Posted at 4:58 PM (CST) by & filed under General Editorial.

Dear Friends,

Today was an extremely busy day in Muscat, Oman, starting at breakfast and ending now slightly after midnight.

We have received a royal welcome and have met several gentlemen of stature and quality. I look forward to tomorrow almost as a child looks forward to Christmas morning. There is so much to learn, absorb and benefit from here.

Internet connections are a bit iffy, but I will do my best to keep in touch with you all.

Respectfully yours,
Jim

Posted at 1:49 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

The big mover of the day was news of the Greece bailout (okay – call it a “rescue package” – it is still a bailout) put together by the EU to the tune of €30 billion ($41 billion) at 5%. Further icing on the cake is to come from the IMF which is providing €15 billion. The Forex markets went into a tizzy last evening with the Euro jumping more than 2 points at one time before things began settling down and a bit of relative calm descended on the currency markets as traders attempted to sort out the implications. Once they did, the Euro surrendered over a full point worth of gains and the Dollar moved back ½ cent off its worst overnight lows.

Gold shot all the way to $1,170 when the news broke but as it came into New York and as the Dollar began recovering, the sell side crowd went back to work and knocked it down off its best levels of the session. The same thing occurred with both silver and copper as well, the latter which had made a new yearly high before sellers came in and took it down.

It was particularly odd seeing the bonds moving higher as the whole idea behind the party in the Forex markets was that a meltdown had been avoided and it was time to play the risk trades once again. Something tells me that the feds are playing in the bonds as they are particularly worried about rising interest rates and would have us believe that they can conjure unlimited amounts of money into existence with little to no effect on yields. The reason cited for the higher prices today was a lack of upcoming auctions over the next couple of weeks.

I must admit I will never come to terms with the repugnant idea of calling numberless scraps of paper backed by nothing but debt a thing of value. Anyone else doing the same thing would be rightfully called a counterfeiter or a flim-flam artist and would summarily be hauled off to the dungeon where his stinking carcass would be left as food for the maggots . Only when the federal government does the same is it hailed as “providing liquidity” or “aiding the recovery process”. Oh well, it is what it is and as long as the majority believe the fairy tale, it will be true. With all that is transpiring in this nation I suspect that it is only a matter of time before the sleeping majority awaken to this wholesale fraud and demand the return of honest money. Let us hope for that day for the sake of our children.

Enough of my little rant for today however as the price chart of gold beckons for further analysis. I mentioned last Friday that there was one more level of resistance between gold and a potential revisiting of its all time high and that level was near the $1,170 – $1,175. Should gold clear that, it would no doubt draw in huge flows by the Managed Money sector that would take it back to the old highs. Well, guess what? It ran exactly to that level and that is where it was capped by the usual crowd. They can read a price chart as well as we can and know where they are vulnerable to attack.

The setback from this level is therefore not particularly surprising but the weakness in the Dollar has thus far kept the sellers from dropping price down significantly. Momentum in gold is still strong and the rising moving averages detail a market in a bullish posture which should keep dip buying active on setbacks. Please refer to the chart for the technical support and resistance levels. Gold would have to drop below $1100 to do any serious damage on the chart although I would not want to see it below $1,130 any time soon as that would bring out the top callers once again.

Open interest continues to rise which is a healthy sign as it indicates the influx of fresh money flows. The big move higher on Friday came on a rather small increase in the total open interest by recent standards so it appears that we did get some weaker-handed shorts pushed out of the market. The stronger-handed bullion banks are digging in however.

The HUI seems stuck near the 450 level as if waiting for some further signal to give it the impetus it needs to move higher. Initial support lies down near 430 with the index needing to take out 455 to give it a legitimate shot at advancing to 460 – 462.

Crude oil set back a bit but the market still appears firm. Rising energy prices will help to keep a firm bid under the gold market as will a rising CCI (Continuous Commodity Index) which is within a couple of points of making a 2 month high. Both bear watching as they will have a definite impact on the gold market.

Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini

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Posted at 1:24 PM (CST) by & filed under In The News.

Dear Friends,

Not to worry however, there will be 18,000 new IRS agents hovering like vultures above the general citizenry to ensure that you buy your private health insurance or they will confiscate any tax refund you might have coming.

A tip of the hat to our tireless internet researcher, JB Slear, for this story.

