Here Are Wall Street’s Expectations For Today.. Goldman = $1 Trillion In QE3

 

After 3 months ago everyone was convinced there was no QE3 imminent ever, all it took for the lemming majority to scramble to the other side of the boat was a 20% drop in stocks. Since then, following a brief stabiliziation in stocks, based precisely on beliefs that Bernanke would once again pull something from this bag of goodies, the lemmingrati once again shifted back, and the majority now pretends it does not expect anything out of Jackson Hole tomorrow, even though it obviously does, as otherwise the market would resume its plunge. UBS earlier conducted a survey among money managers, finding that 50% of the 82 respondents expect Bernanke to limit Jackson Hole remarks only to reviewing the rationale for the Fed to pledge ZIRP until mid 2013. Then there are those who actually told the truth, such as Goldman which, in a note yesterday, says that $1 trillion in QE3 is an absolute minimum if the Fed wants to get GDP higher by at least 0.5%. To wit: “Taken together, our analysis suggests that QE3 is unlikely to be a panacea for growth. Nonetheless, our estimates suggests that $1trn of asset purchases–or an equivalent increase in the duration of the Fed’s balance sheet–might increase GDP growth by up to 0.5 percentage point in the first year after any announcement of QE3.” And since we are talking the truth here, why not stop pretending you care about GDP – just think of the marginal impact on Wall Street bonuses…

First, the UBS responses:

• 18% expect Fed will extend average maturity of Treasury holdings, similar to “Operation Twist”
• 3% expect either “QE3 Max” (purchases include risky assets or a 10-yr yeld target) or a QE3 along the lines of QE2
• “We suspect that a reasonable chunk of the nearly 4% gain in the S&P 500 this week is built on the hope that the speech is friendly to risk assets. Hence they could suffer at least a bit if the Chairman does not pave the way for QE3”

One firm that is not shy about its “QE3 or bust” policy, er, recommendation is Goldman. Here is the firm’s Sven Jari Stehn defending the firm’s outlook why a $1 trillion boost in LSAP (or duration equivalent extension, because see, LSAP is the same as Operation Twist from a risk preference shift perspective, but unfortunately twitter-poll responding FX traders are unable to grasp this…). As a reminder, it was Goldman who was calling for $2 trillion in QE2 only to get $900 billion. Compromise? And does this mean that Bernanke will merely implement $500 billion in Operation Twist 2 then? We shall find out tomorrow. 

That said, if the Chairman disappoints, the market will not be happy.

From Goldman Sachs:

Following the sharp deterioration in the economic outlook, we now see a greater-than-even chance that the Federal Open Market Committee (FOMC) will resume quantitative easing later this year or in early 2012. We recently discussed that such a step might involve either another expansion of the balance sheet or an increase in the duration of the Fed’s balance sheet without expanding it (see “For More Easing, Will Fed Go Big or Go Long?” US Daily, August 15, 2011.) But given the disappointing growth performance since the adoption of the second round of asset purchases (“QE2″) late last year, many commentators question how effective QE3 would be in boosting the sluggish recovery. In today’s comment we attempt to shed some light on this question in two steps.

First, we reexamine the link between quantitative easing and financial conditions. As discussed on many occasions in the past, we think that the Fed’s unconventional policies work primarily through easing financial conditions via lower interest rates, higher equity prices and a weaker dollar. Specifically, we estimated in the run-up to QE2 last summer that $1trn of asset purchases would boost our financial conditions index (GSFCI) by around 80 bps. (This estimate was derived as the average effect from three models that ranged from 25-115bp. For details see Sven Jari Stehn, ” Unconventional Fed Policies and Financial Conditions: How Tight a Link?” US Daily, August 17, 2010.)

Using our previous methodology, we update these estimates to include QE2. Specifically, we explain the level of the GSFCI with three components. First, we include the announced stock of the Fed’s asset purchases (that is the announcements in November 2008, March 2009 and November 2011 to purchase $600bn, $1.15trn and $600bn of securities, respectively). Second, we include the target fed funds rate (as a measure of the current stance of conventional monetary policy) and the slope of the Eurodollar curve (to capture expectations for future monetary policy). Finally, we include a number of economic variables that capture other economic influences, including Reuters/University of Michigan long-term inflation expectations and initial jobless claims. We estimate this model using weekly data between January 2000 and August 2011. We find that the first two rounds of asset purchases, on average, eased financial conditions by 101bp per $1trn (see column 1 in the table below). This estimate is consistent with our previous range of estimates, but a bit higher than their average.

The Estimated Effect of Fed Asset Purchases
 

There is, however, reason to believe that QE3 might be less effective in easing financial conditions than the first two rounds of purchases. This is because Fed asset purchases are likely to have larger effects during times of extreme market stress, and particularly when they are targeted at a specific market dislocation, like the mortgage-related purchases during QE1. As a result, one would expect that QE1 had a more significant effect on financial conditions than the subsequent program. Unfortunately, it is difficult to test for this empirically as we only have two experiences to go by. That said, we find some tentative evidence that the effect of QE1 on financial conditions was larger than during QE2: the effect rises to 120bp per $1trn when we estimate the model only through the end of QE1 in March 2010 (see column 2 above). To the extent that this finding points to diminishing returns to quantitative easing, we might expect additional purchases to ease financial conditions by less than 100bp per $1trn of purchases (or an equivalent extension of the average duration of the balance sheet).

Moreover, the effects of further quantitative easing on financial conditions might well be dampened by the Treasury’s debt management policies. This is because in an environment where the federal funds rate is near zero, asset purchases–whether financed by the creation of bank reserves or by selling short-maturity holdings–are essentially equivalent to a shortening of the average maturity of the government debt. (For details of this argument see Jan Hatzius, “QE2 as a Shortening of Treasury Debt Maturities,” US Daily, October 26 2010.) The average maturity of the privately held Treasury debt, however, has recently been increasing despite QE2–up from 57 months in October 2010 to 58 months in March 2011 (the latest available figure). If this trend continues, the effects of QE3 on financial conditions may be at least partially offset by the Treasury’s debt management policies.

Having discussed the effect of quantitative easing on financial conditions, we turn to the link between financial conditions and growth. Our estimates–summarized in the chart below–suggest that a 100bp easing in financial conditions would boost growth by 0.8 percentage point in the first year and another 0.2 percentage point in the second–i.e., raise the level of real GDP by 1% after two years. (For details see Sven Jari Stehn, “Another Look at the Link Between Financial Conditions and Growth,” US Daily, October 26, 2010.) The chart below furthermore breaks down the total effect into its components, suggesting that about half of the total effect of the easing in financial conditions on GDP can be explained by an increase in consumer spending. The response of fixed investment, housing and net exports to easier financial conditions also contributes significantly to GDP growth.

The Effect of Easier Financial Conditions on GDP
 

Again, we see a couple of reasons why this link might be weaker in the current context. First, the disappointing growth performance in 2011H1 suggests that the effect of the easing in financial conditions in 2010H2 might have been smaller than the above estimates imply. A possible explanation is that some of the normal transmission channels seen in the chart above might be “clogged” in the current environment. In particular, a significantly positive effect on housing construction seems unlikely given the large amount of unoccupied inventory that currently hangs over that market. Moreover, the response of consumption might well be more muted in light of households’ inability to extract equity from homes through refinancing due to widespread negative equity. In a simple attempt to capture these effects, we fully exclude the contribution of residential investment to GDP growth implied from the chart. (An alternative approach would have been to exclude parts of both the housing and consumption response.) Doing so suggests that a 100bp easing in financial conditions might boost growth by only 0.5 percentage point in the first year (see dashed line). Second, it is possible that rising energy prices might offset some of the growth effects of any QE3-induced easing in financial conditions. Although we agree with the view expressed by Fed Vice Chair Janet Yellen–that commodity prices are best explained by the fundamentals of global supply and demand rather than by the stance of US monetary policy–the significant increase in crude oil prices before and after the QE2 announcement raises the question whether there might have been at least some offset to the easing in financial conditions. In support of this view, our “oil-adjusted” financial conditions index–which takes into account the price of crude oil–shows less easing in response to the Fed’s purchase programs than the GSFCI.

