Posted at 9:28 PM (CST) by & filed under Jim's Mailbox.

In response to CIGA Green Hornet’s comments on the dollar and its short term rally:

Dear Green Hornet,

You clearly understand. I hope that this understanding finds home amongst those so dejected today.

The dollar cannot rise in the face of the Fed wishing to construct a less deflationary perception in markets and business. It is simply not possible to sustain.

The dollar rising in the face of the creation of so many dollars simply is not possible to sustain.

The dollar rising in the face of imploding financial and general business entities, being immensely bigger than the Euroland problems, is impossible to sustain.

The dollar rising in the face of Quantitative Easing cannot be sustained.

As you clearly recognize, gold is a currency, has always been a currency and will continue to be a currency regardless of today’s effort to the contrary.

Therein lies the future of gold which will trade on or before January 14th, 2011 at $1650.

When Comex deliveries represent 21,000 100 oz. bars taken delivery and removed from the COMEX warehouse, the price of gold will no longer be a game for the well known names out there.

The price of gold will reflect the true state of the physical market because the Comex in a practical sense will be a cash market.

The Comex as an observation also becomes a cash market at 100% margin requirement.

The effort here is in no way a covert attempt to break the playing board known as the Comex. The actions suggested and practiced here will with certainty level the playing field which is now totally leaning towards the professionals who are picking your pockets regularly and without fail on every single move.

I should know as both my wife and I were members of the Comex when it was across the street from my offices at 90 Broad Street and famous only for trading copper. Now there is a blast from the past.

All the best,
Jim

Dear Jim,

It seems India is ready for war with Pakistan!

Best,
Ciga Big Tatanka

Mumbai attacks: India raises security footing to ‘war level’
India will increase security in the country and on its borders to a "war level" in the wake of the deadly attacks in Mumbai that have been blamed on militants linked to Pakistan, a government minister said.
Last Updated: 4:27AM GMT 01 Dec 2008

The only one of the gunmen captured alive is believed to be from Pakistan and India claims to have proof of a Pakistani link to the Mumbai attacks.

In response to a string of public accusations from Delhi, officials in Islamabad said troops could be moved to the Indian border if relations continue to deteriorate.

"Our intelligence will be increased to a war level, we are asking the state governments to increase security to a war level," Sriprakash Jaiswal, India’s minister for state for home affairs, told Reuters.

"They can say what they want, but we have no doubt that the terrorists had come from Pakistan," Mr Jaiswal said.

More…

Dear Big Tatanka,

You don’t think that India plans to do war with say the Ukraine? Pakistan is only coming into focus now. The Taliban is supported by the Pakistan Military and Intelligence. The so called Pakistan government is therefore captive, ineffectual and to a degree without blame.

You haven’t seen anything yet.

I tell you here and now that Pakistan/Taliban have the potential and substance to vault the world into a conflict so significant that it may well not have a precedent.

At the risk of getting a great deal of hate mail, I know this, I do not think this. What is coming is coming within three years.

Yes, things are that critical.

Here is another important fact sort of hidden in this answer to you. I have contacts with some of the most successful environmentalists and political scientists. Would you believe the safest place on the planet for living after January 14th, 2011 might well be East Africa? How is that a flip flop from accepted standard groups of so-called wisdom?

I wonder what my revered friend and Dean of Gold, Harry would say about that…

Respectfully yours,
Jim

Posted at 9:13 PM (CST) by & filed under Guild Investment.

Dear CIGAs,

The Sunday, November 30th Los Angeles Times’ front page headline boldly reads "BAILOUT: PAY NOW, WORRY LATER"

Those five words say it all.  As we have expected for years, the crisis has developed.  As we have assured readers for years, no major bank will be allowed to fail.  Instead, after $8.5 Trillion in commitments by the U.S. and other governments, we now find ourselves about one third of the way through the crisis.  We anticipate that the final bill worldwide will be between $20 and $40 trillion.  Wow!

