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Friday, April 28, 2006

Liar's Poker

Below is an article by John Hathaway, manager of The Tocqueville Gold Fund:

How Central Bankers Fritter Away Their Time (and Ours)

*A trivial game of bluff. It is played using randomly picked currency from your wallet. The denomination does not matter.

Gold has topped $600/oz. for the first time in 25 years. Unfortunately, for real contrarians, it is making front page news. However, financial media commentary remains fairly ignorant on the subject. The preferred explanations for gold’s rise are mostly benign: it’s the Chinese and the Indians (ooh, they just love bangles, it’s part of their culture); it’s the allocation to commodities that has grown so popular (tangible assets are the rage with all the savviest hedge funds-the Chinese need so much more stuff); it’s the difficulty of bringing new mines into production (you know, the tree huggers hate mining so much); it’s the central banks who have decided that selling gold was not such a great idea in the first place and have now shied away from dumping their reserves (just a bunch of stupid bureaucrats, anyway). These “explanations” all have an element of truth. Any reader of our past website articles would have seen it coming.

However, the Wall Street Journal, CNBC and the equivalent will not tell you that gold is rising because there is a surfeit of paper assets. They will not tell you that a rise in the gold price has historically been a harbinger of bear markets in bonds and stocks and hard times for the financial business. The Pavlovian response of the financial media to the crossing of the $600 threshold was as predictable as their inability to comprehend or to portray the significance.

In truth, the price of gold at $600 is no big deal. In 1980 dollars, it is only $300. If prior highs mean anything, a target of $1700 in today’s dollars is what investors should be thinking about. In our view, gold remains cheap, another sign that the financial markets continue to under-price risk. Investors should worry less about whether this particular moment is a good or bad entry point and ponder the implications of sailing through uncharted waters without a lifeboat.

...

The rest is at:
http://www.tocquevillefunds.com/press/archives.php?id=111

From Russia With Love

Sledge hammers raised over America. The Russians ain't the only ones.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/04/23/ccliam23.xml

The threat to a fistful of petrodollars
By Liam Halligan (Filed: 23/04/2006)

From Russia, you might say, with love. This weekend, Alexei Kudrin, Russia's finance minister, dropped a bombshell in Washington.

Attending the annual meetings of the World Bank and International Monetary Fund, Kudrin caused his American hosts discomfort by openly questioning the dollar's pre-eminence as the world's "absolute" reserve currency.

The greenback's recent volatility and the yawning US trade deficit, "are definitely causing concern with regard to its reserve currency status," he said. "The international community can hardly be satisfied with this instability."

Kudrin's intervention coincided with another meeting, also in Washington, of finance ministers and central bankers from the Group of Seven - which doesn't include Russia.

Top of the agenda: the effect of ever-rising oil prices on inflation and interest rates.

G7 countries are worried the spiraling price of crude - which closed at $72.79 a barrel on Friday and which has now trebled in three years - could inflict real economic damage. The US Federal Reserve, in particular, has been forced to take drastic action - raising interest rates 15 times since June 2004 to keep inflation in check.

Given that fragility, it is significant that Kudrin is now wondering aloud if the long-standing dollar hegemony can last. For him to do so is to highlight that America is vulnerable should that status be lost. That's because Russia, with its awesome oil and gas reserves, could kick-start a challenge to the dollar's supremacy.

Most nations stockpile their foreign exchange holdings in dollars. The US currency accounts for more than two thirds of all central bank reserves worldwide.

This reserve status means that the dollar is constantly in demand, whatever the underlying strength of the US economy.

And now, with massive trade and budget deficits to finance, America is increasingly reliant on that status. The unprecedented weight of US liabilities means a threat to the dollar's dominance could result in a currency collapse, plunging the world's largest economy into recession.

That won't happen immediately. The dollar has sat astride the globe for some time now - in fact, for most of the last century. But this statement from Russia - a country of growing financial and strategic significance - still caused the dollar to slide. It also fuelled speculation that central banks could increasingly diversify their holdings away from dollars.

Kudrin's statement followed news that Sweden has cut its dollar holdings, from 37 per cent of central bank reserves to 20 per cent, with the euro's share rising to 50 per cent. Central banks in some Gulf states have also lately mooted a shift into the euro. Such sentiments helped push the dollar to a seven-month low against the single currency last week.

