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Precious Metals: Just a Squiggle

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Published : September 26th, 2011
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Category : Gold and Silver

 

 

 

 

Now this is a correction. In the space of three days gold is off 10% and silver 25%.


What's happening? Two things:


First, you don't get this kind of run without this kind of correction. When something soars, the number of people with huge embedded profits eventually reaches a tipping point where, for a while, selling necessarily overwhelms buying. So regardless of what's happening in the world, gold running from $300 to $1,900 and silver from $4 to $49 would create exactly this kind of volatility.


Second, all the borrowing we did to stave off the 2008 debt crisis has created a new one, with Greece on the verge of default and the US in trillion-dollar-deficit gridlock -- and a realization that the people nominally in charge have no idea what they're doing. Where new plans to create jobs or lower long term interest rates used to be met with enthusiasm, they're now being met with disdain. This is huge. In the space of a few months the dominant financial fear has shifted from inflation back to deflation.


In other words, it's 2008 again, but with much bigger debt numbers. Which takes us back to precious metals: Notice on the chart below that gold got whacked the last time conditions were deflationary. Between early and late 2008 it lost about 25%.




Then recall how the world's governments reacted back then and note that they're all still armed with printing presses and terrified of upcoming elections. If a Greek default produces panic rather than relief, expect QE3 in the US and something similar in Europe, where the ECB is already becoming a clone of the US Fed:


ECB Policy Makers Signal Readiness to Act in October as Debt Woes Deepen


The European Central Bank may step up efforts to boost growth and ease financial-market tensions as early as next month, Governing Council members said.


Austria's Ewald Nowotny and Belgium's Luc Coene said in Washington that potential measures include the reintroduction of 12-month loans to banks. Asked if an interest-rate cut is warranted, Coene said while that wouldn't help to bring down longer-term borrowing costs, "the ECB has never ruled out things beforehand."


"If the data in early October shows that things are worse than we anticipated we will look at the kind of decisions we have to take for that," he said in an interview late yesterday.


European policy makers are under pressure from counterparts around the globe as their failure to contain the region's sovereign-debt crisis stokes concern the world is on the brink of another recession. Their comments come as European officials debate how to increase the size of their bailout fund to restore confidence in its firepower.


With money-market tensions increasing, the ECB has already reintroduced a six-month loan and continues to offer banks as much cash as they want at its benchmark rate in weekly, monthly and three-month refinancing operations. It last conducted a 12- month loan in December 2009.


"The ECB will probably discuss reintroducing a 12-month tender," Nowotny told reporters in Washington today. "We could perfectly do that when we feel there is an urgent need for that -- I don't think so for the moment, but it could be in two weeks," Coene said. The ECB council next convenes on Oct. 6.


Economists at Barclays Capital, JPMorgan Chase & Co. and Royal Bank of Scotland Plc predict the ECB will also be forced to reverse course on interest rates after raising them twice this year to curb inflation. The benchmark rate is currently 1.5 percent, compared with near-zero for the U.S. Federal Reserve and Bank of Japan, and the Bank of England's 0.5 percent.



G-20 Pledge


Finance chiefs from the Group of 20 yesterday pledged a "strong and coordinated international response to address the renewed challenges facing the global economy."


Many G-20 members pressed Europeans to follow through on a July plan to expand the powers of the region's rescue fund, Japanese Finance Minister Jun Azumi told reporters.


European parliaments are focused on approving the July agreement to expand the scope of the 440 billion-euro ($594 billion) European Financial Stability Facility to allow it to buy the debt of stressed euro-area governments, aid troubled banks and offer credit lines. Its current role is to sell bonds to fund rescue loans for cash-strapped governments.



'Problematic Discussions'


"We really, really hope that it will be up and running by mid-October, but you know yourself how problematic the discussions in some countries are," Nowotny said. After legal ratification, it may take another six to eight weeks for the EFSF to start intervening, he added.


