Thursday, December 29, 2005

Numbers Supporting Future High Prices for Gold and Silver

A year or two ago Jason Hommel put together a list of numbers that indicate the extent of future demand for gold and silver. They are quite striking. They put the worlds of

1.) money (something that is nobody's liability)
2.) currency (a note, financial contract, financial instrument)
3.) government fiat tokens (paper and digital bits temporarily used as money
and currency) (in the history of the world, there has never been a token that did not become worthless)

in perspective relative to each other and more specifically to gold and silver, and gold and silver shares (stocks).

Here is a sampling of 35 numbers that Jason has put together:

1.) $200,000,000,000,000: Estimated total derivative exposure of all banks in the entire world. (20 x U.S. GDP)
Warren Buffett, founder of Berkshire Hathaway, has refered to otc derivatives as "financial weapons of mass destruction". James Sinclair ( has referred to them as the "greatest criminal activity in the history of mankind".

2.) $118,000,000,000,000: World Global Capital Markets (Stocks, Bonds, &?) Feb 2005 McKinsey Global Inst.


14.) $1,860,000,000,000: World "official" gold mined in all of history, 145,000 T (4.6 bil oz.) @ $400/oz.


27.) $288,000,000: 40 mil oz. of "registered" COMEX silver bullion (1-05-05) @ $7.5/oz.


At Jason has a link to his "FREE Silver Stock Report Archive" where you can get the rest of the numbers. The "Silver Stock Report" is a very long .html page/file and is well worth the read. There is also a long list of silver producers and explorers if you are looking for candidates.

There is a money manager, Monty Guild (Guild Investment Management), out there who is starting to think publically in his unscheduled news letter about the over all demand and supply picture of gold and silver. This is what he is figuring so far. He is still working on
estimating the current market capitalization of the gold producing industry.

"A recent survey of institutional money managers by Barclays Capital confirms the subjective ad hoc research that my contacts in the institutional investment world have provided me.

In conversations over recent weeks, my contacts have said that they plan to put 5% of their massive pension fund, mutual fund and hedge fund assets into gold. Independently, it came to my attention today that Barclays Capital did a survey of their institutional clients and 70% of them said they would have 5% of their assets in gold in three years time.

This is extraordinary, and would require a huge price rise of existing gold mining shares to accommodate all of that money. For example, Newmont Mining has a market capitalization today of about $23 billion dollars, Barrick Gold about $15 billion, and these are the big companies in the public gold mining sector. I am researching the total market capitalization of all public gold mining companies but it cannot be very high. Certainly, it is a great deal smaller than $460 billion dollars.

The total investment capital in the world is rumored to be about $46-$50 trillion. Now 5% of $46 trillion is $2.3 trillion and 1% of $46 trillion is $460 billion. If the amount of gold shares purchased over the next three years equals even $460 billion it will cause the total value of all listed gold shares to skyrocket."

[It sounds to me that these institutional "money" managers, as they are called, are late already and are going to be even later getting their customers fiat tokens properly positioned for the current gold and silver bull markets] [But, what do you expect from the herd of "money" managers in the world? They are, after all, part of "the crowd". And "the crowd" is always wrong or very late.]

There are more numbers / statistics / graphs at this digital gold currency exchanger's site:

Friday, December 23, 2005

Increasing Demand for Metal at the COMEX

The number of COMEX contracts standing for delivery of gold metal rather than USD has about doubled for the December gold contract versus the October gold contract.

The number of COMEX contracts standing for delivery of silver metal rather than USD has increased about 6 -7 times for the December silver contract versus the October silver contract.

You can see this data in chart form here:

Both gold and silver have broken their short term down trend lines. Another sign that their reaction to the down side is over.

Saturday, December 17, 2005

Tidbit From the "Cafe"

From Le Metropole Cafe, that is:

"Just saw Martin Renneke of Bridgewater Associates on Bloomberg TV. He is a European with a Swiss accent and a senior investment strategist at that firm. He says there is essentially no limit to how high gold can go in this environment. He says that in Weimar Germany the annual inflation rates moved yearly from 6% to 20% to 600%, to 18,000% to a couple of billion percent inflation. He quotes a study by S&P that concluded that most of the developed world's bond paper will be junk in 30 years. There is 25 Trillion of US treasury paper out there and all the gold ever mined is worth about 2.5 trillion, of which only a tiny percent is available for transaction. He says inevitably bond money will go into gold for security. He said it was highly significant that "Helicopter Ben" Bernanke [his words ONSCREEN--ho ho ho] will be beginning his reign with the elimination of M3 data. He says gold will outperform all other asset classes and there is essentially NO CEILING on how high it might go."

The Cafe's subscription price is just this side of stealing.

Bridgewater's Hennecke Comments on Gold

Bridgewater's Hennecke Comments on Gold, U.S. Bond Market
2005-12-16 00:09 (New York)

By Paul Gordon and Meggan Richard

Dec. 16 (Bloomberg) -- Martin Hennecke, a senior manager at independent investment adviser Bridgewater Ltd. in Hong Kong, comments on gold prices, silver demand, and the U.S. bond market. Gold dropped below $500 an ounce in Asia, pacing a decline on the Tokyo Commodity Exchange after the bourse raised the cost of trading bullion to curb speculative buying.

Gold for immediate delivery fell to $495.05 an ounce, its first dip below $500 since Dec. 1.

Silver for immediate delivery declined for a fourth day in five, to $8.48 an ounce as of 1:40 p.m. in Tokyo.


``The immediate reason why we had the drop is the market had crossed $540 in Japan. The Japanese government increased the margin requirements for trading there, that took a little bit of the momentum off in gold.

``In the short-term, always many, many things can happen. There are a lot of banks who are also on the short side. Often even central banks are leasing a lot of gold. They've been trying to put a bit of a lid on gold prices for a long time.

``For the medium- to the long-term, precious metals are the one asset class with the most striking potential of all.''


``Silver is almost all used for manufacturing. This rise in demand over the last 15 years, demand for silver has almost doubled for the industrial side. With gold, you'd be surprised how much there's continued demand from the industrial side.''


``There will be a huge move probably out of the U.S. bond market into gold and precious metals because the deficits in the U.S. have become totally unsustainable. The U.S. government can hardly serve even the interest on their government bonds, only new money coming in that can serve the interest for existing bondholders out of tax income.''

--With reporting by Leslie Tan in Singapore. Editor: White.


Gold and Silver Bottoms

It sure looks like gold and silver have bottomed here.

Some type of a reaction should be expected after gold goes up for 8 days in a row and silver goes up 7 days in a row. These many days in a row are unusual.

Gold almost made it down (in the US, overnight) to the Fibonnaci retracemment level of 61.80% or about 490 and 1/2. Prices can come close to Fib levels or over shoot them a little bit . The spot low was 493. Good enough in my book. Silver did the equivalent to the 50% Fib level. Many newsletter writers think that gold has put in a major intermediate top. What they do not understand is the large amount of gold that central banks have to sell or lease to their compatriots/partners in crime,
the money center/investment/bullion banks. And, that central banks are runnning out of gold to lease or sell, and, that some central banks are beginning to seriously question selling or leasing gold, and, that some central banks are now buying gold. That there are monster short positions that have to be covered (which takes buying).

Give gold a couple of weeks at this level and it is up and away again.

The AMEX's HUI gold and silver stock index is saying that, too.
Here is a 6 month chart of the HUI
Where is the panic in the HUI? All the HUI did was make a slight retracement.

The HUI just recently broke up and out of a 2 year consolidation. And it held above it during this gold and silver reaction. That is a huge positive for not only the shares but for the metals themselves.
Here is a 3 year chart of the HUI

Those short gold, silver and the shares have got to be scared silly at this point.

Tuesday, December 13, 2005

The US Dollar

Yesterday, December 13, Monday, the US dollar broke down below its 3 1/2 month long uptrend line. This should be quite disturbing to the dollar bulls.
Which can be seen in this 6 month daily price bar chart

Here is a good detailed 8 month long chart of the top of the last bull market in gold.

Tuesday, December 06, 2005

Tidbit from Le Metropole Cafe

Bill Murphy at Le Metropole Cafe ( ) has nailed down what the gold market has been all about for a fair number of years, since the late '90s. Here is a little about what has been recently going on in the gold market from Monday's market wrap up:

"The reasons why gold is doing what it is have been brought to your attention in recent MIDAS commentary. A quick review of some and some adds:

*New physical market buyers are overwhelming The Gold Cartel’s ability to keep the price from rising.

*Many of the gold shorts who used to trade along with The Gold Cartel are running for the hills as fast as they can.

We know this to be the case based on the latest COT [Commitment of Traders Report from the Comex] and gold open interest numbers. This was CONFIRMED again today as the gold OI [open interest on the Comex] fell 6125 contracts on Friday to 335,165. Thus, you have traditional shorts trying to cover as physical market buyers attempt to fill their own orders. Both are competing against each other on the buy side to get long and cover shorts.

