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Friday, October 28, 2005

The US Dollar Topping Pattern

I thought the USD was developing a mini double top to the right hand part of a 3 - 4 month overall topping pattern to its rally in a bear market. Instead, the right hand part of the topping pattern turned into a mini 2 - 3 week head and shoulders pattern. The USD has definately broken down below the neckline of the head and shoulders. Quite bullish for gold and silver.

A 6 month long chart of the USD with daily bar prices

Tuesday, October 25, 2005

New Head of the Fed Nomination

Yesterday, Bush announced his nomination of Ben Bernanke for the new head of the Fed. This has to be confirmed by the Senate.

This is the way Ben thinks:

"Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002

Deflation: Making Sure "It" Doesn't Happen Here

… What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation…."

It would not look good if the USD takes a dive after the the announcement, particularly since it was already taking a dive that morning. So probably the Exchange Stabilization Fund engineered a "Welcome Bernanke Stabilization Rally". after the announcement which can be seen on this .pdf chart.

The Dow and NASDAQ probably got engineered up a whopping 170 and 33 respectively. It would not look good for the US equity markets to be taking dives on the day of the announcement. It is not as though there was any good economic news announced yesterday to rocket the DOW and NASDAQ up.

Saturday, October 22, 2005

An Aspect of the Gold Bull Market

“people lose their judgment collectively but only come to their senses slowly and individually.” - I forget who wrote this

Since the beginning of the '80s (about a quarter of a century ago) massive amounts of USD have been digitally created out of thin air. Most of these USD have gone into financial instruments (paper, mostly digital)(stocks and bonds). The minds of the crowd have been conditioned to believe that stocks always go up, that playing in or investing in the financial markets is the way to get ahead. Forget about creating real tangible wealth. Gold and silver? What would anybody want that stuff for? What good is it? They do not do anything. Over decades the crowd has lost a lot of important knowledge.

This situation is ever so slowly starting to change. There is a huge amount of mental inertia at rest that will be ever so slowly moved into motion. That is why over 4+ years gold still has not even doubled in price. Most do not even know that there is such a thing as a current gold and silver bull market that is under way.

The **"money" supply** inflation has already happened but it seems nobody is concerned since people think it created them wealth in the financial markets, and more recently in the real estate markets. Now **price** inflation of real stuff is starting, to an extent that can not be ignored, not that most people right now know what to make of it. Given enough time, as the prices of stocks, notes and bonds, and real estate keep going down down down, and the prices of gold and silver keep going up up up, they will start to realize that maybe something fundamentally has changed.

When the crowd finally starts to lose faith in financial instruments the relatively tiny markets of gold and silver, and their related mining and explorer shares will have price explosions.

Yes, the gold and silver bull markets are not new, are starting to get old, but they still have massive price increases still to go, because the crowd still does not get the big change that has happened, the massive devaluation of the USD that is still not apparent to the crowds.

The gold and silver bull markets are a long long way from ending.

In the US:

"We are fast approaching the stage of the ultimate inversion: the stage where the government is free to do anything it pleases, while the citizens may act only by permission, which is the stage of the darkest periods of human history,
the stage of rule by brute force." - Ayn Rand

Silver Is Looking Good

Thursday, intra day, silver went down to its 8 week long trend line, bounced off of it and close near its highs of the day.

Friday, intra day, silver went down to its 8 week long trend line, bounced off of it and closed at its highs of the day.

Silver is looking good, acting strong.

You can see those bounces on this daily bar chart of silver.

460 is good support for gold.

"better to be on the fringe strategically planning than be in the middle of the fray getting trampled." - unknown

Monday, October 17, 2005

USD, Gold, Silver, Notes and Bonds

It looks to me that the USD is putting in about a 3 1/2 months long double top:
A 2 year long monthly USD bar chart

Now, if we take a look at a:
6 month long daily USD bar chart
we can see the right hand top in more detail. It looks like the right hand top is being formed by a mini double top. That last 5 week or so uptrend ended with a 2b topping signal. And the last mini 6 day uptrend has already ended with a 2b topping signal with today's price action. Very interesting. The USD is looking real toppy here, that the USD's rally that started at the beginning of this year is over.