Taken together, our analysis suggests that QE3 is unlikely to be a panacea for growth. Nonetheless, our estimates suggests that $1trn of asset purchases–or an equivalent increase in the duration of the Fed’s balance sheet–might increase GDP growth by up to 0.5 percentage point in the first year after any announcement of QE3.

Mr Bernanke Speech-…What to wait?There will be monetary stimulus – the question is in what form and shape

When talking about the impact from Quantitative Easing (QE) one has to realise that most academic studies show that the biggest “impact” from QE on markets comes from the actual announcement of it rather than the execution of it. An analysis of the two prior QE introductions point to a 50 to 100 basis point reduction on bond yields and subsequent inflation of equities via “a feel good” factor – the so-called wealth effect.

But realistically, what has been the net impact of QE1 and QE2? Chairman Bernanke has used 3,000 billion US Dollars to create what? Nothing! Unemployment is still above 9.0 per cent, the housing market is still in a slump, and now the only successful thing going for the Fed is the stock market’s rise from the floor at 666.00 inMarch 2009. But now there’s talk of an interbank funding crisis and unrealised losses. It certainly smells like 2008, doesn’t it? Or what about August 2010? – Yes!  It is almost a 100 per cent analogy to last year. It’s actually like watching the movie Groundhog Day.
 
The impact from another round of QE on the wider capital markets this time around is likely to be more limited than following  previous announcements.  At best I foresee two to eight weeks of relief risk-on trading, but with the market no longer willing to remain idle while policy makers buy even more time. Thus the positive tone could change sooner rather than later.  Putting numbers on the upside potential on the stock market it is important to note that the start of QE1 created a 78 percent rally in stocks, while QE2 saw a 29 percent rally, so the impact is clearly smaller from one QE to another. The most likely scenario from here on would be an upwards move to the tune of 7-15 percent (Target: 1250-1350 in S&P cash.)

QE3 could also signal the final leg of a weak USD. I anticipate theU.S.as being two or three years away from being fully competitive again as a production hub, competing withAsia. With a real unemployment rate of 17 percent and the US Dollar at historic lows theU.S.  seems to have come full circle in terms of unit labour costs meaning it can soon compete more efficiently in the global marketplace. I believe that post the next presidential election we will see labour market policies which are very beneficial to production in theU.S.  This is also a theme which Boston Consulting Group has touched on in its May report called: “Made in theUSA, Again .” Due to this QE3 could present an opportunity to scale into long USD, after the grace period. The US Dollar will first weaken and (then ultimately strengthen). This in itself would be a sign of the economic world healing itself.

Looking at how precious metals will react to a new QE, the answer is simple. I think we will see USD 3,000 if not USD 4,000 for gold, and other metals should follow suit. That said, as with the USD, if this is the “end game” then the spike will be followed by risk aversion which could overall curtail the highs. At all times one has to realise this is close to the end of the trend, and for every USD 100 gold rises, the risk increases disproportionately as there is more and more speculative hangover involved.
 
There will be monetary stimulus – the question is in what form and shape. The U.S. is fast approaching a zero growth environment. Going into actual recession for more than one or two quarters is statistically very difficult for the U.S. as its population is relatively young, innovative and mobile. If we don’t get QE3 we will be faced with some version of Operation Twist in the form of support for the bond market’s longer dated maturities. This should be directed specifically to the segments which are relevant for housing and long-term funding. Effectively the Fed would then buy bonds in the 10 to 30 year sector of the yield curve with a pre-announced target rate below a certain number like 1.50 percent (currently it is trading at 2.25 percent). To finance this, the Fed would turn around and simultaneously sell shorter maturity T-bills making the exercise relatively balance neutral.
 
The real question however is:  is there anything the Fed can do to stimulate growth beyond keeping rates lower for longer? The answer is probably a resounding “No!” The Fed’s impact on the market is limited to psychology and monetary easing. When looking for growth an old economic rule states that when in a debt trap, only fiscal policies work, which means that when in a debt trap you need to increase the stimulus through tax cuts, public sector jobs and the like. (Note: This is not my medicine, but the Keynesian standard approach to it.)

Pre-election fiscal policy measures are in the hands of Congress with huge political opposition, but post election the story will be very different.

There is another political theory stating that the best environment to create growth in is one in which politicians have no power to pass legislation (similar to theU.S.situation for now until theU.S.elections). Think about Clinton: he had a major “programme” coming in as President, yet failed to get anything whatsoever done in his eight years in the White House which then led to the biggest growth period in U.S. history. What does this tell us? Total radio silence works as the micro-economy – investors, consumers and companies – adjust their behaviour and consumption to the new reality and then start moving forward. The last thing that we need is “political noise” and promises of better days ahead with nothing to back them up.

All eyes on Bernanke speech about US economy and the Fed

 

  

Few speeches will be followed as closely as the one to be delivered Friday by Federal Reserve Chairman Ben Bernanke, who is expected to outline what steps he might still take to help spark economic activity and stave off recession.

Bernanke will give his much-anticipated address at the annual Fed retreat in the Wyoming resort town of Jackson Hole, and financial markets may soar or plunge based on what he says.

The Fed chairman is in a bind. Most economic indicators point to a decelerating economy, so he must outline what tools he has left to prevent or reverse an outright contraction.

The indicators don’t all point to recession, but they’re a mixed bag. Manufacturing indices are flashing recession signals, but retail sales and orders of durable goods – cars, refrigerators and other big-ticket items – are hardly in recession territory.

Hiring has picked up, albeit not anywhere near the pace needed to knock down the 9.1 percent unemployment rate.

And if the unlikely occurs and Bernanke announces big steps, he risks drawing the ire of prominent and vocal Republicans – including one who has gone as far as to suggest that the Fed’s previous efforts to fix the economy are treasonous. Texas Gov. Rick Perry, a Republican presidential candidate, refuses to back off his unsavory comments about the independent Fed chairman.

“He’s in a tough position,” said Vincent Reinhart, a former top economist on the Fed’s rate-setting Federal Open Market Committee and a former colleague of Bernanke’s. “A real froth has built up about this speech, probably much more so than he’d want.”

Reinhart, who is now a scholar at the free-market American Enterprise Institute, suspects that the Fed chairman may give markets less than hoped for because he might wait for the next scheduled FOMC meeting, on Sept. 20.

One key factor in the speech and how it’s received is a piece of data coming that very morning: The Bureau of Economic Analysis will release its revision of growth estimates for the second quarter of this year. The bureau revised first-quarter growth on July 29 down to just 0.4 percent, and said second-quarter growth was a tepid 1.3 percent.

If the second-quarter number is revised to below 1 percent, it will be a clear signal that the economy is near, or perhaps already in, another recession.

 

In the Fed’s most recent statement on the economy, on Aug. 9, it made an unusual pledge to keep the benchmark federal funds rate near zero until the middle of 2013. And Fed governors, in a rare divided vote, committed to do even more if events warrant.

“The committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate,” the FOMC statement said.

