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WOW! What an interesting
couple weeks. A lousy August Jobs Report, even though it exaggerated job
growth the upside! The Birth-Death Modlel actually
added 120 thousand mythical jobs, including construction jobs and financial
sector jobs, both clearly in retreat, a blatant deception. The US Federal
Reserve finally was given the smoking gun they needed on a platter to cut
interest rates. Martin Feldstein gave the USFed
considerable political cover, urging cuts, claiming they were already 100
basis points too high. So gold is breaking out, crude oil is breaking out,
the euro is breaking out, the Canadian looney dollar is breaking out, the HUI stock index of
miners is breaking out, and the USDollar is
breaking down. HATS OFF TO THE CANADIAN DOLLAR, WHICH HIT PARITY, A
LONGSTANDING FORECAST OF MINE!!! MAY CANADIAN STOCKS BENEFIT FROM US
INVESTORS SEEKING REFUGE!!! The USFed showed
wisdom, if not veiled desperation in a rate cut of 50 basis points not only
for the Fed Funds rate target, but also for the discount rate. The
floodgates are open for monetary stimulus, monetary inflation, and higher
commodity prices. Central bankers have given inflation full endorsement and
approval, sufficient for a gold breakout to extend to wild levels, like $1000
before mid-2008. Nothing can stop it, because central bankers are held
hostage to the crippled US
financial system. They have become fast conversions to monetary doves. By the
way, the USFed denies they have begun an entirely
new easing cycle. This is of course nonsense, as usual. With the disconnect
between S&P stocks and mining stocks, any shock wave to mainstream stocks
might be beneficial to the gold community.
The key commodities remain
gold as a financial meter and crude oil as a commercial meter. My thesis here
is a parallel concept, of vital importance to gold (silver too) and its
investment arenas. The central banks have a gun at their heads, which
dictates that they continue to flood money into the system without rising
interest rates further. The extreme banking, bond, and growing economic
distress in the United States
prevents further rate hikes widely broadcasted by
the Europeans, British, and Japanese. They, together with the US,
form the core of Western world banking. Rising monetary inflation as directed
intended policy, coupled with lower rates in the United States, and
stalled rates in Europe and Japan,
constitute a near perfect whirlwind for gold. The implications
to the USDollar are dire. The fact that a USDX
index falling below 79 has not generated much alarm tells us that it must
descend closer to 70 than 75 before the alarms are sounded. What alarms are
those? Clearly here, the threat is systemic cost inflation in the USEconomy NOT matched by rising wage income. The import
of price inflation through the FOREX back door from a weaker USDollar exchange rate will soon become a big topic. Next
on the table is bank runs, first in Countrywide, now
in England’s
Northern Rock, and much more to come!!!
GOLD ON NOTICE TO LAUNCH
Gold, even as it breaks out
above the 730 old highs, continues to be misunderstood. Sure, it catches the
attention of network anchors, but their explanations and those from
interviewed guests fall short of adequately assessment. At the same time,
denials persist on the huge damage to be doled out by the USDollar
decline. They have noticed the breakout above 700 and cited gold’s favorable technical chart. They have identified gold as an commodity play in the same vein as crude oil and
copper, which have all risen in the last couple years. They have mentioned
that gold is approaching its beneficial season, as the annual holiday season
invites jewelry shopping in the Western world. Nowhere
is the monetary reason cited in connection with gold breakout above 700. Stories
do appear that the USEconomy should not tumble
terribly, since the central banks have reacted responsibly to the banking and
bond problems plaguing the system. They report a 20% global money supply
growth rate as the proper remedy, but fail to recognize that is precisely why
gold is rising. Gold reacts to monetary debasement.