TRAC: IRS Audit Rate of Large Companies Continues to Plummet

The Transactional Records Access Clearinghouse at Syracuse University today released a report,   Despite Rising Deficits, IRS Audits of the Largest and Richest Corporations Decline:

Despite a growing federal deficit, IRS audit efforts aimed at the nation’s largest corporations have precipitously declined in the last few years and now are at an all time low….

Among corporations reporting assets of $250 million or more, the IRS since FY 2005 has cut back by a third (33%) the hours it spends examining their books. IRS has also sharply reduced the number of large corporate returns it examines — these audits have fallen by 22% since 2005.

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Posted at 1:22 PM (CST) by & filed under Trader Dan Norcini.

Dear Friends,

A quick look at this past week’s Commitment of Traders data reveals a strong increase in money flows from the Managed Money category. This is the source of the force behind the moves in today’s commodity markets whether to the upside or to the downside. This category of traders has slowly bled down their speculative long side exposure in gold over the last few months and it now appears that they have bottomed out in that process and are beginning to rebuild it. This bodes well for gold’s fortunes. Strong inflows into gold will enable it to push higher against concerted selling on the part of the big banks.

When we consider that the Managed Money net long position size was down to levels last seen in August 2009 there is substantial room for a sizeable increase in this category before it will reach anywhere near its recent record levels. Gold is less than $70 off its all time high so it is not difficult to see gold having the potential to easily surpass that level should managed money flows continue at their current pace.

You will also notice that the same category of sellers has also begun increasing their net short side exposure as price has moved higher. Both the commercial/producer/user/merchant category and in particular, the swap dealer categories have ramped up their selling as price has moved higher. It is this category, particularly the swap dealers which have my attention.

Any signs of fallout from the CFTC hearings will show up in this category should they begin to get squeezed and attempt to head for the exits.

So far, they appear to be digging in their heels.

Click chart to enlarge in PDF formatclip_image002

Posted at 7:57 PM (CST) by & filed under General Editorial.

Dear CIGAs,

In a few hours I will be airborne en route to Doha and then on to Muscat.

I am quite up for this trip. Not only is there good business to be done, but my company is made up of three really fun guys to be with.

I anticipate being in touch with you every day.

Regards,
Jim

Posted at 4:15 PM (CST) by & filed under General Editorial.

Jim,

BIS Working Papers No 300 explains how the Central Bank can loose their fight against inflation.

Best regards,
CIGA Christopher
Dear Christopher,

I have been preaching this for years. It is the real basis of the simplification we call the Formula of 2006.

The Intelligencia of the Establishment calls this BS. It is nice now that they have to challenge the BIS now.

Here is a definition to allow more CIGAs to grasp this point. This will allow you with certainty to understand that we have monetized trillions in the Fed purchase of questionable OTC derivative paper.
Monetization – is the process of converting or establishing something into legal tender. It usually refers to the printing of banknotes by central banks. Even . Monetization may also refer to exchanging securities for currency.

Wikipedia.

Respectfully,
Jim

Excerpts From PDF linked above:

To answer these questions, it is helpful to review the mechanisms by which persistently high fiscal deficits could lead to inflation.

A first mechanism stresses the ultimate impossibility of continuing to roll over ever increasing levels of public debt when monetary and fiscal authorities are pursuing inconsistent objectives. When the public reaches its limit and is no longer willing to hold public debt, the government would have to resort to monetisation. The result, consistent with the quantity theory of money, is inflation. And anticipation that this will happen may also lead to an increase in inflation today as investors reassess the risk from holding money and government bonds. In such an environment, fighting rising inflation by tightening monetary policy would not work, as an increase in interest rates would lead to higher interest payments on public debt, leading to higher debt, bringing the likely time of monetisation even closer.

Estimates of the impact of public debt levels on real interest rates vary substantially. For the United States, Chinn and Frankel (2005) find an impact as low as 2 basis points per percentage point of the debt/GDP ratio. For Europe, EC (2004) provides a range estimate rising to 16 basis points.

A main distinction in the literature is whether the quantitative theory of money holds (in which case inflation is always and everywhere a monetary phenomenon) or whether fiscal variables have a direct influence on the price level in addition to money (fiscal theory of the price level).

This “paradox of tight money” is the striking finding of Sargent and Wallace’s analysis (1981). Note that in their example debt is perfectly indexed in real terms. This rules out the case that inflation arises from the monetary authorities’ attempt to reduce its real value. Inflation, instead, arises because at a certain point bond investors refuse to hold debt and the government is therefore forced to issue money, short of an outright default.

