You may be the judge: Intervention
or deleveraging of gold, silver, euro positions all in the same minute.
Please remember that gold goes
down in more than 90% of all COMEX sessions, again, no statistician on earth
will tell you that free markets should behave that way. (readers interested
in a detailed description can read my 18 page piece ‘GOLD
& GATA’ , chapter VI of the Gold Drivers Report 2005)
Please note the timing of the
intervention on the charts above. It all starts at 9.57 AM EST. It happens
over and over again. Fast forward to September 10. Surprise surprise:
So here it is, 10 AM seems to be a popular time for
gold, silver and the Euro to be send to the cleaners
indeed but sure enough it’s all about deleveraging right? Something
that traders suddenly remember to do when the clock approaches 10
o’clock. Sure enough the Asian traders don’t feel the need for
deleveraging their gold positions. Now why is that? It must be that the COMEX traders are
much smarter right? Or maybe they just have a different agenda?
Again, this pattern is reported over and over by GATA
and as its chairman Bill Murphy says:
You have to wonder how
many times people can look at the exact same chart, with gold dropping at the
same time, before they ask what the heck is going on? Free markets just
don’t trade that same way over and over and over, no matter what the
outside fundamental factors are.
END.
So far about market intervention, the reasons for it
are mentioned well above but what about the consequences? What will it do
with the already exploding US
government debt? What will it do with demand for physical gold? What does it
all mean for the fundamental trends that started in 2001 (dollar bear, gold
bull)?
US
government debt escalating
In my piece “Gold
– Fundamentals still pointing towards $2000+” I noted that the US
just raised its debt ceiling to $10.5 trillion dollar so that they can take
on another trillion dollars of debt (current reading= $9.6T)..Well, they might raise the debt ceiling sooner rather
than later again due to the take over of Fannie/Freddie. There are different
estimates out there of what the real costs of the Freddie/Fannie bail out will
be. Some argue that it’ll only requires $20 - $30 billion dollars to
keep things afloat, others mention $200 - $300 billion that would be required
and others argue that the US effectively acquired another $5 trillion of debt
since that’s the amount of mortgage debt they inherited from
Fannie/Freddie. Don Rich of the Mises Institute estimates the real cost of a full bail
out is not unlikely to reach $2.5 trillion:
The Real Cost of a Full Bailout
Don Rich – Mises Institute
A
recent study from the Congressional Budget Office (CBO) has zero credibility.
It pegged likely taxpayer losses in the Fannie Mae and Freddie Mac bailouts
at $25 billion. For those with a sense of history, it is worth remembering
that the S&L bailout had a $160 billion price tag. The numbers diverge so
far from reality as to be laugh-out-loud
funny. Funny, that is, except that the CBO estimate demonstrates a willful
disconnect with the actual consequences of federal government actions.
As
demonstrated below, the real cost of the bailouts will easily exceed $1.3
trillion. In fact, the real cost is likely to range between $1.3 trillion to
$1.6 trillion, and is not unlikely to reach $2.5 trillion.
http://mises.org/story/3062
END.
To put things in perspective, the US
accumulated about $5 trillion dollar of public debt over the last 200 years. Now
to suggest that taking on another $2.5 trillion debt is no big deal is laughable at best. Sure enough bail out exercises like
these requires budgetary resources that only inflation can provide.
It won’t take much time for the investment
world to wake up and see what consequences US government policies may
have. The first signs are not
encouraging:
Nationalization of Fannie, Freddie triggers defaults for derivatives
By Aline
van Duyn in New York
September 8, 2008
One of the largest defaults
in the history of the $62,000bn credit derivatives market has been triggered
by the US
government’s seizure of Fannie Mae and Freddie Mac, raising questions
about how dealers will unwind billions of dollars worth of contracts.
Although the $1,600bn of debt issued by the troubled
mortgage groups is regarded as safe after the US government’s move to
take control of the companies, their move into "conservatorship"
counts as the equivalent of a bankruptcy in the credit derivatives market.
END.
Some
may argue the US
already passed the point of no return so how will this all end? Well, not
good according to legendary investor Jim Rogers, he spells trouble ahead for
the remainder of our lifetimes:
Jim Rogers: How the Federal Reserve Will Fail and
the One Sector Every Investor Should Be In
Keith
Fitz-Gerald
Investment
Director
Money
Morning/The Money Map Report
VANCOUVER, B.C. - The U.S. financial crisis has cut so deep - and
the government has taken on so much debt in misguided attempts to bail out
such companies as Fannie Mae and Freddie Mac - that
even larger financial shocks are still to come, global investing guru Jim
Rogers said in an exclusive interview with Money Morning.