The ramifications of this development are somewhat staggering. As mentioned for some time now, there is room for 100,000 new spec longs [IO on the Comex is about 100,000 less than it has been at the last previous high in Gold] to come pouring in on the buy side to send the price sharply higher from these levels. Many of the would-be buyers are just watching, not doing anything yet. Many WILL when gold takes out its 1983 high in the $510/$511 area (could do so tonight). Gold could explode from there as more of the shorts PANIC!

*As veteran commodity traders fully appreciate (any market for that matter), the best bull markets are when a market makes a substantial move to the upside and few in the investment world understand what is really going on. As Café members fully know by now, that is the case with gold … the worst reported on and least understood market in history. 90% of the material written on gold does not even reach the 6th grade level in terms of content. It is truly nauseatingly pitiful.

*Gold is moving on its own. When it receives a serious tailwind from a falling dollar, etc., it can only support the already advancing price. We received a little of that today. Oil finished up 59 cents per barrel at $59.91. The CRB gained 2.06 to 325.44 (not far off multi-decade highs even with a comatose grain market). The dollar dropped .43 to 91.45 and the euro rose .79 to 118.01."


GATA (Gold Anti-Trust Action Committee) has the full story on the multi-year suppression of the price of gold. Once you understand the full story of gold, you will realize the enormous upside potential that gold and silver has.

Sunday, December 04, 2005

Catastrophe Theory and Snipits and Tidbits

It appears that catastrophe theory can be applied to financial markets and economics.

Rene Thom (1923- ) and Catastrophe Theory
"Originated by Rene Thom, catastrophe theory, a special branch of dynamical systems theory, studies and classifies phenomena characterized by a surprising production of big changes in behavior from small changes in circumstances."

Excerpt from Friday's LeMetropoleCafe's market wrapup:

"I wrote an article about Catastrophe Theory on the café along time ago. This is a well established but quite modern branch of mathematics. You can model catastrophes. If you imagine a surface that has a two levels which are connected by a gentle sloping ramp and also an overhanging cliff. You can travel between the two different levels by going up and down the ramp and nothing extraordinary happens. You can even go from the lower level to the upper level by climbing up the cliff. If, however, you go from the upper level to the lower level over the cliff you have a catastrophic drop. You can see this in many things where seemingly the same thing happens again and again but then almost the same thing happens again but with catastrophic results. Imagine approaching a dog sitting in the middle of a yard. You can probably approach him many times and stroke him and nothing happens. Now if that same dog is in the corner of the yard closed in by a wall when you approach him he suddenly bites you. The event was only slightly different but that makes the transition over the cliff instead of down the ramp.

Many market changes can be modeled by catastrophe theory. The discussion of high dollar reserves have been going on for years. It could be that they will descend down the ramp very gently and diversify very slowly and all will be fine. However, it only takes a slightly different route to make the change go over the cliff and become catastrophic. The elitist know this and this is why Greenspan is always talking about "potential problems" like today he is talking about reducing the deficits. Their hope is that nothing will then seem like an unplanned event that creates a sudden rush away from the planned smooth market trajectory to an over-the-cliff route. They are always talking about "expectations" and managing expectations. Surprises will trigger catastrophes."

Knowledgable smart cookies on the future of the US economy:

Peter Schiff, President/Chief Global Strategist, Euro Pacific Capital, Inc.
"Nowhere will the fallout [from higher long-term interest rates & the average maturity of the eight trillion dollar national debt is now under three years] be greater than in the United States, where the economy is more vulnerable than any other to the crippling effect of higher interest rates. As the world's biggest debtor, America will be forced to pay higher interest rates to creditor nations. The resulting drain on America's national income and strain on consumer spending will plunge its economy into a severe recession."

Bill Buckler of The Privateer
"In realistic practical terms, there is no way that the US economy can deliver these sums [enormous US federal debt and unfunded liabilities in the tens of trillions of US dollars] to the US Treasury so that it can, in turn, deliver them to the American public. If done through a direct increase in taxation, the result would be a public rebellion and an enormous economic depression. If done through direct inflation of the quantity of US Dollars in circulation, it would be a version of what the Weimar Republic did in the early 1920s. And the end result would be the same. ... Being unsustainable, exponential rates of change in economics are self-correcting. They correct with an enormous change of direction - always out of the blue. This is what now is on the horizon for the US."

John Williams' Shadow Government Statistics
"Risks of the current circumstance evolving eventually into a hyperinflationary
depression remain extraordinarily high."

Axel Weber, Chief of the Bundesbank and also ECB council member
"The current trend of the US current account deficit is unsustainable, ... An abrupt unwinding of the current imbalances could mean - massive exchange rate and interest rate movements - and, of course, a shake-up of the global economy"

Antal E. Fekete, Professor Emeritus, Memorial University of Newfoundland
"For over sixty years after the Green Silver Act [1943], America has been fortunate enough to escape that fate. This should not give it comfort. America has never been closer to fully-fledged financial bankruptcy than it is right now, an event for which the banks, businesses, and the people at large are ill prepared, making the coming shock even more devastating. The economists’ and financial journalists’ profession bears responsibility for failure to forewarn and forearm the public. Short of a miracle, America cannot avoid its fate: credit collapse, the vanishing of the value of dollar and all dollar-denominated assets such as bank notes, deposits, bonds, insurance policies, and pension rights."

Peter Warburton, in 2001, Author of Debt & Delusion
“What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. Equally, their actions seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets.”

Paul A. Volcker, chairman of the Federal Reserve from 1979 to 1987
An Economy on Thin Ice
Article is adapted from a speech in February, 2005 at an economic summit sponsored by the Stanford Institute for Economic Policy Research
"Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.
I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand now, it is more likely than not that it will be a financial crises rather than a policy foresight that will force the change."

David Jenson, principle of Jensen Strategic
"To be clear: we face the possibility of an epic economic correction."
This quote is from DECEPTIVE WARNINGS, Nearing Economic Disruption, the Fed Distorts Perception which can be read here:

The USD:

One reason that has been put forth for the dollar rally is that US entities are in trouble at home and are cashing in foreign investments and repatriating the proceeds (converting their cash foreign fiat token proceeds to [buying] USD tokens).

Another reason put forth is the Homeland Investment Act which started at the beginning of 2005. It allows US companies with foreign earnings to repatiate them at a tax rate of 5.25% versus the normal tax rate of 35%. It is due to expire at the end of December, 2005.

Saturday, December 03, 2005

Silver Users Fear Silver Shortage

Press Release

Source: Silver Users Fear Silver Shortage
Thursday October 27, 3:49 pm ET

GRASS VALLEY, Calif., Oct. 27 /PRNewswire/ -- The Silver Users Association (SUA), a group devoted to the conflicting goals of keeping silver prices low and keeping silver available for users, stunned the silver investing community last month by repeating the claims made by silver investors and analysts, including (, that the silver market is very tight and that any significant investor demand will create a shortage of silver.

The SUA made the bullish case for silver when asking the Securities and Exchange Commission (SEC) to deny Barclays' petition for a Silver Exchange Traded Fund (ETF). The Silver ETF will require Barclays Global Investors to buy up to 130 million ounces of silver prior to the approval of a silver ETF, in anticipation of investor demand for the silver ETF. But the COMEX division of NYMEX only has 117 million oz. of silver in all warehouse stock categories combined. Furthermore, COMEX market participants, through approximately 140,000 silver futures contracts at 5000 ounces each, already have claims of up to 700 million ounces of silver -- silver that may not exist.

more at:

Asian central banks likely to increase gold reserves

President Vladimir Putin holds a gold bar at a mineral resources exhibition in
Madagan in the Russian Far East, Nov. 22, 2005. Itar-Tass photo.

" ...

Russia, Argentina and South Africa have decided this month to increase their gold reserves, which reversed the selling trend in six years by world central banks, especially European ones.

It is only a question of time for Asian central banks to follow and buy in gold: they hold 2.6 trillion US dollars in foreign exchange reserves, and able to change more of them into gold as a hedge against US dollar falls.


Meanwhile, they don't like holding too much dollars, so one of the way outs is simply to have more gold.

... "

True, but it will not be something to do "simply".

2.6 trillion US dollars of foreign exchange reserves can buy 5,200,000,000 billion ounces of gold (@ USD 500/oz). (USD 2.6 trillion divided by USD 500 = 5,200,000,000 ounces)

Total world new gold mine supply per year is about 2,500 tons or about 80,000,000 ounces. So if all new annual gold production was bought by all central banks, they would only be replacing about 1.5% of their government fiat token reserves with gold, for the first year of gold buying. (80,000,000 divided by 5,200,000,000,000 = 1.5)

New world gold production of 80,000,000 ounces at USD 500/oz equals USD 40,000,000,000, a small fraction of USD 2.6 trillion of cental bank reserves.

If just USD 40 billion tried to go into the physical gold market and started buying, there would be a price explosion. These central banks know they need to buy gold but they know they can not do it in any practical way that gets the job done. They are screwed.

And this is just central bank demand.

And then there are probably a couple or few central banks that may be thinking of beating the rest of the central banks to the physical gold buying.

