“US consumers are cutting back, and where they are not cutting back, they are scaling down. This new cycle is all about ‘getting small’ and it is deflationary. For yet another in the litany of signs pointing in the direction of social change towards thrift, have a look at what is transpiring at the upper echelons of the income strata – Now Even Millionaires See the Benefits of Budgeting on page B5 of the Saturday NYT is a must read.

“Not only are the rich trading down, but the article quotes a high net worth financial advisor who said ‘many of our clients are very happy to be sitting on bond portfolios and cash reserves.’ And see the article on page 2 of the Sunday NYT – Beauty Products Lose Some Appeal During Recession. According to the NPD Research Group, total sales of department store beauty products are down 7% from year-ago levels. Women are apparently opting for the ‘natural look’ – “some people are selectively replacing higher-priced items with cheaper products from drug stores and discount stores.”

Right on, David!

And here’s the CEO of Pepsico:

“The age of thrift is here.”

Even in Japan, after 20 years of coughing and sneezing, people have caught “the thrift bug,” says The New York Times.

What’s a consumer economy need in order to keep growing?

Uh…it’s needs consumer spending.

What do consumers need in order to boost spending?

Uh…they need more money!

Oh, there’s where it all starts to come apart, doesn’t it? Where do they get more money? They either earn it…or they borrow it. And right now, they can’t earn it – not with 12% unemployment in California! Workers have no bargaining power. And they can’t borrow it either. The banks won’t lend – not with the value of their collateral still falling.

Word comes this morning that mortgage delinquencies have hit a new record. And here’s a headline warning of worse to come:

“$30 billion home loan time bomb set for 2010.”

Even solvent homeowners who aren’t forced into foreclosure still find it beneficial to walk away from their houses. “Strategic defaults,’ says The Los Angeles Times, are becoming a problem for mortgage lenders.

We didn’t read the article. Instead, we began to think. What if we owned a house worth $200,000 with a $300,000 mortgage? What would be the smart thing to do? Easy…walk away from it. Then, buy it back at auction!

Desperate consumers do what they have to do. Canny consumers do what’s smart. And now it’s smart to walk away from any debt that you don’t actually have to pay.

As for adding more debt, you can gage yourself from the comments above, consumers are not eager to borrow. They’ve seen what happens when they go too far into debt. They’re older and wiser than they were in the bubble years. It’s been 10 years since the tech bubble exploded. Since then, stock market investors have made nothing – zero. And now houses are falling too.

So, if a fellow needs money for his retirement, where is he going to get it? Not from his house. Not from a pay raise. And not from his stocks either. He needs savings. He needs real money.

Americans aren’t so stupid after all. When they need to stop spending, they stop spending. When they need to save, they save. Too bad about the economy.

Yes, what is good for individuals seems to be bad for the economy. When people save instead of spend, the consumer economy stalls. And then economists think there is something wrong. They think an economy needs to expand constantly. And so, they try to find ‘solutions’ to the ‘problem.’

Actually, there is no problem at all. It’s just the way capitalism works. There are booms. And there are busts. Periods of growth…and periods when the mistakes made during the boom are corrected. There’s a time for every purpose under heaven. That’s the way it works. The economy breathes in and it breathes out.

And there’s always some dumb economist trying to smother it with a pillow!

A report from the world’s biggest bank, HSBC (NYSE:HBC), tells us the dollar’s days are numbered.

“The dollar looks awfully like sterling after the First World War,” said David Bloom, the bank’s currency chief.

“The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK – debt is racing up to 100pc of GDP,” he said

The Telegraph reports:

“Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia’s ‘mercantilist mindset’ of recent decades is about to be broken by the spectre of an inflation spiral.

“The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.

“A monetary policy of near zero rates – further juiced by quantitative easing – is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.

“What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt.”

That said, we repeat a headline from Seeking Alpha:

“Dollar shorts should look out.”

We agree with HSBC and the Telegraph: the dollar will probably slide – especially against Asian currencies – for the next few decades.