Gold is looking healthy but it gapped up today and that gap could get filled.

Silver on the other hand can move independently from gold. It still has not broken its upward trend line that started at the end of August like gold did. True, it went up 5 days in a row just recently but Friday's outside day tends to negate that. I would say that silver is doing just fine.

US Treasury notes and bonds (indicators of rising prices and increasing "money" supplies) are both down now 5 days in a row and could take a rest from going down at this point. But they both convincingly broke through their lows of 10 weeks ago.
A six month chart of the notes
A six month chart of the bonds

I think gold and silver are going to have winds blowing at their backs shortly.

Thursday, October 13, 2005

U.S. Investment Income Close to `Tipping Point'

http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_berry&sid=a3_fwP85dZzM#

John M. Berry is a columnist for Bloomberg News. The opinions expressed are his own.

U.S. Investment Income Close to `Tipping Point': John M. Berry

Oct. 13 (Bloomberg) -- The U.S. may be approaching a dangerous ``tipping point'' in its international transactions.

At the end of last year, foreign investments in the U.S. were worth $2.5 trillion more than this country's investments in the rest of the world. Yet last year, those U.S. assets abroad remarkably still earned $30 billion more than the foreign assets here.

That stunning disparity in returns is one of many reasons why the huge U.S. current account deficits of recent years have been so readily financed. The sagging net investment position wasn't being compounded by an ever higher interest bill -- as is the case with the mounting U.S. government debt.

This year the game has changed.

Net U.S. investment income turned negative by $455 million dollars in the second quarter, marking a swift deterioration from a $15 billion surplus in the first three months of 2004.

If this trend continues -- and there's no reason to think it won't -- the U.S. will be paying a steadily rising net amount to foreigners, and those payments will both increase the U.S. current account deficit and worsen the country's net investment position.

In a recently published analysis, economists Pierre-Olivier Gourinchas of the University of California at Berkeley and Helene Rey of Princeton University warned this situation could have serious consequences for the U.S.

The Dollar's Credibility

``Reaching the `tipping point' where the U.S. for the first time since the second World War ceases to have a positive net return on its net assets could be seen by the market as a significant blow to the credibility of the dollar,'' the economists say.

``In a context where the external net worth of the U.S. is negative and the return on its net assets also turns negative, market participants could start demanding a higher premium on their dollar assets.''

That the U.S. has been able to sustain financing for its international deficits up to this point is primarily due to the American dollar being the world's principal reserve currency, the center of the global monetary system.

Gourinchas and Rey's analysis traces how over the past half century U.S. investments abroad came to pay far greater returns than foreign investments here. The paper, published by the National Bureau of Economic Research in August, is ``From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege.''

`Exorbitant Privilege'

The phrase ``exorbitant privilege'' was coined by French Finance Minister Valery Giscard d'Estaing in 1965. He used it to describe ``the ability of the U.S. to run large direct investment surpluses, ultimately financed by the issuance of dollars held sometimes involuntarily by foreign central banks,'' the authors say.

In those days, economists regarded the U.S. as ``the Banker of the World,'' lending for long and intermediate terms and borrowing short, they say.

``Since then, the U.S. has become an increasingly leveraged financial intermediary as world capital markets have become more and more integrated. Hence, a more accurate description of the U.S. in the last decade may be one of the `Venture Capitalist of the World,' issuing short term and fixed income liabilities and investing primarily in equity and direct investment abroad,'' Gourinchas and Rey write.

U.S. Balance Sheet

Initially, U.S. assets shifted from long-term bank loans to direct investments, such as the purchase of foreign companies, and in recent years, toward equity investments. Meanwhile, foreign investment has favored low-yielding safer assets, including bank loans, trade credit and debt, particularly Treasury securities.

``Hence the U.S. balance sheet resembles increasingly one of a venture capitalist with high return risky investments on the asset side,'' the economists say. ``Furthermore, its leverage ratio has increased sizably over time.''

Nevertheless, all the advantages that accrue to the U.S. as the provider of the central currency in the global monetary system can't forever offset the impact of the country consuming more than it produces. What if a ``tipping point'' has been reached?

Gourinchas and Rey say their analysis ``does not imply that the current situation can be maintained indefinitely.''