But Russia's intervention will have raised eyebrows in Washington because the backbone of the dollar's reserve currency status - the main guarantee that status continues -is the fact that oil is traded in dollars. And that is something the likes of Kudrin can directly affect.

For historic reasons, the dollar remains the world's "petrocurrency" - the only currency for the settlement of oil contracts on world markets. That makes the EU and Russia dependent on it. But with central banks switching to euros, the logical next step would be for fuel-exporting countries to start quoting oil prices in euros too.

The EU is Russia's main trading partner. More than two thirds of Russia's oil and gas is exported to the EU. That makes Russia a strong candidate to become the first major oil exporter to start trading in euros. Such a scenario, in recent years, has become theoretically possible. But now, with these latest comments, Kudrin has thrust that possibility into the open.

The G7 meeting was dominated, of course, by concern over Iran's nuclear programme. The threat of military action against Iran, itself a major crude exporter, is one reason oil prices are now testing record highs.

It is worth noting that Tehran has ongoing plans to set up an oil trading exchange to compete with New York's NYMEX and with London's International Petroleum Exchange. In the light of Kudrin's comments, it is significant that the Iranians want to run their oil bourse in euros, not dollars.

Were the Iranians to establish a Middle-East based euro-only oil exchange, the dollar's unique petrocurrency status could unravel. That, in turn, would threaten its broader dominance - which, given America's groaning twin deficit, could seriously hurt the US economy.

Some cite this as the real reason the US wants to attack Iran: to protect the dollar's unique position. I wouldn't go that far, but the prospect of a non-dollar oil exchange in Tehran is certainly an aggravating factor.

The opening of Iran's new oil exchange has recently been delayed. But, having spoken with numerous officials in Tehran, and western consultants who've been working with the Iranians for several years, I think it will go ahead. The exchange entity has already been legally incorporated in Iran and a site purchased to house administrative and regulatory staff.

The reality is that as long as most of Opec's oil - read Saudi Arabia - is priced in dollars, the US currency will retain its hegemony. But the opening of an oil bourse in Tehran, which now looks likely, will signal at least tacit Saudi consent for euro-based oil trading. The US knows this, which is why it is nervous about the dollar's status being questioned.

From the G7's fringe, Kudrin has now touched this raw nerve. This weekend's meetings have been dominated by questions of global financial imbalance - in particular, America's huge deficits.

Kudrin's missive comes as central bankers, and currency dealers, start to conclude the only way to resolve the massive US external deficit is a somewhat weaker US currency. As the IMF itself warned yesterday, a "substantial" dollar decline may be needed.

One way to bring that about would be for the euro to enter the global oil trading system. This is unlikely to happen soon. It might not happen at all. But the idea is now not only realistic but firmly on the table in Washington. Perhaps not with love, but it was placed there by the Russians.

Liam Halligan is Economics Correspondent at Channel 4 News

Wednesday, April 26, 2006

Wiemar, Germany Gold and Silver Prices

German Mark prices of Silver and Gold from January 1919 to November 1923:

Jan. 1919 Silver 12 Gold 170
May. 1919 Silver 17 Gold 267
Sept. 1919 Silver 31 Gold 499

Jan. 1920 Silver 84 Gold 1,340
May 1920 Silver 60 Gold 966

Sept. 1921 Silver 80 Gold 2,175

Jan. 1922 Silver 249 Gold 3,976
May. 1922 Silver 375 Gold 6,012
Sept. 1922 Silver 1899 Gold 30,381

Jan. 1923 Silver 23,277 Gold 372,447
May. 1923 Silver 44,397 Gold 710,355
June 5, 1923 Silver 80,953 Gold 1,295,256
July 3, 1923 Silver 207,239 Gold 3,315,831
Aug. 7, 1923 Silver 4,273,874 Gold 68,382,000
Sept. 4, 1923 Silver 16,839,937 Gold 269,429,000
Oct. 2, 1923 Silver 414,484,000 Gold 6,631,749,000
Oct. 9, 1923 Silver 1,554,309,000 Gold 24,868,950,000
Oct. 16, 1923 Silver 5,319,567,000 Gold 84,969,072,000
Oct. 23, 1923 Silver 7,253,460,000 Gold 1,160,552,662,000
Oct. 30, 1923 Silver 8,419,200,000 Gold 1,347,070,000,000
Nov. 5, 1923 Silver 54,375,000,000 Gold 8,700,000,000,000
Nov. 13, 1923 Silver 108,750,000,000 Gold 17,400,000,000,000
Nov. 30, 1923 Silver 543,750,000,000 Gold 87,000,000,000,000

These numbers are from an article at Le Metropole Cafe

The huge payoff, protection that gold and silver provided as real money for those that had the forsight to make sure they acquired substantial amounts back when silver and gold were cheap occurred during 1923.

