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Gold and Silver Trend Recharged by US Dollar Weakness

Commodities / Gold & Silver Mar 01, 2008 - 12:04 AM GMT

By: Jim_Willie_CB

Commodities Best Financial Markets Analysis ArticleOne week ago, my forecast did not come to pass for a euro currency sell off, and for a pound sterling sell off. Even the Aussie Dollar forecast of a sell off failed. In fact, in a convincing fashion, all three forecasts were shattered. What happened? Wrong read of the price pattern with indicators? Not really. Wrong assessment of high priority signals? Surely, yes. By that is meant, during a strong GOLD TREND, and WEAK USDOLLAR TREND, cyclical indicators tend to carry less importance in predictive power.

They can be trumped by trend, as the underlying factors behind the long-term bull market are reinforced, emphasized, and brought to the forefront. In the last week, instead of the Euro Central Bank admitting the obvious, that they must respond to a slower economy and a collapse of home prices across the southern band of the European continent, they continued to talk tough about price inflation and sound unaware of the gradual deterioration at the same time. The ECB remains under German control, in a profound hidden battle with the American leveraged fraud inflation kings. Until the German economy falters more, the ECB is likely to continue their hawkish tone. The ECB actually wants the euro at a lower level. My error came in expecting the Europeans to play the currency card on the monetary table, by softening their tone. Events in the Untied States overwhelmed the currency markets.


Across the Atlantic , events created a quantum shift suddenly. The wholesale price index, as measured by the Producer Price Index, shot up 1.0% in January, up a whopping 7.4% in the last twelve months. It might be the best price inflation index available. The Nigerian bandits threatened crude oil supply once more, lifting its price over the psychologically important 100 mark toward 103. Boone Pickens is feeling some pain, as he let it be known he is shorting crude oil here. Natural gas shot over the 9 level in price. The existing housing market inventory rose upward to 9.9 months, almost as horrendous as the new home inventory. The Case Shiller S&P home price inflation index fell 9.1% in December versus a year ago in the top 20 metropolitan areas.

The Personal Consumption Expenditure (PCE) price index for 4Q2007 came in at 4.1%, rather hot, even if doctored. And a slow Q4 Gross Domestic Product was confirmed at only a 0.6% growth rate. That means the recession is at minus 4% growth, since the engrained lie is between 4% and 5% from hedonic gimmickry. The 10-year Treasury Note yield came down from its 3.8% recent move upward. With all this in the background, what does the beleaguered US Federal Reserve have to say? THE USFED STATED THAT ECONOMIC GROWTH AND JOB PRESERVATION TAKE HIGHER PRIORITY THAN PRICE INFLATION, AND THAT MORE MONETARY STIMULUS (LOWER RATES) WOULD BE COMING. They gave a green light on selling the US Dollar, a green light to buying gold. They will permit price inflation, as desperation grows.

What was the reaction to bad economic news, bad banking news, bad housing news, bad inflation news, but accommodative dovish US Fed response??? Gold rose firmly by $40 per ounce; silver shot up almost a buck; crude oil returned above the $100 mark. On the paper currency front the euro surpassed 150; the crippled pound sterling rose to 198; the Swissy went over 95; the Aussie went over 93; the Canadian Dollar surpassed 100 parity toward 102. The continued monetary ease cycle by the US Fed invites these responses and repetitions of these responses. Asian banks have reacted, from Taiwan to South Korea to Singapore .

Even respected Japanese financial ministers announced that lower interest rates are soon to come. The currency wars are raging. My position remains that the euro eventually will take a hit and come down, only after the Euro Central Bank admits the obvious. Their next move will be to cut interest rates. Until the euro inflicts more pain to them, the ECB will stand by and watch. As for the pound sterling, my position also remains that it will come down hard. In fact, the technical's indicate that sterling is meeting resistance from two important moving averages. Note how the 10-year US Treasury yield has come down from the 3.8% range to the 3.6% range this week. Money has moved from stocks to bonds. Never overlook that the Plunge Protection Team of market interventionist inference experts are probably printing money and buying US Treasuries. They must offer UST Bond principal gains in offset to US Dollar losses. Foreign UST Bond owners are watching closely their monstrous bond portfolios at heavy risk.

We are soon to see gold surpass the magic 1000 mark. We are soon to see silver surpass the magic 20 mark. The entire world will take notice. In a recent exchange with the colorful Gold-Eagle web site journal editor I.M. Vronsky, we discussed our chart interpretations. My target range for the current silver breakout is between 18.7 and 20.9, based upon triangle ranges. To him my immediate breakout target was stated as 21 or 22. Vronsky maintains a June target of a little over 26 for silver, very aggressive, but justified by the sequence of triangle pennants. Each pennant contains the silver price for a period of several months, only to permit a quantum leap upward in price at resolution time.