THE CURRENT BIG MISTAKE…assuming that Deflation lies ahead

There is a mistake currently being made by many short term oriented economists and market strategists.  In the current case, the mistake is extrapolating the short term decline in the rate of inflation (due in part to lower oil prices) into the future, as if all prices will continue to fall.  Many analysts have concluded that the problem ahead of us is deflation.

For over four decades, we have analyzed economic models, and in that period we have made many economic models of our own projecting economic events.  One thing has become very obvious in our analysis.  The most common mistake in economic analysis and modeling future events, relates to the human tendency to extrapolate the current trend into the future.  I will go further, and say this does not only apply to economic modeling, but to all human predictive activity.  There exists a human tendency to extrapolate the current trends into the future.

In our opinion, this is a patently incorrect analysis.  In its most rudimentary form, such analysis is simply assuming that the recent past will repeat itself…and then grabbing the select data points, to support this point of view.   We do not mean to impugn the work of a few very competent economists and analysts, who hold this view due to economic trends that they foresee.  In our opinion, the majority of those subscribing to this view are simply extrapolating the recent past into the future.

OUR VIEW…One should ignore the recent past.

1. Inflation is the big problem looming in the future.  Deflation will not be the problem.

2. The recent past has witnessed a brutal decline in global stocks.  Our outlook for the coming days (and possibly weeks) is a continuation of the rally off of the October/November lows in world stock markets.  It would not surprise us to see a stock market rally of one third or more of the recent decline.  While a big rally continues to be a possibility, market volatility is at all time highs…so expect a wild ride.

3. Gold and commodities have been under pressure.  In our opinion, gold is a good long term purchase on any sizeable decline.  We believe that most other metals commodities will start to rally by mid 2009.  The rally in all of these areas will be large.

4. Oil prices are under pressure, and will likely fall below $50 per barrel, but oil will not fall in price for a prolonged period of time.  In our opinion, oil prices will bottom, probably in the $40’s per barrel and begin to rise.

5. In our opinion, the big long term risk is being short commodities.  The decline in some commodities prices may last longer, but we are much closer to the end of that decline, than to the beginning.

6. The U.S. dollar has continued to hold its recent rally, even after the announcement of astounding amounts of capital that will be invested in, guaranteed, or loaned to financial enterprises.  Thus far, the amounts total about $8.5 trillion globally.  We anticipate that the bailout is only about one third completed.  We believe that before it is over, the U.S. will be forced to increase their share of the pledges to about $25 trillion.  Longer term, this spells disaster for the value of the U.S. dollar.

7. The world economy continues to slip deeper into negative growth, and the economic news will continue to get worse for months. As our readers know, we have believed that the U.S. recession/depression began in late 2007 or early 2008. Today, our views were corroborated by the prestigious National Bureau of Economic Research.  They state that the recession began in December 2007.  Their data is completely contrary to the erroneous data which was presented by the U.S. Government before the presidential election.

8. We continue to hold the view that the economies of the U.S. and of the world, will be under pressure throughout 2009, and into 2010.

WHAT TO DO?

Most stock markets are base-building and searching for a bottom.  Some markets have begun a rally.  Enjoy the stock market rallies worldwide, but beware of volatility and keep an eye on the exit. 

Remember that commodities and inflation are not dead; they are only feigning death, much like a marsupial known in North America as an opossum.  As soon as you turn your back, the opossum jumps up and runs away.  In our opinion, inflation itself may be playing dead, imitating the opossum.

Thanks for listening.

