Posted at 4:42 PM (CST) by & filed under General Editorial.

Dear Friends,

I believe through the $2 trillion of fiscal intervention stimulation, a number I hear from the inside, the 8.5 trillion total so far is going to $20 trillion. Before this is all over the tremendous liquidity will transmute into inflation without precedent.

That is what you heard from Gold today.

The general equity rally in the early 30s was a humdinger so expect that rally to occur in the USA.

The only difference is when the monetary cat is let out of the bag by fiscal spending that Fat Cat will not go back into the bag. Gold will be launched into a multi-year phase of the long term bull market even when the equity rally in this bear equity market completes itself.

That encapsulates all you need to know concerning gold and the US dollar.

Respectfully yours,
Jim

Posted at 3:08 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

Gold caught one heck of a tailwind this morning knifing through one resistance level after another as if they did not exist. It is evident from the ferocity of the climb that the shorts were squeezed in a big way with a plethora of buy stops being touched off in the relatively low volume trading conditions. Here is another example of that lack of liquidity I have been referring to over and over again with the declining open interest creating huge pockets of air both above and below this market. A few well placed orders, either on the buy side or the sell side, and the cascade or upside catapult ensues.

One look over at the currency boards and it is easy to see why the gold shorts were in trouble this morning. The euro took off to the upside, the euro-yen cross soared, crude oil moved up and away from the $40 level and back came the “risk” trades. The “risk aversion” trades were reversed or halted as traders latched onto the auto bailout news and attempts by the Central Banks globally to inject liquidity as a signal to plow back into the commodity sector. Nearly every single commodity quote on my board was once again in blue. Even if anyone did not understand the exact nature of the computer algorithms that these black box hedgies are employing, it does not take much in the way of observation to grasp the fact that those things are geared to movement in the dollar and the equities. That is why the signals always produce the exact same effect in the markets. They are all basically using the same computers to do their thinking for them. Hedge funds are basically mindless traders and if they are all using the same signals, then the result will be that they plow into and out of markets all at the same time. Nowadays this is referred to in the investing world as “genius”; that is, until the hedge fund goes belly up and shuts its doors.

Suffice it to say that today is the “reflation trade” –

Nonetheless, gold has had an undeniably strong technical performance. It is trading well above its 50 day moving average and peaked today right on its 100 day moving average. That level is very close to the downsloping trendline of the recent wedge formation on the daily chart. Should gold be able to muster the strength to take out the 100 day and then horizontal resistance from late last month near $830 – $833, it has the very strong possibly of beginning a trending run. Keep in mind that levels of open interest are  low and the market is relatively illiquid so we will still want to see new fresh buyers coming in and not short covering alone. Light support  moves up to near the $790 level followed by stronger, more substantial support near $770.

I am a bit hesitant to say with complete confidence that the mining shares as indicated by the HUI and the XAU have completed a complete separation between themselves and the broader market but they gave the first solid hint of that yesterday. Today they furthered the amicable divorce. Even as the broader market indices came off their best levels of the session, the HUI and the XAU seemed very hesitant to give up their gains. Yesterday the HUI and the XAU managed their second consecutive close above the 50 day moving average. That is generally enough to turn the technical posture into a bullish one. Sure enough the shorts began running today with indices easily breaking through their respective horizontal resistance levels at the late November highs. That translates to roughly the 250 level in the HUI and the 101-102 level in the XAU. To give you an idea how improved the HUI chart has become, the 100 day moving average on its daily chart comes in near 277. That is less than 20 points away from today’s session high.