But that’s the long term. In the relatively short term we still face the shock of another leg down of the credit contraction crisis. Risk is likely to make a comeback. When that happens – and it could happen in a ‘Red October’ – the dollar will seem like a relatively solid refuge. This is what happened last year. We wouldn’t be surprised by a replay of that ‘flight to safety’ we saw at the end of last year.

But we know what you’re thinking: what? When did the dollar become a ‘safe currency?’ Of course, it’s not safe. But when the end of the world approaches, it will seem safe.

For a while.

Until tomorrow,

Bill Bonner

Source: There’s No Flu Shot for the Thrift Bug

Don’t look now, but history tends to repeat itself.

Also, consider the fundamental picture. We have rallied 48% from the March lows on the back of what? Good earnings? Good employment figures? Good spending figures? Expanding GDP? No.

We have rallied based on one of the largest and most concerted propaganda campaigns ever waged, supported by government stimulus. But no government can stimulate forever. The bottom line is this, if Americans do not return to work, THERE IS NO RECOVERY. Memorize this line. Post it on your refrigerator, your mirror, your dashboard – wherever!

So maybe now you’re asking yourself, “Aren’t the unemployment numbers getting better?”

Well, let’s see…

Verizon (NYSE:VZ) – 8,000 jobs cut
Motorola (NYSE:MOT) – 7,000
Microsoft (NASDAQ:MSFT) – 5,000
Untied Technologies (NYSE:UTX) – 8,000
HSBC (NYSE:HBC) – 6,100
Anglo American (LON:AAL) – 19,000
Avon (LON:AVON) – 2,500
Goodyear Tire (NYSE:GT) – 5,000
GM (NYSE:GRM) – 10,000
Nissan Motors – 20,000
Panasonic (NYSE:PC) – 15,000
PNC Bank (NYSE:PNC) – 5,800

Many of these will be released in the third and fourth quarters. No doubt there are plenty more we haven’t heard from yet. Frankly, I couldn’t list the thousands of companies and millions of jobs lost in this write-up. That’s just a sampling. But let’s get to some hard and fast figures.

According to Seeking Alpha, 13 million Americans will lose their benefits by years’ end. So if unemployment claims are falling, people must be getting back to work. Right?

WRONG!

They are exhausting their benefits. There are 30 million people in the United States on food stamps. There are only 200 million working-age Americans (age 15-64). Is there any wonder why the Administration is NOW saying they will have to raise taxes on the middle class to fund their programs?

Unemployment has been estimated by many good economists as being around 20%. Unfortunately for these people, their nanny-government lifeboats are slowly running out of air.

Those 3 million people who lost their jobs in the second half of last year? Once you factor in their dependants, that equals 10 million people who have no income and no savings.

And how about the other 4 million others who lost their jobs in the first half of this year? They will be next. The numbers get so depressing, I hate to even count them up.

As I have said before, unemployed people don’t spend money. They don’t buy technologies, or durables, or even pay their mortgage. Bankruptcies are up 600% in this recent downturn. And that includes the time after Congress affected new rules to make bankruptcy harder.

So who is going to pay for anything when they are struggling to buy groceries?

If the equity averages are already rallying on the back of these horrible stats, there is nowhere to go but down when the real truth sets in.

And we have seen this corollary frequently in recent months. When stocks and risk assets fall, so do the currencies, and the dollar rises. We are a long way from being out of the woods on this retracement.

So why do I cite all this doom and gloom about the United States? Believe me, there’s plenty more to go around. Because the fact of the matter is this: When these chickens do come home to roost, we will see another gut-wrenching breathtaking sell-off in equities, which will be followed by currencies. We have not seen the end of this yet.

While some are talking of a recovery, others are talking about a possible double-dip recession – and I’m reasonably sure we are in for a “multi-dip.” It is hard to be bullish on the dollar for any reason, but if the market drops again, which I believe it will, funds will rush right back to the dollar (and the yen).

So far, we have seen range-bound trading in the recent months as currencies search for direction. This week the big news was the US GDP. Risk currencies rallied on the back of it, but for 24 hours they have remained flat as there were no buyers to move it higher.