My targets for gold are becoming more vague. They
depend upon continued USFed rate cut action, any
surprises in hedge fund blowups, massive writedown
losses for major banks on mortgage bond holdings, debt ratings agency
downgrades, any credit derivative backfire, sudden hit of the brick wall by
the USEconomy, continued decline in housing prices,
continued rise in home foreclosures, foreign central bank decisions, and
breakout of military war on the Iran front. The onset of a
USFed rate easing cycle presents a 1000 gold price
target in the next 18 months, regardless of these numerous ongoing
ingredients in a giant cauldron. Clearly, gold is heading toward $800 very soon, and probably to $1000 within one year.
We finally have a breakout
on the HUI stock index of unhedged precious metals
mining stocks. Gold responds to the monetary medicine, and mining stocks
respond to the filtering through the system of that medicine. On a weekly
open & close basis, we have an HUI index breakout. My target is 440 in the near term and 470 in the intermediate
term. The filter down to Canadian junior stocks will take a few weeks or
couple months, as investment institutions take action, investors return with
an all clear signal, and many deal with basic fear to wade back into waters
which have not been friendly this summer.
The globally furnished fuel for considerable follow-through to the
gold advance in breakout will be USDollar doubts,
reserves defections by foreign institutions, gradual economic decline in the
US, and response to the housing asset destruction. Alternatives to
traditional reserves investment, led by the USTreasury
Bond instrument, are actively being pursued. This is the foundation to
the next Mania Phase for gold. When it gathers speed and force, it will
become breathtaking, attracting the enlightened individuals, then the fund
managers, and finally the public. On some day in the next 18 months to two
years, gold will rise by nearly $100, yes, on a single day!!! The Plunge Protection
Team is slowly losing control of the situation, as new chambers show strain,
like commercial interbank paper and money markets. The
foreign perspective will increasingly be a witness of desperation to prevent
a USEconomic recession. That will be highly
destructive to the USDollar as well, motivating a
flight. My forecast made a few times one year ago, was that the USEconomy will be the weakest, perhaps in recession mode,
in stark contrast to the global economy powered by Asian expansion. We are
here. The implications for a weaker USDollar are
huge, profound, and ongoing.
In this international banking climate, the prodigious savers in Asia must react. They have been burned by US$-based
toxic bond import. China
is the target of myopic trade sanctions planned, or bluffed. The Asians, with
their huge trade surpluses, will direct increasing amounts of funds toward
into gold, crude oil stockpiles, metal ore stockpiles, properties which
produce the same, and entire companies which own
such properties. The new trend of government sovereign funds is an important
vehicle to manifest those investments. They are looking away from tradition
knee-jerk USTBond investments. Look for China to
increasingly purchase gold, if not for their own
best benefit, but also to send a message to American designed to rattle their
financial cages. At the same time, the Asians will soon begin funding their
own credit market for regional development. Continued reliance upon the USTreasury Bond as the superstructure for regional credit
extension outlays seems now highly impractical. GOLD STANDS READY TO ANSWER
THE INVESTMENT CALL BY ASIANS AS MORE STABLE AND PROFITABLE ASSETS ARE SOUGHT.
Gold bullion demand is set
to vastly increase. The Chinese hold $1330 billion in FOREX reserves, and an
incredible 18.3% of all USTBonds holdings. Early in
2007, China
made a deal with the USGovt devils. Beijing leaders recycled trade surpluses into USTBonds in return for a Bush veto against legislation
moving through the US Congress directed at trade sanctions against China. The
Congress wants a much higher Chinese yuan currency.
In the last three months, China
has been a net seller of $14.7 billion in USTBonds.
They have changed tactics, openly but cleverly threatening to sell vast
amounts of USTreasurys in response to trade
sanctions imposed by the US
Congress. Pundits called it the ‘Nuclear Option’ ominously
but accurately. Relations are strained. They took a blow below the belt with
two major Chinese banks reported serious losses from more acidic US$-based subprime bonds. Worse still, foreign central banks have
been net sellers of USTreasurys in recent weeks. Details
are provided in the September Hat Trick Letter report.
BILLBOARD
MESSAGE – GOLD – DOLLAR
*** A grand decouple is coming, as the world has begun to separate
from the United States.