The grains are looking more and more like they are forging a bottom although so far that cannot be confirmed with certainty. They are meeting up with selling resistance near the 10 day moving average in the corn and the beans. I still have my eye on this complex as I will feel much better about the overall commodity sector once the grains bottom. So many prices have been beaten down to levels that I believe were not justified fundamentally but went there nonetheless in a technical washout from the hedge fund deleveraging trade and the index fund redemption related selling. Just like that crowd overdoes things on the upside, they do the same on the downside. The trick is trying to figure out when enough is enough. Just about the time you are convinced that the blind selling is over, another outbreak of selling appears and down it goes once again. What I keep looking for is the time when traders are paying attention to supply/demand factors that are particular to each commodity market instead of just wave after wave of selling. That will tell us that informed traders and big money is moving back in to take advantage of “value”. I believe we are seeing that in gold but I want to see it in more than one market but would prefer to see it across several of them. Up until recently, no one, and I mean no one, has been willing to step in front of the fund selling and take on any serious long positions. That makes sense since if you are inclined to buy, why not wait until you can get it even cheaper. When you see the prices have fallen to the point where others besides yourself are licking their chops in anticipation of the deal, then you begin moving in as well. But you have to know that you have some reinforcements on your side to take on the hedgies who are busy throwing everything out the window without looking at what it is.

Incidentally, I heard some reports about guys in the oil patch buying the front month futures contracts, taking delivery of the crude and storing it in empty tankers with plans to sell it next year because of the degree of contango in the futures markets. The selling has knocked the front months down to levels that are out of whack with the premiums that the board is giving the back months. Those that know the oil patch very well and know where relative value is are taking steps to make a nice tidy sum of money thanks, once again, to the mindless hedge funds. Too bad we all don’t have some spare supertankers hanging around our back yards.

For a while it seemed as if the bonds were going to drop and drop hard. Yet, like they have done time and time again recently, they bounded up from their lows. That thing sure seems to me to be setting itself up for one heckuva fall but fighting the trend can be quite expensive unless you are very, very nimble.

Click chart to enlarge today’s action in Gold as of 12:30pm CDT with commentary from Trader Dan Norcini

December1008Gold1230pmCDT

Posted at 2:32 PM (CST) by & filed under Guild Investment.

Dear CIGAs,

Today is the first day of US Treasury Bills sales to finance the coming deficits connected with the banking system bail outs. The rate paid for 4 week paper was zero percent. Thus people are looking for gold. Why not buy gold with a zero percent yield? In our opinion, it is at least as safe as T-bills with the same yield, and it has not been rallying like the US dollar has. In our opinion, professionals are buying gold, while the public buys T-Bills.

By the way, this is the first of a great many large auctions of US government securities. These auctions will increase the total amount of US government debt outstanding by about 22% or $2 trillion in the next 2 years. When this much new debt is floated, why will buyers not demand higher interest rates? If the US cannot tolerate higher rates due to their need to keep rates low for the bailout to proceed, then buyers will demand a currency discount to buy US bonds. In our opinion, the US dollar has seen or is very near its highs and major foreign currencies and gold are very near their lows.

Respectfully yours,
Monty Guild
www.GuildInvestment.com

Posted at 2:27 PM (CST) by & filed under In The News.

News Alert: House Passes Auto Rescue Bill
By DAVID M. HERSZENHORN and DAVID E. SANGER
Published: December 10, 2008

WASHINGTON — The House voted on Wednesday to approve a $14 billion government rescue of the American automobile industry, but the bailout plan, which would provide emergency loans to General Motors and Chrysler, was in jeopardy because of strong Republican opposition in the Senate.

The House approved the rescue plan by 237 to 170, mostly along party lines, with 32 Republicans mainly from states heavily dependent on the auto industry joining 205 Democrats in supporting the measure. Voting against were 150 Republicans and 20 Democrats.

The White House so far has failed to generate support among Senate Republicans, who have the power to kill the bill.

General Motors and Chrysler have said they cannot survive much longer without the federal aid, while Ford Motor Company, which is in better shape than its competitors, has said it will not seek the emergency loans.

As an amendment to the auto rescue plan, the House approved a measure that would require banks receiving assistance from the Treasury’s $700 billion economic stabilization program to detail new lending activity each quarter.