The Possible Repercussions

``Foreign lenders could decide to stop financing the U.S. external deficit and run away from the dollar, either in favor of another currency such as the euro, or just as dramatically, require a risk premium on U.S. liquid assets whose safety could not be guaranteed any longer.

``In either case, the repercussions could be quite severe, with a decline in the value of the dollar, higher domestic interest rates and yields, and a global recession,'' they caution.

``In a world where the U.S. can supply the international currency at will, and invest it in illiquid assets, it still faces a confidence risk,'' they say.

Should confidence be lost, the value of the dollar could plunge, and a world financial crisis could ensue. At that point, even the U.S. could be forced to stop living beyond its means.

To contact the writer of this column:
John M. Berry in Washington at jberry5@bloomberg.net

Wednesday, October 12, 2005

A View of the US (therefor the USD) From the Other Side of the World

http://www.chinadaily.com.cn/english/doc/2005-10/06/content_482807.htm

Hong Kong ... ...

Advertisement
It's time to take seriously a US-led global recession Lau Nai-keung

2005-10-06 07:37

I think it is time that we should take a serious look at the possibility that the US is going to take us down towards a worldwide recession in one or two year's time.

It is well known that the US is the world's biggest economy, taking up about 30 per cent of global GDP, but it is now also the world's biggest debtor country. According to the most authoritative person on this subject, the US Comptroller General David Walker, who audits the federal government's books, the tab for the long-term promises the US Government has made to creditors, retirees, veterans and the poor amounts to US$43,000 billion, US$145,000 per US citizen, or US$350,000 for every full-time worker.

And this figure does not even take into account all the personal debts such as credit card bills and mortgages. With a low interest rate of 1 per cent running for the past three years in a row, savings plummeted to just 1.8 per cent last year, below 1 per cent since January and at zero in the latest estimate from the Bureau of Economic Analysis. In 2000, household debt broke 18 per cent of disposable income for the first time in 20 years. Credit card debt alone averages US$7,200 per household.

The US Government indebtedness is financed this way: The US now runs a trade deficit roughly 6.5 per cent of its GDP and the gap is widened every day. Its citizens are spending ever more on foreign goods, and with the US dollar as the international currency, the US Government just prints money to finance the deficit. And with this money, central banks in the surplus countries purchase most of the US Treasury bonds as currency reserve.

By now, Japan is the largest creditor of the US Government, and the Chinese mainland has been a fervent buyer for the last few years. As for Hong Kong, most if not all of our reserves are in US dollar denominated assets. The US Government in turn uses this foreign borrowed money to finance as much as 90 per cent of the federal deficit which stood at US$412 billion last year. The federal deficit is expected to be running at about US$2 billion a day at the moment.

Put it simply, the Americans have been living way beyond their means for much too long. On top of this, the Bush Administration is cutting tax at least three times while fighting an expensive war in Iraq, which has already cost the country US$700 billion, and currently progressing at US$5.6 billion per month. Now the US economy is dependent on the central banks of Japan, China and other nations to invest in US Treasuries and keep American interest rates down. The low rates keep American consumers snapping up imported goods.

Any economist worth his salt knows that this situation is unsustainable. This includes the country's economic guru driver Alan Greenspan, who recently warned his countrymen that the federal budget deficit would hamper the nation's ability to absorb possible shocks from the soaring trade deficit and the housing boom. Now he may have to add two more worries: soaring oil prices and cyclones.

The US is now clearly in huge trouble, economically, socially, politically, and internationally. The Bush Administration bungled big in cyclone Katrina's aftermath in New Orleans, and then a minor rerun from Rita in Houston, and this will trigger the general outburst of people's dissatisfaction with the government, leading to great internal turmoil lasting for many years. In all likelihood, long-term interest rates are going to rise, and the greatest property bubble the world has witnessed is going to burst in the next one to two years.

The countdown is in progress, and there is no way that anybody can do anything to reverse it either by short-term measures such as fiscal and monetary policy, or through long-term reform of tax policy, entitlement programmes and even the entire federal budget. This is as inevitable as gravity, and it will take place under a new and inexperienced chairman of the Federal Reserve Board. I do not want to sound alarmist, but I see very bad omens.