 

Markets want to know what Bernanke still has in the toolbox.

“What they haven’t named at this point is the policy tools,” said Lance Roberts, the CEO and chief strategist for Streettalk Advisors in Houston.

Roberts and other analysts expect Bernanke to discuss a variety of options, including lowering the interest rate paid to banks for keeping reserves with the Fed and lengthening the maturity dates of the government bonds the Fed has purchased over the past several years. Both steps would drive down lending rates further in the economy and encourage financial risk-taking, which translates into economic activity.

“What’s important there is the order. How much weight does he put on the average maturity?” of bonds held by the Fed. Does he emphasize that or put more emphasis on the size of the balance sheet?” Reinhart said.

 

The Fed’s purchase of mortgage bonds and government bonds is called quantitative easing. The Fed has kept its benchmark interest rate near zero since December 2008, so its main policy tool to heat or cool the economy can do little more. Since the Fed can’t offer negative interest rates to essentially give money away, it must approximate that by other steps, such as the large-scale purchase of bonds.

The first two rounds of quantitative easing – dubbed QE1 and QE2 – were designed to drive down the interest rate on short-term government bonds, influencing short-term lending rates in the economy. It also allows the Treasury Department to pay off creditors with new, cheaper borrowing.

The steps have driven down borrowing costs for consumers and businesses – unfortunately as bank lending has tightened. They have also made it unattractive for banks and big institutional investors to seek the haven of government bonds. The low returns force them to take risks in stocks, corporate bonds and commodities in order to get returns that exceed the inflation rate.

If the economy clearly is going into recession, the Fed could offer QE3, a huge bond purchasing program that amounts to throwing the kitchen sink at the problem. This surely would be controversial, since the Fed announced last August that it would purchase $600 billion in government bonds, the so-called QE2 effort, which concluded in June.

Bernanke says that QE2 beat back deflation, or the fall in prices across the economy. His critics, however, think it artificially inflated stock prices and did more harm than good.

“What I want him to do is nothing,” said Walker Todd, a former official at the Federal Reserve banks of Cleveland and New York. “He has already done three or four times more than he should have done.”

Todd advocates raising the benchmark fed funds rate to at least 1 percent to support short-term credit markets and return a sense of normality.

“That won’t kill anybody, and it would give the Fed more policy tools,” he said.

Bernanke also can talk up the U.S. dollar to try to boost investor confidence, said David Malpass, a Fed critic and the president of the Wall Street research firm Encima Global.

“He has a bully pulpit, and in a sense he can talk about how to restore growth in the country. He could be more specific about the importance of tax reform, of the regulatory burdens,” said Malpass, who thinks the weak dollar has frightened off foreign investment in the United States.

Why Did Gold and Silver Pullback?

 

It was an ugly day for precious metals (NYSE:DBP). On Tuesday, gold (NYSE:GLD) and silver (NYSE:SLV) both fell as the Dow (NYSE:DIA) gained the most points in two weeks. Gold dropped the most in a year after reaching a new nominal high of $1917.90 per ounce.  Silver also declined and reached a session low of $41.50 before rebounding back above $42. Since gold and silver often play off each other, let’s take a closer look at gold as it provides a clear reason for the pullback.

As silver bugs will recall, back in April and May, silver margins were hiked 5 times in less than two weeks. The margin hikes sent silver tumbling from $50 an ounce.  Since then, silver has struggled to sustain a move above $40. The strong precious metals rally last week powered silver to a new short-term high of $44.28 on August 22.  On the same day, gold reached a high of $1917.90. However, gold and silver both saw sharp selloffs yesterday. As the chart below shows, gold has seen this type of move before.

The prior sharp selloff was seen on August 11. This is significant because the CME increased gold margins by 22%, effective after the close of business on August 11. The same beat down method seen in silver months earlier, was seen in gold. However, gold recovered quite well until yesterday’s sharp selloff. So what caused this familiar selloff in gold and silver? Another margin hike!  Late Tuesday, it was announced that  The Shanghai Gold Exchange increased gold margins for forward contracts, the second time this month. Li Ning, an analyst at Shanghai CIFO Futures said, “Gold prices on the global market have been rallying strongly and at an increasingly faster pace. The margin hike is a pre-emptive move in case prices crashed and caused great volatility in the market. The Shanghai Futures Exchange could raise margins on its gold futures contract soon too.”

For our premium newsletter subscribers, I warned about this exact situation on Monday. I said, “Gold will meet resistance near $1900-$1950. As gold approaches the higher end of this range, be cautious of another margin hike in gold.”  Many investors may be wondering where gold goes from here? The prior CME margin hike sent gold down 5%. If you apply the same 5% pullback to the recent high of $1917 in gold, you get a gold price of about $1821. Yesterday, gold for December delivery reached a low of $1826. Yesterday’s low also coincides with our warning to premium newsletter subscribers. On Monday, I also said, “Margin hikes worked extremely well a few months ago to dampen silver bugs, but investors should see this as another buying opportunity. Gold will find short-term support at $1825, and even more support at $1800.”

Gold Price poised to “Go Parabolic” to $2,100

As the gold price touched $1,890 per the ounce in London trading today, persistent doubt of the consensus forecast for U.S. and Europe economic growth has weighed down equities, lifted bond prices, and soared gold, as traders scramble in and out of positions to suit renewed uncertainty and the growing distrust of the Fed as well as European and U.S. policymakers.

Adding to the stack of the most recent gold-bullish news, which has been streaming in nearly daily now, comes Hugo Chavez’s request for a repatriation of Venezuela’s gold reserves from the Bank of England.

CEO of Hinde Capital, Ben Davies, today told King World News he believes Chavez’s move to bring 365 tons of gold reserves back to Venezuela could result in an explosive move in the gold price, as data suggest that the gold market has operated equivalently to a banking fractional reserve system since 1971—and a highly levered fractional system, at that.

“There was a game changer event yesterday: Chavez – the proverbial thorn in the West’s side – ruined the gold-bears’ picnic, “ stated Davies. “So what? I hear you say. Well I believe this is significant. Chavez holds 365.7 tonnes of gold overseas, mostly in Western Central Bank vaults, such as the Bank of England. Some 100 tonnes of Venezuelan gold is held there.”

“The question is: do these vaults still have all the gold?” Davies asked rhetorically, who now targets gold at $2,100 on this move.

In fact, the gold may not be there, according to Gold Anti-Trust Action Committee, who has published numerous articles showing the steep ratio between “paper” gold and the physical. Davies said that the global gold market’s fractional reserve system “means each troy ounce has been lent or swapped out many times over, and should gold holders request the return of their gold en masse, we could get a proverbial ‘gold bank’ run.”

If Chavez’s move triggers a gold run, or not, it most certainly will spark at least some fear into those traders seeking an empty chair before the music stops in the gold market. Force majeures at a time of panic to gold will leave wealth exposed to the threat of cliff-dive devaluations and bizarrely-priced physical gold ounce bars, a possible scenario that could turn rich people into poor ones, and vice versa.

Chavez appears nervous about the situation in the gold market, and may trigger other countries to repatriate their gold from Western entities, too, in another bullion bank run similar to the run on Ft. Knox in the early 1970s.

Even the U.S. dollar apologist of the gold market Dennis Gartman of the Gartman Letter is getting skittish about the possibility of a flashpoint in the currency markets.

“Gold is strong in any and all currency terms, and it is now entering that stage when prices go parabolic,” Gartman stated in his Gartman Letter.