More…

Jim Sinclair’s Commentary

Warm, hot, hotter, boom

Pakistan: We’re ready for war with India
Pakistan warned it is ready for war with India if it is attacked following the strike by the Mumbai terrorists.
Last Updated: 12:13PM GMT 09 Dec 2008

The remarks by Pakistan’s foreign minister, Shah Mehmood Qureshi, who also insisted he would not hand over any suspects in the Mumbai attacks, come amid mounting tensions between the nuclear-armed neighbours.

India has said it is keeping all options open following last month’s carnage by the Mumbai terrorists, who killed more than 170 people.

"We do not want to impose war, but we are fully prepared in case war is imposed on us," said Mr Qureshi.

"We are not oblivious to our responsibilities to defend our homeland. But it is our desire that there should be no war."

Indian officials say the hardline Lashkar-e-Taiba (LeT) group, which is based in Pakistan despite being banned by the government, is behind the bloodshed, and Indian media have suggested there could be Indian strikes on militant camps.

More…

Posted at 9:57 PM (CST) by & filed under Jim's Mailbox.

Dear Jim,

Can you comment on the rumor published on reliable sites that the IMF is going to pummel the gold market down to the $455 levels tomorrow at 12:22 PM?

CIGA Arlen

Dear Arlen,

That rumor is nothing more than RAVING BULLSHIT!

Jim

Posted at 9:46 PM (CST) by & filed under In The News.

Jim Sinclair’s Commentary

Only the uptick rule levels the playing field with pool short sellers running wild. No uptick allows the seller to pound away at the bids on a stock until the longs are simply bowled over.

The pounders are the bastards that have been playing the gold juniors, pounding away.

God help these guys if they are brought out into the light.

Their lights may be put out. Their only protection is to hide behind the lack of regulation.

Those arguing NOT to reinstate the uptick rule are the perps.

Uptick Rule May Fail to Lift Stocks, Curb Volatility
By Edgar Ortega and Jesse Westbrook

Dec. 9 (Bloomberg) — Resurrecting the “uptick rule,” the 70-year-old restriction on short sellers, would probably fail to curb bets against equities or damp price swings, according to brokers that trade about 25 percent of U.S. stocks.

Members of Congress, T. Rowe Price Group Inc. and the head of NYSE Euronext blame the Securities and Exchange Commission’s 2007 decision to eliminate the regulation for contributing to the worst year for stocks since 1937. New York-based Morgan Stanley, Citigroup Inc. and Lehman Brothers Holdings Inc. blamed short sellers, who profit from declining stock prices, for spreading rumors that drove their shares to their lowest this decade.

Executives at UBS AG, Deutsche Bank AG and Knight Capital Group Inc. say bringing back the rule, which prevented traders from making bets against stocks when they were falling, is unlikely to reduce volatility. Ever since computers started trading millions of shares in seconds and exchanges began quoting stocks in penny increments in 2000, the regulation has become obsolete, they said.

“It was a good rule back when trading was manual, but now that trading is much more automated, I don’t see it as a viable solution,” said C. Thomas Richardson, global head of transaction services for New York-based brokerage Nyfix Inc.

The guideline barred traders at the New York Stock Exchange from driving down prices by shorting a stock unless its price had increased, or remained unchanged in the preceding trade.

More…

Jim Sinclair’s Commentary

With this rate of return the US Fed and Treasury better pray for the dollar’s health.

Treasury Bills Trade at Negative Rates as Haven Demand Surges
By Daniel Kruger and Cordell Eddings

Dec. 9 (Bloomberg) — Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.

The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.

“It’s the year-end factor,” said Chris Ahrens, an interest-rate strategist in Greenwich, Connecticut, at UBS Securities LLC, one of the 17 primary dealers that trade directly with the Federal Reserve. “Everyone wants to be in bills going into year-end. Buy now while the opportunity is still there.”

The benchmark 10-year note’s yield tumbled 11 basis points, or 0.11 percentage point, to 2.63 percent at 4:48 p.m. in New York, according to BGCantor Market Data. The 3.75 percent security due in November 2018 gained 31/32, or $9.69 per $1,000 face amount, to 109 23/32. The yield touched 2.505 percent on Dec. 5, the lowest level since at least 1962, when the Fed’s daily records began.