Indeed,
the U.S.
financial debacle is now so ingrained - and a so-called "Super
Crash" so likely - that most Americans alive today won’t be around
by the time the last of this credit-market mess is finally cleared away - if
it ever is, Rogers said.
The
end of this crisis "is a long way away," Rogers
said. "In fact, it may not be in our lifetimes."
http://www.moneymorning.com/2008/09/06/jim-rogers-book/
END.
Former
FED president Paul Volcker
isn’t too optimistic either:
Volcker
Says Finance System ‘Broken,' Losses May Rise
By
Doug Alexander and Steve Matthews
Sept.
5 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker said the U.S.
financial system, dependent upon securitization rather than traditional bank
loans, is broken, and may contribute to the weakest expansion since the
1930s.
http://www.bloomberg.com/apps/news?pid=20601087&sid=auKCKTSSU7yE
END.
Earlier this year at the Economic Club of New York
on the credit crises and related matters former Fed chairman Paul Volcker said the credit crisis is the
“mother of all crises” and the modern financial system and has
failed the test of the market-place.
When
asked about the possibility of a dollar crisis, Mr. Volcker retorted,
“Dollar crisis … you don’t have to predict it, you’re
in it … Let me remind you that the dollar after all is a fiat currency
backed only by the word and policies of our government, policies exemplified
by an independent Central Bank committed to maintaining price stability.
END.
And neither is Martin Hennecke of Tyche
Bailouts Will
Push US into Depression: Manager
By
CNBC.com, Sept 11, 2008
The end result of the global economic slowdown may be the U.S.
announcing national bankruptcy as the government cannot afford the bailouts
that it promised and the market will not bail out the government, Martin Hennecke, senior manager of private clients at Tyche, told CNBC on Thursday.
END.
So
how do foreigners respond to the US
financial crisis?
Well,
it seems that Russia
won’t be of a big help:
Russia says may cut U.S.
agencies holding further
Mon Sep 8, 2008 2:02pm EDT
By Yelena Fabrichnaya and Gleb
Bryanski
MOSCOW (Reuters) - Russia's central bank has
cut its holdings of U.S.
agency debt to less than $60 billion this year and may reduce them further,
its first deputy chairman, Alexei Ulyukayev, said
on Monday.
END.
China isn’t
thrilled either:
China frets at US risk after Fannie/Freddie bailout
Monday
September 8 2008
BEIJING, Sept 8 (Reuters) - The U.S. Treasury's takeover of Fannie
Mae and Freddie Mac is good news in the short term for China, the biggest
holder of the giant mortgage lenders' debt, but Beijing's huge U.S. exposure
still poses a serious risk, a prominent government researcher said on Monday.
"China
has bought a lot of asset-backed securities, and there might be short-term
improvement in price," said He Fan, an economist with the Chinese Academy of
Social Sciences. But, taking a longer view, he said the bailout
posed a problem: if the Treasury issues new debt to fund the rescue, should China
be a buyer or not?
END.
So
again, when could we expect the natural trends to resume (dollar bear/gold
bull)? Sure enough no one knows but according to Jim Sinclair of JSMineset.com
we could expect within weeks from now to see the acts of nationalization to
become extremely gold positive and outrageously dollar negative:
Jim Sinclair’s Commentary
The
children who believe that no problem is ever a problem are about to find out
we are in the middle of the Mother of all financial problems. You can measure
in weeks the maximum time this act of nationalization become extremely gold
positive and outrageously dollar negative.
Regardless
of the Titanic intervention, you can anticipate gold is going first to $1200
and then to $1650. The US dollar will trade at .62 and then .52 on the USDX.
END.
For
those who think the gold bull market is over please consider this:
Demand
for physical gold is soaring to levels not seen in decades, is this what a
bear market is all about? No, of course not, the low gold prices
of today is just a result of plain intervention as described above.
