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The gold & silver futures
markets are each hurtling down a dangerous path toward possible default. The artificial
paper price has created enormous physical demand, and hampered supply
production, if not delivery. The gap between the corrupted paper price and
the legitimate physical price in actual trading markets has grown sharply,
enough to force a breakdown like in any distorted market. When December
contracts in gold & silver are demanded to be satisfied via delivery of
the metal, we could easily see the COMEX fail in delivery. A default is
highly likely.
The USFed cut the official interest
rate again by 50 basis points, now to 1.0% on the Fed Funds target, in utter
desperation. Other central banks did not join in rate cut exercises. The Euro
Central Bank is expected to cut next week, reluctantly. So is the beleaguered
Bank of England. The pressure is building on gold demand. Now with the
official US price inflation at CPI = 5% or so, the real rate of money cost is
minus 4%. The actual price inflation runs more like 10% to 12%, making the
real cost of money more like minus 9% to minus 11%. GOLD RESPONDS TO NEGATIVE
REAL RATES VERY FAVORABLY.
GALLOPING RECESSION TO FORCE MORE
INFLATION
If you think the bank crisis is
bad now, wait until the USEconomic recession achieves galloping speed
downhill. The stagflation will eclipse that seen in the late 1970 decade.
Today the economic growth in the GDP was posted for 3Q2008 at minus 0.25%,
even with a hefty 5.4% PCE (personal consumption expenditures). This is
another fairy tale told. The US consumer activity cut the GDP back by 2.25%,
while the government activity added to the GDP by 1.15% in retrograde style.
So the USDollar has rallied amidst economic decay, doing its death dance.
Bear in mind that the stated admitted price inflation for Q2 was only 1.5% in
that GDP corrupt calculation, which avoided a negative GDP for 2Q2008. They
called inflation growth, the usual corrupted modus operandi. The second
quarter was when prices skyrocketed for everything under the sun, if memory
serves properly. Clearly, the wizards in the USGovt stat-rat offices,
employing advanced techniques, moved some price inflation from Q2 into Q3, so
that a recession would not be admitted all summer long. With the USFed rate
cut to 1.0% again, they are admitting the recession.
The Shadow Govt Statistics folks
pitch in a comment to provide light upon corrupted data. “Narrower
Than Expected GDP Contraction Is Nonsense. The difference between the
reported 0.3% annualized Gross Domestic Product (GDP) and the consensus
expectation of a 0.5% contraction is no more than statistical noise, yet the
reported result most certainly was manufactured so as to allow the hypesters
on Wall Street and in Washington to spin their fairy tales of a
‘less-severe recession’ in order to help draw the gullible back
into stocks, at least for a day or two before next week’s election.
This follows earlier economic scare tactics aimed at the public to help sell
the ‘Bailout’ package… With a 95% confidence interval of
+/- 3% around this morning’s estimate of an annualized 0.25%
contraction in real (inflation adjusted), annualized quarterly third-quarter
GDP growth, the number was not even statistically indistinguishable from
growth or contraction in the 3% range. A quarterly contraction in excess
of 2% would have been more realistic… U.S. Economy is in a severe
recession. With real retail sales, housing, non-farm payrolls, new orders for
durable goods, and industrial production all showing quarterly and annual
growth patterns never seen outside of a recession still in deterioration, GDP
reporting eventually should show a string of quarterly contractions, with the
recession dating back to fourth-quarter 2006, long before the
exacerbation of the current systemic solvency crisis.”
A simple statement is required to
close the preface. The financial market crises, in numerous arenas, have come
in large part because the banking authorities have intentionally provided
rescues only for New York investment banks and other big financial firms. Up
to a month ago, the USFed had sterilized most injections into the Wall Street
centers of the banking system by denying the mainstream bank system via
liquidity drains. Drain the national system where households work and live,
and provide subsidies for the financial crime syndicate. This is a betrayal
of government to the people. Elite gain came at mainstream expense. Attention
has gained on the misuse, false promises, and other misdirection of USGovt
funds even in the bailout packages. The big banks are ordered not to lend,
but to acquire smaller banks.
