US Dollar on Edge of BREAKDOWN, Gold on Verge of BREAKOUT
Currencies / US Dollar Jul 02, 2008 - 03:48 PMBy: Jim_Willie_CB
The US Dollar is on the edge of the chasm again. The nonsense has been cast aside about a bank recovery, a housing stabilization, and an economy that can withstand a spillover. How incredible it is to see grown adults accept such marketing and promotional drivel. Wake up and smell the blood! The US financial and economic system has never been so vulnerable in almost a century. What we see now is far more dangerous than the 1970 decade, characterized by vast cost shocks. Back then, China was not a player. Its current presence puts a price ceiling on finished product pricing power, and even more importantly, on wages broadly in the labor market. Households cannot afford higher prices, as bankruptcy pain escalates.
Other key differences are discussed in the upcoming July Hat Trick Letter. The US financial networks and media seem to describe the entire set of symptoms that constitute near systemic collapse, without ever mentioning the potential for collapse. My view is that the banks will lead the process. They, for the most part, will be making giant strides into mine fields, after having held themselves back on accounting shenanigans. Their structured vehicles laden with acidic cargo have been circling the cities for some time now, but must soon return to the company back lots where their destruction might spread to the vital corporate centers. Most banks will dilute themselves into oblivion, as they stave off bankruptcy, improve their liquidity, and deal with the steady stress of insolvency. Some banks have begun to call in healthy loans in order to maintain cash positions. Some are kiting on deposits, borrowing them illicitly during an unsanctioned three-day period of sinister shifts. Some like Wachovia and Key are dead but have not admitted it. Most are demanding that good borrowing customers jump through hoops endlessly.
A couple big Wall Street investment banks are probably walking dead also, such as Lehman Brothers and Merrill Lynch. On the next round, they will tend to take each other down together. General Motors is being prepared by financial funeral directors as we speak. See the Merrill Lynch downgrade. The dead are downgrading the dead! Preparations are being made to relax official rules in order to facilitate bank failures, reported in the news without bother of implications cited. Treasury Secy Paulson wants ‘additional emergency authority' to limit financial market disruptions. Translated, that means he wants relaxation of bailout mechanisms, loan extension facilities, and other bank sector subsidies, even as handouts and corrupted doles are to be widened. He cites powerful negative forces from energy prices, bank & bond crises, and the housing decline. He uses the word ‘liquidation' rather openly, much like ‘fire' in a theater. He talks openly about orderly liquidation of large financial institutions. Implied is more JP Morgan assumption of monumental books of business, otherwise known as casino games.
Many such security assets have no market anymore. Try selling a subprime mortgage bond these days, or a leverage bond composed of the same decomposing debris! He is trying for a second time to propose a blueprint for regulatory overhaul to benefit the Wall Street elite banks that caused most of the Western world financial destruction. When the US Govt seeks to enact reform, Paulson wants them to reach for his blueprint.
Imagine hurricane preparations devised by town officials, with nobody changing daily activity and habits. For two decades, the public has subsidized corrupt, crooked, conniving Wall Street elitists without a peep of objection. The problem is that the public citizenry in the Untied States is profoundly ignorant, based upon lack of reliable information and lack of ability to discern much beyond video games and reality television shows and new hamburger options and Hollywood star drug habits. The majority is clueless, while the enlightened few feel helpless to contend with a corrupted system that controls the media networks, regulatory bodies, and law enforcement. Lawsuits against JP Morgan have all failed. Challenges against the US Treasury on gold management have all failed, yet are ongoing. Challenges against the commodity exchanges on oversized short position concentration have all failed. Meanwhile, most Wall Street information shared publicly is patently untrue, self-serving, and acts as part of their corporate brokerage trading strategies. In order to act defensively in defiance, one must invest in gold and silver, or else buy into an energy firm.
Last week the US Federal Reserve blinked. This week they are hiding. They have no policy options left. They are backed into a corner. They can defend the US Dollar and further kill both housing and credit starved commerce, or they can bow to the stock market with further stimulus to the US Economy and invite additional grand increases to cost structures again. The US Fed has suffered some rather substantial damage to its private portfolios. This is unprecedented. They are not an altruistic organization, but rather the most parasitic exploitative financial organization ever to operate on US soil, outside organized crime. Heck, they are Ruling Elite organized crime in league with the US Govt! That is just another description of my oft-quoted theme of the Fascist Business Model in full force since year 2000. That is the legacy of the current administration.
Now the Intl Monetary Fund has decided to conduct an investigation into the financial management of the US banking system! This is totally unprecedented. The German journal Der Spiegel wrote that the IMF had informed US Federal Reserve chairman Ben Bernanke of its plans for a general examination of the US financial system.
The IMF board of directors has ruled that a so-called Financial Sector Assessment Program is to be carried out in the United States . This, according to the German journal, “is nothing less than an X-ray of the entire US financial system… No Fed chief in US history has been forced to submit to the kind of humiliation that Ben Bernanke is facing.” For some reason, the entire story escaped the intrepid lapdog US press network system. We would live in a different world if all financial network news was from public funded commentators.