Also, the market got awfully jittery on the release of the consumer spending news yesterday. The manufacturing euphoria expended itself, and now we find out that personal income has dropped 1.4%, the biggest fall in four years. Inflation-adjusted spending fell 0.1%. The real dark spots in the economy have started showing back up. The stimulus has worked its way and done its best, but its effects are now negligible. Even though there are signs of a “recovery,” it isn’t going to be one without the consumer. If he’s exhausted his means of spending, or is just afraid to put out any money, the recovery trade will be doomed. And that means dollar strength once again.

But for now, we will have to trade with what we have. It is hard to argue with the markets, even with the most compelling of reasons. A person may as well try to stop an ocean wave from breaking onshore.

And as we look ahead, we must always be mindful of what may be. As numerous talking heads were saying on Tuesday of this week, “We have turned the corner… things are going to get better – if they don’t get worse!”

Regards,

Bill Jenkins

Source: Illogical Optimisim

Is General Electric Co. (NYSE: GE) poised to be the next U.S. player scuttled by the worldwide credit crisis?  Or is the onetime-bellwether conglomerate on track for a major corporate turnaround – the kind of rebound that will restore the company’s global muscle while providing investors with a shot at double- or even triple-digit gains?

With a bold move it made yesterday (Tuesday), the Fairfield, CT-based GE is doing all it can to make that second scenario come true.

Since the global credit crisis, Wall Street gloom-and-doomers have continually predicted that GE’s financial-markets exposure – courtesy of its massive GE Capital Corp. financing units – would cause the once-admired U.S. blue chip firm to share the same fates as American International Group Inc. (NYSE: AIG), Lehman Brothers Holdings Inc., or The Bear Stearns Cos. Inc., all one-time heavyweights whose exposure to “toxic” financial assets sealed their doom.

So GE yesterday opened GE Capital’s books up to Wall Street, hoping the bold move would stifle investor fears that the financing would continue to struggle, or that it would need to be separated from is parent, as the Obama administration has suggested.

The upshot: While some investors and analysts weren’t swayed – and believe the problems remain and that GE merely bought some time – others now believe the company has a new, and much-sharper strategic focus, one that could richly reward investors who have the courage to bet on GE now.

Even with the continued speculation that GE Capital still may require a cash infusion in the future, the changes that GE has already made are enough for the company’s stock to double over the next three years, says Jack De Gan, chief investment officer of Harbor Advisory Corp., a Portsmouth, N.H.-based wealth-management firm.

“They are shrinking the balance sheet at GE Capital much faster than anticipated at the last ‘deep-dive’ meeting, which is, I think, the reason the shares are up,” De Gan told CNBC-TV in an interview.

GE’s shares rose 20 cents each, or 1.62%, to close at $12.52, although they traded as high as  $12.70. De Gan’s price prognostication isn’t out of line; a double from here would take GE’s stock up to about $25 – not far below their 52-week high of $30.39.

The Low-Flying High-Finance Unit

GE’s finance unit, which once accounted for nearly half of the company’s overall business, suffered an 80% drop in profit in the second quarter and has dragged the company’s stock to its lowest level since the mid-1990s. Despite the hemorrhaging, its losses in areas such as real estate and consumer lending were relatively small.

GE is under pressure to separate its industrial unit from GE Capital, as outlined in a white paper on financial regulatory reform by the Obama administration.
“The loophole for special-purpose credit card banks creates an unwarranted gap in the separation of banking and commerce and creates a supervisory ‘blind spot’ because Federal Reserve supervision does not extend to the credit card bank holding company,” the paper said.

But yesterday, in a Webcast that GE used to help tell its upbeat story to investors, GE revealed that its GE Capital financing arm no longer needs to raise additional capital in order to navigate the continuing fallout from the worst economic downturn in more than 60 years, and also said that this still-crucial business unit has stopped issuing commercial paper through the Federal Deposit Insurance Corp.’sTemporary Liquidity Guarantee Program (TLGP).