Flight out of the U.S. dollar and euro won’t have many paths to left to safety, as banking officials of well-managed currencies fight back the stem of appreciation. A recent survey among Swiss reveals a majority of respondents alarmed by the rise in the franc, and fear a string franc will devastate exports of Swiss-made goods.

“You have a look at some of the other safe-haven assets that investors were looking at, the Swiss franc and Japanese yen,” Fat Prophets resource analyst David Lennox told Bloomberg. “Authorities there have taken steps to try and curb the rise in those particular currencies. That’s probably pushed more investors into gold.”

Read more: http://www.beaconequity.com/gold-price-poised-to-%e2%80%9cgo-parabolic%e2%80%9d-to-2100-2011-08-22/#ixzz1W7fQsCMv

The First Domino Had Fallen:Chavez took Venezuela´s Gold Reserve Back from The City

It was another absolutely madly volatile week, especially as we moved to the end of it. It’s a day-traders bliss, but I’m not a day-trader. It’s not an easy way to trade, and every tick counts. It’s just not for me, or most people.

I much prefer to have longer term holding such as precious metals and their underlying equities while swing trading some of the account as well by holding positions for days or weeks.

I enjoy making the money when good trading setups are there, but when they’re not, such as now, it’s nice to take things a bit easier and enjoy some of the profits we do make during the good times, and we did have some extraordinarily good times this summer.

For now the 1K Challenge I started last week is done. I all but blew up the small 1K account and it reinforced once again to me that I am not a day trader.
I may try a similar challenge with swing trading, but 1K really doesn’t give you much leeway to being with.

Our favourite precious metals, gold and silver, had some great moves this past week and are headed higher still it looks like. I used to get so excited when gold passed $500, $800 and certainly $1,000 but now I don’t feel any real kind of excitement about the moves. Sure it’s great increasing wealth but we’ve just got so much more upside ahead of us that these tiny moves aren’t really exciting me yet.

There are no signs of a bubble that I can see and I think I’ve got a pretty good pulse on the market, or at least I have for the past 8 years when I began getting involved in buying physical precious metals. We’re not even to the inflation adjusted high which at an absolute minimum using government rigged numbers is in the area of $2,200 or so.

There are a tonne of articles out very recently showing just how undervalued gold and silver shares are compared to the metals themselves. And they are wildly undervalued, I agree. But none of that really matters if we have another major market crash such as we did in 2008.

I’m not sure if we should be liquidating them yet or if we should hold them. If we get a further market crash then some that are already on sale could be on sale for another 50% or more!

Luckily we’ve got a very solid mining portfolio and most have held up extremely well with several making new highs. I think we’ve got a great mix of quality mid-sized companies all the way down to a few pure exploration plays, and the fact that they’re doing well even today reinforces my views.

The earthshaking news for gold this past week was that Venezuela announced they would like to repatriate their gold from Europe and the US. Venezuela holds $11 billion is physical gold and is wanting to have it held in countries with more solid economics such as Brazil, Russia or China.

A few things strike me here. They must know or have a feeling the gold is not there. Whether it’s there or not I don’t know but I have a feeling it’s encumbered in some way shape or form and has likely been leased out at the minimum or has physically been removed at the far end.

I think that Venezuela will be pressured hard politically to give this repatriation idea up or they may simply be settled in cash, not gold. This is a dangerous game Hugo Chavez is playing and one which could literally blow the doors off of the gold price.

If it were to surface that central bank gold is not actually there, there would be a run on gold the likes of which I can’t even imagine.

Hugo is the first domino to fall and demand his gold back and this could spark a major shift from central banks in wanting to actually hold their own gold rather than have it stored in apparent good faith by others.

We’ll see how this plays out but I have a feeling that one way or another the world is going to wake up to the realization that GATA’s premise has been true all along. The gold simply isn’t there!

Metals review

Gold rose 6.07% for the week in solid trading while world markets crumbled on fear. I was talking with subscribers the other day about how small a market gold is really and how underinvested people are in it. While it may look like it’s going a bit parabolic here, this can last a very long time.

Gold will be the mother of all bull markets and we’ve got much further to go on the upside, This bubble will put the tech bubble to shame as this one is based on fear, not greed and we will truly see panics into gold by the end of this.

I’ve talked about the coming growing premiums in precious metals on several occasions. My thoughts remain that trading the ETF’s such as GLD or SLV is great, but for the longer term you must hold physical gold, as a coin will sell for at least 100% premium to the paper price of a share of GLD or SLV.

Just this past week we saw gold coins and bars sell in Dubai for a 500% to 750% extra premium as supply was being limited. This is far from a huge premium still, but there will come a day when a gold coin sells for twice it’s paper quote, at the very least.

Even while gold is rising quickly it’s still a relatively safe asset as it only moved 6% in a whole week. US stock markets have moved that much in single sessions in recent days.

I don’t know where gold goes from here in this spike up but we should be expecting some kind of correction on a technical basis in the near future. The obvious number would be psychological resistance at $2,000.

The GLD ETF saw strong volume for the week with volume ramping up Thursday and Friday as investors dumped shares in a hurry. The volume is high, having hit over 34 million Friday alone, but not as high as recent volume spikes. I’d say we definitely have more room to run on the upside here and now.

Silver blasted out of the triangle pattern I’ve been talking about here for the last couple weeks at least and ended higher by 9.88% for the week. It’s looking like we’re heading back to $50 now that we’ve broken out. This may take a few days or a few weeks.

Always if trading silver be very aware. You literally cannot take your eyes off the market, or you must have a hard stop in place. I’ve been watching and trading silver in the past only to get the news that the margins are being raised and that was my sell signal. It marked the exact highs every time, and it comes every time.

It’s not fair that the CME can smack silver down this way so easily, but it is part of the game and we just have to accept and try to take advantage of this.

I did not pick up a trading position in silver as it broke higher but I may on weakness.

The SLV ETF saw a little tick up in volume which confirms the breakout but we’re far from the massive volume spikes we’ll be seeing once silver begins it’s top in this move here now.

Platinum rose 4.45% for the week. Last week I mentioned that platinum was trading in a wide range between about $1,680 and $1,880 and that it was quite possible to trade this range until it’s broken one way or another. That means that now would be a wise time to perhaps take some of that position off the table or at least be ready to sell it if we can’t continue this move higher.

What amazing wild swings we’ve seen in platinum lately.

Moves of $200 or more in about a week are what I’d call high volatility, not off the charts but high. Gold does no such thing yet, but it will.

I’d be poised to take profits here if we don’t move above the resistance level. You never go broke taking a nice profit and you can always buy the position back if it clears resistance on good volume.

The PPLT ETF volume was quite solid, especially the last two days of the week. I haven’t a clue where we go from here, but my thoughts are outlined above.

Palladium only rose 0.82% this past week but I see no reason why we won’t see it move higher to $800 and then $820 in fairly short order here.

There is no doubt palladium is struggling with getting past the moving average cluster here but that is normal and healthy and will make these moving averages great solid support once they become so.

Looking at the PALL ETF we saw the heaviest volume come in Thursday and Friday as price retreated. This is interesting and perhaps signifies palladium is not quite so ready to move as I said above after-all. We’ll soon find out.

Fundamental Review

We saw three banks fail this past Friday but what struck me Thursday evening was the announcement of another bank failure. I’ve never seen a bank fail on a Thursday before, and this makes a total of four banks this past week to join this years list of biggest losers.

A huge position in GLD call options was taken by Steven Cohen who runs one of the world’s largest hedge funds. I don’t know when these hedge fund managers will finally wizen up and buy physical gold, or perhaps they already understand that it’s too difficult to acquire large amounts of gold and silver as Eric Sprott can attest too.

