Posted at 3:48 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

Several noteworthy events occurred today which impacted gold trading in the US. First and most importantly were developments along the currency front. The British Pound was utterly mauled as news came out that the Royal Bank of Scotland had incurred the largest loss in British corporate history. If that was not bad enough, shares of Lloyds Banking Group fell by nearly 50% at one point in today’s trading as the market greeted the Bank of England’s rescue plan for the banks and the economy with a resounding THUD. The fear is that interest rates are falling to near zero and that the British economy is in horrific shape. Investors are also looking at the details of the rescue plan and are voicing concerns as to how this massive increase in debt is ever going to be repaid. Sound familiar?

News of continued downgrades in sovereign nation debt in and around the Eurozone sent the Euro into the toilet as it dropped to its lowest level since early December last year.

Now those of us who have been accustomed to watching the action of gold on a daily basis would have generally expected gold to drop alongside of the Euro especially as the Dollar went on another of its rip-roaring short squeezes amid panic buying. However, something happened related to this currency movement that caused a complete reversal of the norm. Gold in Sterling terms shot to a brand new all time high at the London PM Fix coming in at 612.307 while Gold priced in Euro terms came in at 661.383 coming in just shy of its all time high PM Fix of 663.352 made back in October of last year. Gold traders in New York looked over at that and decided that they needed to get out if they were short or get in if they were out! In other words, what looks to be a genuine flight to the safety of gold has begun in Europe. And why not? With US Treasuries paying next to nothing and several European nation government bonds being downgraded, where else can those who are fearful of what is occurring go with their life’s savings? If I were a bond holder and looked ahead at the plethora of new debt being issued, supply of such magnitude that the numbers send the mind reeling, I would seriously doubt that demand would be able to keep up with it.

What we are seeing is gold trading as a currency – something that has repeatedly been echoed at this site now for years especially in the face of repeated deflationist claims that gold would sink alongside of the rest of the commodity world. Keep this important fact in mind. Gold is a currency; it is only a commodity when there is general trust in paper money. Any fears or concerns about the stability or trustworthiness of any fiat currency will send money scurrying into gold. It is now evident that is occurring in Europe. It WILL OCCUR here in the US at some point in the not too distant future.

The second noteworthy item affecting gold was the price action in the expiring February crude oil contract. After dropping to a new yearly low, it rebounded sharply taking out the previous day’s highs as shorts began covering and bottom pickers began moving in. One day does not a trend make but I am keeping a very close eye on this market as crude oil, whether we like it or not, has become a sort of barometer for the rest of the commodity complex as a whole. Higher crude prices would only serve to bring in additional buying support into the gold market.

Technically gold blasted through two overhead resistance areas with seemingly little to no opposition. The first one at $840 was gone without gold breaking a sweat; the latter zone near $860 also was breached as buy stop momentum carried prices through it sending the shorts reeling before bullion bank selling came in and managed to suck up all the bids and drop it back below this level. The inability of gold to close strongly above the $860 level reinforces it as a significant barrier with $880 still lurking above that as the opposition to a move to the $1000 level.  Support lies now at $840 and then below that near the $820 level.

The mining shares, as indicated by the HUI and the XAU, showed a very strong disconnect from the broader US equity markets which went one way (down) while they went the other (up). Both indices have recaptured the 10 and 20 day moving averages after a perfect bounce off of the 50 day moving average last week. This is quite bullish action with the next barrier to both indices their former double tops make back in late December and early January of this year. Expect to see shorts try to hold the line there for if they fail, a trending action will be highly likely.

It is difficult for me to see where the buying came from that pushed the Dollar higher seeing that Treasuries were hit hard while equities were also taken down sharply. If anyone was busy running into the US Dollar as a safe haven play, I sure did not see it.

Bonds are weaker today after getting hit hard overnight but seem to be holding above the session low with continuing weakness in equities supportive.

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

January2009Gold1230pmCDT.jpg

Posted at 2:19 PM (CST) by & filed under General Editorial.

Dear Extended Family,

The Second Coming of Obama is a guarantee that there will be an impact of fiscal stimulation.

Expectations assist results of fiscal stimulation. The buying of cement and rebar will increase jobs and therefore impact economic statistics.