To make things simple, let us just examine some key economic issues raised by some economists:

What if the dollar plummets? Do stocks follow? How about pensions?

What if interest rates soar? How would all the new homeowners, who stretched to buy with adjustable and interest-only loans, cover their mortgages?

How would consumers with record credit-card debt make their payments? Would they stop buying? Stop taking vacations? What will happen if they go bankrupt? New rules going into effect later this year make it harder on such debtors.

How would a government, which depends on the taxes of a strong economy to operate, keep all its promises?

To us, the good news is that when the country is in deep trouble, the US will not have the energy to pick on China. Even when it is necessary to start another war to divert people's attention, it would pick one much smaller in size and weaker in strength, like Iran. This will provide a much more amicable environment for China to make good use of its "period of strategic opportunity" till 2020 for the country to pass through a turbulent zone between per capita income of US$1,000-3,000.

But in the short term, now the US not only sneezes, and all symptoms indicate that it is going to suffer from a SARS-like trouble, the whole world should take extra precaution not to get infected. One thing is for sure, some time in the not too distant future, every central bank and institutional investor is going to dump US dollar and US Treasury bonds. Once, when a country like South Korea dumps the dollar, the still unsold US Treasuries in the asset column of Asian central banks - US$2,000 billion according to some estimates - will collapse. The cheapened dollar will cause a sudden jump in the US inflation, which forces the Fed to jack up interest rates. A giant leap in inflation will cause a severe recession, or perhaps a depression, in the US. These countries' exports to America will dry up, which in turn will spread the global economic downturn like wildfire.

After the stampede, everybody is going to get hurt, not least the central bank of China, and the Hong Kong Monetary Authority, which are major US creditors and with the US as their number one export market. The recent currency reform of the RMB is most timely, and it is about time we should do something about the Hong Kong dollar. At the same time, China should make extra efforts to rekindle internal consumption, and diversify its market really fast before the great US bubble bursts.

(HK Edition 10/06/2005 page2)

Record Yuan Price of Gold

http://news.xinhuanet.com/english/2005-10/11/content_3605929.htm

Gold price hits record high in Beijing
www.chinaview.cn 2005-10-11 19:03:19

BEIJING, Oct. 11 (Xinhuanet) -- The price of gold hit 138 yuan (17 US dollars) per gram in the Chinese capital of Beijing, a record high in the last decade, Beijing Daily said on Tuesday.

General Manager of the Gold Department of the Beijing Art and Craft Mansion, Wan Jian, ascribed the price hike to rising gold prices in both the world and domestic markets, as international gold output has not increased in proportion with demand.

China's huge gold consumption swells during the week-long National Day holiday at the beginning of October, said Wang. The gold sales volume increased by over 15 percent year-on-year during the holiday. End item

Saturday, October 08, 2005

Harry Schultz and Stephen Roach

The legendary Harry Schultz on the gold market:

"gold mkt is now in a different kind of phase, not just another leg up. It's serious now. This is where the insiders gradually load up. U can quote me on that if u like."


MARKET TALK: Asian CBs Should Hold More Gold - MS
Oct 07, 2005 - 09:51:06 HKT
Dow Jones Newswires

Asian central banks should hold more gold, writes Morgan Stanley's global head of FX research Stephen Jen; says gold good "neutraliser" vs FX risks, especially important for central banks in region that have large FX reserves (for example, Japan, China, Korea and Taiwan); estimates correlation coefficients between gold prices and JPY, GBP close to zero (means gold prices not sensitive, so gold excellent hedge vs JPY, GBP volatility); adds for EUR and USD, gold pretty good hedge (coefficients at 0.38 for EUR and 0.26 for USD). (RNH)


10/7
Morgan Stanley

Global: Transition Curse
Stephen Roach (from Zurich)

The end of an era is nearly at hand. After nearly 18 1/2 years on the job, Alan Greenspan is required under law to step down at the end of his full term as Fed governor on January 31, 2006. Akin to the election of a new pope, the changing of the guard at the Fed is a rare and important event for the US and world financial system. In the past 27 years, it has happened only three times. In each of those instances, the transition did not go well -- financial markets quickly seized up, eager to test the mettle of the new central banker. My suspicion is that the curse of the Fed transition is likely to be in play again -- with potentially profound implications for increasingly vulnerable financial markets.