My view is that some sort of powerful steps are being taken to perhaps wrest control of the US banks away from Americans, after declaring them to be a high risk to the global financial system. In 2001, reports came out that the Bank For Intl Settlements in Basel Switzerland had declared the Soviet Union a geopolitical security risk. After large loans were called for repayment, the Soviet Union collapsed. Back then, the BIS also announced that the US banking system represented a similar financial risk to the global economy. One must wonder if some profound changes are soon to come.
USDOLLAR ON EDGE OF BREAKDOWN
The US Dollar is showing early signs of breakdown. Look closely not at the critical support levels from March and April, but rather the intermediate pattern. If the intermediate pattern on display over the last four months is ignored, and a simplistic view is taken of critical April support levels continuing to hold, then one might conclude ‘No Big Deal' on the recent US Dollar move down in the last couple weeks. However, if that intermediate pattern is viewed in technical terms, one must conclude that the US $ DX index has begun a breakdown. At 72.10 late in the day Wednesday, the breakdown continues almost silently.
Gold and silver prices have responded. Notice the 200-day moving average held firm since the bounce began in March and April. One can easily now call that bounce as utterly feeble. It enabled a vividly clear pause pattern. Those who call the bounce as the beginning of a US$ recovery are exaggerating, undoubtedly motivated by the vested interests of Wall Street to support trade of their own private book of investments. The US $ DX index has broken below the clearly defined bearish pause flag pattern, one found in classical technical chart textbooks. The MACD cyclical index shows a definite downward direction in the upper chart portion. The crossover in this moving average convergence divergence index is early but profoundly clear.
The biggest confirmation one can point to on the US Dollar weakness, extended from the US Economic weakness, is the big decline in the 2-year US Treasury Bill yield. It has continued to fall from the time of last week's article about the market response to the US Fed that blinked. With a 2-year US TBill yield now at 2.60%, some conclusions can be drawn. An economic recession is confirmed. The US Fed has had a rate cut taken off the table. More price inflation is coming, permitted as a harsh secondary expense for treating the worst recession the nation will see in 70 years. A credit derivative accident spawned from higher long-term rates cannot be permitted, but might occur anyway despite all the wizards best efforts. One should regard all talk of crude oil speculation to account for its price rise as pure distraction from the clear and powerful US Dollar risk of further breakdown.
The euro currency has been the principal beneficiary of the US Dollar weakness in the last couple weeks. It is back over 158, after having flirted with the 154 handle for a spell, just enough to fool the silly casino players on Wall Street. In fact, today it is near the 159 level. The euro now threatens all-time 160 high established in April, having surpassed both the May and June highs. Europe has problems, but they also have a trade surplus and an official interest rate not so absurdly low as the American rate. The EU economy is totally bifurcated, with southern nations under extreme duress while Germany is now running essentially flat. Maybe the Germans running the Euro Central Bank are attempting to fracture their monetary union?
Any official interest rate hike ordered by the Euro Central Bank, which meets on Thursday, would be ill-advised. They might do so anyway, but watch for them to take it back later this autumn if they are so unwise as to do so.
The subtle punishment will be a euro well past 160 toward 170 in the exchange rate, which will interrupt European exporters severely. The British pound sterling has actually risen also, despite its utterly pathetic set of fundamentals. Without its lofty official interest rate, the sterling would be panhandling with licensed hired vagrants outside the FOREX trading halls. The currencies are analyzed in more depth in the Hat Trick Letter reports.
The one loud fundamental behind the US Dollar weakness is the endless war. Its costs are one billion straws on the camel's back. Its sacred status should be more debated, especially since it has contributed in an important way to the destruction of the national finances. The debate on private profiteering and military contract corruption, not to mention its high priority for contraband trafficking, should begin, except for loud cries against the patriotism of such critics. The conclusion is that patriots should be silent to profiteering, corruption, and trafficking. Go figure! A side comment on yet another doctored statistic. The number of soldier deaths in Iraq & Afghanistan is officially tied to those who die with boots on Iraqi and Afghan soil, excluding all soldiers who die following serious wounds in Qatar , Kuwait , Persian Gulf naval vessels, German hospitals, Walter Reed Hospital , and so on. My sources report that the war death count is 3x to 5x higher than the official count, thus another falsified statistic. This writer wants America safe, but the real threats reside in Wall Street, the US Govt, and the ancillary agencies.
GOLD ON VERGE OF BREAKOUT
The gold price leads the precious metals. Simultaneous with the US $ weakness, the gold price has lifted above the May high. No resistance exists between the 950-960 ribbon and the all-time 1030 high registered in March. The retest of the May low has been successful. Its price now stands just shy of 950 late on Wednesday. Notice the 200-day moving average held in support, guiding FOREX traders. A powerful reversal seems evident as a bowl-shaped pattern. A sharp uptrend in the MACD is also clear in the cyclical index. In my view, the fundamentals are present for a triumphant challenge of the 1000 mark.