This is what can happen when a government fiat token is not tied in any way to something (like an amount of gold and silver) that restrains a government from creating at will as many tokens as it wants to. No wonder the US's Federal Reserve bank, the creator of US Dollar tokens, is illegal, unconstitutional.

And now America has Bernanke at the head of the Fed:

"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." - Ben Bernanke remarks before the National Economists Club, Washington, D.C. November 21, 2002

"Those who create and issue money and credit direct the policies of government and hold in the hollow of their hands the destiny of the people." - Rt. Hon. Reginald McKenna, Chancellor of Exchequer, England

Thursday, April 20, 2006

Converging Silver Price Indicators Update



The right most dot provided by the equal spacing tool turned out not to be a 10th and final up day, but a reaction day. There was plenty of warning what silver would do by the silver overnight price action between the close of the COMEX on Wednesday and its opening on Thursday.

The next job is to determine when silver has bottomed and to draw what is probably going to be a more upward sloping longer term trend line.

otc Derivatives War Games

Europe simulates financial meltdown
By George Parker in Vienna

VIENNA -- Europe's financial regulators have held a "war game" exercise, simulating a continent-wide financial crisis, amid fears they are ill- prepared to stop a problem in one country spreading across borders.

“However, the report warned that hedge funds and credit derivatives were sources of concern "as related risks remain opaque and they have become extremely relevant in assessing financial stability both across borders and across all financial sectors."

It said that, while hedge funds could contribute to market efficiency, they "can also be sources of systemic risks."

Credit derivatives markets were said to have grown by 128 percent in 2005 compared with the previous year, with a nominal value of 12,430 billion Euro ($14,900 billion, £8,700 billion) in June last year. ...
https://registration.ft.com/registration/barrier?referer=http://www.jsmineset.com/ARhome.asp?VAfg=1&RQ=AR,1&ARList=1&cTID=0&cCat=&PRID=0&cSubCat=&Full=1&Archive=&ArtSel=$$$3596$$3595$$3594$$3593$$3592$$3591$$3590$$3589$$3588$$3587$&location=http%3A//news.ft.com/cms/s/66c09a88-c802-11da-a377-0000779e2340.html

"Be prepared for a crisis, EU regulators are told"
http://business.timesonline.co.uk/article/0,,13130-2124232,00.html

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It looks like some in the financial industry think that there still are not enough otc derivatives in the world: "exotic equity derivatives ..."

BNP Paribas to Hire 200 People to Boost Equity Derivatives Team
http://www.bloomberg.com/apps/news?pid=10000085&sid=aU5ORaIqPrEQ&refer=europe

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http://today.reuters.com/investing/financeArticle.aspx?type=fundsNews2&storyID=2006-04-18T193414Z_01_N18366037_RTRIDST_0_ECONOMY-FED-RISK.XML
Hedge funds in view as Fed ponders systemic risk

...

Gathered at a two-day conference hosted by the Federal Reserve Bank of Atlanta on systemic risk, senior policy-makers said that the unregulated activities of hedge funds could have serious implications which are still not well understood.

"There is a dark side connected to financial integration. If shocks are large enough, the financial system becomes a risk-transmitter rather than a risk-disburser," said Nigel Jenkinson, a director of the Bank of England.

"We may have fewer systemic events, but they will be larger," he told a dinner at the Atlanta Fed on Monday.

...

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Tidbit from the Cafe:

"You have to wonder what cigarettes these people are smoking! As long the world economy is growing then the debt and the trade imbalances are just fine! Has no one realized that this is a giant Ponzi scheme, or Enron style accounting. The financial system creates debt and reports it as income and then tells everyone that the debt doesn’t matter. Great scheme until the day that it doesn’t fool anybody anymore.