If and when hedge funds begin to move into the physical precious metals space then we’ll see some meteoric rises. Even a mention of this will increase the price dramatically. It will only take one or two large players to buy physical gold to spark a major move.

As gold returns to being recognized for what it is, money, a huge first step is being taken by one smaller mining company. They are going to produce their own coins, as is being done by a few other companies also, but they are going to hold a portion of their treasury in physical gold and silver as well.

I know of one other company that does this and I own it. I may take a closer look at this company in the near future. Imagine if mining companies actually believed in their product years ago and had held a percentage of their production aside. Then perhaps we’d be seeing some decent share prices rather than the garbage prices most miners are selling at these days.

To say most mining companies are cheap is an absolute understatement.

What this company is doing that is very unique though is that they are considering issuing dividends in precious metal form one day. While a shareholder would likely need a hefty number of shares for this to be possible, this will be a trend one day.

While Hugo Chavez has decided to begin the process of trying to repatriate his gold, he’s also decided to nationalize the gold industry within Venezuela.
He’s doing this to increase the countries gold reserves. I don’t know why he doesn’t just buy output from national mines as China and Russia are already doing. Why he has to make such a stink about things I don’t know, but he is.

It was announced that Mitt Romney, Republican presidential candidate, holds between $250k and $500k in gold. While this is small compared to his fortune of between $190 and $250 million, it’s still a nod of approval for gold.

How he acquired such a fortune would be another story all-together and would appal people. Politicians really don’t make that much money outright, but they sure do score some sweet bonuses and they certainly do serve themselves for the most part, not the populous who’ve elected them.

Here’s the latest from Matt Taibbi on the SEC potentially covering up Wall Street crimes. That much has been pretty obvious for a long time now but the pervasiveness and consistency to which they do it should shock you.

We really don’t have anyone looking out for us and we have to help, and protect ourselves.

Buy physical gold and silver now!

It’s far from too late, still today.

Well that’s it for this weekend. I hope you are having a great summer as it’s quickly drawing to a close now.

I think we’ll begin dipping our toes into a few swing trades in the next few days as there is money to be made here. The last round of swing trades netted up gains of about 300% in at least one positions in only a few days and a 56% gain in the swing trading portfolio trading only about 50% of it.

Until next week take care and thank you for reading.

Gold miner minting its own gold and silver coins – looking to pay dividends in kind!

Junior, U.S-headquartered gold miner, Gold Resource Corporation (GRC) has entered into a position of holding some of its in-house treasury in physical gold and silver rather than cash in a move that will undoubtedly further increase its appeal to the gold-owning fraternity..

In reporting strong second quarter figures which have seen new production, revenue and dividend payout records, the company’s board has announced that it has approved the company minting approximately US$1 million worth of its own one ounce gold and silver coins.

As production increases, the idea is to hold an increasing portion of its assets in physical gold and silver and possibly offer shareholders holding certain minimum positions the ability to someday receive their dividends in-kind.

Commenting on this move, the company’s President, Jason Reid, said “Holding physical gold and silver in our treasury provides an excellent means of diversification in light of today’s world economic conditions and not only provides that diversification to shareholders but underscores Gold Resource Corporation’s commitment to precious metals.. Minting Gold Resource Corporation’s Double Eagle precious metal coins, currently underway, not only marks the next Company milestone but takes a large step towards potentially offering our shareholders a future in-kind dividend. With the unprecedented printing of fiat currencies around the world and the potential negative impact of governmental policies of various nations around the globe, Gold Resource Corporation provides investors excellent precious metal exposure from an increasing production profile, from dividends and now with physical exposure in the Company’s treasury.”

Gold Resource has always taken an innovative approach to its gold mining activities, and not one that has always met with outside approval as witness a highly critical article in Barrons in July, which the company has described as a “hatchet job”. Gold Resource is a maverick amongst gold miners having brought its El Aguila mine in Mexico into production without producing an SEC-compliant reserve report prior to moving forward. This is in fact the way many gold, and other, miners would have operated before what some might consider excessively protectionist legislation on SEC compliance, which heavily increases the cost of new mine development, started to be put in place to try and protect investors from possible fraud.

Gold Resource describes itself as a gold producer targeting projects that feature very low operating costs and high returns on capital. The primary focus is on cash flow, with a priority to return a meaningful dividend back to its shareholders. So far, since its start of production just over a year ago it has already declared13 special cash dividends for shareholders. As to its track record to date, Gold Resource successfully declared commercial production in July last year from a shallow, high-grade open pit at its El Aguila project – one of several in Mexico. This has enabled it to reach production and cash flow in an extremely short amount of time. A second operation – on the Arista high grade polymetallic vein deposit – is already producing. In its first 13 months of operation the company has already declared no less than 13 cash dividends for its shareholders – an aggressive dividend policy just not seen these days when juniors plough cash back into their projects and any possibility of dividend payments seems to be deferred ad infinitum.

Because Gold Resource operates in this manner it does raise some suspicions amongst those who feel, in our view misguidedly, that such a totally different approach to mine development and shareholder rewards has to signify some kind of deep down malpractice and fraud. Holding part of its treasury in gold and silver and the announced aim to ultimately pay in-kind dividends is unlikely to reduce such fears from the doubters, but in the meantime Gold Resource continues on its path and at current precious metals prices appears to be going from strength to strength.

Companies nowadays, and gold miners are no exception, often feel the need to take an innovative approach to attract shareholders and boost their stock prices as witness Newmont’s pledge to increase its dividend on a fixed basis parallel with rises in the gold price and also Gran Columbia’s floating of a silver backed debenture noted in a recent interview with Frank Holmes. Gold Resource Corporation is perhaps the ultimate example of such a policy.

Fear Sets In, Panic Begins, Ruin Perceived, Prepare for Gold $2100

Something big is going on in the United States in a sentiment change, an altered state of psychology, a growing sense of panic. My opinion is that the nation has entered the early stage of comprehension among the population of systemic failure. The most immediate measures are the rash of heavy selling down days in the US Stock market, the strong purchases in Gold, as well as the reactions to constant news of sovereign debt in trouble, and the big banks teetering. Several other softer measures have been noted, made overwhelming by their sheer numbers. A perception wave has taken hold of a toxic USEconomy, a toxic US financial sector, a toxic US housing sector, a toxic economic brain trust in the US towers. A sense of doom is creeping into the nation’s living rooms and board rooms, that the nation is in deterioration. Worse, they are realizing how US Federal Reserve is toothless, unable to address or treat the problems.

The citizenry is not adept or gifted enough to conclude that the problem is national insolvency, whose errant prescription has been a flood of liquidity. But they sense something is horribly wrong, and worse, that no current treatment will fix anything. They detect the backfire of the blunt banker solution and the misfired futility of the federal government solution. Witness the rooted perception and horrifying awareness that the United States is moving gradually and unavoidably into a systemic failure. The perception is that neither governments nor bankers have any solutions to help the people, who must impose their own gold standard. The Gold price registered a new high over $1900 per ounce, this after mental midget clowns and propaganda wags in May pronounced the bull market as finished. Their opinions are worthless. Watch them vanish behind the tall shrubbery when Gold surpasses $2000 this autumn.