GE Capital Chief Executive Mike Neal, who appeared on the Webcast, told investors that the finance unit was operating just as detailed back in March. The projections outlined then were based on the U.S. Federal Reserve’s “baseline” economic scenario, which were a key – though controversial – element of the much-discussed  “bank stress tests” conducted by the Obama administration and the nation’s central bank.

“We’re fairly close to where we thought we would be with the base case,” said Neal. “We don’t see any need to raise external capital.”

GE Capital is projected to earn $2 billion to $2.5 billion this year. The baseline scenario is the more conservative of two scenarios outlined by the Fed last spring as government officials performed federally mandatedstress tests on the nation’s largest banks. The scenario called for a maximum unemployment rate of 8.8% and a gross domestic product (GDP) contraction of 2% in 2009.

GE is trying to reduce the corporate importance of its financing arm, and is making progress. GE Capital’s total assets were valued at $557 billion at the end of June, down from $600 billion last year, according to apresentation the company gave to investors. GE’s goal is to reduce the division’s total worth to about $400 billion in the future. The company is on track to have total investments down to $450 billion by the end its next fiscal year.

Does GE Need a Dance Partner?

Still, many analysts aren’t convinced, particularly since the nation’s unemployment rate hit 9.5% in June – meaning the assumptions the company used for its longer-term projections are all wrong.

“There are parts of the [GE Capital] portfolio that of course would give someone pause and concern,” Steven Winoker, an analyst for Sanford C. Bernstein & Co. LLC, told Reuters.

Another analyst said GE is simply buying time for its financial unit, which will ultimately have to be spun off.

“This isn’t any more about a decision: it’s about when it’s implemented,”Sterne Agee’s Nicholas P. Heymann told TheStreet.com.

Even De Gan, the bullish Harbor Advisory CIO, concedes some risk remains. The company’s near-term future carries the most risk, because of GE Capital’s real estate holdings, he said in the CNBC interview. GE right now has about $5 billion in unrealized losses that it expects to absorb through earnings over the next three years. If that market doesn’t rebound, the company might not be able to follow through with its plan, he says.

But De Gan told interviewers that this risk appears to have already been factored into the current stock price. The bottom line: Someone who opts to make GE a multi-year investment could end up watching as the company’s shares march back up toward the $30 level.

There is also speculation that GE is seeking an eventual partnership with a lender. A shrinking business would make GE Capital more attractive for banks looking to buy a stake in the division. Heymann expects GE to eventually partner with a large bank such as HSBC Holdings PLC (NYSE ADR: HBC).
GE Capital refutes any assertions about a possible partnership.

“I don’t know what the scenario would be where we would entertain that,” Chief Financial Officer Keith Sherin said in the Webcast.
”I’m not focused on that.” CEO Neal added. “I don’t think anybody here is.”

Other analysts are more optimistic.

“The Treasury [Department's] suggestions are just that, so far, with new regulatory rules probably several iterations away from a final version,” Sanford Bernstein’s Winoker wrote in a recent report.

Winoker also noted that if GE were forced to break off its finance arm, it would have five years in which to do so.

Source: Hot Stocks: As Wall Street Debates GE’s Future, Could Turnaround Plan Cause Shares to Double? ]]> http://www.contrarianprofits.com/articles/hot-stocks-as-wall-street-debates-ge%e2%80%99s-future-could-turnaround-plan-cause-shares-to-double/19520/feed 0 http://www.contrarianprofits.com/articles/and-then-theres-thisfriday-july-24th-2009/19422 http://www.contrarianprofits.com/articles/and-then-theres-thisfriday-july-24th-2009/19422#comments Fri, 24 Jul 2009 19:30:03 +0000 Ed Steer http://www.contrarianprofits.com/?p=19422 Gold added about five bucks to its price from the time that trading began in the Far East Thursday…and the London a.m. gold fix. Then from there, it gave back seven dollars going into the p.m. gold fix…and after that, it gained over eight dollars until half past lunchtime in New York. Then a really serious seller showed up taking nine bucks off the price between then and the close of electronic trading in New York. It was pretty choppy trading all around…and it was obvious that every rally ran into serious resistance. The same could be said for silver.
But according to the usual New York gold commentator [who is not Dennis Gartman, by the way], volume in gold was heavy…estimated…

There wasn’t big volume yesterday, so not too much should be read into this action…but it’s always noteworthy so see that parabolic rises in prices are never allowed to get too far out of hand before the usual ‘not for profit’ sellers show up.