Monty Guild and Tony Danaher
www.GuildInvestment.com

Posted at 2:53 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

Comex gold was taken sharply lower beginning at 4:00 AM CST and then at the usual shellacking time of 7:00 AM, CST in New York. The reason given for the sell off was “risk aversion” as the US equities were sharply lower which once again saw further foreign currency selling and repatriation into the Dollar. There was the usual chatter of “long liquidation” but that has been ongoing for nearly 4 months now as open interest has continued to plummet since July and so is not particularly enlightening. One look at the Japanese Yen and that is all we need to know about why gold is down –

Not to fear friends – this same kind of mindless selling was being seen across the spectrum of the commodity futures markets this morning. Every single commodity market that I track was showing red in its line on my quote screens this morning, regardless of its current fundamentals. That is the tipoff that the selling is indiscriminate and is originating mainly from the index funds and from some of the hedgies. Give them a dose of stock market friendly news and the same dopes will be all buying everything in sight once again. Unless you are a short term trader, and by that I mean a trader whose long term horizon is a 60 minute bar chart, all you can do is to simply laugh at the foolishness that passes for “sophisticated trading strategies” these days. If you think gold is acting irrationally, you should try trading cattle – Yes indeed – Microsoft stock and Amarillo, Texas have lots in common these days.

Having watched these markets nearly tic by tic for as many years as I have now been doing, I have to laugh at those who keep telling me about the “efficient price discovery mechanism” that our glorious financial markets are. Ask any bona fide commercial end user or producer who has to employ the futures markets to hedge their risk whether the futures markets are the least bit “efficient”. If you are not careful, you are liable to get whacked across the knees with a 2 by 4. As far as many of us are concerned, the futures markets have been completely ruined by the index funds. I for one wish they would all simply go away as that would make a wonderful Christmas present. Come to think of it, a few more hedge fund failures would also suit me just fine. Think about what these guys do – for “risk aversion” they run into a paper currency known as the Yen and run out of “risky” gold during a time of financial chaos and uncertainty. The guys who write economic textbooks in the future years from now will have to go back and proof read their texts to make sure that they actually got this right as it will be so bewildering to them that they will suspect that the printer typeset the words incorrectly.

Meanwhile, yields on some Treasuries are now at 50 year lows! Before long you will have to pay the government to buy their debt at this rate! And to think we have people who are throwing away gold in order to stash their life’s savings into US debt paying these kinds of yields. My suggestion is to buy brass, gunpowder and reloading equipment instead – you get to own something tangible and at the same time can keep the idiot who stuck all his money into worthless US debt from trying to steal your tangibles that are actually worth something.

I mentioned in last week’s comments that many traders wrap up their trading year around the Thanksgiving holiday and take off the rest of the year. The result is that liquidity begins to dry up considerably with the spread between bids and offers widening out and smaller orders moving the market much further than such an order would move the market under more normal trading conditions. We are already seeing the effect of this combining with the plummet in open interest (it dropped yet again to 271,000) . I see no reason whatsoever for this to change anytime soon. It will work the same way when the market moves higher. The perverse effect will be that so many traders will be getting whipsawed that more and more of them will have had enough of the madness and they too will move to the sidelines further compounding the already out-of-control volatility.

It does seem to me however, that the given the rather minor extent of the Dollar’s rally this morning along with the corresponding weakness in the Euro-Yen cross, the sell off in gold is way overdone. I mention that only to emphasis the effect of the falling liquidity and how it is acting to exaggerate any moves either up or down. Those who like to play games with market prices LOVE conditions such as this as it amplifies their ability to push the market in the desired direction, namely – DOWN. All you need to do is place a few strategically large enough sell orders to get the ball rolling and then step back and let the lemmings do the rest of your work for you as you pick their pockets. Even though I personally despise what the bullion banks do with the Comex, in some sense the longs who refuse to change tactics deserve what they get. If they will not adapt to what their enemy is doing, they should not expect to obtain a different outcome. Take the metal and end the charade. Play the paper game and lose. It is that simple.