The banking system has healed the interests of the Fat Cats, but done nothing at all in terms of increasing the willingness of financial institutions to make loans.

The buying of cement and rebar will definitely impact business conditions and the statistics thereupon.

In terms of real accomplishments the predictable result of fiscal stimulation will be to transmit monetary potential inflation into real inflation.

A drop in the high level of confidence because of the main predictable result reflected by the numbers at today’s inaugural will cause a hyper-inflation that is a currency event based on the loss of confidence.

The up cycle in inflation therefore stands on a basis of loss of confidence in the new management of the new administration.

The risk of loss of confidence is heightened by the level of today’s expectations of a form of the Second Coming.

Gold is headed to $1250 on its way to $1650, after which Alf will be right. The short sellers in gold and shares thereupon should just sit tight so they can experience the loss of all time.

The problem shown in the picture below has no possibility to correct whatsoever in the either the near or long term.

Respectfully yours,
Jim

xnissan-6163 - 20090120_075451

Posted at 11:30 PM (CST) by & filed under General Editorial.

Dear Extended Family,

Please do not be confused by today’s market.

1. The new Commander and Chief to take over the onerous Presidential duties tomorrow is being welcomed by those that see President Elect Obama as a sort of "Second Coming FDR." That seems a tad overrated under present circumstances. It is not economically the best comparison.

2. The idea that the various constituent countries of the Euro have more problems than the US is media misguidance.

3. The upcoming addition of fiscal stimulus will have an effect. That effect has severe unwelcome consequences that will not be postponed. The effect will be evident before the 2nd half of 2009.

4. The planet is getting too close to a universal WEIMAR EXPERIENCE which has no historical comparison to judge by. History is about to be written.

5. Gold is the only and certain answer in this monetary abandon about to be kicked in the rear by fiscal madness.

I need a few days after the 8+ hours in the air from Joberg to Dakar and another 9 hours immediately thereafter from Dakar to JFK. That is a long time to be in one seat no matter how comfortable it is.

Respectfully yours,
Jim

Posted at 11:12 PM (CST) by & filed under Guild Investment.

WHY ALL THE EMOTION? …CHINA WILL DO WELL IN 2009.

There is a great deal of gnashing of teeth and renting of garments lately about China’s economic growth in the western press. China says that they will grow by 8% in 2009, and the more historically accurate western economists think 7%.  I am in the 7% camp, and I think positive 7% is good growth.  It compares with minus 3% for the U.S. and Europe.

Many people see political revolution in China as a result of layoffs of migrant workers who worked in export industries.  We disagree.  There will be no revolution or anything close to a revolution. In our opinion, there will be some publicized rioting, and some suffering, but in general the suffering in China will be less than that in the developed world. Although China has only a modest social safety net other than the family, the family will support most jobless people. We would be willing to bet that most of the pessimists on China have not been there in the last 5 years.  China is an amazing and impressive country, and a traveler in China notices that the whole country is impressive, not just the big cities.

We believe visiting foreign countries and companies is essential in order to make an educated analysis.  We try to visit China, India, and neighboring countries fairly frequently.

With 1.3 billion people, China still has a vibrant and strong rural agriculture program. The great majority of the workers laid off can return home to their rural villages, be with their families and work family plots, which now produce more food than they did five years ago.

59886_ChinaGDPGrowthRate-1-1

 

Even though China alone will not be strong enough to pull the world out of a serious recession/depression, they will do well compared to other parts of the world.

INDIA

We haven’t touched on India for several weeks.  Our latest view is that after a long period of decline (about 60% from the highs), and a 20% decline in the value of the rupee versus the dollar last year, India has become more attractive.  Given the chaos surrounding the Satyam fraud, the questions about the coherence of the ruling political coalition, and the upcoming election, we believe that it is best to wait and watch for an entry point later in 2009 or in 2010.     

For 2009, GDP growth will be positive, although not up to historical standards.  In our opinion, India is a long term investment alternative for global investors. Within India, we favor industries which benefit from India’s excellent intellectual capital, as well as consumer and medical related companies.  Over time, infrastructure investment must be made for India to maintain its growth pattern.