Until the global interest rate cut
was announced, the USFed had not created much new money, despite the numerous
rate cuts on the US side. The policy was unconventional and deliberate, with
a two-fold purpose to aid Wall Street and to keep a lid on the gold price. Their bad policy, emphasis upon rescue
and redemption for criminal fraud, neglect of the private sector, have left
the USEconomy vulnerable to an extreme breakdown. A GRAND REFLATION WILL SOON
BE ATTEMPTED, TIMED OBVIOUSLY AFTER THE ELECTION. The effect will be much
like blowing up a dam holding back a lake, where downstream the price
inflation will be broad, deep, and powerful. That day comes soon, and if not,
then the entire US financial system will go dark. That cannot be permitted.
COMMENT ON USDOLLAR PARADOX
As a preface, much response came
from last week’s article about the “USDollar Death
Dance” from both the public and analyst community. No hint of
investment in the USEconomy is coincident with the paradoxical US$ rise. In “Plumbing
the Depths of Depravity” posted of October 29 (the intrepid expert
forensic financial analyst Rob Kirby, and erstwhile bond trader, confirmed my
view of a twisted engineered perverse USDollar rally. He echoes one of my
major points delineated, that settlement of credit derivatives, like with
the credit default swaps from failed insured asset backed bonds, has produced
a demand for USDollars in contract settlement payouts. His website
contains a treasure trove of information that reads like criminal
indictments, but without the hundreds of obscurely written pages and weird
words.
In the cited article, Kirby wrote:
“What folks need to understand is that the global OTC derivatives
market, measured in tens or hundreds of Trillions, is virtually all US Dollar
denominated. Its SYSTEMIC failure, which is now occurring, requires US
Dollar balances to clear (settle) the trades (bets). This has created the
paradoxical global demand for US Dollars, the currency of a country that is
fundamentally bankrupt. By rationing credit to hedge funds that were naturally
levered and ‘long commodities’ (institutions like JP Morgan
routinely took the other sides of their customers commodities bets, ruining
institutions like natural gas player Amaranth), and propping up the balance
sheets of those who were short commodities [such as] the Banks. The Federal
Reserve led cabal of Central Bankers have ENGINEERED the collapse in
commodities prices while creating the illusion (of a perverse USDollar
rally). The engineered collapse of the commodities complex became necessary
in the eyes of monetary elites because the rush for tangibles and
corresponding repudiation of fiat money was becoming manic, as so CLEARLY
evidenced by the emerging shortages of precious metals, gold and silver
bullion.” My rejoinder is that the crude oil price, and many
commodity prices, have come down right before the election, just like in
autumn 2006, a perception we share.
Kirby went on to conclude that “We
are CLEARLY going to HYPERINFLATE!!!!” He steadfastly contradicts
shallow assertions that deflation will dominate the scene. Anyone observing
the money supply acceleration in recent weeks can easily see this, yet
deflationists seem unable to observe the human response in desperation. We
two have frequent debates between ourselves, whether USTreasury Bond default
will occur or else a big Reflation Episode. It is possible both will occur.
These exchanges will contribute toward a key section in the upcoming November
Hat Trick Letter on the weekend of November 9. A topic raging lately between
us has been the failures to deliver USTreasurys. This extraordinary
phenomenon highlights the extreme mountain of toxic bond (in)securities
spewed worldwide by the corrupted US financial sector, but it also highlights
the questionable legitimacy of USTreasury Bonds. The traded volume of
USTBonds had been recorded a few years ago to be over $2 trillion above
official issuance in USTBonds. So maybe we are seeing a redux of counterfeit
issuance of USTBonds in order to satisfy unprecedented demand. By the way,
USTreasury management is done, and accounting is done, handled by only one
giant bank.
Could the failures to deliver
USTreasurys, as shown in the alarming graphic below, be a precursor to actual
default? We will see. Kirby maintains a period of tremendous hyper-inflation
is coming. My forecast is for a possible USTreasury default, as conditions
grow out of control, and economic disintegration catches the nation by
surprise. The collapse of General Motors could trigger a profound change in
perception concerning the effective implementation of USGovt and Wall Street
bailouts and rescues. Either way, disruptions like never seen before are on
the horizon. The settlement failures bring into question the integrity of the
USTreasurys as a legitimate market. Their counterfeit from more supply than
issuance is well documented, and rings like a loud echo to the naked stock
shorting chapter of US financial markets.