Historically, the Fed has always been a chairman-dominated institution. Yes, policy is made by committee -- a seven-person Board of Governors, joined by a rotating group of five of the 12 District Bank presidents (that always includes the representative from New York). While each member of the Federal Open Market Committee has one vote, the Chairman’s vote has always carried the greatest weight in the deliberations of the modern-day Fed. As such, it should not be surprising that financial markets take the transition to a new Fed Chairman as a very serious event. This one person has long been emblematic of the character of the institution.

The history of recent Fed leadership transitions does not read well in the financial markets. The last one occurred in August 1987, when Alan Greenspan assumed the reins of power. A little more than two months later, the US stock market crashed. Paul Volcker became Chairman in August 1979 -- a transition that that was quickly followed by a wrenching sell-off in the bond market. And the US dollar was in serious trouble from the very start of G. William Miller’s brief term as Fed chairman, which commenced in March 1978.

It’s not that new Fed chairman typically fail to meet the immediate test of financial markets. In each of these instances, the incoming central banker inherited very tough macro conditions. The Greenspan transition occurred when the US stock market was already sharply overvalued. At the same time, the US and Germany were at odds on the interest rate coordination needed to stabilize a then very weak dollar. The crack in the US stock market was very much an outgrowth of the long simmering interplay between the dollar, interest rates, and unstable conditions in equity markets. Similarly, Paul Volcker came to power in an era of raging double-digit inflation -- 13% annualized increases in consumer prices. At the time, there was no political will to turn the monetary screws tight enough to tame inflation. Volcker was quick to challenge that perception, and the bond market caught on quickly to the wrenching monetary tightening that was about to unfold. For G. William Miller, it was indoctrination under fire. As the US trade balance deteriorated, inflation went from bad to worse, and the US currency reeled in response -- ultimately forcing the Carter Administration to announce a formal dollar support program in late 1978.

These conditions certainly didn’t make life easy in the early days of the last three Fed chairmen. Financial markets were stretched and vulnerable at these delicate moments of leadership transition. Investors had developed a sense of security in the incumbent Fed chairman and were uncertain as to how his successor would fare. The leadership transition at America’s central bank played on the "confidence factor" that always underpins financial markets. Going from the known to the unknown is invariably unsettling -- even under the best of circumstances. Unfortunately, the circumstance surrounding the last three Fed transitions were far from ideal.

Alas, that is very much the case today. Saddled with a record current account deficit, the US is more dependent than ever on the confidence of foreign investors to fund ongoing economic growth. When Greenspan hands over the reins to his successor in early 2006, the current account deficit will be at least 6.5% of GDP. That’s more than four times the average external shortfall of 1.5% that prevailed during the three most recent transition points -- 1978, 1979, and 1987. Moreover, in a post-Katrina, energy-shocked climate, there is good reason to expect additional reductions in personal and government saving in the months ahead -- actually, deeper dis-saving (deficits) on both counts. As a result, already-depressed national saving should move even lower, prompting further deterioration in America’s already massive current account deficit. In other words, America’s dependence on the "kindness of strangers" is likely to increase significantly at precisely the point of an historically-delicate transition to a new a new Fed chairman.

And that, I’m afraid, brings me to the most controversial point of all -- the selection process, itself. With the consent of the US Senate, the choice of selecting a new Fed chairman falls to the President. Generalizing on the basis of George W. Bush’s most recent senior appointments, I suspect the President will look for three key traits in a new Fed chairman -- familiarity, loyalty, and a pro-growth bias. This is not meant to be critical. It is a carefully determined observation based on the President’s record. In the case of a Fed Chairman, those criteria imply that President Bush will probably not select the next Paul Volcker -- a tough, independent policy maker who might be predisposed toward "tight money." While this is inconsistent with the President’s statement on this matter at a recent press conference, in the end, I still believe George W. Bush will opt for a trusted team player who shares the goals and objectives of his political agenda.