Yes, one could easily be demoralized by recent price action in gold but
always keep in mind the big picture and forget about the (intervention) noise
troubling your mind. Remember that gold supply is going down and will go down
even faster since almost the entire junior mining sector has been slaughtered this year. Most of the juniors
won’t be able to raise money in current environment so they are putting
their exploration projects on hold. No exploration means no
new deposits. Since 75% of all new discoveries are made by juniors it
isn’t hard to understand that gold supply will go down coming years.
Please remember that gold demand already exceeds supply by a 1000 tonnes a year and this will widen up even more not only
by a decline in gold supply but by a tremendous increase in gold demand as
well. Abu Dhabi for
instance reported record high gold sales not seen in 30 years:
Gold sales in Abu Dhabi
surge 300%
by Summer Said on Monday, 01 September 2008
Gold jewellery sales in Abu Dhabi
soared 300 percent in volume and almost 250 percent in value in August from a
year earlier after the metal dropped to nine-month lows, the emirate's
industry group said on Monday.
"It was the best month the market has seen in almost 30 years and it
compensated for any drops we have seen earlier this year," Abu Dhabi
Gold and Jewellery Group Chairman Tushar Patni told Reuters.
"We had never expected that if gold fell below $800 an ounce we would
see a 300 percent increase in volume and 250 percent in value, especially as
many buyers are abroad on holiday."
http://www.arabianbusiness.com/529652-gold-sa...habi-surge-300-
END.
Indian demand is on the rise as well:
Indian gold
imports jump as lower prices fuel demand
2
Sep, 2008, 1340 hrs IST, REUTERS
NEW DELHI: India's
gold imports in August jumped 45 percent from a
year ago, the first annual rise this year, as lower prices and upcoming
festivals drove demand in the world's leading consumer, a trade body chief
said on Tuesday.
http://economictimes.indiatimes.com/Gold_imports_jump_as_low_prices_fuel_demand/
articleshow/3436375.cms
END.
It seems that the month of September will show up a record import for
gold since Indian ex-duty
premiums are reported to be
hugely above legal import point. ($15 Sept 10 AM, $12 Sept
10 PM). These premiums are completely
unprecedented over the last 10 years so India’s
imports of gold in September should be stunning. (source: LeMetropoleCafe)
So record high
gold demand vs falling gold prices on COMEX. Finally
it seems that not only GATA is seeing the discrepancy. Kinross CEO Tye Burt acknowledged at the Denver Gold Forum that it is
hard to explain the difference between COMEX and physical demand today. Furthermore
he mentioned that global mine production in gold has been in decline for the
last nine or 10 years and that it won’t be stopping anytime soon. To
him that’s symptomatic of an industry that is going to be in severe
constraint in the not distant future:
Kinross
CEO Burt fires up gold investors in Denver
Mineweb
Author: Dorothy Kosich
Posted: Thursday , 11 Sep 2008
Kinross President and CEO Tye
Burt Wednesday proved to be a beacon of reason and optimism piercing through
the gloom of a Denver Gold Forum wallowing in the
depths of despondency due to depressing metals prices and a lack of financing
for junior mining projects.
"This is the gold
business. It is cyclical. The demand fundamentals are strong. The supply
fundamentals have never been better for our metal."
"Global mine production in gold
has been in decline for the last nine or 10 years," Burt said. "We
don't see that stopping any time soon."
"To me that's symptomatic of an industry that
is going to be in severe supply constraint in the not too distant
future," Burt declared.
While it may be hard "to explain the difference
between Comex and physical demand today," Burt
asserted that "it isn't hard to look into the future and see a world of
dramatically constrained gold production and gold supply."
END.
So where to go
from here? Should we buy into the gold market right now? Should we wait? What
about the gold shares and especially the juniors?
Well, the simple
thing is we have to wait until the dust has been settled. Many analysts are
calling for $640 gold while others say the bottom must be near. Although I
think myself the bottom must be near due to overwhelming physical demand we
just have to wait until the down-trend has been breached to the upside coming
weeks.
Regarding to the
junior sector, the horror show continues and many juniors are trading at
levels not seen since the beginning of this bull market in 2001. Does it mean
the death of the juniors? Although most people would tend to believe that
would be the case indeed one has to remember that we were there before in
2001/2002. Juniors were trading at penny levels coming down from multiple
dollar levels the years before. In 2003 however many juniors caught tail wind and appreciated by 1000% or more
in just a year. It’s all about perception. Yes, maybe new record highs in gold is needed to reenergize the
junior market but the high quality ones will survive. I’m not saying
here you should go out and start buying gold stocks like crazy but it should
be prudent to keep an eye on the high quality ones since once this trend
(current down-trend) reverses things can go really fast. Juniors sitting on
huge proven resources will do well when gold prices are heading towards
$2000+ coming years, the only question again remains which juniors will
survive the current crunch..