They realize that their own rising currencies can and must be managed within a environment of good economic growth. This stands in
grotesque contrast, and a wonderfully attractive alternative, to unchecked
credit growth, unbridled financial leverage toxic bond instruments,
fraudulent ratings on debt securities, collusion with Wall Street broker
dealers, seizures within bank systems, USDollar
depreciation, broadening financial interventions, and other perverse policies
and practices used to export risk and toxins and mispriced
assets. Money will soon flow into the gold sector at an accelerated pace,
on a global basis. The Fed will have to continue cutting interest rates,
expand its balance sheet in monetized assets (that nobody else wants), and
start to print money at a faster rate than the 13% in recent months. A two
week growth, when annualized, pressed toward 50% in money supply growth was
registered in September!!! Other governments, now reluctant to be accommodative,
will eventually be in a race to outdo each other in creating money. Political
participation is next, with deficit spending measures and debt relief
proposals, to climax in big huge broad expansive unprecedented rescue
packages to save BOTH housing prices and mortgage bonds. House values must be
halted in their decline, while mortgages bonds must find a strong buyer of
last resort. ***
FOREIGN CENTRAL BANKS FROZEN SOLID
European and Japanese central
bankers stand on similar conflicted positions. On the first week of
September, the Euro Central Bank held steady at 4.0%, did not hike interest
rates, but talked in stern tones about their vigilance against price
inflation. The Bank of England also held pat on rates at 5.75%, as did the
Bank of Canada and Australia.
Citation of ‘financial market turbulence’ sounds simple, but
banking distress and reluctance to see their native currencies appreciate is
another motive, given the huge problems facing the United States. We see a
cooperative move to offer assistance to the USFed,
cornered and facing urgent need to cut rates.
Debate over monetary
matters in Brussels and London ended suddenly when the USFed cut the Discount Window rate. The banking world
took notice, as a gigantic distress flag emerged. None of the major and
secondary nations can forestall their vast money supply growth. The
reversal in USFed monetary policy will have broad
global implications on not only continued money supply growth, but also
speculative fervor in alternatives like gold. The
bailout of Northern Rock by the Bank of England highlights the ongoing
intractable situation, a story of insolvency free of US subprime roots, a home grown disaster on English soil. Bank
of England head Mervyn King declared that bad
practices in the banks should not be rewarded, but reversed his position in
desperate fashion. The banking cancer has rendered central bankers as
monetary doves suddenly, a fact not lost by gold advocates!!! The entire
Western world banking system, especially the US
and England,
is a house of cards, built in the cloud of a housing bubble! The rally in
gold and related mining stock investments will enter the next phase, powered
by global inflation, easier terms for money, and defensive desperation by
central banks to ward off recession and massive asset deflation. Whether the USDollar will be harmed and sent lower will be of
secondary importance, in the larger sphere. The key is unbridled Weimar-like
monetary inflation in the US,
Europe, and Japan,
in coordinated fashion. The stimulus to prevent economic reversals is always
the higher priority.
EUROPE: The USFed
requires foreign central banks to halt their rate hikes, a process evidently
begun, but not without risk. If the USFed cuts
rates while Europe continues to hike rates,
the USDollar will enter a profound decline. The
Euro Central Bank is embroiled in a battle with French President Sarkozy. The ECB wants more rate hikes to deal with price
inflation. Sarkozy wants politicians to have a role
in such decisions, to halt them. The European Union Monetary Affairs
Commissioner Joaquin Almunia on Sept 3rd made an
important public statement. “The current cycle of Eurozone interest rate tightening is nearing its end.