VANISHING OPEN INTEREST IN C.O.T.
What conditions would precede a
default in gold & silver COMEX futures contracts? Tough question. These
are unprecedented times. Surely, a widening between physical price and paper
price reads like bold billboard graffiti. That invites a queer arbitrage, to
buy in one location and sell in another, of course practiced only by the
privileged insider. One other characteristic of imminent default could be a
vanishing act in the open interest (OI) seen in the Commitment of Traders for
futures contracts. The gold OI has reduced sharply since late spring when it
ranged between 400 and 460 thousand, now to 319.5k on 21 October 2008. The
silver OI has reduced sharply since late spring when it ranged between 125
and 140 thousand, now to 95.8k on 21 October 2008. The severe drop in open
interest is highly unusual, not at all normal!
If these unfair paper markets,
intended as devices for price discovery, when just devices for price suppression,
are heading into default, then the movement among many players might be to
exit the stage before chaos erupts, and embarrassment is heaped upon trading
firms. Leading US bankers might be isolated. Also, and more importantly, if a
default occurs, the settlement of existing contracts comes seriously into
question. The players might wish to exit the crime scene before major doubt
distorts contract settlement. Who would want to have hundreds of $thousands
tied up in a market with yellow police ‘Crime Scene’ tape
cordoning off the zone? By the way, the shrinkage in large commercial net
short position usually means a big powerful upsurge in the gold price is
coming, as in very soon. They have little more to liquidate, and never
liquidate all, since they delivery from production facilities.
BACK TO GOLD LEASE RATES
The gold lease rates have jumped
significantly. Lease rates have more than tripled in the last month alone!
They have not subsided. The last time rates on the one-month lease were in
this neighborhood was over a decade ago in another crisis. It means that vault
owners who control large quantities of gold are much less willing to permit
other parties to borrow it, plain and simple. The COMEX, where paper gold is
traded, might not be able to acquire much needed gold from central bank
vaults and other bullion bank vaults in order to satisfy delivery
requirements. Vault owners must expect higher gold prices to come. Clearly,
the gold market is experiencing shortage. The lease market is an excellent
forward indicator on physical price movement. Silver lease rates have also
tripled, just like gold, and not subsided either. The lease game is
thoroughly perverse. One effect rarely noted is that short sellers within the
futures contracts might be squeezed due to leasing challenges. If they have a
harder time to roll over contracts, by means of higher required posted margin
or higher cost of leased gold, then they must cover. A price rally
ensues.
Steven Isenberg, chief executive
officer of M Partners in Toronto pointed out that the cost of borrowing gold
rose dramatically in March 2001, when central banks were making less bullion available
to speculators, mining companies, and jewelers. Gold promptly rallied more
than 12% in the following two months. He said, “This [the lease rate
for gold] usually precedes a sharp move in the gold price.”
Ross Norman, director of
TheBullionDesk.com, said the latest lease rate spike “is indicative
of perhaps an even tighter market still yet to come.” While gold
miners and jewelry groups are the most frequent borrowers, central banks are
the traditional lenders. Fat Prophets offers an excellent interpretation on
lease rates, given on October 12. “Today’s commentary concerns
the last carry trade left in the markets, i.e. gold. Gold peaked at $1032 in
March this year. However, since then it has fallen steadily, trading as low
as $734. While this fall has been in line with a rising USD dollar, it has
also been orchestrated. The current spike in gold lease rates indicates
that demand for physical gold is extremely high and growing quickly. We may
well be witnessing the first seeds of the gold price breaking free from the
short sellers and the end (death) of the gold carry trade, which so many
bullion banks made such large profits on in the 1990s. The lease rates
(available on TheBullionDesk.com) will be the key indicator to watch.”
The margin requirements at COMEX
have been increased. Could this move be intended to hinder gold investors?