The gold/silver price ratio has turned down in the last three months, in full favor of silver. The historical ratio has been in the 20 range, even a little lower. If a 1000 gold price holds, such a ratio would dictate a 50 price for silver, 150% higher than the 20 level. The remarkable point is that gold bullion has been held in substantial volumes, and sold in big volumes, by central banks. At the same time, silver has been depleted. The silver stockpile created during the 1950 decade has vanished. Silver is used for numerous applications, probably the most widely used metal in modern history. Yet the rise in the silver price has actually dragged behind that of gold, contrary to logic. Expect silver to vastly outperform gold in the next couple years. Its growth rate in price will likely double that of gold.


The US Fed Chairman Bernanke sounded helpless before Congress in his required periodic grilling. His body language spoke volumes of weakness, confusion, shock. He seemed to describe the deteriorating condition adequately, forecast almost nothing in the near future, describe with decent clarity the inadequacy of current policy (on lowering interest rates), muddle the picture with his typical knucklehead notions of inflation expectorations, and elicit less than usual bootlicking by his interrogators. Bernanke gave clear indications that more rate cuts are coming. Baby Ben mentioned the US Dollar, in a rare display of liberty to do so. He predicted some bank failures, but stressed that the smaller banks are more vulnerable. My view is that the larger banks are more vulnerable, those which abused mortgage bonds and their leveraged derivatives, those which piled up such securities before private equity deals went off the railroad tracks. He pointed out that domestic exporters have benefited from a lower US Dollar, but warned that higher commodity and material costs would weigh down the US Economy.

He made yet another shoddy forecast that by the second half of 2008, price pressures would come down from slower demand. THAT IS PRECISELY HIS NEXT ERROR, AS PRICES WILL CONTINUE UP DESPITE A WORSENING RECESSION.

Why does Ben mention the second half of the year? Because by then, other factors can be blamed on the wrong forecast. By then, enough time will have passed, so few will remember his vacant assurance in forecast. The Bernanke message is clear: money is free, speculate to your heart's content!!!

Gary Dorsch makes an excellent observation, that the official Fed Funds rate is tracking the housing price index closely. His work is always required reading on my table. The US Fed under his leadership has been reactive, dominated by academically useless historical perspectives and empty solutions. No helicopters have been sighted yet. No B-52 bombers have been spotted. My view of BenB is overwhelmed, green with inexperience, surrounded by equally wet-behind-ears rookies, unable to assess the bank & bond problems, totally ignorant of credit derivative effects, well versed in revisionist economic history, but hesitant (or forbidden) to flood the system with money as his reputation has forewarned. Maybe he only recently learned who runs the US Fed, from distant lands. The US Dollar might be selling off as a reaction to the perception that the Bernanke Fed is clueless, helpless, and reactive to burning blazes. FOREX traders might be selling the buck, expecting a panicky US Fed to act desperately. Agreed!

Did Greenspan actually advise the Persian Gulf Arab nations to sever the US Dollar peg to their currencies? Yes, he did! In doing so, he shows more Swiss stripes. This man has taken residence where his loyalty originated for perhaps 20 years, in Europe . His second paycheck by the Swiss Uber-bankers did not receive proper scrutiny. What was his objective?

Now the Arab sheiks can cut their US $ peg and use Greenspan for political cover. The impact on the US Dollar on the downside, and gold on the upside, will be profound. The Petro-Dollar has not received proper press coverage. Has any analyst except the Jackass mentioned the risk to the USDollar from the eventual lost US$ peg, followed by a removal of the Petro-Dollar standard?

For the first time in my memory, an interviewed expert guest described the US financial situation as moving toward a Banana Republic. Dan Mitchell is a senior fellow of the Heritage Foundation. He advocates reduced taxation, smaller and less intrusive government involvement, and more. He advocates supply side tax policy and fundamental tax reform.


The public and finance sector continues to be dazed and confused over inflation. They look to the doctored CPI index and more realistic PPI index, to the Employment Cost Index, and never to the legitimate source of inflation. The USDollar money supply continues to rise. Shown is the outstanding work of the Shadow Govt Statistics money supply, up to January. The US$ M3 money has risen from 15.5% last month to 16.5% in January. Their price inflation estimate is now in the 12% neighborhood.

Notice how the M1 money supply figure is stalled flat, not growing much at all. Monetary deflation accompanies economic recession.