Those of you wishing to secure some more physical gold from the Comex warehouses so that you may deprive the shorts of their only line of defense, just received a discount of nearly $5,000 on your purchase price for 100 ounces complements of that same crowd. Each time one of these bear raids occurs and the weak longs rush out of the exits, those who want the real metal can easily step in and lock in a better purchase price for the physical. The more metal that flows out of the warehouses the more the shorts are being set up for a religious experience. The key is not to let up the pressure from the physical side of things. It bears repeating – the paper shorts have NO DEFENSE against determined longs who are taking possession of the actual metal at an increasing rate. Have you had enough of this phony paper market yet? Are you tired of the cart leading the horse around? Then take the metal away from the warehouses and the Comex will cease being the corrupt den of thieves that it is. Do not forget how the Hunt brothers handled the silver shorts in the late 70’s before the feds stepped in to bail out their pals who were short the metal. The problem the Hunts had was that there were just two of them – an easy target – but in the case of thousands and thousands of investors who take physical delivery of the gold out of the Comex warehouses – what is the claim going to be from the feds? That the Comex market should not be a place where buyers can go and obtain gold? If not, then shut the damn thing down. If so, then buzz off.

Today we had another 2,566 deliveries that were taken, or stopped, against the December gold contract. That brings the monthly total to 11,166 ounces in just two days worth of deliveries. The entire month of October had only 11,554 to give you an idea how heavy the buying of the actual metal has been so far. Once again the stopper of size has been Bank of Nova Scotia. We are off to a very good start but cannot relax.

Meanwhile, back over in the HUI and XAU worlds, the indices were taken back down below the 50 day moving average after having successfully managed two consecutive closes above that important technical level. Generally, such a performance would be a confirmation that the lows are in especially with the shorter dated 10 and 20 day moving averages turning higher and threatening an upside crossover of the 40 day. What we will want to watch then will be at what level the dip buyers will perhaps make their presence felt. It looks to me from the HUI chart that the region near the 208 – 210 level should provide us some buying support. Below that is support near the 198 level although I would prefer to see the former level hold to keep the bearish chatter to a minimum. The shares had been managing to begin separating themselves somewhat from the broader US equity markets until today tripped them up so let’s see if they can regain their footing sooner rather than later.

Click chart to enlarge today’s 12 hour action in gold in PDF format as of 12:30 pm CDT with commentary from Trader Dan Norcini.

December0108Gold1230pmCDT

Posted at 1:16 PM (CST) by & filed under General Editorial.

Dear CIGAs,

In all probability, today’s action in Gold confirms that the Fed’s last real meaningful weapon to fight deflation is coming into play very soon.

This effort is to disqualify gold as a currency. I question the intelligence of this from the deflationary/inflationary perspective that is so important to the Fed right now.

As I have told you multiple times, there is no such thing as the Exchange Stabilization Fund in the sense of employees with real names, faces and addresses.

The Exchange Stabilization Fund is nothing more than an account at a major international investment firm known well to you and represented on the floor of the COMEX by name. It is prominent in the COT figures.

The Chairman of the Federal Reserve, the President of the United States or their designee, runs the Exchange Stabilization Fund.

This is why the commercial dealers get the inside information on the gold price and currencies short to medium term, having eyes to see, ears to hear and a back office that must know.

This is why the paper exchange can do what they have done today as long as the COMEX warehouse remains full to back them up.

Today the public has the standard definition of deflation on their mind only, being taken advantage of by the Exchange Stabilization Fund to fain a story that gold is not a currency. The paper gold COMEX fellows who are the floor brokers for the Exchange Stabilization Fund and having this information are extending the drop to the best of their ability. They do trade even on the day, you know.

Gold is a currency. It has been a currency since the beginning of time. It will always be a currency.

The role of gold as the primary currency will be in place no matter what the efforts are made to cloud the issue.

Regards,
Jim

Posted at 11:35 AM (CST) by & filed under General Editorial.

Dear Friends,

The minus $42 in Gold so far this morning is a gift from the Comex and will be proven in time. Aren’t you tired of being had on a constant basis? If so, then do something rather than simply complain. Click here for information on taking delivery from the Comex.