Yep! Is the move consistent with rising gold lease rates? Yep! Will the
devious maneuver halt a gold price response? Nope! Margin collateral demands
in a general sense have risen by 500% in many hedge fund accounts. The
pressure extends to India, where withholding credit from major buyers has
inhibited gold buying. The trend is clear, as pressure by authorities has
been to reduce leverage by force. When liquidation is late, price reversal
comes swiftly.
PEPTALKS, ANECDOTES &
SHORTAGES
Two interviews have been cited in
recent past articles. They are so important, a repeat must be provided in
case readers missed them. In a rare event shedding light on the positive side
of the gold market, CNBC interviewed Jurg Kiener, CEO of Swiss Asia Capital.
He points out the stark contrast of the two markets, paper gold versus
physical gold. Kiener expects soon the US ‘gambling price’ gold
market in major US-based and London-based exchanges to eventually default
after a titanic battle that began years ago has reached fever pitch. By that
he means a return suddenly to physical price determination will come for
gold. He concluded that when such an inevitable event occurs, THE GOLD PRICE
WILL DOUBLE VERY QUICKLY, LIKE IN DAYS.
John Embry of Sprott Asset Mgmt
focuses on the extreme amount of nationalization and other bailout funding by
the USGovt, as a prelude to a potential gold futures default. He said to
watch the December COMEX futures contract. The old saying is that gold
responds to the medicine applied, but not the prescription written. Sadly,
not much of any medicine has been administered to the public or the
mainstream USEconomy yet. Almost nothing has occurred yet for applied
medicine on mortgage workouts, rewritten home loans, loan balance forgiveness
and ample new funds for new home loans that would truly assist the pain in
the mainstream. Instead, a sham of a voluntary bank program has resulted in
little more than a ‘Revolving Door’ that returns distressed
homeowners to the foreclosure center. Embry makes great points in his article
“Rescue Will Send Gold to Surreal Price Level” But notice
the title has the future tense. He implicitly agrees that the rescue for the
system outside the banking sector has not begun, that the USDollar debasement
is a process only just begun, although Pandora’s Box has been opened.
He says in the interview, “… the US authorities will not
hesitate to debase their currency in an attempt to salvage the financial
system. In the fullness of time, this will be wildly inflationary and
should propel gold and silver prices that would be viewed by many in
today’s context as surreal.”
Gerald Celente of Trends Research
Institute is a superstar. He commented on how the USGovt bailouts will result
in enormous upcoming supply of new money creation. It is all funny phony
money in my view, requiring protection from the imminent guaranteed runup in
price inflation. NEVER DOES A DEBT RELATED SOLUTION FIX A DEBT RELATED
PROBLEM. He regards the USGovt bailouts, rescues, and mergers to be a
colossal failure of policy, which will not prevent a USEconomic depression.
The absence of realistic assistance to the American people who struggle with
mortgages is what is missing in glaring manner. He points to most bailouts
giving subsidy aid to CEOs and preferred stock holders. Gold will surpass the
$1000 mark in the near term, but probably not until the liquidation
engineered by the corrupt bank authorities has subsided. His comments came
immediately after an important global interest rate cut that involved
numerous central banks, which joined the embattled US Federal Reserve.
Celente wrote: “Beyond
the $1 trillion subprime problem that has been erroneously targeted as the
prime culprit behind the credit crisis are more serious financial
catastrophes that are barely reported, mostly overlooked and cannot be
remedied. The Fed cannot print enough money to paper over the $531.2 trillion
in derivatives and credit swaps, the trillions in the overbuilt commercial
real estate market ready to collapse, the multi-trillions in leveraged
buyouts going bust, and other exotic financial instruments that have turned
toxic. Yesterday’s lowering of interest rates and the continual Fed
action to flood the markets with money will lead to an era of
hyper-inflation, the likes of which no living American has ever seen. Gold
prices shot up some $24 after being down over $20 earlier in the day. We
continue to forecast gold $2000. And once again, we urge you to take
precautionary measures in view of a worsening global market meltdown.”
Jim Willie CB
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Jim Willie CB is a statistical analyst in marketing
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