Its sluggish path smells of economic recession in the tangible economy dominated by homes and businesses in a massive struggle. Just where does all this new money go? Surely some homes, some cars, some consumer spending, but their sales trends are tilting down in the tangible economy. The answer lies in the finance sector. My guess is bigger new trades by the armada of hedge funds. The move up from 90 above 100 in crude oil has been blamed on hedge funds. For every dollar in hedge fund equity used in big trades, four to five dollars of borrowed money is put to work in leverage. Replacement of commercial paper might come from expansion of corporate commercial loans. Then the large commercials are taking some big lumps in gold and silver, unable to push the price down. Instead, they are covering a portion of their under-water open interest positions. That requires borrowed money. In a similar vein, the JPMorgan irrepressible credit derivative mountain builders most assuredly increase their USTBond positions, along with rate swaps, gold, and currency. That also requires money. At a time when bank core cash is scarce, they are borrowing in all likelihood.

Disrespect for those who utter nonsense about inflation expectations, better described as inflation expectorations, is most deserved. These hacks, clowns, and charlatans cannot even define inflation. A grand Orwellian game has taken place for well over a decade.

My description is that an Orwellian game of truth management has become engrained in both the USGovt and Wall Street, just another umbilical cord of deception from the Fascist Business Model design.

The other disgusting development in truth is the gigantic JPMorgan cemetery for off-balance sheet of dead securities. National security cover has been generously granted to the privileged JPMorgan by John Negroponte, the national intelligence czar, upon orders from the president in May 2006. In the name of national security, publicly traded companies are excused from their usual accounting obligations for disclosure of securities. The beneficiaries are members of the Fascist Team. For an eye-opening comparison between JPMorgan and Citigroup, each of which suffer from the same credit derivative pestilence, but with only Citi showing symptoms of overtly detectable skin disease, see a recent article. Rob Kirby in mid-February gave yet another excellent forensic financial fraud analysis in “Numbers That Do Not Add Up” (click here ). He concludes JPMorgan receives a pass, a corrupted fraud coupon. My view can be simply stated. Rumors abound that many Wall Street insider firms abuse JPMorgan according to an endorsed plan. JPMorgan has become the ‘Garbage Can' that never gets taken to the roadside for Tuesday morning pickup.


The Union Bank of Switzerland came out with a revised mortgager bond loss estimate of $600 billion. Did they call it ‘Subprime' loss of just ‘Mortgage' loss? The public impression is still a subprime slime problem, when the reality is clearly a general mortgage problem, extending to the entire risk price lattice for the US financial foundation. By midsummer or autumn, the disaster of the prime adjustable loans will be vividly clear. My expectation is that the prime adjustable market will deliver gigantic shock waves to the US financial sector and banks in particular this year, in magnitude three to five times greater than the subprime arena. The subprime crisis was the opening act. The prime adjustable mortgages will the Act II. Foreclosures in January rose by 90%, after a similar rise was seen last September.

New analysis from private equity giant Provident Equity Partners show that 30% of mortgage holders will be under-water with negative equity, owing more to the bank than their entire property is worth. That is, if home prices fall just another 5% this year in 2008.

Expect a bigger decline by the fall (autumn). The craziest story of all is that Fannie Mae declared a Q4 loss of $3.55 billion, but remains the centerpiece of the USGovt plan to revive the secondary mortgage market. Be careful in gearing up a centrifuge built atop an acid pit. Their stated loss enables removal of limitation, the federally mandated limit on its $724 billion in mortgage book of business for accounting fraud and felonious activity. The other limit for conforming loans was legally raised above the $417k limit to $730k. Only in America !

My quick interpretation of economic outlook is simple. Forget the Philly Fed, the Chicago PMI, the Empire State Report, the sentiment indexes. They are all pointing downward. By the way, the Univ of Michigan consumer sentiment just plunged again, from 78.4 in January to 70.8 in February, when many thought it had bottomed out. The Conference Board index of consumer confidence also plunged, from 87.3 in January to 75.0 in February. No, put aside these many pulse readings. The 2-year versus 10-year USTreasury yield curve has moved. It is now at 1.72% (2-yr) and 3.58% (10-yr) to give a still steady 182 basis point spread. The spread has not changed much in the last few weeks. That signals rising price inflation, and some relief for the bankers on lending profit margins. However, the short end has moved down again sharply below 2.0% to signal stronger recession signals. The USFed will push the Fed Funds rate down toward 2.0% at least. The USFed is obedient. Take the two signals and you get STAGFLATION.

The gold price is a prime beneficiary of stagflation, since the USFed fights a losing battle to turn the tide against a powerful economic recession, willing to permit powerful price inflation in order to prevent asset deflation from overwhelming the bank system. Houses and mortgage bonds are big deflating assets. They must reverse. Price inflation will be permitted. Gold will soar to at least $1500 perhaps this year. Silver will reach $30 perhaps this year, maybe higher.


No longer a secret, the Bank of America has circulated a private paper to the US Congress warning of $739 billion in mortgage defaults.