This could well pose a serious problem for US financial markets. With America’s external financing critically dependent on the foreign confidence factor, any doubts over central bank independence will not go over well. That’s especially the case for a US economy beset with record imbalances, a potential inflation scare, and bubble-like conditions in asset markets. Foreign investors have been extraordinarily generous in the terms they have offered for funding America’s external deficit. In part, that generosity may reflect the "Greenspan factor" -- the confidence that investors have in Alan Greenspan’s adroit management of periodic international financial crises. With the Greenspan factor about to be taken out of the confidence equation, any fears of an "easy money" Fed could well prompt foreign investors to exact concessions in those financing terms in the form of a weaker dollar and higher real interest rates.

As I look to January 31, 2006, those are precisely the risks I see in the immediate phase of the post-Greenspan era. The rocky financial market history of recent Fed chairmen transitions is a warning, in and of itself. America’s heightened vulnerability to the foreign confidence factor amplifies those risks. And President Bush’s appointment record points to a candidate who could seriously compound the perception problem. This is potentially a very tough combination. It leads me to believe that the curse of the Fed transition is about to strike again.

Thursday, October 06, 2005

US Dollar Double Top?

Late yesterday the US dollar gapped down and is now down about .60 on the USD Index this early Thursday morning. Or, it looks like it is putting in a double top to its rally that it started after making that 80 low at the end of 2004.

You can see the gap down here.

It seems to me that the US dollar is now giving up the struggle to get above the previous July resistance at about 90 - 90.5 on the Index.

You can see the July resistance in this 6 month daily bar chart of the USD Index.

Watch for the USD to break its 4-5 week long uptrend line that started at the beginning of September. Unless prices of the USD get radical, this could take days or a week or two. I would prefer days but I have to take what ever the market dishes out, serves up.

A part of last night's Sinclair commentary:

"My reason for pointing out the roll over of the US economic recovery and the huge growth in the evil demon of over-the-counter derivatives is to structure the condition under which the US Fed will have to turn tail and run wild with liquidity injections into the system in order to offset a liquidity crisis of biblical proportions. All the hawk talk out of the Fed is talk by US Treasury salesmen to Asia to peddle the paper that is going to roar out of the electronic printing press of the US Treasury to finance the upcoming $550 billion + Federal deficit."

As the US dollar goes down, it should put a wind at gold's and silver's backs.

"Who made up all the rules / We follow them like fools ;
Believe them to be true / Don't care to think them through."
- "They", Jem Griffiths

Monday, October 03, 2005

Why Keep Loaning Real Stuff to a Dead Beat Debtor?

The rest of the world sends more real stuff (oil, food, automobiles, computer parts, etc.) to the US than the US sends to the rest of the world, or the trade deficit. To make up the difference, the US creates digital dollars out of thin air and sends them over seas. Such a deal!

That is in affect a loan from the rest of the world of real stuff to the US since the US paid for real stuff with intrinsically worthless digital USD. Year after year the US trade deficit stays in existence, which is an accumulating loan from the rest of the world that keeps growing year after year. How big is the rest of the world going to let this loan get?

Never mind calling in the loan (the accumulated trade deficits), all the rest of the world has to do to put on a Big Hurt on the Big Easy (the US) is to simply stop making new annual loans to the US.

More loans: many/most of the US dollars that the rest of the world ends up with due to the trade deficit are loaned back to the US in the purchase of US Treasury bills, notes and bonds. Exactly why and how is another story.

The US government recently released the Federal Government's Debt for Fiscal Year 2005. This is debt in addition to the trade deficit. The increase in debt was $553 Billion. Additionally, $186 Billion is estimated to have been borrowed from Social Security. That is about an additional $0.739 Trillion of added debt in one year.

It appears that the management of the US has no intentions of changing anything in order to change the rate of increase of US total debt of all kinds.

How long can a dead beat debtor be allowed to keep piling on new debt?

US Treasury bonds and notes have been heading back down increasing yields and US interest rates at a time that the US economy is the Road Runner out past the edge of the cliff.

The selling of USD denominated financial instruments is not good for the value of the USD let alone the value of those instruments. But it is good for the USD price of gold and silver.

The Latest 2 Point Spin on OTC Derivatives

From jsmineset.com

General Editorial

Sunday, October 02, 2005, 7:56:00 PM EST

Higher Interest Rates and a Lower US Dollar

Author: Jim Sinclair


Now there is a piece of heresy in today’s world of OTC derivative trading kids, market maven brats, wunderkinds and seers.