ROOT OF NATIONAL ILLNESS

In my view, the national illness is a toxic USEconomy dominated by pervasive profound grotesque insolvency. In the early part of the 2000 decade, a strong hint of near-term future failure was obvious. The USEconomy shed its industry to Asia since the 1980 decade. In the early years of last decade, the migration of factories was to China. In its place, the US consumers relied upon home equity withdrawal, blessed as good by the American economists and high priest of heretical ideology Alan Greenspasm. The hint to sound money economists such as the Jackass from the dependence shift was a clear signal of ruin in a few years, as in now. It came on time. In my view, the national illness is a toxic US financial sector dominated by pervasive insolvency and massive fraud. The FASB accounting rule change permitted grotesque falsification of the bank balance sheets, reflected in market capitalizations above zero. The value zero has been and still is more accurate, still is the price target. The big US banks continue to fight off the powerful forces of a housing market in resumed chronic decline, sovereign bonds overseas beset by heavy losses, and a spate of bond investor lawsuits that rack up. All attempts to limit lawsuit exposure have failed. Litigants line up in court like Wal-Mart shoppers on a big sale. Americans are awakening to the unfixable nature of the USEconomy and the broken fraudulent nature of the US financial sector.

The Achilles Heel, the broken leg, the ruined road, and the toxic field is HOUSING & MORTGAGES. The contaminated blood, the leaking gangrene into the circulation system, the sewer line in the water supply is BANKING & FINANCE. The USEconomy grew dependent upon the two-sided asset bubble. No resolution or remedy or liquidation means rotting flesh and gangrene on the body economic. Americans have noticed. The US banking system remains insolvent, worse each quarter from toxic assets. Home prices have resumed their decline, despite all incorrect announcements by banking, political, and economic leaders over public address propaganda loudspeakers. The crowd control devices are not working, as the people are deeply worried. The banks are plagued by an REO inventory bloat extended from home foreclosures, where they do not dare release all the homes onto the already bloated market for sale. The banks are peppered in attacks by bond investor lawsuits, which work to resolve the bond fraud from misrepresentation of mortgages packaged in AAA toxic bundles. They lost 30% to 60% in a matter of months and a few years. The banks have a dirty secret of hundreds of thousands of home loans operating in strategic default, whether the homeowners refuse to pay anything more on their mortgages, often demanding to see the proper title on the property. The news media will not cover this story. In every court challenge, the banks have lost the cases, resulting in the homeowners taking clear title with the loan fully forgiven. The newest threat to the banks is the next Option ARM wave, the second round of adjustable rate mortgage that will continue in a storm until 2013 ends. Americans are awakening to the unfixable nature of the USEconomy and the broken fraudulent nature of the US financial sector.

No meaningful home loan balance scheme conducted by the USGovt means the housing mass & mortgage connective tissue circle the toilet in a flush. The reason is simple. Home loan balance reductions would expose gigantic bond fraud in tracing the mortgage bonds to home loans with title registrations. It would result in exposure of Fannie Mae counterfeit bonds having circulated widely. It would result in forced bank asset writedowns amidst the pervasive accounting fiction at work on the balance sheets, blessed as good by the FASB. It would expose MERS as a fraudulent device to hold titles without legal standing. It would embolden half the nation into civil disobedience, as in outright refusal to pay banks on home loans. It would expose the nation as insolvent generally. It might interfere with some perverse national plan to use Fannie Mae as some devious device to become landlord to one third of the nation’s homes, a plan of collectivism that Karl Marx might approve. Americans are awakening to the unfixable nature of the USEconomy and the broken fraudulent nature of the US financial sector.

PANHANDLE DOCTRINE & PARASITE DOCTRINE

The tragedy that struck the US nation has a great connection to toxic economic thought from its economic brain trust. It is thoroughly toxic, corrupted, and destructive ideology woven in an acidic blanket with rampant impairment to working capital. It earns a D grade on economics effectiveness, and in fairness is not what Keynes prescribed. It is toxic thinking. It seems to have elevated the Voodoo Economics of the 1980 decade to the Fascist Business Model in the 2000 decade. The license to engage in fraudulent activity is engrained in the pact between big business (led by big banks) and the USGovt policy making groups which are dominated by Wall Street firms (led by Goldman Sachs). The summary line is vividly clear to astute adept students of economics: the United States no longer has any concept of capitalism, and has undergone three decades of capital destruction. The crescendo of the capital destruction has taken place in the last three or four years, whose climax tune is the shrill Quantitative Easing. The cast of American economists is wedded deeply to the notion of credit dispensation and monetary growth under the illusion of control. They do not comprehend capital formation anymore, relying instead upon what the Jackass calls with bitter intended mockery the Panhandle Doctrine applied to consumers, matched by a Parasite Doctrine applied to banks. If you give a street bum money, he will buy coffee and maybe a sandwich. The USEconomy is based upon coffee and sandwiches, not much more, as the consumer is given money in pockets and purses to spend. The depravity of economic thought is shocking. The stock market & housing sector (FIRE) replaced industry & factories with tragic outcome. FIRE means finance, insurance, and real estate, a great ironic moniker since the fires burned capital at a rapid rate.

A prevailing belief exists among American economists that if the consumer picks up, then industry will expand with big capital spending and job hires. The belief is entirely backwards, a symptom of American economist ignorance and stupidity. The consumer (street bum) relies upon tax breaks, reduced Social Security & Medicare contributions, extended jobless benefits, clunker car gifts, first time home buyer tax credits, and more. They are all examples of the Panhandle Doctrine from which the USEconomy have grown dependent upon. Observe the toxic American economist ideology. For banks, a parallel Parasite Doctrine hard at work has gutted the financial sector. The regular fare offered as examples as strategic crutches to a broken sector are sponsored USTreasury carry trade (aided steered by Interest Rate Swaps), betting on their own stocks lifted by phony FASB accounting rules, participation in USFed frequent flyer programs like the Money Market giveaways, flash stock trading (High Frequency Games) done with impunity, short stock sale bans (Goldman Sachs given an exemption), and naked selling of USTBonds (grandaddy fraud). See failures to deliver, buttressed by Interest Rate Swap artificial end demand that serves to cover the other end and qualify as a bonafide bucket shop.

Thanks to Aaron Krowne and his Mortgage Implode website, for the intrepid work on the mortgage market and recently on the USTreasury market. He provided the graph on Failures to Deliver on USTBonds. See the ML Implode article (CLICK HERE). The total is roughly $1 trillion in bond fraud, an ongoing figure. The story broke in mid-2009, only to disappear with organized suppression. The Wall Street firms lost their investment banking business, but found a fertile source of liquidity from naked short sales of USTBonds, whose buyers were the artificial factory of Interest Rate Swaps. Without this naked shorting line of liquidity, the Wall Street job cuts would have been much worse, equal to the London and European bank sector job cuts. The Parasite Doctrine has a poster boy project with these fraudulent sales given cover by the Securities & Exchange Commission, whose official ranks are filled by Wall Street henchmen.

THE CONFIDENCE GAME RUSE

The American public is told that confidence is the root cause of the absent woefully low business spending. The confidence took on damage after the vacant USGovt & USCongress budget deal and debt extension to be sure. But the true source of absent business capital investment is broad deep insolvency, the poor business risk, extending from the broken housing market, the wrecked banking sector, and the inadequate industrial base. The government finance requirements serve to crowd out the bond market, which in a normal system would rely upon the financial sector for capital formation, business development, and construction of platforms that offer job growth. In the US financial sector, the innovation is with carry trade speculation, exploitation of easy money facilities, and profound bond fraud, hardly the stuff of growth mechanisms. Big banks do not lend when they can reliably make money on the USTreasury Bond carry trade. The American corporate sector has responded to the liquidity flood, aka monetary hyper-inflation, and the corresponding acidic undermine to capital, by moving investment overseas. See Cisco, General Electric, and Hewlett Packard, which is instead raising a white flag to Asian PC makers. The most glaring consequence to the monetary policy, marred (not aided) by QE and QE-Lite and QE2 and Secret Global QE, has been the entire cost structure has risen, without benefit of rising incomes.