Just another reason that the price of gold can become explosive.

Wednesday, November 30, 2005

Houses Sell for Gold

In addition to the sale of a house in Vietnam requiring gold, the same applies to substantial business transactions. Gold always has been, is and always will be actual real money, nobody's liability, despite the Keynesian Barbarous Relic Crowd propaganda.

The same applies to silver.

From Tuoi Tre, Ho Chi Minh City, Vietnam
Saturday, November 26, 2005

Over the last two weeks real estate agents have had few customers. Doan Khac Thuat, director of Saigon real estate trading, explained that the dramatic gold price increase has caused trading activities to come to a halt.

Currently payment in real estate is undertaken by gold, not cash, and with such a dramatic price increase, clients will have to pay tens of millions of Vietnamese dong more for a house valued at 1,000 taels of gold.

Mr Thuat related how a deal failed last week due to a last-minute decision, with the buyer refusing to buy a house when he heard that the price exceeded the threshold of VND 900,000. There is a tendency among buyers to wait for gold prices to cool.

Truong Anh Tuan, director of Hoang Quan Real Estate, also said that numerous deals fell through last week. He said that houses valued at 2,000-3,000 taels of gold cannot sell these days, and other brokers revealed that no successful deals have been made recently.

The price rise has brought loss to those who borrow gold to buy land and houses. Ngo Xuan Quy from Tan Phu district, Ho Chi Minh City, one such individual said that the gold price was VND 890,000 per tael when he borrowed gold but it has now risen to VND 940,000 per tael, equating to a loss of VND50mil over half of month.

According to Nguyen Ngoc Duong, deputy director general of Van Phat Hung, the continuous price increase will prompt investors to buy gold instead of houses and land as the profit made by real estate investment cannot offset the increase of gold prices. If the gold price keeps increasing, the real estate market will remain frozen.

According to Lam Van Chuc, director of Phuc Duc, the current real estate market has been narrowed compared to the same period last year. On Tran Nao and Luong Dinh Cua streets, where 110 real estate centers used to practice, there are now only 10 companies operating.

Mr Chuc went on to say that real estate businesses are facing big difficulties due to stagnant activities, while some have to pay large sums of interest to banks. "If the situation continues, 30 percent of real estate businesses will go bankrupt," he said.


Monday, November 28, 2005

Gold and Silver Are About To Get Tail Winds

The US Dollar is up to a resistance level established during the first quarter of 2004:
which you can see on this 2 year chart
in addition to having stopped going up along the top of the upward sloping channel that it is in:
which you can see on this 6 month chart
in addition to having formed a 2-b end of upward trend signal last Thursday.
Things are looking terrible for the US Dollar. Three strikes and you're out?

Since the Dow Jones Industrial Average is back up to its resistance level of early this year:
which can be seen on this 3 year chart
it would be a good time for non Americans to sell their US equities and convert their proceeds of US Dollars into their home fiat tokens (currencies or even money as some people call them) while the US Dollar is strong against their home fiat tokens. It is a good time for non Americans to lock in both their equity gains and foreign exchange gains. On top of that, The Dow was up 6 days in a row, an end of upward trend signal, as of last Friday. An extra reason for selling their equities, and then selling their US Dollar proceeds for their home tokens.

"A general dissolution of principles and manners will more surely overthrow the liberties of America than the whole force of the common enemy. While the people are virtuous they cannot be subdued; but when once they lose their virtue then will be ready to surrender their liberties to the first external or internal invader." -- Samuel Adams

Tuesday, November 15, 2005

Oops! There is that word **systemic** again

Risk Measurement and Systemic Risk - November 8, 2005

Speech by André Icard, Deputy General Manager of the Bank for International Settlements, at the Fourth Joint Central Bank Research Conference on Risk Measurement and Systemic Risk, European Central Bank, Frankfurt, 8 November 2005


In addition, the number of counterparties big enough to accommodate our business needs is very limited, especially in the domain of OTC derivatives. As this limits the number of eligible investments and counterparties, the BIS runs significant credit risk and business volume concentrations. In fact, the resulting triangularity between credit quality, liquidity and concentration is exacerbated not only by the growth of our own business volume, but also by the continuing merger activity among issuers and counterparties. As most of you will agree, a situation like this requires careful monitoring and management of the resulting risks; and models alone, though helpful, do not guarantee that we get such a trade-off right. Furthermore, the use of collateral can help mitigate the counterparty risk posed by positions in OTC derivatives, but leaves open a significant part of the risk involved.

The last point is of some importance, as a relatively small number of institutions has become key to the integrity and smooth functioning of quite a number of markets. As these players combine various forms of intermediation activities, on and off balance sheet, it is conceivable that problems in one of these activity areas could affect the activity of other parts of the firm, and thus spread across various markets. Idiosyncratic shocks to key bank or non-bank institutions, particularly when coinciding with systematic factors, could thus become systemic. Indeed, the concentration phenomenon that I identified in the first part of my talk as a feature of the BIS’s risk exposure reappears here as a potential concern about the system’s "plumbing".

While big, Refco was probably not big enough to matter in any systemic sense, and its crucial futures brokerage continued to be operational. But the events surrounding its demise offer a taste of how the proverbial "flap of a butterfly’s wing" could cause repercussions throughout the financial system by affecting parts of the market infrastructure. What if a bigger broker with more of a presence in OTC instruments had been hit by the same event? At the risk of overemphasising the point, I find it relatively easy to imagine that cases involving bigger institutions with more complex net positions would have much broader implications.


US Fed to Discontinue Publishing M3 Numbers

Discontinuance of M3

Release Date: November 10, 2005
Release dates | Historical data | About
Discontinuance of M3

On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release.

Measures of large-denomination time deposits will continue to be published by the Board in the Flow of Funds Accounts (Z.1 release) on a quarterly basis and in the H.8 release on a weekly basis (for commercial banks).


Unbelievable!!! What does the Fed have to hide in the near future? The Fed produces digital US Dollars. This is like GM (General Motors) announcing that it will no longer report how many vehicles it produces.

The US economy is rolling over slowly here and now since where ever you turn there is too much debt. There are limits to how much can be borrowed just to consume. Well, the US is hitting those limits. Federal income tax revenue is decreasing. There are serious increasing "money" supply problems and increasing price problems in the US. The Fed created the increasing price problems by increasing the "money" supply. Traditionally the Fed increases interest rates to decrease the increasing price problem. If the Fed does that now, it will crash the US economy, and Americans will know that it was the Fed that did it. So politically it looks like the Fed will not be allowed to do that. That it will have to stand aside and let price inflation rip. That it will have to compound the increasing price problem by creating even more digital US dollars out of thin air (essentially what counterfieters do) to give to the US Treasury since its revenues are going to be substantially decreasing, thus compounding even more the price increasing/inflation problem. This part Americans will not understand. Essentially they will not really know who or what to blame for increasing prices that get really wild. No longer publishing M3 numbers is just part of the con.

Saturday, November 12, 2005

Hugo Salinas Price's Message Goes to Sao Paolo

"Mexican Congressmen are going to Sao Paolo, Brazil, for a meeting of the "Latin American Parliament" on Nov. 24 and following days.

Among the Congressmen included in the delegation is a group from the three main political parties in Mexico (who are totally at odds on other matters!) who will make a presentation divided into three parts, regarding silver as a currency which can help unite the economies and politics of the region.

One party member will present the history of silver, why it went out of circulation.

A member of another party will present the way that silver can be reintroduced into circulation permanently - a coin with no nominal face value, whose value will be quoted in a similar fashion (similar seigniorage) by participating Central Banks in each country's local currency, and with the provision that no quote can be reduced, once given out.

Yet another member of another party will present the social, economic and political adantages of placing such a coin into circulation.

After the dismal failure by the US at the recent get-together in Buenos Aires, this new and imaginative proposal may well receive close attention and - who knows? - may spark interest in the Mexican plan, for reintroduction of silver into circulation, in other countries of Latin America, all of which desperately need new and inspiring ideas besides the outworn dollar-dependency song.

So, let's hope these courageous Congressmen are successful in transmitting the message of real money as a "liquid financial 'cushion'" for savers (see Howard Kurlitz's article "Greenspan's Legacy of Debt")

A financial cushion that has a built-in capacity to respond to inflation AND the possibility of rising in value as silver goes up.

So, Mexico's message goes international." - Hugo Salinas Price

Thursday, November 10, 2005

Silver News

Ok, some tidbits from LeMetropole's Cafe:


Something extraordinary IS GOING ON with silver. The open interest rose to a multi-decade high at 143,966 contracts, up another 2833. The OI dichotomy between silver and gold becomes more pronounced on a daily basis. Same MIDAS analysis. Some mega players are loading up on futures positions before they go after the physical silver market. Stand by for some serious upside silver fireworks in the weeks ahead … like a $1 move up in a single trading session."