The ratification process has drawn fire from some investors for being protracted and failing to provide the fund with enough cash to prevent the crisis leaking beyond Greece. Curbing the scope of policy makers to do more is the suspicion taxpayers in AAA-rated countries such as Germany and Finland would balk at stumping up even more rescue cash.


That has fanned speculation Europe may eventually ratchet up the fund's spending power, perhaps by using the bonds it sells as collateral to borrow more cash from the ECB. Another proposal is to mimic a U.S. program established following the 2008 collapse of Lehman Brothers Holdings Inc. by allowing the fund to offer the ECB credit protection for buying more sovereign bonds.



EFSF Firepower


"It is very important that we look at the possibility of leveraging the EFSF resources and funding to have a stronger impact and make it more effective," European Union Monetary Affairs Commissioner Olli Rehn said in Washington yesterday. French Finance Minister Francois Baroin said separately that policy makers "need the right firewall to prevent contagion" and can discuss giving the fund "the necessary strength."


Weidmann has said he opposes turning the EFSF into a bank that can refinance itself at the ECB as it would amount to "monetizing state debt." Coene also said he's "not sure that will be a good idea."


Coene signaled reluctance to step up the central bank's government bond purchase program even after the IMF said Sept. 20 the ECB "must continue to intervene strongly" in European debt markets to "maintain orderly conditions."


Some thoughts:


It's impossible to overstate the panic that the world's politicians and central bankers are experiencing. They have no idea what's happening now that the magic power of easy money seems to have failed. And because easy money is all they know, they will absolutely, without the slightest doubt, double down in coming months, flooding the US and Europe with credit.


Ironically, Europe's troubles actually make it easier for the US to keep easing, because credit creation depends on the willingness of the rest of the world to accept dollars. As long as dollars are in demand -- as they are now, as capital flees the euro in favor of US Treasury bonds -- the Fed can create more dollars and Washington can continue to issue more debt. Expect them to ramp it up big-time in the near future.


And politics doesn't matter. The idea that president Mitt Romney or Rick Perry would accept a 1930s style depression in order to balance the budget is laughable. Faced with the prospect of becoming their generation's Herbert Hoover, they'll open the monetary floodgates just as certainly as would a second-term Barack Obama. In Germany, the recent bailouts may soon cost Chancellor Angela Merkel her job, but as a reader commented on a recent DollarCollapse article:


Merkel is effectively losing one election after another but she loses to the left. The German left is pro integration and pro bailouts. In this weekend elections in Berlin, the minority party of the current coalition, that can be compared to the tea party, lost even the 5% quorum to have a representation to congress. They campaigned against Europe.


In other words, the next generation of European leaders will be hired by voters sick of austerity and will therefore be even more favorably disposed to bailing out everyone in sight.


This is profoundly positive for precious metals. As stomach-churning as this correction seems, a decade from now it will look like just another squiggle in a long, steep uptrend.




 

 