The IMF chief Rodrigo Rato seems to have understood "I find these views optimistic to the point of willful blindness," he said, referring to the idea that the imbalances could either go on indefinitely or dissipate painlessly."

Tuesday, April 18, 2006

Converging Silver Price Indicators



As of the end of Monday the 17th, silver is getting up near a vertical tangent to the french curve drawn on the above chart. Prices do not move vertically on financial charts. Something is up! Also, it can be seen that silver is near the top of its short 3 week long channel, not that prices can not move out and up from a channel some. What else can be seen is an equal spacing tool puts a point a hair to the left of the vertical tangent to the french curve.

On top of those 3 elements, silver is up 7 days in a row which is rare. 8 and 9 days in a row have happened on charts, but rarely. In silver's channel, silver has gapped up 4 times.

These 5 indicators say silver is getting close to a top. History says 2-4 days more. How about Thursday or Friday of this week.

This top is just a temporary one. Who knows how long or how low the reaction will be. Ultimately, silver should make it up to around US$ 200-300 per ounce. Maybe a whole lot more if the Fed really gets carried away with hyperinflation: creating US dollars out of thin air, competing with US dollar counterfeiters, in much larger amounts than normal.

Friday, April 14, 2006

Silver Price Prediction and French Curves

It is possible to fit a french curve to a 6 month silver chart that touches intra day lows 5 times before it starts to really head upwards. By thursday or friday, silver can be touching the part of the curve that has a tangent that is vertical. Another possibility is that it shoots straight up from here and hits the part of the curve that is heading up and back to the left. Another possibility is that silver breaks downward and to the right through the curve. Whatever silver does, the odds are extremely good that when silver breaks through the curve, no matter which part, a reaction has set in. It looks like this could happen by the end of next week, Friday, April 21, 2006.

This is a facinating time for silver. It is already up 6 days in a row and has left 3 gaps over the last 3 weeks; end of trend signals. There also are rare charts that exist showing prices that moved up 8 and 9 days in a row. This is possible with silver, too.

"Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, 'Account overdrawn.' - Ayn Rand, author of Fountain Head, Atlas Shrugged, and other books

US Trade Deficit

Pure communism wanted, central command of prices:

http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_baum&sid=aG9CkBF9Sm_w

In this article Caroline Baum (a columnist for Bloomberg) reveals communist ideology by stating

"If the long rate really influences the economy, encouraging corporations to invest and consumers to finance home purchases, why not put that rate where the Federal Reserve wants it rather than leave it to the whims of the market?"

The strangest thing is that the USSR imploded on itself without getting involved in some huge war and almost nobody was astounded or asked how could that have happened. Especially in the US. Most in the US simply thought "Oh, isn't that nice." and went on about their day.

No wonder the US is going down the tubes.

Now to the US's trade deficit:

The US trade deficit number came out the other day and the US financial media tried to spin the number as good merely because the number was less than the previous month's number. That's all there is to it? It's that simple? We don't have to worry about the trade deficite anymore? The same thing happened to the March, 2003 number.
And January of 2002 was less than January of 2001.

First, look at the trends in place:

2001
Jan. - Dec. - 357,819, January - 33,736, February - 27,865, March - 31,840
2002
Jan. - Dec. - 418,038, January - 28,299, February - 31,049, March - 30,704
2003
Jan. - Dec. - 494,814, January - 41,218, February - 40,073, March - 43,543
2004
Jan. - Dec. - 617,583, January - 46,053, February - 45,834, March - 46,966
2005
Jan. - Dec. - 723,616, January - 58,267, February - 60,114, March - 53,745

Wednesday, April 12, 2006

Silver Price Prediction

If you look at a 5 or 10 year chart of silver, what the price of silver is doing now is moving almost straight up compared to its movements over the last 5 years. This type of movement in financial markets halts abruptly and a reaction (a rest) to too fast of an upward move sets in.

Since the beginning of the gold bull market, very roughly speaking, gold is up about 100%. In just over about 3 years, silver is about 200%.

The high point silver is now probably putting in could very well be the top of a more upward sloping channel than the channel that it has been in since 2003. The new more upward sloping trendline (bottom of a channel) should be the new low of a reaction that has or should set in shortly in silver, and the low that silver put in in the middle of 2005.