My local gold & silver dealer, _which is the biggest wholesaler in town_, has just called to beg me to lent him 200 kilos of silver, because Peñoles is way behind in his regular deliveries and the local market here in Guadalajara is undergoing a shortage of silver.
All the best

Wednesday, November 09, 2005

Shanghai Gold Exchange Launches Night Sessions

Gold bourse opens for night trading today

Zhang Liuhao
2005-11-08 Beijing Time
CHINA'S gold investors need no longer worry about prices fluctuating during the night and not being able to anything about it because the Shanghai Gold Exchange is launching night sessions for trading on a trial basis from today, the Oriental Morning Post said.

Shanghai will be the first bourse to open for night trading, according to the Shanghai-based newspaper.

The night sessions will run from 8:55pm to 11:30pm every Monday to Thursday, but close on Fridays, weekends and holidays.

The Shanghai Gold Exchange allows only institutional investors to trade in the metal. Individual investors can trade through commercial banks in their deposit accounts but can't hold real gold, only "paper gold" as it is known in the industry.

The exchange, China's sole bourse for the precious metal, introduced the 50-gram gold bullion for trading last year, which was considered a step toward allowing individual investors to have direct transactions in the precious metal.

Gold trading volume topped 430.58 tons on the Shanghai bourse in the first half of 2005, a year-on-year rise of 49 percent, while trading value rose 58.96 percent to 49.36 billion yuan (US$6.10 billion).

Tuesday, November 08, 2005

The US Dollar Topping Pattern - II

Here is how the dollar looks after Monday, November 8:
A futures chart

The double top to the right hand top failed. The head and shoulders right hand top failed. Then a bullish upside down head and shoulders developed and the dollar went into new highs for this rally. Still, two end of upward trend signals got generated. This is bearish for the dollar even if they failed.

A double top can still be developing. A higher right hand top can be a final strong test/shake out of any weak shorts still left in the market. When there is a bullish double bottom in a market, the ideal bottom is when the right hand bottom goes lower than the left hand bottom which is a final shake out of weak longs. Same goes for the inverse.

The dollar is up 3 days in a row as of Monday. If it closes up a 4th day, that would be bearish for the dollar since that would be an end of upward trend signal.

The dollar is also up near the top of its upward sloping channel. Bearish.

Gold is definately down in over sold territory.

I'm still very bearish on the US dollar.

Friday, October 28, 2005

The US Dollar Topping Pattern

I thought the USD was developing a mini double top to the right hand part of a 3 - 4 month overall topping pattern to its rally in a bear market. Instead, the right hand part of the topping pattern turned into a mini 2 - 3 week head and shoulders pattern. The USD has definately broken down below the neckline of the head and shoulders. Quite bullish for gold and silver.

A 6 month long chart of the USD with daily bar prices

Tuesday, October 25, 2005

New Head of the Fed Nomination

Yesterday, Bush announced his nomination of Ben Bernanke for the new head of the Fed. This has to be confirmed by the Senate.

This is the way Ben thinks:

"Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002

Deflation: Making Sure "It" Doesn't Happen Here

… What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation…."

It would not look good if the USD takes a dive after the the announcement, particularly since it was already taking a dive that morning. So probably the Exchange Stabilization Fund engineered a "Welcome Bernanke Stabilization Rally". after the announcement which can be seen on this .pdf chart.

The Dow and NASDAQ probably got engineered up a whopping 170 and 33 respectively. It would not look good for the US equity markets to be taking dives on the day of the announcement. It is not as though there was any good economic news announced yesterday to rocket the DOW and NASDAQ up.

Saturday, October 22, 2005

An Aspect of the Gold Bull Market

“people lose their judgment collectively but only come to their senses slowly and individually.” - I forget who wrote this

Since the beginning of the '80s (about a quarter of a century ago) massive amounts of USD have been digitally created out of thin air. Most of these USD have gone into financial instruments (paper, mostly digital)(stocks and bonds). The minds of the crowd have been conditioned to believe that stocks always go up, that playing in or investing in the financial markets is the way to get ahead. Forget about creating real tangible wealth. Gold and silver? What would anybody want that stuff for? What good is it? They do not do anything. Over decades the crowd has lost a lot of important knowledge.

This situation is ever so slowly starting to change. There is a huge amount of mental inertia at rest that will be ever so slowly moved into motion. That is why over 4+ years gold still has not even doubled in price. Most do not even know that there is such a thing as a current gold and silver bull market that is under way.

The **"money" supply** inflation has already happened but it seems nobody is concerned since people think it created them wealth in the financial markets, and more recently in the real estate markets. Now **price** inflation of real stuff is starting, to an extent that can not be ignored, not that most people right now know what to make of it. Given enough time, as the prices of stocks, notes and bonds, and real estate keep going down down down, and the prices of gold and silver keep going up up up, they will start to realize that maybe something fundamentally has changed.

When the crowd finally starts to lose faith in financial instruments the relatively tiny markets of gold and silver, and their related mining and explorer shares will have price explosions.

Yes, the gold and silver bull markets are not new, are starting to get old, but they still have massive price increases still to go, because the crowd still does not get the big change that has happened, the massive devaluation of the USD that is still not apparent to the crowds.

The gold and silver bull markets are a long long way from ending.

In the US:

"We are fast approaching the stage of the ultimate inversion: the stage where the government is free to do anything it pleases, while the citizens may act only by permission, which is the stage of the darkest periods of human history,
the stage of rule by brute force." - Ayn Rand

Silver Is Looking Good

Thursday, intra day, silver went down to its 8 week long trend line, bounced off of it and close near its highs of the day.

Friday, intra day, silver went down to its 8 week long trend line, bounced off of it and closed at its highs of the day.

Silver is looking good, acting strong.

You can see those bounces on this daily bar chart of silver.

460 is good support for gold.

"better to be on the fringe strategically planning than be in the middle of the fray getting trampled." - unknown

Monday, October 17, 2005

USD, Gold, Silver, Notes and Bonds

It looks to me that the USD is putting in about a 3 1/2 months long double top:
A 2 year long monthly USD bar chart

Now, if we take a look at a:
6 month long daily USD bar chart
we can see the right hand top in more detail. It looks like the right hand top is being formed by a mini double top. That last 5 week or so uptrend ended with a 2b topping signal. And the last mini 6 day uptrend has already ended with a 2b topping signal with today's price action. Very interesting. The USD is looking real toppy here, that the USD's rally that started at the beginning of this year is over.

Gold is looking healthy but it gapped up today and that gap could get filled.

Silver on the other hand can move independently from gold. It still has not broken its upward trend line that started at the end of August like gold did. True, it went up 5 days in a row just recently but Friday's outside day tends to negate that. I would say that silver is doing just fine.

US Treasury notes and bonds (indicators of rising prices and increasing "money" supplies) are both down now 5 days in a row and could take a rest from going down at this point. But they both convincingly broke through their lows of 10 weeks ago.
A six month chart of the notes
A six month chart of the bonds

I think gold and silver are going to have winds blowing at their backs shortly.

Thursday, October 13, 2005

U.S. Investment Income Close to `Tipping Point'

John M. Berry is a columnist for Bloomberg News. The opinions expressed are his own.

U.S. Investment Income Close to `Tipping Point': John M. Berry

Oct. 13 (Bloomberg) -- The U.S. may be approaching a dangerous ``tipping point'' in its international transactions.

At the end of last year, foreign investments in the U.S. were worth $2.5 trillion more than this country's investments in the rest of the world. Yet last year, those U.S. assets abroad remarkably still earned $30 billion more than the foreign assets here.

That stunning disparity in returns is one of many reasons why the huge U.S. current account deficits of recent years have been so readily financed. The sagging net investment position wasn't being compounded by an ever higher interest bill -- as is the case with the mounting U.S. government debt.

This year the game has changed.

Net U.S. investment income turned negative by $455 million dollars in the second quarter, marking a swift deterioration from a $15 billion surplus in the first three months of 2004.

If this trend continues -- and there's no reason to think it won't -- the U.S. will be paying a steadily rising net amount to foreigners, and those payments will both increase the U.S. current account deficit and worsen the country's net investment position.

In a recently published analysis, economists Pierre-Olivier Gourinchas of the University of California at Berkeley and Helene Rey of Princeton University warned this situation could have serious consequences for the U.S.

The Dollar's Credibility

``Reaching the `tipping point' where the U.S. for the first time since the second World War ceases to have a positive net return on its net assets could be seen by the market as a significant blow to the credibility of the dollar,'' the economists say.

``In a context where the external net worth of the U.S. is negative and the return on its net assets also turns negative, market participants could start demanding a higher premium on their dollar assets.''

That the U.S. has been able to sustain financing for its international deficits up to this point is primarily due to the American dollar being the world's principal reserve currency, the center of the global monetary system.

Gourinchas and Rey's analysis traces how over the past half century U.S. investments abroad came to pay far greater returns than foreign investments here. The paper, published by the National Bureau of Economic Research in August, is ``From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege.''

`Exorbitant Privilege'

The phrase ``exorbitant privilege'' was coined by French Finance Minister Valery Giscard d'Estaing in 1965. He used it to describe ``the ability of the U.S. to run large direct investment surpluses, ultimately financed by the issuance of dollars held sometimes involuntarily by foreign central banks,'' the authors say.