Thus, in the absence of fiscal tightening, monetary policy may ultimately become impotent to control inflation, regardless of the fighting credentials of the central bank.

Conflicts between the goals of fiscal and monetary authorities can explain a number of inflationary outbursts in emerging market economies. Notable examples of this are: the Brazilian inflationary boom in the early 1980s when monetary policy, in the face of persistent fiscal deficits, started to act more aggressively against inflation (Loyo (1999)); the large jump in Israeli inflation in October 1983 (Sargent and Zeira (2008)); and the Indian inflation of the 1970s and 1980s in which fiscal deficits were monetised (Rangarajan and Mohanty (1997)).

A second mechanism by which public debt can lead to inflation focuses on the political and economic pressures that a monetary policymaker may face to inflate away the real value of debt. The payoff to doing this rises the bigger the debt, the longer its average maturity, the larger the fraction denominated in domestic currency, and the bigger the fraction held by foreigners. Moreover, the incentives to tolerate temporarily high inflation rise if the tax and transfer system is mainly based on nominal cash flows and if policymakers see a social benefit to helping households and firms to reduce their leverage in real terms. It is, however, worth emphasising that the costs of creating an unexpected inflation would almost surely be very high in the form of permanently high future real interest rates (and any other distortions caused by persistently higher inflation).

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Posted at 4:01 PM (CST) by & filed under Jim's Mailbox.

Greetings Jim,

The Gold Currency Index weekly chart closed at a new all-time high this week, moving well above the previous high in December. Technical indicators are moderately bullish, so the move is in a good position to continue higher. A subsequent weekly close well above current levels would confirm the long-term breakout and predict substantial additional gains. Gold in US dollars is still playing catch-up, but if the GCI confirms this breakout during the next several weeks, it should pull gold up to a new all-time high as well.

Best,

CIGA Erik
Prometheus Market Insight
http://www.prometheusmi.com

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Dear Jim,

I thought I would forward this too you. It sounds like what you said at the meeting in Toronto.

Best,
CIGA BT

Sovereign debt crisis at ‘boiling point’, warns Bank for International Settlements
The Bank for International Settlements does not mince words. Sovereign debt is already starting to cross the danger threshold in the United States, Japan, Britain, and most of Western Europe, threatening to set off a bond crisis at the heart of the global economy.
By Ambrose Evans-Pritchard
Published: 6:31AM BST 08 Apr 2010

"The aftermath of the financial crisis is poised to bring a simmering fiscal problem in industrial economies to the boiling point", said the Swiss-based bank for central bankers — the oldest and most venerable of the world’s financial watchdogs. Drastic austerity measures will be needed to head off a compound interest spiral, if it is not already too late for some.

The risk is an "abrupt rise in government bond yields" as investors choke on a surfeit of public debt. "Bond traders are notoriously short-sighted, assuming they can get out before the storm hits: their time horizons are days or weeks, not years or decade. We take a longer and less benign view of current developments," said the study, entitled "The Future of Public Debt", by the bank’s chief economist Stephen Cecchetti.

"The question is when markets will start putting pressure on governments, not if. When will investors start demanding a much higher compensation for holding increasingly large amounts of public debt? In some countries, unstable debt dynamics — in which higher debt levels lead to higher interest rates, which then lead to even higher debt levels — are already clearly on the horizon."

Official debt figures in the West are "very misleading" since they fail to take in account the contingent liabilities and pension debts that have mushroomed over recent years. "Rapidly ageing populations present a number of countries with the prospect of enormous future costs that are not wholly recognised in current budget projections. The size of these future obligations is anybody’s guess," said the report. The BIS lamented the lack of any systematic data on the scale of unfunded IOUs that care-free politicians have handed out like confetti.

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Posted at 3:53 PM (CST) by & filed under In The News.

Thought For Saturday:

Yesterday the talk was about the major banks understating their debts.

We know that the FASB has surrendered all their ethics to Wall Street and that has allowed financial entities to overstate their assets by valuing OTC derivatives at whatever they please.

Now we have more debt and less asset value than stated.

How long can an economy live a lie?

Jim Sinclair’s Commentary

More accurate warnings from the Bank for International Settlement.

This makes my price objective of $1650 almost silly in its conservatism.