Despite the fact that Thursday was a quiet trading day and neither metal did much price wise…open interest in gold increased another 3,100 contracts to 383,107 contracts. Volume was decent….74,589 contracts. Open interest in silver rose as well, another 410 contract to 99,744…on volume of 15,052 contracts.

The Commitment of Traders report came out yesterday as per usual. In silver, the bullion banks decreased their net short position by a respectable 2,807 contracts…but are still net short 34,625 contracts or 173.1 million ounces of silver. Virtually all of that net short position is held by two U.S. banks…JPMorgan (NYSE:JPM) and HSBC USA (NYSE:HBC). Since the Tuesday cut-off for this report, the bullion banks have decreased their net short position a bit more. The full-color COT graph for silver is linked here.

In gold, the bullion banks decreased their net short position by 9,020 contracts…but are still net short 182,287 contracts…which is quite a bit…18.23 million ounces of the stuff. What’s really unfortunate in gold is that since the Tuesday cut-off, these same bullion banks have put the entire 9,020 short contracts back on…plus more! A ‘back-of-the-envelope’ calculation indicates that they’re short position is now back up to around 19.5 million ounces as of the close of trading on Thursday…and they probably added more on Friday when they capped that $10 rally. So, from a COT point of view, gold is still well into the danger zone…and the chance of a huge sell-off in gold is still a distinct possibility. The full-color COT graph for gold is linked here.

But…under current circumstances…can they, or will they??? This is why I find this price capping at $940 so suspicious. If they’re painting the charts with a false top, we could get creamed in the near future. But…then again…maybe not. The COT says ‘yes we will’…and current circumstances say ‘no we won’t.’ And as I said yesterday, I could easily explain a big price move in either direction for both metals. I’m sure glad that I don’t have to bet any money on the near-term outcome of all this.

As far as deliveries went yesterday, the Comex reported that 55 gold and 42 silver contracts were delivered. There were no changes in the SLV ETF…but over at GLD, I see that they reversed the transaction of the piddling 9,817 ounces they added on Thursday…and have now removed it. Much to my amazement, the U.S. Mint had another update to their production numbers. This is five days in a row…a record! On Friday they reported another 5,500 gold eagles and another 75,000 silver eagles…bringing the monthly totals up to 56,000 in gold and 1,800,000 in silver. And over at the Comex-approved warehouses, another 208,010 ounces of silver were withdrawn on Thursday. Friday’s changes will be reported on Monday.

The big precious metals news yesterday was in the silver market…and I’m surprised that nobody has picked up on this already…and I thank Ted Butler for sending it to me in the wee hours of Saturday morning. The story is posted at newswire.ca and the headline reads “Claymore Silver Bullion Trust Closes its IPO”. The IPO was for 3.6 million units at $10 [probably Canadian dollars since it's a Canadian fund]…plus a full warrant. The fund has also granted the agents an over-allotment option for up to an additional 540,000 fund shares [plus warrant] during the next 30 days. A quick guess says that they should be able to pick up about 2.6 million ounces of silver if everything works out. Central Fund of Canada and their silver trust should be out of the starting gate pretty soon too, I would think. The link to the Claymore IPO story is here.

Today’s first story is from cnsnews.com. Just when you thought you’d heard everything, here is U.S. Vice President Joe Biden saying “We Have to Go Spend Money to Keep From Going Bankrupt”. I wonder if the Chinese government has read this article and heard the video? I thank P.S. for this story…and the link is here.