Data and Statistics for these countries : Austria | All
Gold and Silver Prices for these countries : Austria | All
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John Rubino is the author of The Coming Collapse of the Dollar (co-written with James Turk), How to Profit From the Coming Real Estate Bust (Rodale, 2003), and Main Street, Not Wall Street (William Morrow, 1998). A former Wall Street financial analyst and columnist with theStreet.com, he currently writes for Fidelity Magazine and CFA Magazine He lives in Moscow, Idaho
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The news seems to be the reason that FED & central banks have rigged the gold prices down to give temporary shallow support to dollar. gold will soon emerge as supply is much less than demand. It is just interent rigging, physical gold can not move in this way.
One could of course contemplate Ron Paul president...
There is no lack of contemplation of Ron Paul. The problem is, upon careful consideration, Congressman Paul simply has a very dangerous and misinformed view of foreign policy. Mr. Paul would be a wonderful person for a well-rounded candidate to bring into his cabinet to begin the process of rooting out the Fed.
I think "dangerous" is maintaining 1000 plus military bases on other countries, etc.
"Careful consideration"? Think better. Start by listening to Paul's arguments, with an open mind.
By the way, one of the reasons why the Fed has been the disgrace it is, its precisely to support the industrial-military complex.
I agree with you that maintaining 1000+ military bases on other countries, etc. is not a prudent policy. That, alone, doesn't leave you with Ron Paul. And 'listening to Paul's arguments, with an open mind' is the reason I understand how dangerous his views are. Having an open mind doesn't rewrite world history. Dr. Paul has a twisted comprehension based in making an ideology work. He's a 'single-layer thinker'. Many problems can be simply addressed that way and the multi-dimensional repercussions would be worse than what you've amended. Studying MORE than Paul - a balanced and comprehensive argument that actually takes historical and political FACT into consideration would be a more prudent definition of "think better".
PM as a store of wealth? Yeh whatever. Unless you're already wealthy enough to take big losses, to have lots of funds to hold you out while you wait for things to recover then its a waste of time. Anybody who was going to make money out of PM's bought them years ago... and then promptly started drumming up the hype. The rest of us are just pawns in their game.

$10,000 gold? $500 silver? The world financial markets are ending? Its all going hyperinflation? No doubt the same old crap used to dupe us little guys many times over in previous PM bull markets throughout history. Its all hogwash, these guys make a living out of scaring us with BS.

I believed it, and now I'm screwed. No more money on PMs for me. My salary may have dropped 40% in 4 years due to the weak US dollar but thats nothing compared to losing almost 30% of my savings in 2 days. Anybody want to buy some physical silver? I hate the site of the stuff.

Sure. I'll buy what you have at spot if it's 1 oz gold coins or 90% silver.

I've had a standing order in for several days with my usual sources and no one is selling their physical stuff.

I see a disconnect between ETFs and the real thing. You would be wise to hang in there.

Sherlock
Hi Bill,

Thanks for your response. Wow I really was spitting the dummy at this point wasn't I? Ha ha. So thats what I said at the time, but what did I actually do? I bought more (sly grin). I sold one of my guitars and juggled the family budget to make room for another purchase. I needed to look at the big picture, and for the most part I'm in this game for the long-haul.

I watched the charts all day, saw the price fall to $27, waited for signs of a proper bounce-back (please don't be a dead cat bounce) and then bought at $29. This will offset the batch I bought at $40, averaging things out.

Glad to hear your enthusiasm for coins - thats where all my bullion is. I prefer coins to bars and have the entire stack in small denominations.

1oz, 2oz and 1/2 oz silver coins - mostly 2012 Lunar Dragons from Perth mint (so if the silver price fails they still retain some collectable value). These seem to be selling at 50% to 100% over spot on ebay. Also a stack of 1oz eagles as pure bullion.

In gold I go for 1/10 to 1/2 oz coins - mostly eagles or the local Perth Mint ones again. I'm hoping gold will get down below its 200-day average to make that a more attractive buy. Right now I'm overbought in silver (60% silver, 40% gold and I usually like it the other way around).

Gold help me if this turns out to be a bad decision, but I'll stay in the game... for now.
Good for you. The only way we could be wrong is if the US and Europe took the necessary steps to correct their economies and currencies.

Care to bet on that happening?

Bill
silver had to go back into the 31-31.99 range because anything in that range was only recorded once at 31.94 on 2/18 of this year, so it had to go back to brace itself so it could stand at a higher level.
She may step down into the 28's for a minute , then a confident climb up.
Another CME takedown...
http://www.kitco.com/reports/KitcoNews20110923DeC_CME.html
Latest comment posted for this article
I agree with you that maintaining 1000+ military bases on other countries, etc. is not a prudent policy. That, alone, doesn't leave you with Ron Paul. And 'listening to Paul's arguments, with an open mind' is the reason I understand how dangerous his v  Read more
carrierpigeon - 10/5/2011 at 1:40 PM GMT
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