The future of public debt: prospects and implications
by Stephen G Cecchetti, M S Mohanty and Fabrizio Zampolli
2 February 2010

A revised version, published on 26 March 2010, is available as BIS Working papers No 300

This paper was prepared for the Reserve Bank of India’s International Research Conference "Challenges to Central Banking in the context of Financial Crisis", Mumbai, India, 12-13 February 2010.

Abstract

Since the start of the financial crisis, industrial country public debt levels have increased dramatically. And they are set to continue rising for the foreseeable future. A number of countries face the prospect of large and rising future costs related to the ageing of their populations. In this paper, we examine what current fiscal policy and expected future age-related spending imply for the path of debt/GDP ratios over the next several decades. Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability.

Link to full PDF…

 

Jim Sinclair’s Commentary

According to government statistics not only is there no inflation, but life is getting cheaper to live.

"The increases can be attributed to rising prices for fuel, tires and insurance, the study said."

AAA: The price of owning a car — any car — rose over the last year
April 8, 2010 | 5:53 pm

As with many things nowadays, the cost of owning a car went up over the last year, AAA said Thursday.

The average cost to operate a medium-sized automobile — such as a Ford Fusion or a Honda Accord — increased 4.8% in the last 12 months, according to AAA’s annual "Your Driving Cost" study. Based on driving 15,000 miles a year, it costs 47.6 cents a mile, or $9,519 a year, to operate a mid-size car, the study said.

Other models haven’t gotten any cheaper either. Small-car owners paid an average of 43.3 cents a mile, or $6,496 a year, on the same 15,000 miles-a-year scale, the study said. That category — made up of Chevrolet Cobalts, Nissan Sentras and similar-sized rides — rang up the smallest increase: 2.9%.

The most expensive type of vehicle to own was a four-wheel drive sport utility vehicle. AAA said Jeep Grand Cherokees, Toyota 4Runners and their kin cost an average of 73.9 cents a mile to operate, or $11,085 a year, a 10.7% increase from the previous year.

The increases can be attributed to rising prices for fuel, tires and insurance, the study said.

Tire prices inflated 9% over the last year, AAA said, while the average cost of auto insurance grew 5.7%. AAA surveys depreciation, financing, fuel, tires, maintenance, insurance and license and registration costs to put together its annual study.

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Jim Sinclair’s Commentary

Plant the seed? The Federal Budget Deficit is ALREADY growing like the Japanese sci-fi flicks of the 1950s in which the Green Glob then ate the Earth.

With health bill, Obama has sown the seeds of a budget crisis
By Robert J. Samuelson
Monday, March 29, 2010

When historians recount the momentous events of recent weeks, they will note a curious coincidence. On March 15, Moody’s Investors Service — the bond rating agency — published a paper warning that the exploding U.S. government debt could cause a downgrade of Treasury bonds. Just six days later, the House of Representatives passed President Obama’s health-care legislation costing $900 billion or so over a decade and worsening an already-bleak budget outlook.

Should the United States someday suffer a budget crisis, it will be hard not to conclude that Obama and his allies sowed the seeds, because they ignored conspicuous warnings. A further irony will not escape historians. For two years, Obama and members of Congress have angrily blamed the shortsightedness and selfishness of bankers and rating agencies for causing the recent financial crisis. The president and his supporters, historians will note, were equally shortsighted and self-centered — though their quest was for political glory, not financial gain.

Let’s be clear. A "budget crisis" is not some minor accounting exercise. It’s a wrenching political, social and economic upheaval. Large deficits and rising debt — the accumulation of past deficits — spook investors, leading to higher interest rates on government loans. The higher rates expand the budget deficit and further unnerve investors. To reverse this calamitous cycle, the government has to cut spending deeply or raise taxes sharply. Lower spending and higher taxes in turn depress the economy and lead to higher unemployment. Not pretty.

Greece is experiencing such a crisis. Until recently, conventional wisdom held that only developing countries — managed ineptly — were candidates for true budget crises. No more. Most wealthy societies with aging populations, including the United States, face big gaps between their spending promises and their tax bases. No one in Congress could be unaware of this.

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Jim Sinclair’s Commentary

Good timing for this release.

China’s $7.24B March trade deficit 1st in 6 years
China reports $7.24 billion trade deficit in March as imports surge, first in almost 6 years 
Elaine Kurtenbach, AP Business Writer, On Saturday April 10, 2010, 11:14 am EDT

SHANGHAI (AP) — For the first time in six years, China’s imports in March outpaced its exports, leaving a $7.24 billion shortfall thatBeijing says reflects a trend toward more balanced trade but is likely to be short-lived.