The rub is that this piece of heresy is going to take place due to unusual circumstance with an undeniable scenario. This conclusion is supported by eons of monetary history when such an evil gathering of economic fact takes place.


1. The US Federal Budget deficit as a result of really bad weather and worse contingency planning is not going to be as advertised - under $360 billion - but rather over $550 billion. The idea that you can fight multiple wars, rebuild decimated cities and lower taxes is madness of world-class proportions. Lets' also not forget that cities and states as good little children are following the example of their Federal Daddy and deficit spending their tiny rear ends off as well.

2. The Trade balance thanks to ever escalating energy prices is also going off the scales on the deficit side.

3. The mad, mad, mad, world of US conspicuous consumption has landed US saving rates at below zero.

So how can all this be financed? Don't look at China as China bashing has finally bashed the dickens out of the theory that because Asia has so much US paper it has to buy as much as the US can print. Not so! Asia may not be functionally able to sell what they have but their continued consumption in order to allow the US to offend them is simply not going to happen. Asia will off-load their US paper by massive international corporate acquisitions outside of the US.

It happened again as the US put pressure on China for a more vigorous revaluation of their currency at the recent Washington get together. This is like a person (the financial management of the US) slitting their own throat and demanding a sharper knife so they can cut a few other necessities off as well.

So as currently presented, US financial managers intend to peddle US federal paper to people who are fed up financing the US, producing a backlash that no one really expects. More federal paper means more dollars. More dollars mean more supply on the market as interest rates rise as a direct result of smaller and smaller purchases by non-US interests of the much bigger supply of US Treasuries for sale.

The classical result that will happen by mid 2006 is:

1. A sharply lower US dollar.

2. Sharply higher interest rates.

3. Former Chairman Volcker's prediction that we would have a financial crisis within the next five years (one more year to go) could actually unfold tomorrow.

Want another reason for gold at $529 and $1650. Well, here it is!

* Credit Derivatives Go Wild
* New Total is a Notional Value of 12.4 Trillion
* Concern Grows over 3rd Party Deals

The spin on this is two fold: First, the notional value is simply notional while real value is determined by slices. Second, the problem is simply a back office situation of keeping track of the transactions.

The geeks can slip and slice, cut and dice, but when derivatives hit the fan they will hit for all the performances required. Therefore, the notion of slicing is nothing more than mad mathematicians who are out of touch with real world markets. When the fat lady finally sings, notional value will be real value.

The so-called back office problem is somewhat true but not in manner that it is presented. This is not a log jam of paperwork as much as it is the presence of third parties implied lifting of legs of the derivative spreads randomly which simply cannot be done without a disaster of mammoth proportions.

God help the world when interest rates really get out of hand. There are 12.4 trillion dollars and what side do you think they are betting on?

I have long held that there is not a single thing basically different between the derivative schemes of today and the old London commodity straddles and T-Bill spreads of the late 1970s. The spread transactions for instance on the COMEX where in the old days put on after the close at any level you desired in the range of the trading day. They were not put on as a purchase and then sale but sold as a completed long and short in different months.

I for instance purchased a 6000 contract silver spread in this manner. These spreads were usually taken off in the same manner, having more tax implications then than any other motivation. The difference between the old COMEX spread and today's over-the-counter derivative is that you could drop on side of the spread if you wanted to produce a mountain of money. I know this because the biggest money my old firm made was when my former partner Vincent went into our arbitrage department when gold broke above $400 and took off every short they had on their spread trading. This could be done because these trades were clearing house guaranteed.

This is not the case with the over-the-counter derivative markets where I maintain the pillar transactions are total frauds. The reason why there is panic in Mudville is because these transactions have been offset by many who really don't understand the inside game of a derivative, leaving the potential of selective leg lifting which simply cannot occur with such disruption you might as well be standing in a line in Baghdad to apply for a job with the police force.

Don't you think it slightly strange that when Enron blew up, all the firms that had formed to trade in supposed markets in OTC derivatives on electricity closed up shop? The answer is simple. There was no such market. The entire thing was a fraud.