In those days, economists regarded the U.S. as ``the Banker of the World,'' lending for long and intermediate terms and borrowing short, they say.

``Since then, the U.S. has become an increasingly leveraged financial intermediary as world capital markets have become more and more integrated. Hence, a more accurate description of the U.S. in the last decade may be one of the `Venture Capitalist of the World,' issuing short term and fixed income liabilities and investing primarily in equity and direct investment abroad,'' Gourinchas and Rey write.

U.S. Balance Sheet

Initially, U.S. assets shifted from long-term bank loans to direct investments, such as the purchase of foreign companies, and in recent years, toward equity investments. Meanwhile, foreign investment has favored low-yielding safer assets, including bank loans, trade credit and debt, particularly Treasury securities.

``Hence the U.S. balance sheet resembles increasingly one of a venture capitalist with high return risky investments on the asset side,'' the economists say. ``Furthermore, its leverage ratio has increased sizably over time.''

Nevertheless, all the advantages that accrue to the U.S. as the provider of the central currency in the global monetary system can't forever offset the impact of the country consuming more than it produces. What if a ``tipping point'' has been reached?

Gourinchas and Rey say their analysis ``does not imply that the current situation can be maintained indefinitely.''

The Possible Repercussions

``Foreign lenders could decide to stop financing the U.S. external deficit and run away from the dollar, either in favor of another currency such as the euro, or just as dramatically, require a risk premium on U.S. liquid assets whose safety could not be guaranteed any longer.

``In either case, the repercussions could be quite severe, with a decline in the value of the dollar, higher domestic interest rates and yields, and a global recession,'' they caution.

``In a world where the U.S. can supply the international currency at will, and invest it in illiquid assets, it still faces a confidence risk,'' they say.

Should confidence be lost, the value of the dollar could plunge, and a world financial crisis could ensue. At that point, even the U.S. could be forced to stop living beyond its means.

To contact the writer of this column:
John M. Berry in Washington at [email protected]

Wednesday, October 12, 2005

A View of the US (therefor the USD) From the Other Side of the World

Hong Kong ... ...

It's time to take seriously a US-led global recession Lau Nai-keung

2005-10-06 07:37

I think it is time that we should take a serious look at the possibility that the US is going to take us down towards a worldwide recession in one or two year's time.

It is well known that the US is the world's biggest economy, taking up about 30 per cent of global GDP, but it is now also the world's biggest debtor country. According to the most authoritative person on this subject, the US Comptroller General David Walker, who audits the federal government's books, the tab for the long-term promises the US Government has made to creditors, retirees, veterans and the poor amounts to US$43,000 billion, US$145,000 per US citizen, or US$350,000 for every full-time worker.

And this figure does not even take into account all the personal debts such as credit card bills and mortgages. With a low interest rate of 1 per cent running for the past three years in a row, savings plummeted to just 1.8 per cent last year, below 1 per cent since January and at zero in the latest estimate from the Bureau of Economic Analysis. In 2000, household debt broke 18 per cent of disposable income for the first time in 20 years. Credit card debt alone averages US$7,200 per household.

The US Government indebtedness is financed this way: The US now runs a trade deficit roughly 6.5 per cent of its GDP and the gap is widened every day. Its citizens are spending ever more on foreign goods, and with the US dollar as the international currency, the US Government just prints money to finance the deficit. And with this money, central banks in the surplus countries purchase most of the US Treasury bonds as currency reserve.

By now, Japan is the largest creditor of the US Government, and the Chinese mainland has been a fervent buyer for the last few years. As for Hong Kong, most if not all of our reserves are in US dollar denominated assets. The US Government in turn uses this foreign borrowed money to finance as much as 90 per cent of the federal deficit which stood at US$412 billion last year. The federal deficit is expected to be running at about US$2 billion a day at the moment.

Put it simply, the Americans have been living way beyond their means for much too long. On top of this, the Bush Administration is cutting tax at least three times while fighting an expensive war in Iraq, which has already cost the country US$700 billion, and currently progressing at US$5.6 billion per month. Now the US economy is dependent on the central banks of Japan, China and other nations to invest in US Treasuries and keep American interest rates down. The low rates keep American consumers snapping up imported goods.

Any economist worth his salt knows that this situation is unsustainable. This includes the country's economic guru driver Alan Greenspan, who recently warned his countrymen that the federal budget deficit would hamper the nation's ability to absorb possible shocks from the soaring trade deficit and the housing boom. Now he may have to add two more worries: soaring oil prices and cyclones.

The US is now clearly in huge trouble, economically, socially, politically, and internationally. The Bush Administration bungled big in cyclone Katrina's aftermath in New Orleans, and then a minor rerun from Rita in Houston, and this will trigger the general outburst of people's dissatisfaction with the government, leading to great internal turmoil lasting for many years. In all likelihood, long-term interest rates are going to rise, and the greatest property bubble the world has witnessed is going to burst in the next one to two years.

The countdown is in progress, and there is no way that anybody can do anything to reverse it either by short-term measures such as fiscal and monetary policy, or through long-term reform of tax policy, entitlement programmes and even the entire federal budget. This is as inevitable as gravity, and it will take place under a new and inexperienced chairman of the Federal Reserve Board. I do not want to sound alarmist, but I see very bad omens.

To make things simple, let us just examine some key economic issues raised by some economists:

What if the dollar plummets? Do stocks follow? How about pensions?

What if interest rates soar? How would all the new homeowners, who stretched to buy with adjustable and interest-only loans, cover their mortgages?

How would consumers with record credit-card debt make their payments? Would they stop buying? Stop taking vacations? What will happen if they go bankrupt? New rules going into effect later this year make it harder on such debtors.

How would a government, which depends on the taxes of a strong economy to operate, keep all its promises?

To us, the good news is that when the country is in deep trouble, the US will not have the energy to pick on China. Even when it is necessary to start another war to divert people's attention, it would pick one much smaller in size and weaker in strength, like Iran. This will provide a much more amicable environment for China to make good use of its "period of strategic opportunity" till 2020 for the country to pass through a turbulent zone between per capita income of US$1,000-3,000.

But in the short term, now the US not only sneezes, and all symptoms indicate that it is going to suffer from a SARS-like trouble, the whole world should take extra precaution not to get infected. One thing is for sure, some time in the not too distant future, every central bank and institutional investor is going to dump US dollar and US Treasury bonds. Once, when a country like South Korea dumps the dollar, the still unsold US Treasuries in the asset column of Asian central banks - US$2,000 billion according to some estimates - will collapse. The cheapened dollar will cause a sudden jump in the US inflation, which forces the Fed to jack up interest rates. A giant leap in inflation will cause a severe recession, or perhaps a depression, in the US. These countries' exports to America will dry up, which in turn will spread the global economic downturn like wildfire.

After the stampede, everybody is going to get hurt, not least the central bank of China, and the Hong Kong Monetary Authority, which are major US creditors and with the US as their number one export market. The recent currency reform of the RMB is most timely, and it is about time we should do something about the Hong Kong dollar. At the same time, China should make extra efforts to rekindle internal consumption, and diversify its market really fast before the great US bubble bursts.

(HK Edition 10/06/2005 page2)

Record Yuan Price of Gold

Gold price hits record high in Beijing 2005-10-11 19:03:19

BEIJING, Oct. 11 (Xinhuanet) -- The price of gold hit 138 yuan (17 US dollars) per gram in the Chinese capital of Beijing, a record high in the last decade, Beijing Daily said on Tuesday.

General Manager of the Gold Department of the Beijing Art and Craft Mansion, Wan Jian, ascribed the price hike to rising gold prices in both the world and domestic markets, as international gold output has not increased in proportion with demand.

China's huge gold consumption swells during the week-long National Day holiday at the beginning of October, said Wang. The gold sales volume increased by over 15 percent year-on-year during the holiday. End item

Saturday, October 08, 2005

Harry Schultz and Stephen Roach

The legendary Harry Schultz on the gold market:

"gold mkt is now in a different kind of phase, not just another leg up. It's serious now. This is where the insiders gradually load up. U can quote me on that if u like."

MARKET TALK: Asian CBs Should Hold More Gold - MS
Oct 07, 2005 - 09:51:06 HKT
Dow Jones Newswires

Asian central banks should hold more gold, writes Morgan Stanley's global head of FX research Stephen Jen; says gold good "neutraliser" vs FX risks, especially important for central banks in region that have large FX reserves (for example, Japan, China, Korea and Taiwan); estimates correlation coefficients between gold prices and JPY, GBP close to zero (means gold prices not sensitive, so gold excellent hedge vs JPY, GBP volatility); adds for EUR and USD, gold pretty good hedge (coefficients at 0.38 for EUR and 0.26 for USD). (RNH)

Morgan Stanley

Global: Transition Curse
Stephen Roach (from Zurich)

The end of an era is nearly at hand. After nearly 18 1/2 years on the job, Alan Greenspan is required under law to step down at the end of his full term as Fed governor on January 31, 2006. Akin to the election of a new pope, the changing of the guard at the Fed is a rare and important event for the US and world financial system. In the past 27 years, it has happened only three times. In each of those instances, the transition did not go well -- financial markets quickly seized up, eager to test the mettle of the new central banker. My suspicion is that the curse of the Fed transition is likely to be in play again -- with potentially profound implications for increasingly vulnerable financial markets.