Bombay Sensitive 30 Index (last five years)
59887_bombay-1

MR. OBAMA AND FREE TRADE…

As you know, we are very concerned that free trade becomes a constant in the world, so that the world can enjoy the benefits of free and fair trade. To that end, we have included a link to an excellent, although technical, article from the Financial Times by the respected lawyer and economist Jagdish Bhagwati of Columbia University, titled Obama and Trade: an alarm sounds. 

http://www.ft.com/cms/s/0/f1ccbb92-ddef-11dd-87dc-000077b07658.html?nclick_check=1.  In summary, he is skeptical that Mr. Obama’s appointments really understand and support the trade liberalization.  We agree with him that free trade is absolutely necessary for the world to enjoy continuing growth and rising standard of living.

TECHNICAL AND FUNDAMENTAL STOCK MARKET ANALYSIS

TECHNICAL STOCK MARKET ANALYSIS

Even though we are fundamental investors, basing our decisions on our analysis of economic, social, political trends, and on fundamental analysis of economies, industries and companies, we do keep in touch with the technical view of the markets.

After many decades in the business, we have a few favorite market technicians.  Most technicians whom we respect are calling for the possibility of a major rally in U.S. and foreign markets after a retest of the November 2008 lows.

IMPORTANT FUNDAMENTAL DEVELOPMENTS IN THE BANKING SYSTEM

We take the possibility of a retest seriously, and continue to work hard to analyze companies which will benefit from such a recovery.  One major fundamental factor supporting the market rally thesis is that the ratio of free reserves to total reserves at U.S. Federal Reserve banks has risen to an all time high.  In 1932, during the Great Depression, when the same pattern of free reserves developed, the stock market began a multi-year rally, rising by over 300 % in the next 4 plus years…during the heart of the economy’s Great Depression.      

Over the short term, free reserves may be volatile as banks continue to write down their capital by writing off bad debts and toxic assets.  Regardless of short term influences, it is clear that the Fed and other central banks will provide a great deal of liquidity to the banking system, for as long as is necessary.  The effect of this liquidity pumping will be an increase in free reserves in the Federal Reserve System.

It has not been lost on the monetary authorities that free reserves, as a percentage of total reserves, must stay high if the banking system is to re-liquefy.  Our banking industry sources tell us that the banking industry is slowly beginning to resume lending operations.  If this is true, stock markets, especially in the U.S., could rise dramatically in coming months, after retesting the bottom.

BIG BANKS CANNOT LEND AS MUCH AS THEY WOULD LIKE

One of our closest friends is an expert on the mortgage finance industry in the U.S.  He reports that although the U.S. federal government is pushing banks to lend more, the government banking regulators are doing the opposite.  In many cases, regulators are pressuring banks to strengthen their balance sheets by raising more capital before increasing their lending.  Simultaneously, the politicians in Washington are yelling that the TARP money should go to homeowners who are in danger of foreclosure.

It is obvious that one of the following two options is true.
1) Many U.S. politicians DO NOT UNDERSTAND how the U.S. fractional reserve banking system works.
2) Many U.S. politicians view politics as more important than a strong banking system.

As we have stated repeatedly in past memos, the banks need at least $1 trillion more in capital than they currently control.  The Fed can provide liquidity, and they are.  They can use quantitative easing, and they are.  They can flood the system with cash and potentially destroy the value of the dollar, and they appear to be moving ahead on that front.  The alternative is that if the banks do not have enough capital, they will not be allowed to lend under the law.

As we see it, $1 trillion more capital for banks is required now, or a much bigger infusion of capital into the banking system will be required later…after the economic recession/depression has dragged on for years.

MANY SMALL U.S. BANKS ARE IN DANGER

We have it on good authority that the U.S. financial regulators have felt for over a year that up to 3,000 small banks in the U.S. could be in trouble.  A number of restructuring specialists have been hired to expedite reorganizations.  There were only 25 failed banks in 2008.  However, that number includes the two biggest bank failures ever, Washington Mutual and Indy Mac.  In addition, the government orchestrated the forced acquisition of several banks, averting some other failures.

We expect many more regional banks to fail or be acquired at unfavorable terms for the seller in the next two years.