Furthermore check Economics 201, Chairman Bernanke. Low interest rates suppress the USEconomy, not stimulate it. Almost twice as much interest income is earned versus interest costs paid. The pensioners and retirees are struggling with inadequate income, spending less. The bond investors sought out higher yields in mortgage bonds, only to be burned by 25% to 40% losses in principal. Pension fund income is way down. Of course the motive has been to support and stimulate speculation in Wall Street, where the USFed primary loyalty lies, surely not with Main Street and business interests.

FEAR SETS IN, PANIC BEGINS, RUIN PERCEIVED

A confluence of major perceptual factors is flowing in the national mindset. Fear is setting in. The early stage of panic is evident. A growing perception of ruin can be spotted. People are responding to numerous high profile stories, each of which is important in painting a mosaic of extremes, none of which would have occurred in the 1990 decade. The chorus of crisis is loud and shrill. Here are some important events that the American public must examine.

The broken USGovt budget and upcoming huger deficits. With tax receipts trending down, and the need for economic stimulus programs clear, the USGovt deficit next year will be larger, not smaller, despite what the errant Govt Accountability Office statement reads.
The blatantly obvious USeconomic recession, whose billboard signs litter the highway, the latest being the Richmond Fed down 10% (called good), and the Philly Fed down 37 (could not be called anything but horrible). The Philly Fed forecast was minus 2 by the intrepid marketing prop carnival barker American economists.
The EUR 850 billion bailout by the Euro Central Bank, intended to cover the mountain of Italian and Spanish Govt bonds. But the bailout will accomplish nothing, just like Greece, where numerous bank bond bandaids have been applied. And besides, the Germans have refused to offer any more bailout funds, calling Italy and Spain too big to bail out, quite properly.
The creepy feeling of a global monetary system breakdown. The major currencies are being debased to such a grand extent that even the less gifted American public can notice. They see the onslaught of sovereign bonds overseas, and might harbor more distrust for USTreasury Bonds that the media reports. They might be buying gold & silver coins from the USMint, which cannot keep up with demand.
The anticipated QE3 heresy is certain to continue. It has already come in Global QE form, as the Jackass expected. My forecast is that the USFed will formally support the US Stock market and violate its charter. But the move will be applauded and serve as the next heroin injection to the body economic, with certain additional capital destruction and rising cost structure.
The Swiss and Japanese central bank futile actions, designed to halt their rising Franc and Yen currencies. The lesson learned is that all major central banks have turned toothless, their policies ineffective, wasteful, and destructive. The Competing Currency War is making all of them big losers. Their economies suffer.
The pitiful paltry puny USTreasury long-term yield of 2.0% to 2.2% does not offer the American saver the proper incentive to save, nor the proper return on investment, certainly not an adequate yield to reflect the risk taken. The yield now stands at 7% to 8% below the true CPI rate.
SINKING INTO THE AMERICAN PEOPLE MINDSET IS THAT THIS IS 2008 ALL OVER AGAIN, BUT TWICE AS BAD, SINCE THE SOLUTION HAS FAILED AND TRUE REMEDY IS SEEN AS IMPOSSIBLE!! The USGovt and USFed and Wall Street policy makers and league of Rasputins have thrown $3 trillion at the problem, have bailed out the big US banks, have conducted numerous liquidity programs, have made Swap Lines to Europe, have completed a few mickey mouse stimulus initiatives (clunker cars, first time home buyers), have extended but terminated aid to states, have extended jobless benefits, have given SS/Medicare relief, have operated gigantic debt monetization programs (QE’s), but the USEconomy is rolling over into a recession anyway. The confirmation of the recession is the many denials with shorter frequency between denials

THE SHAPE OF QE3

As the Jackson Hole Conference is set to begin in the spectacular picturesque mountains of Wyoming, anticipation and anxiety rise. The Grand Tetons serve as a fitting location to announce the renewed dependence from the USFed teats, the monetary spigot. Where the spigot is directed remains the main question in debate. Given the robust supposed USTreasury Bond rally, it hardly seems suitable to direct QE3 toward more USTBond buying, unless they wish to avoid USTreasury auction failures. The ultra-low yield combined with ultra-high supply makes for extremely high risk. Bond investors might not show up at all. A failed auction would be highly embarrassing as a event after the highly publicized bond rally, an irony worthy of Rolling Stone exposure or a Saturday Night Live comedy segment. The USGovt minions and Wall Street made men had crowed that the bond rally contradicted the Standard & Poors downgrade for the USGovt debt. My forecast is that the QE3, when it comes, will be designed and intended openly to support the Stock market. It will not arrive this week. It will arrive with full bore announcement in response to the next round of deep US stock market declines. History will be made. The spin on the USTBond rally to 2% on the 10-yr is deafening and deceptive. We are told the bond market anticipates QE3 but that is patently false. The bond market smells with great dread the next USEconomic recession, or more accurately, recognition of the ongoing chronic powerful recession that began in 2008 and never ended. The bond market smells unfixable recession, all current tools having failed. The bond market detects correctly that the US Stock market from mid-2010 has been propped by QE initiatives, now absent.

The irony, intrigue, and corruption is both bizarre and macabre. The Standard & Poors President Deven Sharma has decided to step down only three weeks after the agency downgraded the US credit rating. What a predictable move. The post will be occupied by Douglas Peterson, chief operating officer of Citibank, to take effect on September 12th. Business as usual on Wall Street. The S&P lead role will be in capable hands. One might wonder if the outgoing officer will be charged with child pornography or a rape in a hotel. That event might not be needed.

GOLD MAKES RECORD HIGHS

This week has been tumultuous. The best summary in my view is to conclude that the Gold price set a record high, and fully revealed what direction it will take this autumn. In the low volume vacation dominated days of summer, an opportunity to engineer a selloff has begun in earnest. Gold has gone down to $1765 and Silver to $40 flat, still way up on the year. Hats off to Ben Davies, who has been impressively accurate in his precious metals forecasts. He nailed the silver forecast in April, expecting a steep pullback to $35. We saw it!! In June, when Gold was trading in the low $1500 level, Davies boldly forecasted that Gold would break above $2000 by yearend 2011. The strong upward moves seen so far in August have captured global attention. After action last week, Davies fine tuned his 2011 gold call, stating he expects Gold to reach $2100 by the end of December after first a correction to $1675. Today we saw it!! The hefty pullback will lose some faithful followers, but offer savvy investors a great chance to add to their positions. The cartel is busy making countless grateful Chinese, Indians, and Asians who have not stopped buying precious metals in defense of rapid inflation. They see the American bankers as the inflation villains. The sudden pullback has assured the last fire sale before the autumn gold bull romp, a great trampling event to come. It is written, it will happen. See the King World News interview (CLICK HERE).

The compromised clowns have been busy citing how the Gold price is $150 to $200 too high based upon price inflation, or even 50% over-valued based on some cockeyed Fed Business Model. They overlook the broken distorted market is the USTBonds, supported by powerful usage of Interest Rate Swaps, aided by USFed monetization still and the migration from stocks to bonds. The volatile moves in the Gold market can be interpreted with high predictability. The big down move today signals even bigger upward moves in the next few months. The money is moving quickly today on Wednesday. The 10-yr USTreasury has rallied on the TNX from 2.14% to 2.21% as a decent move. The crude oil price is up from $85.40 to $86.1 as a modest move. Nobody can deny that panic has hit the stock market, as the recession can be seen without rose colored glasses. Expect much more debasement of the USDollar, as tax revenues fall and stimulus costs rise. The bigger USGovt deficits must be financed, during a truly hostile climate. The complete ruin of major global currencies is in progress, not stoppable. Money is being ruined to such an extent that people are bewildered, wondering what constitutes money if sovereign bonds are being attacked and losing value. The tainted USTreasury Bond market has become almost a source of great amusement. The entire major currency market is in turmoil. See the Swiss Franc, the Japanese Yen, and their rapid rise several standard deviations above their norms or trendlines. Havoc has taken root.