The next story comes from the …and I thank the usual New York gold commentator for bringing it to my attention. In what some on Wall Street are calling the biggest blockbuster deal in the history of the financial sector, Goldman Sachs confirmed that it was in talks to acquire the U.S. Treasury Department. I know that it’s ‘impossible!!!’ to believe, but the story is linked here, so you can draw your own conclusions.

The third story today is from over at the mineweb.com…and I thank Bill Murphy over at lemetropolecafe.com for running it in his MIDAS commentary yesterday, or I would have missed it entirely. The headline reads “Vault Space Shortage: Swiss banks running out of storage space for gold bullion”. This is a problem that sounds like it’s going to get much worse before it gets any better. The link is here.

And lastly is this piece from Hugo Salinas Price. Not only is Hugo one of the richest men in Mexico, he is also the President of the Mexican Civic Association for Silver…an organization that is getting very close to re-monetizing silver in that country. When he is talking, I’m only too happy to listen. His latest commentary is entitled “Causes and effects” and the link is here.

There is only one way to kill capitalism…by taxes, taxes and more taxes. – Karl Marx

Today’s ‘blast from the past’ is somewhat different this week. The rock band Toto scored its biggest hit with Africa back in 1982. But this is not the 1982 version linked here…it has, as they say, been reinvented. It is sung a cappella…by a jazz choir called Perpetuum Jazzile from Slovenia of all places! And before you dismiss this out of hand, I urge you to give it a listen. It’s absolutely amazing! I was totally blown away. It was a Paul Potts/Susan Boyle [Britain's Got Talent] kind of moment when I heard this for the first time. I like it even more than the original version…and I thank reader Dave Delve for sending it to me. This piece definitely requires that you turn up your computer’s speaker system…then click here. Enjoy!!!

I have no idea what gold and silver prices will do next week. If they scream higher…I’ll understand the reasons. And if they get killed…I’ll understand the reasons for that, too.

But, that’s two days away. So forget about it, and enjoy the rest of your summer weekend and I’ll see you on Tuesday morning.

Source: And Then There’s This…Monday, July 20th, 2009

But the “hottest” investment money may soon be flowing from China back into the United States – thanks to an accompanying development that didn’t even make the news (let alone headlines) here in this country. This will translate into windfall profits for U.S. investors with holdings in the “right” kinds of companies, and in the long run should bolster the U.S. dollar.

This other, below-the-radar development was China’s decision to relax the rules that guide its company’s overseas investments. In a clear attempt to boost investments beyond its borders, China has changed some of its rules to make it easier for its companies to make foreign investments, and to use foreign financing for those deals.

Why China’s “Hot Money” is Headed Our Way

The new rules – which take effect Aug. 1 – will make it lots simpler for China-based firms to make major investments here in the United States– no small deal at a time when credit and other forms of capital remain scarce. This development is especially bullish for U.S. investors holding stocks in U.S. companies involved in such industries as oil, gold, natural resources and high technology, as well as companies that possess strong global brands, since these are precisely the kinds of companies China-based firms will be on the prowl for.

Once the rules take effect, Chinese companies will no longer have to report foreign currency transactions, or go through China’s central bank. Instead, these firms will be able to buy foreign currencies in whatever market they happen to be operating in, and will even be able to borrow from the banks in those markets as a way of fueling direct overseas expansion. Lastly, China-based firms doing business abroad will no longer have to repatriate assets, meaning they will be able to take their foreign profits and directly reinvest them overseas.

China is making this bold move for a number of reasons. Obviously, Chinese leaders want their country’s economic expansion to continue unabated, and these investments will provide China and its companies with access to leading products, cutting-edge technologies and badly needed natural resources – much of it at bargain prices, since many of the top target markets are mired in recession.

But a key incentive for these liberalized rules has to do with China’s aforementioned foreign currency reserves, an estimated 70% of which are held in dollars or dollar-denominated assets. By allowing its companies to make direct investments, and by no longer forcing them to repatriate foreign currencies, China believes its dollar-based holdings won’t keep rising at an accelerating rate.

At first blush, that sounds like it would be bad for the greenback. Surprisingly, the reality will be quite the opposite.