Historically, the Fed has always been a chairman-dominated institution. Yes, policy is made by committee -- a seven-person Board of Governors, joined by a rotating group of five of the 12 District Bank presidents (that always includes the representative from New York). While each member of the Federal Open Market Committee has one vote, the Chairman’s vote has always carried the greatest weight in the deliberations of the modern-day Fed. As such, it should not be surprising that financial markets take the transition to a new Fed Chairman as a very serious event. This one person has long been emblematic of the character of the institution.

The history of recent Fed leadership transitions does not read well in the financial markets. The last one occurred in August 1987, when Alan Greenspan assumed the reins of power. A little more than two months later, the US stock market crashed. Paul Volcker became Chairman in August 1979 -- a transition that that was quickly followed by a wrenching sell-off in the bond market. And the US dollar was in serious trouble from the very start of G. William Miller’s brief term as Fed chairman, which commenced in March 1978.

It’s not that new Fed chairman typically fail to meet the immediate test of financial markets. In each of these instances, the incoming central banker inherited very tough macro conditions. The Greenspan transition occurred when the US stock market was already sharply overvalued. At the same time, the US and Germany were at odds on the interest rate coordination needed to stabilize a then very weak dollar. The crack in the US stock market was very much an outgrowth of the long simmering interplay between the dollar, interest rates, and unstable conditions in equity markets. Similarly, Paul Volcker came to power in an era of raging double-digit inflation -- 13% annualized increases in consumer prices. At the time, there was no political will to turn the monetary screws tight enough to tame inflation. Volcker was quick to challenge that perception, and the bond market caught on quickly to the wrenching monetary tightening that was about to unfold. For G. William Miller, it was indoctrination under fire. As the US trade balance deteriorated, inflation went from bad to worse, and the US currency reeled in response -- ultimately forcing the Carter Administration to announce a formal dollar support program in late 1978.

These conditions certainly didn’t make life easy in the early days of the last three Fed chairmen. Financial markets were stretched and vulnerable at these delicate moments of leadership transition. Investors had developed a sense of security in the incumbent Fed chairman and were uncertain as to how his successor would fare. The leadership transition at America’s central bank played on the "confidence factor" that always underpins financial markets. Going from the known to the unknown is invariably unsettling -- even under the best of circumstances. Unfortunately, the circumstance surrounding the last three Fed transitions were far from ideal.

Alas, that is very much the case today. Saddled with a record current account deficit, the US is more dependent than ever on the confidence of foreign investors to fund ongoing economic growth. When Greenspan hands over the reins to his successor in early 2006, the current account deficit will be at least 6.5% of GDP. That’s more than four times the average external shortfall of 1.5% that prevailed during the three most recent transition points -- 1978, 1979, and 1987. Moreover, in a post-Katrina, energy-shocked climate, there is good reason to expect additional reductions in personal and government saving in the months ahead -- actually, deeper dis-saving (deficits) on both counts. As a result, already-depressed national saving should move even lower, prompting further deterioration in America’s already massive current account deficit. In other words, America’s dependence on the "kindness of strangers" is likely to increase significantly at precisely the point of an historically-delicate transition to a new a new Fed chairman.

And that, I’m afraid, brings me to the most controversial point of all -- the selection process, itself. With the consent of the US Senate, the choice of selecting a new Fed chairman falls to the President. Generalizing on the basis of George W. Bush’s most recent senior appointments, I suspect the President will look for three key traits in a new Fed chairman -- familiarity, loyalty, and a pro-growth bias. This is not meant to be critical. It is a carefully determined observation based on the President’s record. In the case of a Fed Chairman, those criteria imply that President Bush will probably not select the next Paul Volcker -- a tough, independent policy maker who might be predisposed toward "tight money." While this is inconsistent with the President’s statement on this matter at a recent press conference, in the end, I still believe George W. Bush will opt for a trusted team player who shares the goals and objectives of his political agenda.

This could well pose a serious problem for US financial markets. With America’s external financing critically dependent on the foreign confidence factor, any doubts over central bank independence will not go over well. That’s especially the case for a US economy beset with record imbalances, a potential inflation scare, and bubble-like conditions in asset markets. Foreign investors have been extraordinarily generous in the terms they have offered for funding America’s external deficit. In part, that generosity may reflect the "Greenspan factor" -- the confidence that investors have in Alan Greenspan’s adroit management of periodic international financial crises. With the Greenspan factor about to be taken out of the confidence equation, any fears of an "easy money" Fed could well prompt foreign investors to exact concessions in those financing terms in the form of a weaker dollar and higher real interest rates.

As I look to January 31, 2006, those are precisely the risks I see in the immediate phase of the post-Greenspan era. The rocky financial market history of recent Fed chairmen transitions is a warning, in and of itself. America’s heightened vulnerability to the foreign confidence factor amplifies those risks. And President Bush’s appointment record points to a candidate who could seriously compound the perception problem. This is potentially a very tough combination. It leads me to believe that the curse of the Fed transition is about to strike again.

Thursday, October 06, 2005

US Dollar Double Top?

Late yesterday the US dollar gapped down and is now down about .60 on the USD Index this early Thursday morning. Or, it looks like it is putting in a double top to its rally that it started after making that 80 low at the end of 2004.

You can see the gap down here.

It seems to me that the US dollar is now giving up the struggle to get above the previous July resistance at about 90 - 90.5 on the Index.

You can see the July resistance in this 6 month daily bar chart of the USD Index.

Watch for the USD to break its 4-5 week long uptrend line that started at the beginning of September. Unless prices of the USD get radical, this could take days or a week or two. I would prefer days but I have to take what ever the market dishes out, serves up.

A part of last night's Sinclair commentary:

"My reason for pointing out the roll over of the US economic recovery and the huge growth in the evil demon of over-the-counter derivatives is to structure the condition under which the US Fed will have to turn tail and run wild with liquidity injections into the system in order to offset a liquidity crisis of biblical proportions. All the hawk talk out of the Fed is talk by US Treasury salesmen to Asia to peddle the paper that is going to roar out of the electronic printing press of the US Treasury to finance the upcoming $550 billion + Federal deficit."

As the US dollar goes down, it should put a wind at gold's and silver's backs.

"Who made up all the rules / We follow them like fools ;
Believe them to be true / Don't care to think them through."
- "They", Jem Griffiths

Monday, October 03, 2005

Why Keep Loaning Real Stuff to a Dead Beat Debtor?

The rest of the world sends more real stuff (oil, food, automobiles, computer parts, etc.) to the US than the US sends to the rest of the world, or the trade deficit. To make up the difference, the US creates digital dollars out of thin air and sends them over seas. Such a deal!

That is in affect a loan from the rest of the world of real stuff to the US since the US paid for real stuff with intrinsically worthless digital USD. Year after year the US trade deficit stays in existence, which is an accumulating loan from the rest of the world that keeps growing year after year. How big is the rest of the world going to let this loan get?

Never mind calling in the loan (the accumulated trade deficits), all the rest of the world has to do to put on a Big Hurt on the Big Easy (the US) is to simply stop making new annual loans to the US.

More loans: many/most of the US dollars that the rest of the world ends up with due to the trade deficit are loaned back to the US in the purchase of US Treasury bills, notes and bonds. Exactly why and how is another story.

The US government recently released the Federal Government's Debt for Fiscal Year 2005. This is debt in addition to the trade deficit. The increase in debt was $553 Billion. Additionally, $186 Billion is estimated to have been borrowed from Social Security. That is about an additional $0.739 Trillion of added debt in one year.

It appears that the management of the US has no intentions of changing anything in order to change the rate of increase of US total debt of all kinds.

How long can a dead beat debtor be allowed to keep piling on new debt?

US Treasury bonds and notes have been heading back down increasing yields and US interest rates at a time that the US economy is the Road Runner out past the edge of the cliff.

The selling of USD denominated financial instruments is not good for the value of the USD let alone the value of those instruments. But it is good for the USD price of gold and silver.

The Latest 2 Point Spin on OTC Derivatives


General Editorial

Sunday, October 02, 2005, 7:56:00 PM EST

Higher Interest Rates and a Lower US Dollar

Author: Jim Sinclair

Now there is a piece of heresy in today’s world of OTC derivative trading kids, market maven brats, wunderkinds and seers.

The rub is that this piece of heresy is going to take place due to unusual circumstance with an undeniable scenario. This conclusion is supported by eons of monetary history when such an evil gathering of economic fact takes place.

1. The US Federal Budget deficit as a result of really bad weather and worse contingency planning is not going to be as advertised - under $360 billion - but rather over $550 billion. The idea that you can fight multiple wars, rebuild decimated cities and lower taxes is madness of world-class proportions. Lets' also not forget that cities and states as good little children are following the example of their Federal Daddy and deficit spending their tiny rear ends off as well.