When 1000 is indeed broken, look for a powerful breakout to at least reach 1100, and probably shoot up to 1200 quickly. Recall that we are still in the slow gold season, so prepare for something very big during the typically strong season.
The US Fed has no market friendly options left. Such is the plague of stagflation, as all options are seen as deeply harmful to one or another large segment of the US Economic total system. With no hint anymore of deceptive US Fed rate hikes, with continuing bank crisis mired in insolvency and soon bankruptcies, with continuing housing glut weighing down the entire economy, with enormous costs strains led by energy and food, the US Economy is absolutely certain to serve as a big drag on the global economy with its recession. Its denied recession has given ground to a new debate on how deep the recession will be. Of course, unelected minions in the US Govt and entrenched conmen on Wall Street will continue to harp on how we have avoided a recession, all stupid talk of self-serving nature.
As the US Govt reacts to recession and the end effect for handouts of beans & rice to the bedeviled citizenry, gold will react to the inflation behind the solutions. As the US Fed and Dept of Treasury react to the banking debacle extended from mortgage bonds, gold will react to the inflation behind the solutions. The bigger problem is that the solutions will not solve much of anything, and will be required on a repeated basis. My theme of ‘Vicious Cycles' directing the destruction in the meltdown have become more widely recognized. Each treatment of subsidies, liquidity measures, handouts, and bailouts will be followed by more of the same. Nothing has been solved. Structural breakdown needs more than a run through the car wash with a Wall Street wax job in order to produce deep reform.
The silver price improvement has finally caught up to that of the gold price. Its monster 70 cent move up on Tuesday brought a smile to my face. When 21 is indeed broken, look for a powerful breakout to at least reach 25, and probably shoot up to 30. Recall that we are still in the slow precious metal season, so prepare for something very big. The central banks own no silver. The commodity trading pits are under pressure to deny delivery. Shortages are reported by both the US Mint and diverse coin dealers. Some silver merchants report continued brisk trade, the only arena not flashing red lights.
FINALLY SOME MOVEMENT IN MINERS
Finally the precious metal mining stocks have picked themselves off the ground. A nice reversal pattern is evident on the weekly chart. Previous charts are shown in daily terms. Notice the W-shaped reversal pattern, better known as a ‘Reverse Head & Shoulders' pattern of bullish type. The neckline lies at 460. The head has a bottom located at the 400 mark loosely determined. So in the intermediate term, expect a move to 520 on the reversal, surely enough to challenge the March high. Time must be spent with the right side action at the 440-460 ribbon of resistance.
True to form, Wednesday saw a down move, which will build the right side shoulder. The next move over 460 on the HUI index will trigger a big upleg. A challenge toward the 520 high will come in a matter of weeks, not months. The reversal move will offer strong momentum for that challenge. Expect new breakout highs before September is over, probably far earlier, like later in July or in August. Last year in surprising fashion, powerful moves were seen in gold and the US Dollar during the usually quiet early August timeframe. Expect the same this summer.
Notice the 20-week moving average has provided support in December 2007, in February, in March, and might again now. The ‘Head' of the reversal pattern found support from the 50-week moving average this spring. Given that support from the 50wMA, one should expect strong support from the 20wMA this summer. An important final point must be made. During the springtime correction, the 20wMA never went below to cross the 50wMA. This implies the bull market in mining stocks remains intact. Try telling that to the Canadian Junior mining stocks though. Their day is coming. The low sentiment could mark its bottom. The July Hat Trick Letter will display the HUI versus S&P500 stock index ratio. It shows a tremendous reversal recently. In other words, as the mainstream ‘Paper-based' stocks in the S&P stock index have suffered, the HUI mining stocks have advanced forward. The negative correlation is very favorable for precious metal investors involved with mining stocks.
In the last two months, some important points should be kept in mind. The bigger mining companies must replace depleted reserves. They are turning to the successful explorers, case in point being both Gold corp and Barrick. They are not interested in acquisitions of mid-sized junior miners, but rather the explorers that possess expertise in exploration and discovery of valuable ore deposits. A bidding round of junior miners is not only likely, it is also guaranteed. My eye is set upon the hedge funds who are in many cases employing spread trades, going long the large mining stocks and going short the explorer speculative mining stocks. Expect hedge funds to take heavy losses.
Some actually believe that Barrick is a ringleader behind providing capital not to fund their own mining operations, but to New York and London hedge funds to suppress the small gold mining firms. Others believe that Goldman Sachs has abused its managed GDX exchange traded fund, as they short the entire sector by shorting the entire index. One should consider the possibility that either or both the GLD or SLV exchange traded funds, managed by the cartel members JP Morgan and Barclays respectively, might be assisting in suppression of mining stocks in order to acquire them later for a price as cheap as a song. This pair of titans surely is shorting gold and silver with paper futures contracts. We live in a corrupt financial world. Its mafia dons reside in New York and London .
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by Jim Willie CB
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