Defusing the “Nuclear Option”

For many investors concerned about the outlook for the U.S. dollar, the threat that China will stop buying U.S. Treasuries – or even worse, might “dump” the U.S. government debt – has provided fodder for something known as the “Chinese Nuclear Option.” The basic premise is this: China, fed up with the United States’ spendthrift ways, and overly liberal uses of debt, finally gets fed up with the losses it’s been taking on its U.S. investments and opts to dump both U.S. dollars and U.S. debt – a move that crashes the U.S. economy.

This scenario is a popular one within the conspiracy crowd. The doom-and-boom merchants also seem to like it.

But what these folks don’t understand is this: China can’t stop buying U.S. Treasuries, and can’t cease to accumulate U.S. greenbacks – even if its leaders wanted to.

In fact, based on my 20 years of experience in the region, I expect China to accelerate its Treasury purchases throughout the rest of this year and into 2010, which will come as a shock to all those expecting U.S. Treasury sales to crater. But I also expect the Red Dragon to take a few other steps that also will catch most western observers by surprise.

Before I get to that though, let’s talk about why China’s not going to start dumping dollars anytime soon and why the so-called “nuclear option” is actually a benign threat:

• China needs our trade and the money that comes with it – so you can expect reserves to continue to climb. In fact, my guess is that we may see Chinese currency reserves rise to as much as $3 trillion less than 36 months from now – and that’s even after China’s economic leaders take steps to slow down the pace of growth it the country’s foreign reserves!
• China finds itself the unanticipated position of needing America. And America of needing China. Many people may not like it, but that’s a different story. Even if the Chinese wanted to stop buying our bonds and trading in our dollars, there is not another currency on the planet with enough liquidity at present to absorb the overflow. The euro came close a few years ago, before it ultimately failed. And that means that China is stuck with Uncle Sam – and Uncle Sam with China.
• Thanks to the record inflows in the second quarter, China now has $2.13 trillion in currency reserves, some 70% of which is dollar-denominated. That means that China can no longer afford to see the U.S. dollar dumped. If that happened, China’s economic future would be put at risk – something that Beijing is not about to let happen. Indeed, China must continue to support the greenback, or risk a complete meltdown. So it will find a way to “deal” with the growing U.S. debt load. At the very least, we may well see China at least maintain its current pace of Treasury-debt purchases; and it may well step up its Treasury purchases for the rest of this year and throughout 2010.

China: The Planet’s Most Promising Profit Play?

Just this week, China reported that its economy expanded at a faster-than-expected 7.9% for the second quarter – even spawning talk of a “V-shaped” economic rebound. After China’s growth rate was reported to have slowed to 6.1% in the first quarter – the worst showing in a decade – economists said the best investors could hope for for was a “U-shaped” recovery, and perhaps not even that.

Past statistics will now probably be revised higher, a fact that led HSBC Holdings PLC (NYSE ADR:HBC) China economist China economist Qu Hongbin to boost his forecast: He’s now forecasting growth of 8.1% this year, and is forecasting growth of 9.5% in 2010 – up from prior estimates of 7.8% and 8.1%, respectively. China’s recovery will be broad and deep, and will be due to inherent health, and not just because of the $586 billion economic stimululs package the country announced last November – a stimulus we said at the time was designed as much to benefit the West as it was to boost China’s domestic health.

It now appears that assessment was completely correct.

For folks who think China’s all about control, these loosened foreign-investment rules and faster-than-anticipated growth should serve as a real eye-opener. China is a communist country in name only. Driven by an intense need to maintain its growth and the desire to become a respected member of the global Tier One fraternity, China is rapidly becoming one of the world’s most effective and efficient capitalists.