Last month’s trade deficit with the rest of the world may buy China some respite from building pressure to revalue its currency, though its surpluses with the United States and Europe remain as robust as ever.

Even if China allows the yuan to gain slightly in value against the dollar in coming weeks, the shift is unlikely to settle the raging debate over whether its currency policy is unfairly distorting trade.

"The calm won’t last. China’s trade surplus will soon reappear. Indeed, the surplus that matters most politically, that with the U.S., is already rising again and not far off a record high," Mark Williams, senior economist with Capital Economics, said in a report Saturday.

Beijing appeared pleased with the trade data for March, with the commerce minister and others leaking news of the deficit — the first since a $2.26 billion deficit in April 2004 — in advance of Saturday’s announcement by the Customs Administration.

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Jim Sinclair’s Commentary

How many cities and states in the USA have been sold these cancerous frauds? Greece is far from alone.

When the devil is in charge of Wall Street virtue is a sin.

Looting Main Street
How the nation’s biggest banks are ripping off American cities with the same predatory deals that brought down Greece
MATT TAIBBI
Posted Mar 31, 2010 8:15 AM

If you want to know what life in the Third World is like, just ask Lisa Pack, an administrative assistant who works in the roads and transportation department in Jefferson County, Alabama. Pack got rudely introduced to life in post-crisis America last August, when word came down that she and 1,000 of her fellow public employees would have to take a little unpaid vacation for a while. The county, it turned out, was more than $5 billion in debt — meaning that courthouses, jails and sheriff’s precincts had to be closed so that Wall Street banks could be paid.

As public services in and around Birmingham were stripped to the bone, Pack struggled to support her family on a weekly unemployment check of $260. Nearly a fourth of that went to pay for her health insurance, which the county no longer covered. She also fielded calls from laid-off co-workers who had it even tougher. "I’d be on the phone sometimes until two in the morning," she says. "I had to talk more than one person out of suicide. For some of the men supporting families, it was so hard — foreclosure, bankruptcy. I’d go to bed at night, and I’d be in tears."

Homes stood empty, businesses were boarded up, and parts of already-blighted Birmingham began to take on the feel of a ghost town. There were also a few bills that were unique to the area — like the $64 sewer bill that Pack and her family paid each month. "Yeah, it went up about 400 percent just over the past few years," she says.

The sewer bill, in fact, is what cost Pack and her co-workers their jobs. In 1996, the average monthly sewer bill for a family of four in Birmingham was only $14.71 — but that was before the county decided to build an elaborate new sewer system with the help of out-of-state financial wizards with names like Bear Stearns, Lehman Brothers, Goldman Sachs and JP Morgan Chase. The result was a monstrous pile of borrowed money that the county used to build, in essence, the world’s grandest toilet — "the Taj Mahal of sewer-treatment plants" is how one county worker put it. What happened here in Jefferson County would turn out to be the perfect metaphor for the peculiar alchemy of modern oligarchical capitalism: A mob of corrupt local officials and morally absent financiers got together to build a giant device that converted human shit into billions of dollars of profit for Wall Street — and misery for people like Lisa Pack.

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Jim Sinclair’s Commentary

It could be that in a practical sense all states of the USA could run dry.

Look at what Greece did to the euro. Now consider what 33 or more states of the USA will do to the dollar and as a mirror image the euro.

33 states out of money to fund jobless benefits
By Hibah Yousuf, April 9, 2010: 2:26 PM ET

NEW YORK (CNNMoney.com) — With unemployment still at a severe high, a majority of states have drained their jobless benefit funds, forcing them to borrow billions from the federal government to help out-of-work Americans.

A total of 33 states and the Virgin Islands have depleted their funds and borrowed more than $38.7 billion to provide a safety net, according to a report released Thursday by the National Employment Law Project. Four others are at the brink of insolvency.

Debt-challenged California has borrowed the most, totaling more than $8.4 billion, followed by Michigan and New York, which have loans worth more than $3 billion. Nine other states have borrowed at least $1 billion from the federal government.

"The nation’s financing system for jobless benefits is under unprecedented stress," said Andrew Stettner, deputy director of the New York-based advocacy group for the unemployed. "While the recession has certainly made things worse, this funding crisis has been developing for years."

At the onset of the recession, only 19 states met the recommended funding level, which is one year of reserves equal to the highest amount of unemployment insurance paid out during prior recessions.

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