NOTE: We will be
covering coming weeks through our GoldDrivers
Report some companies that are likely to benefit most once this correction is
over. (For Premium members only – special discount membership offer click HERE)
In my piece
“Gold
– Fundamentals still pointing towards $2000+” I ended up by announcing to
publish the charts this week which puts gold in perspective to its own
historical norm, CRB, Oil, Inflation etc.. Due to the lengths of this article
however I
will discuss only three of them, the remaining charts is for chart members
only.
Gold & Historical Norm
- DOW/GOLD
ratio
- Gold vs its own
long term average
- Gold
vs Oil
When gold (and most commodities) came
crashing down from a high of $730 to $540 in just a few weeks time (2006)
many experts declared the end of the precious metals (and commodity) bull run
(sounds familiar right?) But based on what? Bull markets usually tend to end up in
new ‘REAL’ all time high territories. Believe it or not but gold
is nowhere near historic highs these days, no matter what the 'experts' want
you to believe. In order to trade in record high territories based in 2008
dollars we should see gold trading above $2000,-
these days.
Mind boggling numbers? Well, take a peek at
the charts below and judge yourself:
Dow Gold Ratio
The DOW/GOLD chart is a powerful tool in
order to determine major turnarounds. It's simple, when the DOW/GOLD chart
tops you buy gold, when the DOW/GOLD chart bottoms you buy equities. Once
you've established your position you can ride the wave up or down for at
least a decade. The DOW/GOLD chart flashed a 'buy' for Gold again in the year
2000 and indeed 8 years later Gold is already 200% off its lows since then.
The DOW/GOLD chart tells you to hold on to your Gold until a new bottom has
arrived in the 1 - 5 area. Well, if it were all that simple why don't we hear
that much about it?
Well, as said before the DOW/GOLD chart
isn't useful at all in order to predict yearly price movements. It could very
well be that next year will show a higher reading than this year instead of
an expected lower reading thereby losing confidence as being a reliable
indicator. Unfortunately that's the same analogy as denying that higher
temperatures will arrive in summer based on a single day temperature drop in
spring. The problem is that the DOW/GOLD cycle has a wave length that's so
big that we humans have a hard time to figure out where to position ourselves
into this cycle. Nevertheless many veteran analysts such as Richard Russell
and John Hathaway do refer to this cycle. Indeed history does suggest that
the DOW/GOLD ratio bottoms periodically in the 1 - 5 range. The Dow/Gold
ratio topped in 2000 far above 40 and is heading down now (current reading at
13.8). If the DOW/GOLD ratio can live up to its expectations than we can
expect a new DOW/GOLD bottom shortly after the end of this decade.
Gold vs
its own long term average
Another favorite bear tune concerned
‘record’ high gold prices ($1000+) which would be a
characteristic of gold’s exhausted
bull run. They argued that gold had reached all time record
highs which should be taken as a warning sign. Well, nothing could be further
from the truth since bull markets tend to end by making new
‘REAL’ highs and needless to say gold is trading nowhere
near new ‘REAL’ highs these days. In order to do so gold should
be trading above $2000 levels. The chart below
tells it all!
gold/oil
ratio
History shows a strong
correlation between gold and oil. One ounce of gold typically used to buy 16
barrels of oil but today this ratio has dropped to extreme low levels below
8. From an historic perspective (gold vs oil) gold
should be trading above $1500 levels these days. The chart
below speaks for itself.
Remaining charts
for members only.
Summary
- Idea of recent market intervention
becomes more accepted
- Market intervention won’t reverse a
primary trend, only delays the inevitable
- Strange discrepancy between COMEX and
physical gold demand becomes undeniable
- Bull markets usually end up in making new
‘REAL’ all time highs
- Gold has nowhere reached new
‘REAL’ all time highs
- Supply/demand fundamentals for gold are
extremely bullish
- Gold will likely be trading above $2000
within a few years
END
Next week:
Gold/HUI anomalies beyond extremes
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