2. The Trade balance thanks to ever escalating energy prices is also going off the scales on the deficit side.

3. The mad, mad, mad, world of US conspicuous consumption has landed US saving rates at below zero.

So how can all this be financed? Don't look at China as China bashing has finally bashed the dickens out of the theory that because Asia has so much US paper it has to buy as much as the US can print. Not so! Asia may not be functionally able to sell what they have but their continued consumption in order to allow the US to offend them is simply not going to happen. Asia will off-load their US paper by massive international corporate acquisitions outside of the US.

It happened again as the US put pressure on China for a more vigorous revaluation of their currency at the recent Washington get together. This is like a person (the financial management of the US) slitting their own throat and demanding a sharper knife so they can cut a few other necessities off as well.

So as currently presented, US financial managers intend to peddle US federal paper to people who are fed up financing the US, producing a backlash that no one really expects. More federal paper means more dollars. More dollars mean more supply on the market as interest rates rise as a direct result of smaller and smaller purchases by non-US interests of the much bigger supply of US Treasuries for sale.

The classical result that will happen by mid 2006 is:

1. A sharply lower US dollar.

2. Sharply higher interest rates.

3. Former Chairman Volcker's prediction that we would have a financial crisis within the next five years (one more year to go) could actually unfold tomorrow.

Want another reason for gold at $529 and $1650. Well, here it is!

* Credit Derivatives Go Wild
* New Total is a Notional Value of 12.4 Trillion
* Concern Grows over 3rd Party Deals

The spin on this is two fold: First, the notional value is simply notional while real value is determined by slices. Second, the problem is simply a back office situation of keeping track of the transactions.

The geeks can slip and slice, cut and dice, but when derivatives hit the fan they will hit for all the performances required. Therefore, the notion of slicing is nothing more than mad mathematicians who are out of touch with real world markets. When the fat lady finally sings, notional value will be real value.

The so-called back office problem is somewhat true but not in manner that it is presented. This is not a log jam of paperwork as much as it is the presence of third parties implied lifting of legs of the derivative spreads randomly which simply cannot be done without a disaster of mammoth proportions.

God help the world when interest rates really get out of hand. There are 12.4 trillion dollars and what side do you think they are betting on?

I have long held that there is not a single thing basically different between the derivative schemes of today and the old London commodity straddles and T-Bill spreads of the late 1970s. The spread transactions for instance on the COMEX where in the old days put on after the close at any level you desired in the range of the trading day. They were not put on as a purchase and then sale but sold as a completed long and short in different months.

I for instance purchased a 6000 contract silver spread in this manner. These spreads were usually taken off in the same manner, having more tax implications then than any other motivation. The difference between the old COMEX spread and today's over-the-counter derivative is that you could drop on side of the spread if you wanted to produce a mountain of money. I know this because the biggest money my old firm made was when my former partner Vincent went into our arbitrage department when gold broke above $400 and took off every short they had on their spread trading. This could be done because these trades were clearing house guaranteed.

This is not the case with the over-the-counter derivative markets where I maintain the pillar transactions are total frauds. The reason why there is panic in Mudville is because these transactions have been offset by many who really don't understand the inside game of a derivative, leaving the potential of selective leg lifting which simply cannot occur with such disruption you might as well be standing in a line in Baghdad to apply for a job with the police force.

Don't you think it slightly strange that when Enron blew up, all the firms that had formed to trade in supposed markets in OTC derivatives on electricity closed up shop? The answer is simple. There was no such market. The entire thing was a fraud.

Monday, September 26, 2005

Silver's Price Gap

Silver last week on Monday of that week gapped up in price from the prices on Friday of the week before. Monday of last week was also 4 up days in a row. So the odds of prices going back down to fill that gap were good. That gap was filled Friday of last week. Good. Another job silver got done.

Today, Monday, silver traded intra day below Friday's prices and intra day above Friday's prices. Additionally silver closed above Friday's close. That is a bullish outside day. Very nice to see in addition to the gap getting closed.

Today's outside day for silver can be seen on this daily bar chart

"I love the poor. It's cheaper to buy 'em. And, they're grateful." - a certain covert operative [if there were no poor in the world there would be no governments or governments would be tiny in size and power]

Thursday, September 22, 2005

Danger Signs of Global Crisis and Clyde Prestowitz

Danger signs of global crisis

Author and member of former President Ronald Reagan’s administration Clyde Prestowitz says the United States is "being completely irresponsible" with its growing budget deficit, which spells a crisis bigger than the Great Depression, unless it takes charge. HARDEV KAUR writes. "I AM less worried about Malaysia than the US," Clyde Prestowitz, author of Three Billion New Capitalists: The Great Shift of Wealth and Power to the East said.

The US, the world’s greatest consumer, the world’s largest economy and the only driver of world economic growth, "was being completely irresponsible" and endangering the world economy.

Clyde, who was in Kuala Lumpur recently, suggested that perhaps America may consider "outsourcing management of the US economy to Asia".

It is not as simple as blaming China, India and other Southeast Asian economies for the woes of the American economy. Prestowitz, who took a year to complete the book, points out that it involves the US government’s failure to develop and promote a clear industrial policy.

It is time American administrators and policy makers woke up to the fact that the world has changed. What worked for the US previously will not work in the future. Washington must be prepared for a new world that is very competitive, aggressive and well educated.

In the book, which covers China, India and Russia with a combined population of three billion pursuing market economies, he argues that these "new capitalists" will give Americans a new perspective and a run for their money.

But America is over consuming and is "being completely irresponsible" with its growing budget deficit. It does not worry and as Vice-President Dick Cheney said we "can just print these things (money)". This however means that other nations do not have to be fiscally responsible either as they have US dollar reserves. And this spells danger.

While Asia saves, the US continues to consume. America thus continues to absorb global savings, which Prestowitz estimates is 80 per cent. And with the growing American appetite for consumption, the figure could reach 100 per cent "and when this happens the music stops".

The resultant problems confronting the global economy would be on a scale that would dwarf the Great Depression of the 1930s, Prestowitz warns.

A member of former President Ronald Reagan’s administration, Prestowitz says there is no one in charge of fixing the economic problems. There are danger signs on the horizon and warnings of impending problems including that from Paul Volker, the former head of the US Federal Reserve. Volker forecasts a 75 per cent chance of a global financial crisis in the next five years. And yet, there appears to be no one "in charge".

"To pre-empt the gathering financial crisis and ensure a sounder basis for the third wave of globalisation, the United States should take the lead in a global effort to reduce the role of the dollar," he writes in the book.

"It must do so gradually and cautiously. Because the whole system now depends on US consumption and dirty floating of the dollar, any sudden or unilateral change could precipitate disaster."

Indeed there are already moves by Opec and Russia to reduce their exposure to the US dollar. If other nations also reduce their dollar holdings, Prestowitz believes that the US standard of living will quickly decline as America does not have the physical capacity to eliminate its trade deficit, and instead will have to cut consumption.

In the absence of a strategy in the US, the decisions are made elsewhere — in Beijing for example — and Prestowitz points out that Beijing may not always make decisions that are "best for the US".

"My point is not to say that China is bad or evil or that we ought to be afraid of China. It is much more to say that we need to understand the game China is playing and then play our game so that we maintain our position," he said.

He makes a plea that America must educate its people and get them ready to be competitive intellectually and in their work ethic with countries like India and China, or "we will become a second rate power".

Even now jobs are moving out to more competitive regions. Twenty-four hour work shifts have taken on a totally new meaning — outsourcing. The job can be done thousands of kilometres away and at a fraction of the cost in the US. And the Chinese can do the job for 20 per cent less, Prestowitz says.

"Now a strong (and more confident) China has decided to open its doors itself and join the global trade game in order to level the playing field. As the world’s low cost manufacturer, China was about to turn globalisation into a whole new ball game."

This poses challenges to Washington which finds that "… Its relative economic superiority and power are rapidly slipping away. Far from leading the world on a global march to freedom, the United States could find itself hard-pressed to maintain a reasonable standard of living and defend its vital interests," Prestowitz says. And this will have consequences for the rest of the world.

Saturday, September 17, 2005

Real Bills vs. Rothbard's 100% Gold System

Real Bills vs. Rothbard's 100% Gold System
by Nelson Hultberg
September 6, 2005

In two recent articles, Fool's Gold and Real Bills, Phony Wealth, Sean Corrigan and Robert Blumen of the Mises Institute have put forth attempted rebuttals to Antal Fekete's work on the Real Bills Doctrine as a necessary accompaniment to a gold monetary system. They offer numerous economic arguments as to why real bills are supposedly dangerous instruments that will ignite inflation, and why Murray Rothbard's 100% gold standard is the only answer. There are four basic flaws in their analyses that I will cover in this essay. These are far from the only flaws, but I will leave a further and more theoretical examination to Dr. Fekete himself.