More…

Jim Sinclair’s Commentary

Citi is certainly an expert on "UNRAVEL."

Citigroup says gold could rise above $2,000 next year as world unravels
Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world’s monetary system with liquidity, according to an internal client note from the US bank Citigroup.
By Ambrose Evans-Pritchard
Last Updated: 7:29AM GMT 27 Nov 2008

An employee of Tanaka Kikinzoku Jewelry K.K. displays a gold bar at the company’s store in Tokyo Photo: Reuters

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

"They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank’s chief technical strategist.

"The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.

More…

Jim Sinclair’s Commentary

Pakistan is the greatest problem the planet faces. Raiding nuclear capable countries without a government is somewhat risky.

Israeli experts help India prepare commando raids into Pakistan
DEBKAfile Exclusive Report
December 6, 2008, 4:23 PM (GMT+02:00)

New Delhi has asked Jerusalem to assist in the operational and intelligence planning of Indian commando cross-border strikes against Islamist terrorist havens in Pakistan – including al Qaeda, Indian counter-terror sources report.

The Indian government’s decision to embark on these in-and-out incursions in reprisal for the Mumbai outrage of Nov. 26-29 was first revealed in DEBKA-Net-Weekly 375 published Dec. 4 (Indian Retaliatory Raids inside Pakistan Impending).

DEBKAfile adds: Israel is willing to help the Indians carry out punitive forays into Pakistan because it has its own scores to settle for the brutal murder of six Israelis in Mumbai’s Chabad Center by the Islamist terrorists and for the Pakistani Inter-Services Intelligence (ISI) agency’s hand in the atrocity.

Security sources in New Delhi disclosed Saturday, Dec. 6, that ISI officers actively trained the terrorists on military lines and selected their targets, including two big hotels and the Jewish-Israeli center.

Indian sources told DEBKAfile that Israel was asked for assistance because its special undercover forces were long seasoned in plotting and executing reprisals for terrorist attacks; above all, they were expert in getting away after covert operations without leaving a trail. New Delhi wants its commando operations in Pakistan to be stealthy and focused, and does not propose to admit responsibility.

More…

 

Jim Sinclair’s Commentary

This is to be expected in India and to grow. The article is clueless of why.

India Post is selling gold coins like hotcakes
2008-12-04 17:55:00

BANGALORE: The Indian government is extending a novel scheme to sell gold coins through post offices to several states in the wake of its stupendous success in the last two months.

India Post in association with World Gold Council and Reliance Money launched the innovative plan in October. The scheme offers 24-c gold coins in 0.5g, 1.5g and 8g varieties and people can buy gold coins through post offices.

In the first phase, gold coins in the denomination of half gram, one gram, 5 grams and 8 grams were be sold in over 100 post offices in Delhi, Tamil Nadu, Maharashtra and Gujarat. The initiative was then introduced in Punjab, Andhra Pradesh and Rajasthan.

On Friday, India Post chief postmaster general M P Rajan said that the gold coins selling scheme has been extended to the southern state of Karnataka.

"Under the scheme launched on October 15th in Delhi, Maharashtra, Gujarat and Tamil Nadu, in the first phase, 8,500 gold coins were sold in the first 15 days," said Rajan.

More…

 

Jim Sinclair’s Commentary

53% now, probably 70% soon. You expected doing the same thing over again would have different results? Ask Einstein.

Half of ‘rescued’ borrowers still default
Many modified mortgages in 2008 defaulted in 6 months, a top federal regulator says. A new study raises concerns over the quality of such loan adjustments.
By Tami Luhby, CNNMoney.com senior writer
Last Updated: December 9, 2008: 5:11 PM ET

WASHINGTON, D.C. — More than half of delinquent homeowners whose mortgages were modified earlier this year ended up redefaulting within six months, a top bank regulator said Monday.

Some 53% of borrowers with loans modified in the first three months of 2008 and 51% of those with loans modified in the second quarter could not keep up with payments within six months, according to U.S. Comptroller John Dugan, who spoke at a housing conference.

