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Gold, Crude and Euro Breaking Out on US Interest Rate Cut - Montary Doves at Point of Gun

Commodities / Gold & Silver Stocks Sep 20, 2007 - 05:30 PM GMT

By: Jim_Willie_CB

Commodities Best Financial Markets Analysis ArticleWOW! 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.


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, 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 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.


*** 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. ***


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.


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.


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, t he 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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