles up in the inbox, and Precious Metals prices refuse to respect it and respond accordingly. Perhaps an exceptionally weak non-farm payrolls number this morning will break the back of the Dollar.

As it is the Dollar, or rather the perception of strength in the Dollar, that has kept the Precious Metals suppressed and in check. If you ever needed proof that the markets are controlled by little black boxes, this is it. "The Dollar goes up, then Gold must go down," says the little black box. And so it does. Never mind the fundamental reason why the Dollar is a bad bet, and Gold is the ONLY bet. It should be obvious by now that their are few, if any, humans left on Wall Street with any brains.

It's a tough nut for sure right now. Bad economic data pushes the equity markets down globally. In their infinite wisdom, traders rush to the toxic Dollar "for safety". Because of this rush to safety, bad economic data that would "normally" support and give rise to the Precious Metals acts as a road block because of the "false strength" in the Dollar. The black boxes don't discern that the strength in the Dollar is real or false. "The Dollar is going up, sell Gold."

Brilliant!

So what do we do about it? At these prices, there is really only one option. Maintain your positions if you have any, and add to them if you can with small purchases, if you can find the metal. If you are looking to establish a position, consider the funds you have available to in invest in Precious Metals, and put 1/3 to 1/2 of it to work on weakness in price. Yesterday would have been an excellent opportunity to do just that in Silver. Keep the rest of your powder dry, and add to your positions once the market begins to move higher again.

Buying into the Precious Metals sector today is much like buying into it back when Gold was in the 300's and trying to crack 400 in 2003. The opportunities that exist at these prices today are akin to having a second chance to "strike Gold". From 2003 to March 2008, Gold rose on the back of a slowly unraveling US Dollar and the "threat of rising inflation". Geopolitical uncertainty and the birth of today's financial crisis gave Gold quite a kick in the arse last Fall and Winter. With today's "sale prices" on Gold, many who failed to take advantage of the low prices in 2003 to protect their wealth, have a "second chance" to do so now. The US Dollar's days are now numbered in small numbers, take advantage of this opportunity now to accumulate. The next run in Gold may not blast off for several weeks yet, but once it gets off the ground, the run could last for months as rising prices and hyperinflation carry the Precious Metals to heights yet seen.

Dollar *danger* ahead
Well, the one thing the US government might have had going forward was the strength of the dollar, which, despite America’s economic weakness, low rates and some evidence of Japan-style quantitative easing, was still going strong in recent weeks.

But there are now signs of slackening demand for the US currency, according to Bank of America’s Robert Sinche.

Specifically, one source of the the dollar’s recent rally has been the scarcity of USDs among G7 nations and emerging market countries. That’s now easing, according to BoA, with the provision of currency swaps, such as the $30bn for South Korea, Brazil, Mexico and Singapore announced last week. Intuitively, a mass of dollars coming into the system would ease upward pressure on the USD and that easing can be seen through recent declines in the Libor-OIS spread, BoA says:

While there are many factors that influence the LIBOR-OIS spread, particularly the stability of prime money market fund balances, the spread does provide some measure of the offshore demand for USDs, as does the pricing behavior action in the NDF markets. There are signs that these pressures are beginning to moderate in recent weeks as USD funding liquidity has become available on a widespread basis, suggesting that the scarcity demand for USDs is lessening significantly.

The second factor affecting the USD in recent weeks, according to BoA, has been the repatriation by Americans of foreign assets. Data from the Treasury TIC report indicates that US residents had sold foreign equities for each of the three months ended August, with total net sales of $21.6bn. That, however, may be slowing:

It appears that repatriation accelerated in September/early October, with weekly data (from AMG) showing the sharpest redemptions in international mutual funds during the first half of October. However, those redemptions slowed sharply during 2H October, falling to only an estimated -$0.2bn (2 weeks ended October 29) from -$6.4bn in the 2 weeks ended October 15. With global equity prices stabilizing in recent days, the pace of USD-supportive redemption/repatriation is likely to slow further in the weeks ahead.

The final factor, according to BoA, has been the recent appetite for risk aversion, which drove investors to the safe-haven status of USDs, as well as the Japanese yen. Using the VIX as a measure of risk appetite, BoA thinks the VIX’s recent fall means a “significant correction” in USD gains is likely. As goes the VIX, goes the dollar.

Finally:
A strict reading of interest rate differentials would imply the potential for a further 10% fall in the USD Index during the weeks ahead, about three times the 3.5% correction in place from the October 28 recovery high. While that magnitude of correction appears unlikely in the immediate future, we do note the seasonal forces that often weaken the USD into yearend. Moreover, in a global financial system characterized by a scarcity of capital, it is rather ironic that the currency of the largest capital importer (largest current account deficit) has been so strong in recent months. In this context, the strength in the USD in recent weeks also appears unsustainable, with broad-based gains in both developed (ex-Japan) and select developing-country currencies expected during the final two months of the year.
http://ftalphaville.ft.com/blog/2008/11/05/17851/dollar-danger-ahead/

J.P. Morgan – Loving Their Handiwork
Morgan is the quintessential leviathan in the Interest Rate arena through their obscenely sized Medium-Term Interest Rate Swap book which stood at 59 Trillion at June 30, 2008.

The interest rate swap book, due to its sheer size, overwhelms the bond complex by creating artificial demand for government securities. This interest rate suppressive activity began in earnest back in the 1990’s and has kept market rates of interest at artificially low levels. The FUNDAMENTAL [and ongoing] MISPRICING of CAPITAL – for many years – has led to a myriad of economic excesses like the Dot Com boom, subsequent housing boom and the financial asset boom itself.

Morgan’s overbearing effect in the interest rate complex required the simultaneous suppression of the gold price. This was done to make falsified inflation data seem credible. It has often been said that, “if real inflation heats up – BOND VIGILANTES would raise market rates of interest reflective of real inflation”. The reality folks, the BOND VIGILANTES are extinct – they lost their jobs long ago – being swallowed by the black hole that is J.P. Morgan’s derivatives book.

Of course, the reason why J.P. Morgan’s financial adventure-ism has not yet landed them in the financial dog-house is no doubt rooted in this:

Dawn Kopecki reported [spring of 2006] in BusinessWeek Online in a piece titled, Intelligence Czar Can Waive SEC Rules,

“President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye.”

Folks need to realize that J.P. Morgan “IS” the Federal Reserve. They undoubtedly have a “pass”. This becomes clear when one stops and really analyzes the words of Dallas Federal Reserve President, Richard Fisher;

"The Federal Reserve will do what it takes to maintain its credibility, which is central to preserving the integrity of the US dollar," Dallas Federal Reserve Bank President Richard Fisher said on Tuesday.This report, from Reuters, continues: "We seek to get it right. And the answer to your question is we will do what gets it right," said Fisher. Answering audience questions after a speech to the Dallas Friday Group, Fisher said the US dollar is a "faith-based currency" dependent on the credibility of a central bank. "In addition to a faith-based currency, we are the currency of the world and we must maintain its integrity..."

Don’t you just love the way they maintain the faith, their credibility and keep getting it right?

This rancid injustice has already led to the situation where COMEX futures precious metal’s prices have decoupled from, and bear no resemblance to the costs of obtaining physical stocks of the same.

This appears to have also happened in the interest rate complex with Libor [London Inter
Bank Offered Rate - a futures generated price] becoming a poor proxy for where banks will actually lend money.
http://news.goldseek.com/GoldSeek/1225998899.php