I disagree that the Fed has sterilized, in a practical sense versus an academic sense, much of its recent explosion in monetary policy.

The buyer of the T-bills has been primarily China while 90% the liquidity has been injected into US entities.

Be that as it may, failure to stimulate business is the theme of markets this morning.

There is little left for the Fed to do but what is said below.

The Master of Depression, Mr. Bernanke, knows this well and will embrace the strategy whole heartedly quite soon.

This will probably start between December 15 and the New Year while world markets tend to be secondary to the season.

Remember the FACT that gold is a CURRENCY that move inverse to the US dollar.

Our friends at the Comex magnified today’s gold price action before the US market was fully there.

This article is highly technical except for the clearly understandable statement, which is the headline, and quote below that:

If all else fails, devalue the dollar

“Bernanke then wonders why – if the policy options for fighting deflation are so varied – did Japan fail, through its quantitative easing programme? Tellingly, he concludes that the problem there was as much political as economic.

The question then, is whether the US quantitative easing program will succeed.

In the event it does not, one final deflation-fighting measure to consider, from Ben:

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 Fed is mothballing its $559bn supplementary financing program. Or, to put it even more obliquely:

Washington – The balance in the Treasury’s Supplementary Financing Account will decrease in the coming weeks as outstanding supplementary financing program bills mature. This action is being taken to preserve flexibility in the conduct of debt management policy in meeting the government’s financing needs.

The SFP is the principle means by which the Federal Reserve has been offsetting – since September – its massively expanded liquidity operations.”

More…

Posted at 10:28 PM (CST) by & filed under General Editorial.

Dear Friends,

It is not a coincidence that the appreciation in the dollar and fall in the euro both began to lose their respective momentum when it became clear that Quantitative Easing was now the primary strategy of the Federal Reserve. This method does not replace other methods, but is instead an addition to the multiple other approaches already in place.

In the same timeframe it appears the last of the weak longs exited the energy group.

I believe that the advent of Quantitative Easing is the beginning of Gold’s move to $1200 and $1650.

I believe the dollar rally is done at Harry Schultz’s PO of .88-.89 on the USDX.

The low in the euro has occurred.

All of this is a product of Quantitative Easing without sterilization.

When Bernanke referred to the Helicopter Drop of electronically created money without limits, he was referring to the following now famous speech:

Deflation: Making Sure "It" Doesn’t Happen Here
Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002

Since World War II, inflation–the apparently inexorable rise in the prices of goods and services–has been the bane of central bankers. Economists of various stripes have argued that inflation is the inevitable result of (pick your favorite) the abandonment of metallic monetary standards, a lack of fiscal discipline, shocks to the price of oil and other commodities, struggles over the distribution of income, excessive money creation, self-confirming inflation expectations, an "inflation bias" in the policies of central banks, and still others. Despite widespread "inflation pessimism," however, during the 1980s and 1990s most industrial-country central banks were able to cage, if not entirely tame, the inflation dragon. Although a number of factors converged to make this happy outcome possible, an essential element was the heightened understanding by central bankers and, equally as important, by political leaders and the public at large of the very high costs of allowing the economy to stray too far from price stability.

With inflation rates now quite low in the United States, however, some have expressed concern that we may soon face a new problem–the danger of deflation, or falling prices. That this concern is not purely hypothetical is brought home to us whenever we read newspaper reports about Japan, where what seems to be a relatively moderate deflation–a decline in consumer prices of about 1 percent per year–has been associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems in the banking and corporate sectors. While it is difficult to sort out cause from effect, the consensus view is that deflation has been an important negative factor in the Japanese slump.