The report, which will be released in full next week, covers nearly 35 million loans worth a total of $6 trillion – or 60% of all primary mortgages in the United States.

The high redefault rate raises concerns about the long-term effectiveness of loan modifications, which many are pushing as a key solution to the nation’s financial crisis

More…

Jim Sinclair’s Commentary

On this one Chuck is right.

Restore the Uptick Rule, Restore Confidence
Short sales of stocks are fine given one tried and tested regulation

By CHARLES R. SCHWAB
The last time the stock market suffered from extreme volatility and risk of market manipulation as severe as we are experiencing today, our grandparents’ generation stepped up to the plate and instituted the uptick rule. That was 1938. For nearly 70 years average investors benefited immensely from that one simple stabilizing act.

Unfortunately, in a shortsighted move, the Securities and Exchange Commission (SEC) eliminated the rule in July 2007, just as we were about to need it most. Investors have now been whipsawed by what appears to be manipulative trading, what we used to call "bear raids," which drive stock prices down without warning and at breakneck speed. Average investors feel the deck is stacked against them and are losing confidence in the markets.

For the sake of our children and grandchildren, and to avoid a needless future repeat of a bad situation, it is time to restore the uptick rule.

The uptick rule may seem far from a kitchen-table issue, but it is critically important to ordinary investors. With more than half of all U.S. households invested in the stock market, either directly or through a retirement plan, it matters a great deal. The average 401(k) retirement account has lost 20%-30% of its value over the last 18 months — more than $2 trillion in retirement savings has been wiped out. Behind those numbers are real people who planned and saved, and who are suddenly facing an uncertain retirement and the prospect of working longer.

More…

Posted at 3:00 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

Not much time today gang – I apologize for the brevity – these markets are getting to the point where you can hardly look away from the screen for even a moment… madness is too kind of a word to describe what they have become of late.

Gold was able to shrug off pressure from the weakness in the Euro-Yen cross and close higher for the pit session which is quite an achievement. It is holding support at levels shown on the chart near $765 or so. Resistance remains at $780 followed by $790.

Open interest went up yesterday but that is a bit misleading because it was all concentrated in the June 2009 and December 2009 contracts.

The gains in the HUI and the XAU are turning the chart patterns friendly especially give the inability of the broader stock market to maintain rallies. The HUI is trading above the 50 day moving average. If it can maintain its gains and this level going into the closing bell, it should spark some further short covering among technically oriented shorts. The 10 and 20 day moving averages are heading higher and the 40 day looks like it is also turning up. That would signify the trend is now higher for the shorter term. The 50 day would need to turn up to bring the intermediate trend to up.

On the delivery front – Fortis was the largest seller issuing 30, 16 of which were taken mainly by the largest stopper HSBC. That brings the total to 12,449 for the month.

In closing, may I request that those of you who seem to relish sending me emails with links to articles bashing gold and to predictions about IMF gold dumps and $450 gold prices please cease doing so. What do you really expect me to say to such articles anyway? This is a gold-friendly web site because of all the reasons outlined so many times over the last few years. If you really believe those other articles then may I kindly suggest that you simply become a dedicated gold bear and sell all your gold and buy Treasuries. Gold is a time-tested store of value and insurance against the depredations of Central Bankers and spend-thrift politicians. That is why people buy it. If you trust paper securities right now and distrust gold, then that is your prerogative. At this point in time, I do not. At some point in the future I hope to be able to do once again. All the articles that some of you send my way are not going to change my convictions about this so stop wasting your time and mine – please!

Thank you!
Trader Dan Norcini

Click chart to enlarge today’s action in Gold as of 12:30pm CDT with commentary from Trader Dan Norcini

December0908Gold1230pmCDT

Posted at 1:55 PM (CST) by & filed under Guild Investment.

Jim Sinclair’s Commentary

I am in agreement that a study of similar historical periods argues strongly for an equity rally. Those rallies in the past have had one year legs, but in present time we must wait to see.