For the rest of this essay

News on the US Fed meeting about credit derivatives settlement

According to the BIS, total otc derivatives in the world are somewhere around $250 trillion or the best part of $300 trill. I doubt that the BIS, at any point in time, can really know the true amount of derivatives out there in the world. I think that these things have the potential to ultimately freeze up the world's financial system at least for a little while. Can you imagine how useful real money will be for those that have it at a time like that, and had the forsight to buy real money dirt cheap? Now a days most people's wealth is just digital bits on a hard drive representing liabilities. Most people think they own their "money" (a term from the old days which is now commonly used to mean digtal bits. Hey, how did that happen? It's a long story.) in a bank. "money" in a bank is mostly nothing but digital bits. You can't **own** something if you do not have real control over it. The bank's system administrator has control over the bits on a hard drive of a computer. A system administrator is controled by his employer. Lets call the employer a financial institution. Governments control financial institutions. Guess who **owns** your "money"? Oh, but I "own" stocks and bonds you say. Sorry. Most of those are just digital bits, too. Funny how the world's financial system has come such a long long long way in changing who really controls (read **owns**) what.

Thursday, the crooks agreed to police themselves.
The foxes agreed to protect the chickens.

It ain't a pretty picture out there.

Dealers Vow to Enforce
Tougher Rules in CDS Market

By Karen Brettell and Dean Patterson
Thursday, September 15, 2005

NEW YORK -- Fourteen credit derivative dealers met with the New York Federal Reserve Bank on Thursday and vowed to police the booming market themselves to keep regulators from doing it, a meeting participant said.

This will entail dealers eventually refusing to do business with clients, namely hedge funds, that do not adopt standard systems and practices that stop delays in trade confirmations and lax disclosure of contract transfers, according to the meeting participant, who is a dealer.

"Dealers have the resolve and unity to do whatever it takes to resolve these issues," the dealer said. "We will be firm with the hedge funds. We are willing to do it."

The dealers also agreed to produce a standard set of statistics that will be supplied to regulators to show whether back office operations are improving, the dealer said.

The dealers also agreed to set up special desks to deal with lags in trade confirmations and disclosure of contract transfers, the dealer said.

All 14 dealers endorsed new protocol announced earlier this week to reduce confusion regarding contract transfers, the dealer said. Dealers will "unquestionably" be able to comply with the new protocol by its target date of Oct. 24, the dealer said.

"We will enforce the protocol with hedge funds," he added.

The U.S. credit derivatives market has grown more than eight-fold over the last three years to $8.42 trillion at the end of 2004, according to industry groups.

At issue were lags in the processing of trades and delays in informing involved parties when contracts change hands, which regulators believe has the potential to throw the market into confusion if it comes under stress.

Delays in processing trades could lead to disputes over payments in the event of a default, as well as confusion over the amount of exposure banks have to counterparties.

The Fed is concerned that delays in communicating to involved parties when contracts change hands could spill into systemic problems in the global financial system.

"Industry participants outlined a number of concrete steps," to address the back office issues, the Fed said after the meeting. "The Federal Reserve and other members of the supervisory community will continue to monitor developments in this market very closely."

Investors use credit default swaps, the most common credit derivative, to protect against borrowers defaulting on their debt. They are also used to speculate on the future direction of a debt issuer's credit quality.

U.K. regulator Financial Services Authority, which was expected to attend the meeting along with regulators from Switzerland and Germany, as well as other U.S. regulators, first raised concerns about operational risk in the credit derivatives market in February.

The 14 banks invited to the meeting, which started at 4 p.m. EDT at the New York Fed's offices, were Bank of America Corp., Barclays Capital, Bear Stearns, Citigroup, Credit Suisse's Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase & Co., Lehman Brothers, Merrill Lynch, Morgan Stanley, UBS, and Wachovia Corp.


Friday, September 16, 2005

Gold's Gap Up In Price

Yesterday, Thursday, September 15, gold gapped up in price on the COMEX.
The December contract
Normally in a case like this, a bull market, prices would go back down to the bottom of that gap to close that gap before turning around and going back up.

It would not surprise me if this does not happen with gold here as the US Treasury notes and bonds were down substantially yesterday. In other words the bond vigilanties may be back in the note and bond markets due to fear of loss of purchasing power of USD denominated debt instruments. It looks like notes and bonds are making double tops to this most recent rally attempt.
A chart of the 10 year notes
A chart of the 30 year bonds

"We hang the petty thieves and appoint the great ones to public office." - Aesop, Greek fableist

Wednesday, September 14, 2005

Market dislocation in US Treasury bonds

U.S. Treasury Sees `Market Dislocation' in 2012 Notes

If an interest rate sensitive derivative nuetron bomb goes off, gold and silver prices should explode upwards. It is hard to see how tie wire and chicken fencing can continue to hold up the appearance of a healthy US economy.

Also, tomorrow is when Greenspan has a special meeting with the 14 largest credit derivatives players in the US.

"Gold’s honesty is derived from the fact that it is an asset free of debt acting as a measure of value, a storehouse of value with universal acceptability as a medium of exchange. " - Anonymous

Time to roll out the safe havens?

Even the establishment Economist magazine is suggesting all hell (inflation) is going to break loose shortly:

"Alan Greenspan has achieved the remarkable feat of suspending disbelief in America’s gerrymandered finances for the past few years. On his departure, watch the gold price soar."

Pump panic, gold glee (September 13)

Strange, today, September 14, gold recovered all of yesterday's loss.

"How fortunate for governments that the people they administer don't think" - Adolf Hitler

Saturday, September 10, 2005

Monty Guild

Monty Guild is one smart cookie and a money manager.

Friday, September 09, 2005, 12:31:00 PM EST


Author: Monty Guild

Several years ago, we became bullish on energy and precious metals for our clients. Our bullishness was a creature of long term economic and social events, which will continue to affect the world for at least one generation and probably longer.

The most important event is the entry of about one billion new people into the developed world's economic system. On top of the generational trend, there are shorter-term trends as well. They may be connected to the election cycle in a country or to seasonal or other cycles, which are a function of local events within an individual country (i.e. changes of government, wars, political instability).

We did not become bullish on energy because of terrorism and Middle-East tension, although it is a secondary reason to see oil and gold go higher.

There are six billion people on earth and about one billion live in the parts of the world with somewhat developed economies. They live in Europe, Canada, U.S., Japan and small parts of Asia, South America and Africa.

We became bullish on oil and gold because several years ago we saw that two major population blocks were joining the world economic system. We began to ask how they would make themselves felt. If they were to add 40% of their population to the world economic system - that is, if China and India were successful in lifting only 40% of their people out of subsistence economics into the world economic system - the size of the system would double in a generation.

If in twenty years the number of individuals participating in the industrialized world doubled, it would take a 4%+ compounded growth rate for the entire world economy to accommodate that growth. The world economic system would grow at 10% in some sectors and at 1% in others. China and India have been growing at about 9% and 7% respectively.

We saw two possible avenues for their expression in the world economy and concluded the growth would cause big changes in the way the world used resources and held its wealth:

1. The Southeast countries would collect and use raw materials, especially energy and industrial minerals (i.e. iron ore, coal, copper etc.). In order to create an economic base, raw materials, labor, capital and technological know-how were necessary. These countries had labor in excess, they had technological know-how, and the developed world was happy to give them capital. What they needed was raw materials to build the economic system.

2. Once assets were acquired as a result of creating and selling products and services, they would acquire gold and strong currencies to hold their accumulated assets. They would acquire gold and other precious metals as a store of value to protect their newly acquired wealth. We must remember that India has a history of thousands of years of holding their wealth in the form of gold jewelry and gold bullion.


Accumulated wealth can be reinvested in the country. It can also be hoarded to protect a family's assets or it can be invested for interest. The demand for gold is both for hoarding and for investment. Gold pays no interest, but if it is rising versus, say, the U.S. dollar at 10%, it is better than collecting 4% interest in U.S. dollar bonds.

The weakness in the dollar over the last few years, and the policies of the U.S. government, have caused China and India to hold a larger proportion of their hoarding and income earning assets in gold and other currencies, and less in U.S. dollars.

These people are very intelligent and their long history has taught them to count on the family, rather than the government for good advice on how to hold on to your assets. They prefer something portable that cannot be debased, manipulated and easily confiscated. Gold represents this type of asset. As their assets grow, their demand for gold grows.


In our opinion, in the short run, currency speculators look at real interest rate differentials between competing currencies. In the intermediate period, they look at balance of trade figures. In the long run, GDP growth rates and budget deficit figures are of concern.

In the case of the U.S. dollar, none of these figures look good. If you monitor these statistics,you know the U.S. dollar and many foreign currencies are not the place to hold assets. Gold is the place. As wealth increases in China and India, we expect a bigger and bigger percentage of assets to be held in gold.


How industrialized are China and India?

We estimate that about 5 -10% of people in these countries may be approaching middle class living standards. Their objective is 40%. They have a long way to go, and as long as they want to grow, they will consume energy and industrial minerals and they will hold gold and non-U.S. currencies for their savings.