The Libyan chapter will be properly told in a year or two. Tyrant Qaddafi wanted to install a Gold Dinar for North African usage, a similar sin committed by Saddam Hussein. These guys never learn that a challenge to the USDollar is met with armed resistance. The US & UK forces entered the fray. The secondary goal might have been to take oil producing capacity offline, thus lifting the crude oil price. Big Oil interests do not want the global recession to rock the crude oil price too much. The other benefits have been the $50 billion in funds frozen solid in US & London banks. Another $50 billion is frozen in European banks. Expect it to remain out of reach by Libya’s new leaders, despite talk. It is too badly needed within the Anglo banking system. See Oslo. The search is on not only for Qaddafi, who is surely comfortable somewhere in a desert bunker, but also well fed, and well medicated with his usual fare of psycho-tropic drugs. The hunt is also on for Libyan gold bullion. The Anglo bankers need it, since the COMEX and LBMA are just about bone dry, and the big US & UK banks are insolvent on the edge of failure. See their Credit Default Swap rates on debt insurance. For the greater good of the Anglo Empire, gold must be found and secured and locked up in the banking system, regardless of the propaganda messages put forth.

Prepare for $2100 gold by January, and $60 silver by January. The last open door is being made possible in the final days of August. Like last year, the months of September through January will be ones for the history books. The start of big bank failures in the United States, London, and Europe should add to the gold run. Contagion has hit Italy, Spain, and France (the newest PIGS lookalike). The breakdown will be broad, deep, and frightening in the next few months. The twisted thinking is probably that gold must be brought down as much as possible, to make a lower base before the next gigantic upward moves beyond the $2000 level and probably past $2100. The gold breakout will capture global attention and make major headline news. This is 2008 all over again, but much worse!! The story line will be that nothing was fixed, but that nothing can be fixed, and much more debasement of money will come. The Gold Meter will rise in direct reflection.

Gold Price poised to “Go Parabolic” to $2,100

As the gold price touched $1,890 per the ounce in London trading today, persistent doubt of the consensus forecast for U.S. and Europe economic growth has weighed down equities, lifted bond prices, and soared gold, as traders scramble in and out of positions to suit renewed uncertainty and the growing distrust of the Fed as well as European and U.S. policymakers.

Adding to the stack of the most recent gold-bullish news, which has been streaming in nearly daily now, comes Hugo Chavez’s request for a repatriation of Venezuela’s gold reserves from the Bank of England.

CEO of Hinde Capital, Ben Davies, today told King World News he believes Chavez’s move to bring 365 tons of gold reserves back to Venezuela could result in an explosive move in the gold price, as data suggest that the gold market has operated equivalently to a banking fractional reserve system since 1971—and a highly levered fractional system, at that.

“There was a game changer event yesterday: Chavez – the proverbial thorn in the West’s side – ruined the gold-bears’ picnic, “ stated Davies. “So what? I hear you say. Well I believe this is significant. Chavez holds 365.7 tonnes of gold overseas, mostly in Western Central Bank vaults, such as the Bank of England. Some 100 tonnes of Venezuelan gold is held there.”

“The question is: do these vaults still have all the gold?” Davies asked rhetorically, who now targets gold at $2,100 on this move.

In fact, the gold may not be there, according to Gold Anti-Trust Action Committee, who has published numerous articles showing the steep ratio between “paper” gold and the physical. Davies said that the global gold market’s fractional reserve system “means each troy ounce has been lent or swapped out many times over, and should gold holders request the return of their gold en masse, we could get a proverbial ‘gold bank’ run.”

If Chavez’s move triggers a gold run, or not, it most certainly will spark at least some fear into those traders seeking an empty chair before the music stops in the gold market. Force majeures at a time of panic to gold will leave wealth exposed to the threat of cliff-dive devaluations and bizarrely-priced physical gold ounce bars, a possible scenario that could turn rich people into poor ones, and vice versa.

Chavez appears nervous about the situation in the gold market, and may trigger other countries to repatriate their gold from Western entities, too, in another bullion bank run similar to the run on Ft. Knox in the early 1970s.

Even the U.S. dollar apologist of the gold market Dennis Gartman of the Gartman Letter is getting skittish about the possibility of a flashpoint in the currency markets.

“Gold is strong in any and all currency terms, and it is now entering that stage when prices go parabolic,” Gartman stated in his Gartman Letter.

Flight out of the U.S. dollar and euro won’t have many paths to left to safety, as banking officials of well-managed currencies fight back the stem of appreciation. A recent survey among Swiss reveals a majority of respondents alarmed by the rise in the franc, and fear a string franc will devastate exports of Swiss-made goods.

“You have a look at some of the other safe-haven assets that investors were looking at, the Swiss franc and Japanese yen,” Fat Prophets resource analyst David Lennox told Bloomberg. “Authorities there have taken steps to try and curb the rise in those particular currencies. That’s probably pushed more investors into gold.”

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Marx Was Right. Capitalism May Be Destroying Itself by Nouriel Roubini…

Nouriel Roubini: “Karl Marx had it right. At some point, Capitalism can destroy itself.”

Nouriel Roubini is a mainstream economist who teaches at New York University and may be best known as one of the early predictors of the ’08 crash.

He is no Marxist.

But today, in an interview with the Wall Street Journal, Roubini admitted that Marx was right about Capitalism and raised the possibility that Capitalism is destroying itself in the way Marx outlined more than a century and a half ago.

TRANSCRIPT

( Courtesy of B.J. Murphy)

I’ve produced a rough transcript (Roubini’s accent gives me some trouble) of the critical portion of this very interesting interview. I urge you to read each word carefully at least once, if not twice. B. J. Murphy

WSJ: So you painted a bleak picture of sub-par economic growth going forward, with an increased risk of another recession in the near future. That sounds awful. What can government and what can businesses do to get the economy going again or is it just sit and wait and gut it out?

Roubini: Businesses are not doing anything. They’re not actually helping. All this risk made them more nervous. There’s a value in waiting. They claim they’re doing cutbacks because there’s excess capacity and not adding workers because there’s not enough final demand, but there’s a paradox, a Catch-22. If you’re not hiring workers, there’s not enough labor income, enough consumer confidence, enough consumption, not enough final demand. In the last two or three years, we’ve actually had a worsening because we’ve had a massive redistribution of income from labor to capital, from wages to profits, and the inequality of income has increased and the marginal propensity to spend of a household is greater than the marginal propensity of a firm because they have a greater propensity to save, that is firms compared to households. So the redistribution of income and wealth makes the problem of inadequate aggregate demand even worse.

Karl Marx had it right. At some point, Capitalism can destroy itself. You cannot keep on shifting income from labor to Capital without having an excess capacity and a lack of aggregate demand. That’s what has happened. We thought that markets worked. They’re not working. The individual can be rational. The firm, to survive and thrive, can push labor costs more and more down, but labor costs are someone else’s income and consumption. That’s why it’s a self-destructive process.

Global Research Articles by Nouriel Roubini