The main part of the interest rate rise is already done. I do not think its is going to rise much more. In the very short term,
rate cuts will not be announced, but for sure, in the medium term, interest
rates are going to fall because the Spanish, European, and world economies
are fundamentally solid.” The consensus is that the ECB will
hike once more to 4.25% in the autumn. Pressure is felt by ECB officials
to continue hikes, since their euro money supply is
growing at a 11.7% rate, year over year in July. One
month ago, Jean Claude Trichet chose words to
indicate an upcoming rate hike is on the table, now stalled. On the other
side is pressure to cut rates, obviously from the French, but also from the
European Trade Union Confederation. Stress reverberates throughout German
banks, where US$-based subprime loans have roiled
the banking system. Gold is seen as a vote in response to discontinued ECB
rate hikes. Regardless, the euro currency will
rise further, from the start of a USFed easing cycle, not joined by Europe.
Gold psychology is rising in Europe. It
finds a strong bid as a vote that Trichet is
bluffing. After their next and possibly final rate hike, the ECB will
implicitly give the green light signal for buying gold.
BRITISH: The British
pound sterling money supply is growing at an annual rate of 12.8%, year over
year in August. It fuels their housing bubble. Given the decline in North Sea
oil production, the English economy is more reliant upon phony
monetary inflation for growth, a reflection of the US situation where dependence
upon home value appreciation is crucial. With an official rate of 5.75%,
fully 50 basis points above the USFed official
rate, England
encourages bond speculation while it inhibits borrowing through higher cost. At
that last hike in July, they cited limited spare capacity, elevated price
pressures, and an upside balance of risk to price inflation. England is
heading for a housing bust and economic fallout. New UK prime
minister Gordon Brown explained the heretical position justifying political
input in July, when he said “Rigid monetary rules that assume a
fixed relationship between money and inflation do not produce reliable
targets or policy.” The pound sterling is basically tracking the euro currency lately. Like their ECB counter-parts, the
BOE cannot hike rates when the USFed cuts, since
doing so would lift the pound sterling significantly and harmfully.
JAPAN: The Japanese,
on the other hand, have been cooperative for over a year, have held rates
steady since July 2006, and are grumbling about their urgent need to increase
the official rate from a lunatic 0.5% now. Bank of Japan board member Atsushi
Mizuno points to the loan crisis as justification for higher rates in Japan. He
cites excesses that enabled unchecked borrowing helped to trigger the US subprime mortgage crisis. Mizuno sees continued Japanese
economic growth, especially with billion$ in newly injected by central banks,
with no reason to lower forecasts to their growth or inflation. Risky
mortgage related bonds have been dumped in recent months, many funded by
cheap yen loans. The Japanese yen has witnessed quite a runup.
It had risen by 20% versus the New Zealand Dollar, and by 9% versus the USDollar since June and July, but before the recent week
activity.
What Mizuno did not mention
is the dilemma facing the BOJ. The Japanese yen currency has begun to rise
WITHOUT a BOJ rate hike. The USGovt and Wall
Street constantly pressure Tokyo
not to hike rates, and to fund the global carry trade. In just the last
couple weeks, more chatter was heard that Tokyo financial warlords are prepared to
intervene to support the USDollar. The USFed Discount Window decision also froze the Japanese
central bankers. Fukui
said, “If the Fed were to take some kind of policy step in
September, we will closely examine whether our views match those of the Fed. There
is a possibility that US
growth will be restrained. That is the point we need to watch. We do not have
any preset schedule on when to act.” There is your green
light for the yen carry trade to be revived after a stall this summer when
the yen currency rose almost 10%. Easy Japanese money has been an
important source for speculative investments, which might include gold more
than we are aware. The yen will pull back from here. In fact, the rally in
short-term USTreasurys invites that carry trade, as
yields fall, the bonds rise in value.
SOCIALIZED
PRICE INFLATION
The USEconomy
will next socialize price inflation as a sickening unpalatable trade-off to
avert a recession, with an acceleration in job loss,
home foreclosures, and careening asset declines. Rate cuts will do little to
repair the housing slow motion free fall and mortgage bond quicksand. The singlemost easily understood price to observe for the
common man and woman, unsophisticated in financial savvy, is the price of
gasoline. It is a surefire lock to jump past $3 per
gallon by the spring season, and thus public attention. Food prices are on
the rise, from energy feeder costs, from farmer decisions, from national
movements toward ethanol fuels. Refinery constraints will worsen the problem.