I am cautious about being bearish on equities right now. Models of 1873 and 1929 show humdingers of a rally during the worst of the world’s depression unrelenting.

The most likely scenario is when Obama starts there will be 2 trillion in fiscal stimulus and that intervention will trigger the $8.5 trillion bailout into the system, starting an inflation few can imagine.

No lender will fail to loan on a government contract that probably guarantees payment.

Over time fiscal stimulus will be famous for only one accomplishment – triggering hyperinflation

Gold’s rally then can be quite long term, as in more than three years.

Gold will trade at $1650, but I am sure even that number is very low.

Reasonable people are saying $3000 to $5000.

Base metals are not staying as low as they are now in a hyperinflationary environment.

Gold as honest money will lead everything.

When the fiscal stimulus fails to establish a sustainable recovery, it will have pulled the trigger for hyperinflation. This is a currency event, not an economic event.

Regards,
Jim

Dear CIGAs,

THE ECONOMIC NEWS IS BAD, BUT MARKETS ARE RALLYING IN SPITE OF THE NEWS

This letter discusses a number of problems facing the world economy.  At the present time, the global economic background is bleak.  However, the short-term market outlook in many countries is not nearly so bleak.  We believe that many of the world’s markets are currently in rally mode.  After experiencing large declines for months, we expect the prices of shares in many countries, gold, foods, and foreign currencies to continue to rally for the next few weeks. 

Volatility and fear will continue to dominate as markets move higher.  There may be days that make us doubt our thesis, yet we are sticking to our expectations for stronger stocks, gold, foreign currencies in the near term.  We discuss this more in our summary.

THE NEWS IS FULL OF THE DETROIT AUTOMAKER BAILOUT

The Detroit spectacle includes lengthy questioning by congressmen and senators.  This is a very demoralizing process to watch; not so much because of the questions or answers, but because it is a sideshow to the main problem we are currently facing.  In our opinion, the congressional members are missing the main point.  This is not surprising because they are primarily lawyers, and few have been trained in business or economics.

THE BIG DECREASE IN JOBS

Last Friday, a large increase in job losses was announced for the month of November.  The announcement also included restatements from October and September.  Since January 1, 2008, the U.S. economy has lost an estimated 1.9 million, and by the time the year is over, it could be well over 2.2 million jobs lost.  In our opinion, these numbers may well be understated.

As our readers know, we have long been fans of Shadowstats.com, an economic consultancy run by John Williams.  Mr. Williams and his staff do an excellent job of pointing out how the government’s reported statistics and the revisions are manipulated to make the data look better.  Shadowstats even goes so far as to reconstruct the government statistics on items such as unemployment, inflation, and GDP as they used to be calculated, before the reporting became so political in the in the 1980’s.  According to Shadowstats.com, the current job figures and GDP figures are considerably misstated.  For example, according to Shadowstats, if one were to go back and adjust for discouraged workers who have ceased looking for work, the unemployment rate is currently well over 10%.  This compares to the 6.7% announced by the Bureau of Labor Statistics.

IN OUR OPINION, THE REAL NUMBERS PROVE THAT OUR CALL FOR A SERIOUS RECESSION/DEPRESSION IS ON TRACK TO BEING FULFILLED

THE SCARY SCENARIO IS THAT THE BANKING SYSTEM IS STILL NOT BEING RE-LIQUEFIED

It is true that the large bank bailouts began just three months ago, and that each week, several more countries have been lowering interest rates.  However, given all the stimulus to the banking system, we had hoped to see much more liquidity returning to the economic system. 

It is too early to cry wolf and announce that a much more severe recession/depression is in the cards, but with each passing day, it is harder to stay optimistic about the long term future of the world economy.  As of today, almost everyone agrees that 2009 will be a difficult year for the world economy, but we are speaking about 2010…and beyond.  Liquidity must return to the world banking system soon, for the world economy to begin a recovery in 2010.

