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Dear Friends,

Welcome to the make believe world of what is left of the young lions. These people are clearly the top of the mega-speculative feeding chain and are now trying to eat each other.

Gold is the inverse of the dollar. Dollar strength is a product of short-term demand and short covering. This short covering emanates from enormous unstable risk carry trades and OTC derivatives written thereupon being buffeted by changing interest and cross rates, even if the changes are only window dressing.

What that means is large supply and demand emanating from our dear friends who are the same people who have basically killed the international financial systems. They are back again causing the US dollar to run contrary to the interests of fighting deflation as you will read below.

This dollar strength is not fundamental nor will it last one day longer than it takes the young lions to close or square their positions.

Welcome to the make believe world of what is left of the young lions. They are now trying to eat each other.

Jim Sinclair’s Commentary

To understand what is happening that so far has confused if not demoralized you, it is time to read the following. The key points are underlined.

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

Deflation: Making Sure "It" Doesn’t Happen Here
“Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly.”

Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system–for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.

More…

Jim Sinclair’s Commentary

Judging from historical review, employing Quantitative Easing as a tool to fight deflation over a significant period of time will serve to depress the value of the currency in the long term.

Bernanke May Seek New Tactics as Fed Rate Nears 1%
By CB Online Staff
(Excerpts from article)

`Quantitative Easing’

The Bank of Japan, struggling against deflation, slow growth and consumers’ reluctance to spend, brought its policy rate close to zero before turning in 2001 to a so-called quantitative easing strategy of increasing money in accounts held for commercial banks. The policy lasted for five years, before the central bank began to draw down reserves and raised its benchmark rate to 0.5 percent, where it has been since February 2007.

The Fed has flooded the economy with so much cash that excess reserve balances at banks, or cash surpluses beyond what banks are required to hold against deposits, soared to $136 billion for the two-week period ending Oct. 8 compared with an average of $1.4 billion in the same month last year.

“The Federal Reserve has already entered a regime of quantitative easing,” said Brian Sack, vice president at Macroeconomic Advisers LLC who also worked with Bernanke as an economist in the Monetary Affairs Division.

As their liquidity programs dump excess funds into the banking system, it’s become more difficult for the Fed to keep the rate at which banks lend overnight to each other in line with policy makers’ 1.5 percent target

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Jim Sinclair’s Commentary

As violent moves take place both in rates (Lie-bor) and de-leveraged assets, currency value in today’s world reflects the short term currency demand and supply having nothing whatsoever to do with underlying fundamentals.

Dollar fundamentals are dire. Combine the facts that the largest denomination of reserves held by central banks previously having indicated a desire to diversify, and that dollar based institutions hold more OTC toxic derivatives than others, the dollar long term direction is DOWN.

What is taking place now is the crazy speculators in complex trades creating un-real prices in terms of trend, screwing up the world one more time.

Currency Carry Trade

What does it mean?
A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage the investor chooses to use.

Investopedia Says…
Here’s an example of a "yen carry trade": a trader borrows 1,000 yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let’s assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% (4.5% – 0%), as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.

The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar was to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless hedged appropriately.

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Jim Sinclair’s Commentary

The supposed upcoming new Bretton Woods Agreement is more concerned with:

1. Unregulated hedge funds now screwing up the exchange markets making Bernanke’s fight against deflation ineffectual.
2. The implementation of Quantitative Monetary Easing.
3. The implementation of Fiscal Stimulus on a Global basis.

There is no chance of any new monetary order when the old one is presently acting like a Category 4 twister.

Yen Near Highest This Week as Stock Decline Crimps Carry Trades
By Ron Harui and Stanley White
(Excerpt from article)

Leaders of the Group of 20 industrial and emerging nations, due to gather Nov. 14-15 in Washington, will consider steps ranging from raising bank-capital standards to regulating hedge funds to address the financial crisis. Member nations’ finance ministers called for interest-rate cuts and increased government spending after meeting this week in Sao Paulo.

More…

Conclusion:

Since gold is the inverse of the US dollar and the dollar strength is purely from enormous money flows seeking to readjust their positions, it is quite short term. It could end as early as one minute from now.

When it does end, the dollar dives and gold roars.

Gold will trade at $1200 and at $1650.

Respectfully,
Jim