The BOA proposes creation of a Federal Homeowner Preservation Corp with three functions:

1) purchase crippled unwanted mortgages, thus serving as buyer of last resort,

2) forgive (and eat) debt above home market value, thus removing homeowner negative equity,

3) refinance home loans at lower rates, thus using federal guarantees.

We are finally beginning to hear the first sounds, to see the first glimmer, of a New Resolution Trust Corp built of the same planks as that in 1990 under the aegis of FDIC head Bill Siedman. This proposal was mentioned in my articles at least twice, to provide a bond cemetery, to build a new secondary mortgage centrifuge, and to enable mortgage solutions for refinanced loans. By summertime, urgency will be clearer, enough for the sleepy dopey corrupted clueless grandstanding Congressional members to take action. The USFed might be too wet behind the ears with inexperience, and distracted by their banker loyalty. The Dept of Treasury is too distracted by defense of a paper-thin Strong Dollar Policy, where stupid pills are handed out at office doors upon entry.

The USGovt Administration has turned attention away from its hobby war (profitable indeed) to offer a flimsy moronic inadequate misdirected stimulus plan worth $150 billion directed at households. The President, fully counseled by hack inept economists, believes the solution is to give a few hundred dollars to each household, hope they spend it, when they will actually use it to pay for credit cards. Only in America ! The USFed Chairman Bernanke, Treasury Secy Paulson, and the President strongly resemble Mo, Larry, and Curly of the Three Stooges. Not only are the television characters more entertaining, but they were likely more intelligent. They were surely less corrupt.

One should never forget the actual priorities of the US Federal Reserve. They publicly state, and proclaim to the Congress whom they betray and stonewall, that they operate to promote economic and job growth, and to prevent price inflation. Their true function is management of monetary inflation, to assist in the lies behind price inflation measurement, and to clean up sequential tragedies of booms and busts littered through their legacy, acting as disaster underwriters. The true priorities of the USFed are to save the big US banks and to revive the housing market. In other words, they only care about the bank balance sheets and profitability. In order to preserve the banks, they must reverse the housing bear market. Let us not forget, that the USFed has not correctly forecasted a single bloody thing. They have denied everything in progress. Yet they are appealed to provide a solution.


What does official response to the housing crisis and mortgage debacle with continued bank collapse mean to the gold & silver price, to the USDollar and currencies??? Everything!!! The USFed and Dept of Treasury have begun to solicit USGovt assistance in the form of big powerful fiscal programs. The flimsy stimulus plan will be followed by several similar ones, each one bigger than the previous. This is the stuff of what produces commodity speculation juices and animal spirit rise. The real cost of money is zero, actually deeply negative when you figure price inflation runs at 12%. The commodity bull has found renewed strength. We have a situation with gold threatening 1000, silver threatening 20, natural gas threatening 10, after crude oil surpassed 100. The Three Amigos of the copper price, crude oil price, and Baltic Dry Index for shipping are all three looking strong.

Numerous questions come from Hat Trick Letter subscribers and public readers alike. The question many times is centered upon the length of the bull market in commodities, gold and crude oil in particular. My response often points to a basic question of whether anything has been fixed. Has the bank capital shortage been fixed? Has the housing price leveled off? Have home inventories reduced? Have prime mortgage bonds even begun to hit the news? Has the US manufacturing sector returned to US shores? Are US corporations investing more in the Untied States? Is the USEconomic dependence upon bubbles changed? The answer is NO to all. The USFed will bring interest rates down to 2.0% and possibly down to 1.0% again. Would anyone be surprised if the USFed took rates down to 0.5% or even 0% at some time in the future? Not me! The US financial system is ten times weaker than Japan 's.

Another viewpoint is worth quick mention. The current USGovt Administation launched a nasty war against Iraq on a recognized vaporous basis. My description was of a new important chapter of the Global Energy War, which invited response. The Sovereign Wealth Funds are such a response. They are buying fewer USTreasurys, fewer US stocks, almost no US bonds, and instead have turned to large scale purchase of commodities, energy fields, many commodity and energy firms. Do not expect that foreign wealth centers will bail out the US banks and in turn the USEconomy. Their first and second rounds of capital supply in exchange for equity will not be followed by continued supply. Not when they see nothing being fixed. They will be bigger buyers of commodities.

The trend is changing also for US-based pension funds. The California Pension & Retirement System (CALPERS) and the Texas Teachers Union have announced plans to devote more future investment to commodities and energy. They join the Sovereign Wealth Funds after being burned on US$-based bonds. A powerful torrent is building for commodities, in opposition to the corrupt US$-based paper conmen games. Hedge funds are players already. Someday soon, US banks will join the dance.


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By Jim Willie CB
Editor of the “HAT TRICK LETTER”

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