THE BIG NEWS IS THAT THE BANKING SYSTEM HAS NOT RESUMED FLOWING LIQUIDITY TO THE ECONOMY

THIS IS BIG NEWS, BUT IT IS GETTING LITTLE MENTION…PROBABLY BECAUSE IT IS PERCEIVED TO BE TOO COMPLICATED FOR THE AVERAGE PERSON TO FULLY GRASP

The banking system’s "pipes" remain plugged, and all of the capital and guarantees spent and promised so far have not been enough to revive lending and the increase flow of credit which is essential for economic growth. 

The reason is that the banks still have a very severe capital shortage.  The U.S. government’s $800 billion of TARP money has not been sufficient for the banks to continue to operate and make loans.  Even those banks who have received capital injections from their respective governments continue to shrink their lending, because the capital on their balance sheets is not enough for them to stay solvent (given the amount of the bad loans the banks still hold). 

Some think that in order for the banks to begin lending and creating liquidity for the economy, they need an additional $1 trillion in capital.  In our opinion, the banking system needs another $2 trillion to keep functioning.  As usual, there is a choice.  In our opinion, the choice is $2 trillion now, or many more trillions later…after more and more companies are forced into bankruptcy, and even more massive layoffs have taken place.

THE DAILY FUNCTIONING OF ALL INDUSTRIAL, RETAIL AND FINANCIAL ORGANIZATIONS REQUIRES CAPITAL FROM THE BANKING SYSTEM

The availability of bank loans is a prerequisite for most companies to operate.  Loans for inventories, supplies, leases, plant expansion, new product development, payrolls, and many other purposes is not presently available.  Short term bank loans, which typically roll over every year (there is approximately $800 billion for corporate working capital) are at risk of not rolling over next year.  If this happens, it will cause operating companies in many industries to lay off employees, shrink their payrolls, and produce less goods, thereby causing the economy to shrink further.

THESE SAME PROBLEM EXIST IN MANY OTHER INDUSTRIALIZED COUNTRIES

WE CANNOT STRESS ENOUGH HOW IMPORTATNT IT IS THAT THE GOVERNMENT OF EVERY DEVELOPED AND DEVELOPING COUNTRY WORK TOGETHER TO PROVIDE MORE CAPITAL TO THEIR RESPECTIVE BANKING SYSTEMS.

Today, the U.S. Government through the Federal Reserve and Treasury Department are the main U.S. lenders, either directly or through guarantees.  If other lenders do not join in, then the only employer will be the governments.  Companies will not be able to operate and employ people.  Government could eventually become the only real lender and the major employer in the economy…which is frightening.

FREE TRADE IS A NECESSITY

If countries get involved in erecting trade barriers or competitively devaluing their currencies to stimulate trade, the global economic slowdown could become much worse.

SUMMARY

Technically, the world markets could continue to drift upwards in an erratic manner for a few more weeks.  For most of 2008, world market declines have been violent, and a relief rally is in order.  That being said, it is hard to maintain a long term positive view about global markets.  The problems enumerated above, and a general failure of policy makers and politicians globally to understand the crisis is frightening.

As I reflect on the situation, the current outcome is not surprising.  Politicians and bureaucratic functionaries are not educated or experienced in financial and economic crisis management.  In the current time of great stress, many of them have become altogether frozen, or have followed the path of doing too little, too late.

It is early to say, but we expect a renewed decline after the current rally finishes.  We continue to see gold as an important insurance policy against the potential for a collapse in the U.S. dollar, and/or the failure of one or more countries as financial entities.  Another national financial failure like Iceland will likely occur.  The next national failure will be of a bigger country in Eastern Europe or one of the Baltic States.  Globally, more banks will fail, and governments will eventually be forced to take the drastic action that we believe is currently warranted.

In general, base metals and commodities will remain weak for a few more months (and possibly longer) if banks are not re-liquefied.

The U.S. dollar rally has been strong, and is now beginning to show some cracks.  We believe that the best one can hope for in the U.S. dollar is sideways price action.  Longer term, we are of the opinion that the U.S. dollar will decline.

Thanks for listening.

Monty Guild and Tony Danaher
www.GuildInvestment.com