So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself. Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency. A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. Also helpful is that inflation has recently been not only low but quite stable, with one result being that inflation expectations seem well anchored. For example, according to the University of Michigan survey that underlies the index of consumer sentiment, the median expected rate of inflation during the next five to ten years among those interviewed was 2.9 percent in October 2002, as compared with 2.7 percent a year earlier and 3.0 percent two years earlier–a stable record indeed.

More…

The following articles should also be reviewed.

Sincerely yours,
Jim

M3, where art thou?

With quantitative easing under way, money supply is going to become an increasingly important gauge.

Morgan Stanley notes the measure will be a key indicator of when ‘QE’ actually starts to kick in. Before adopting QE, all excess reserves created by the Fed were being hoarded by banks. Rather than increasing, the so-called money multiplier (the link between the Fed’s balance sheet and the money supply) had actually plummeted. The only other time this has happened is during the Great Depression, say Morgan Stanley. But there is reason to be optimistic. They write:

“…there now appear to be some tentative signs of a turnaround. In the latest weekly data reported by the Fed, M1 jumped a whopping US$44 billion. And this follows on the heels of a US$33 billion jump in the prior week. To be sure, the monetary aggregates can be quite volatile, and special factors such as the recent hike in the deposit insurance cap can lead to short-term distortions, but going forward we will be watching the growth in the money supply in order to gauge the effectiveness of QE.”

More…

The pictorial Quantitative Easing

3200

In words: The Fed’s liquidity programmes, such as the TAF, have combined to inject about $1,100bn into the financial system (Figure 10) — and simultaneously jacked up the Fed’s assets. Normally the Fed offsets an increase in its assets by selling new treasuries, which decreases the amount of currency in circulation and conversely increases its liabilities. This is called sterilisation and is one way the Fed can increase assets without expanding the money supply.

The Fed’s primary method of draining the excess liquidity (The SFP programme) has only gotten rid of about $500bn of that $800bn increase. The Fed is not fully sterilising its massive increase in assets — in effect it is increasing the money supply.

This is not necessarily a bad thing. For a start, inflation helps you pay off debts — which are fixed, and of which there are a lot in the US — by essentially devaluing your debt (and conversely, in a perverse sort of way, making the savings of those who had the foresight tendency to err on the side of prudence, worth less).

The inflationary effect is, however, mitigated by one thing — the breakdown of the money multiplier as bank lending has seized up. Thus, money supply has increased, in this case measured by M1, but it’s increased less than the rise in the base money supply would suggest.

A final word on the matter, from BoA’s Jeffrey Rosenberg, regarding yesterday’s announcement that the Fed would start buying mortgage-backed stuff (MBS) from the GSEs Fannie and Freddie (emphasis our own):

Today’s Fed announcement on GSE purchases launches explicit QE that kills two birds with one stone. QE offsets the current deflationary impact of financial system distress and directing these purchases towards GSE debt and MBS may help reduce mortgage rates, a key goal to stabilizing the housing market. While QE may offset current deflationary risks, longer term these measures must be temporary to avoid creating their own problems of inflation and dollar devaluation, a risk highlighted by today’s USD decline and increase in gold…

More…

Posted at 2:15 PM (CST) by & filed under In The News.

Dear CIGAs,

$8.5 trillion is unthinkable in terms of paying back the depreciated value of financial and non financial business entity portfolios. Assume someone came to your door and asked you how your investments were going. When you explain to that person that a bad man in Toronto organized a group of really nasty people named hedge funds to naked short your shares and as a result you have lost 90% of your retirement fund, that person hands you a check to cover your loss.

Would you then characterize the money from that check as neutralized funds only filling a black hole in your balance sheet having no real economic impact on you?

That opinion, held by many, is so academic. The idea that $8.5 means nothing because it fills some black hole of losses is "form" over "substance" and simply too academic to believe. This is $8.5 trillion!

Now with that thought in mind contemplate $8.5 trillion dollars (for starters) before President Elect Obama’s fiscal stimulation for the creation of 2.5 million jobs, then a condition called, "Out of Control."