SUMMARY…OUR INVESTMENT OPINIONS

1. We expect market volatility for at least the next few months.

2. World stock markets will remain in a trading range until a few months before the end of the current recession/depression.  Our opinion has not changed.  We continue to disagree with the consensus view which now states that the U.S. economy will recover in mid 2009.  We stick to our opinion that the global economy will begin to recover in early 2010 if we are lucky.  More likely it will be mid 2010.  Historically, world stock markets are a good buy for longer term investment four to eight months before the economy bottoms.

3. Long term investment opportunities will develop in food related investments, gold, fast growing stock markets, and foreign currencies.

4. Today, in financial circles, the talk is of deflation.  Before too long, the talk will be of inflation.  Many countries are growing their money supplies at very high levels.  This high level of money creation will, in our opinion, eventually lead to inflation.

Thanks for listening,

Monty Guild and Tony Danaher
www.GuildInvestment.com

Posted at 4:18 AM (CST) by & filed under General Editorial, Trader Dan Norcini.

Dear Friends,

Please review the following charts detailing the Treasury International Capital Flows data for the month of November 2008 along with some comments.

In the first chart shown, please note that the Treasury has two different methods for computing the net capital flows for each month. One uses only long term securities while a newer methodology measures both LONG term and SHORT term securities. The BLUE line is long term securities while the RED line is the plot of both long and short term securities. The BLACK line is the absolute value of the US trade balance which happens to be negative.

You will note that since July of last year (2008), when the credit crisis seemed to erupt, with the exception of only one month, notably September, foreign investors, both private and official, have been unloading long term US debt in favor of shorter dated securities. This data can be quite volatile so it is rash to make too many assumptions based off a few months activity but I would say that we are seeing what seems like the beginning of a serious trend. Demand by foreign investors for long term US debt is a measure of their willingness to continue financing US deficit spending. Should this data mark what becomes a definitive trend, that would leave only the Fed and the Treasury itself as the buyers of last resort for their own issuances.

You will also notice in subsequent charts, the move to begin with the last 2 month’s data has now been confirmed – China has become the largest holder of US Treasury debt in the world having easily eclipsed Japan which has quietly been continuing to slowly draw down its reserves of Treasuries. Who would have ever envisioned 10 years ago that the nation which is the model of free market capitalism would have become completely dependent on a Communist nation to finance its way of life.

Lastly, note that all major categories of US Debt were offloaded by foreign investors in November 2008. Bonds, Agency debt (Fannie and Freddie) along with US corporate issues were summarily dumped. The only US securities that showed net inflows were US equities.

Click here for today’s November 2008 TIC Data with commentary from Trader Dan Norcini

Posted at 1:28 AM (CST) by & filed under General Editorial.

Dear CIGAs,

When the Rappers have it figured out we are getting dangerously close to the unavoidable HYPER-INFLATION, a currency event, and to serious social unrest.

Do not play this if rap is offensive to you. This is not for the kids, please.

Posted at 6:19 PM (CST) by & filed under General Editorial.

Dear CIGAs,

After a long trip I am now safely at home and would like to share the following picture of myself in RSA with one of my African family. After catching up on some rest I will be back up to speed here on JSMineset.

10012009153

Posted at 6:15 PM (CST) by & filed under Guild Investment, Jim's Mailbox.

Dear Jim,

To say that this rating agency is peopled by ignoramuses is way too kind. That goes for the other rating agencies as well. They are either completely ignorant, they are suffering from a huge conflict of interest, or both.

Respectfully yours,
Monty Guild
www.GuildInvestment.com

"Moody’s Investors Service announced today that it has revised and updated certain key assumptions that it uses to rate and monitor corporate synthetic CDOs. Moody’s will immediately start reassessing all of its outstanding corporate synthetic CDO ratings across 900 transactions in the U.S., Europe and Asia using these updated assumptions. Based on initial assessment, Moody’s expects to lower the ratings of a large majority of corporate synthetic CDO tranches by three to seven notches on average. The actual magnitude of the downgrades will depend on transaction specific characteristics such as tranche subordination, vintage and portfolio composition…Moody’s is increasing its default probability assumptions for financial and non-financial corporate credits in the reference pools of synthetic CDOs by a factor of 30% across all rating categories…POSTBANK…hrx…deutsche…etc"