We are entering a repeat of the 2002 to 2005 runup
in costs systemically, with great strain to businesses on profit margin
squeeze. This time, a corporate response to outsource jobs and enjoy a
temporary shallow fleeting cost benefit, will not be available. The benefit,
if there every was any to the United States,
from Asian participation in globalization is reaching a critical impasse. Thank
the trade protection battles for that. The USEconomic
response might therefore be a sizeable push throughout the pipeline of some
wage increases to meet the higher cost of living. Watch for this, since if
workers cannot handle higher costs at home, they will be lost.
OIL
CONFIRMS GOLD BREAKOUT
Confirmation of cost
inflation is the record crude oil price, now over $82 per barrel. Confirmation
of currency debasement and monetary inflation is the approach of a record
gold price, now over $742 per ounce. It is interesting. The justification of
the record crude oil price is the frequent supply disruptions from numerous
corners, desire by OPEC producers to exploit income revenue streams even with
false talk of supply increases, and a powerful Asian economic expansion
accompanied by strong persistent demand. These miss the mark. The crude
oil price is rising from the threat of a weak USDollar.
When the USFed announced the change in the Discount
Window rate, both energy stocks and the crude oil price jumped up. Exxon
Mobil (XOM) stock rise by 4.3% on the day. Crude oil on a volatile day had a
1.60 range but rose half a buck. MY SOURCES TELL ME
THAT GOLDMAN SACHS MIGHT BE PUSHING UP THE CRUDE OIL, WITH INSIDE INFORMATION
OF AN ATTACK AGAINST IRAN.
The rise in crude oil price came before the USFed
rate cut. More importantly, the OPEC nations are slowly moving toward an
abandonment of the PetroDollar. The current downleg in the USDollar is
likely to do irreversible damage to the PetroDollar
defacto standard. A USEconomic
recession will guarantee a fracture of the PetroDollar,
and invite difficult friction with key Arab nations!
The Saudis might be the
last remaining pillar to that important support mechanism to the USDollar and related banking system. If the Saudis hold
on their own monetary policy, they might deliver formidable blows to the USDollar in hidden ways. They can purchase $10 billion in
US weapons sales, but they is sugar coating to
assist the insiders running the USGovt syndicate. Saudi
money supply growth is running at 22% with higher price inflation than seen
in 30 years. A refusal to cut interest rates is seen by certain keen
analysts as a precursor to a full break away from the US$ peg, an
absolutely crucial move! Hans Redeker of BNP
Paribas summarized well. “This is a very dangerous situation for the
dollar. Saudi Arabia
has $800 billion in their future generation fund, and the entire region has
$3500 billion under management. They face an inflationary threat and do not
want to import an interest rate policy set for recessionary conditions in the
Untied States.” The Saudi central bank said Thursday that they will
take “appropriate measures” to halt huge capital inflows
into their nation. The policy is not sustainable and will inevitably result
in a resounding collapse of the US$ peg which girds the PetroDollar defacto standard
serving as a vital pillar.
The United Arab Emirates
still leads the movement for the entire Gulf Cooperative Council of nations
to de-peg from the US$ and obstruct the import of price inflation in their
smaller economies. UAE bankers want the entire group to depeg
together. Persian Gulf economies almost all have much more commerce with
Europe than the US.
The UAE price inflation threatens to hit 10%.
Americans take the USDollar and its international support for granted,
either out of ignorance by the unwashed masses, or
out of arrogance by the corrupt titans of the financial sector. Both will
become victims in the next phase, from higher costs to the public former and
higher borrowing costs to the elite latter.
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By : Jim Willie CB
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Jim Willie CB is the editor
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Jim Willie CB is
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