The new financing rules will help China build on its recent successes in at least three key ways, by:

• Enabling China-based firms diversify abroad, making them more globally competitive, and much more flexible in terms of the opportunities available to them. I see this as an extension of something I said way back in 2007, when I mentioned that Chinese companies – in the truest Confucian tradition – would view the credit crisis as an opportunity to be capitalized upon rather than a burden to be endured. Investors can China-led and funded mergers and acquisitions to jump significantly in the next 24 months. Investors who take the correct positions ahead of time can expect to profit handsomely – in both the near-term and over the long haul.
• Helping Beijing balance the needs for constant internal growth against the ever-growing international reserves requirements it now sees developing around an increasingly fragile U.S. dollar. Expect Beijing to be especially active in the use of the multi-country-swap agreements it recently put in place as a means to this end.
• Creating ways to help China offset the economic risks associated with its concentrated dollar holdings. Investors can expect to see escalating pressure on the World Bank to create special drawing rights and/or China-led currency equivalents as this situation develops further.

There is no doubt that some people will view what I have told you today with fear. Others will greet this news with hostility. Both reactions are to be expected in an era of increasingly protective legislation emanating from one of the worst financial crises on record. But I also think these are both the wrong viewpoints to embrace.

You see, I smell opportunity.

As noted above, the relaxation or outright removal of these foreign-investment curbs by China is simply another strategy designed to slow the accumulation of dollar-denominated reserves and to reduce the risks associated with the shaky greenback.

But China-based companies will go on a shopping spree, seeking out the world’s biggest bargains. And right now, some of the biggest markdowns can be found in the U.S. market. The bottom line is this: In making these moves, China has essentially installed a big neon arrow that tells us where the hot money is headed – specifically, right into companies involved with oil, commodities and currencies. Companies with high-tech know-how will be prime takeover targets.

And, given the growing affinity China’s emerging consumer class has with top global brands, companies that control the world’s most-popular brands will be the recipients of capital infusions – if not outright buyout offers.

Oil and commodities are a literal no-brainer. If China wants to slow down the accumulation of reserves in U.S. dollars, and there isn’t another currency that’s widely held enough and liquid enough to take the greenback’s place, natural resources and hard assets are the most logical place to be.  We’ve been on this trend for some time, now.

The same holds true for currencies. History demonstrates time and again that strong economies produce strong currencies. From the Romans to the Babylonians in ancient times, to the English, French and Spanish in the Age of Exploration, and even to the dollar and yen in more-recent decades past, the strongest currencies always belonged to the countries with the strongest economies, and with the strongest assets, to boot.

Right now, that all describes China.

To position yourself for profit, consider starting with one of EverBank’s WorldCurrency Access Deposit Accounts – for Chinese renminbi. Not only is it the only deposit account of its kind in the United States, it’s also insured by the Federal Deposit Insurance Corp. (FDIC). As another possible profit play, consider establishing a small position in the WisdomTree Dreyfus Chinese Yuan Fund ETF (NYSE: CYB). As an exchange-traded fund, or ETF, that tracks the Chinese yuan, it’s easy to trade and even easier to own if you don’t want to hassle with direct currency ownership.

Investments such as this one benefit from strong growth backdropped by a system of stability.
Expect both.

Zhou Xiaochuan, governor of the People’s Bank of China – that country’s version of the U.S. Federal Reserve – recently ruled out any sudden shifts in China’s foreign-currency-reserves-management programs, telling Bloomberg News that his country’s central bank will continue to be invested to “ensure liquidity, safety and returns.”

China will be a big beneficiary from such a stable strategy – as will investors who understand these new rules and apportion their capital accordingly.

Source: How to Profit From China’s “Hot Money” Strategy

[Editor's Note: Fifteen trades. All profitable. Since launching his Geiger Indextrading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 14 for 14, meaning he's closed every single one of his trades at a profit. And he did this during one of the most volatile periods for the U.S. stock market since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, the Geiger Index.]

With both metals firmly set back on their respective heels, both Ted Butler and I felt sure that the bullion banks would continue to press their advantage once trading in New York began…but they did not…and gold and silver recovered somewhat as the trading day wore on. Volume in both metals was very low. The shares got creamed…but closed off their lows of the day.

Thursday’s big down day in gold and silver before the long weekend should have shown big declines in open interest in both metals…but, once again, that didn’t happen. Open interest in gold rose 2,928 contracts to 381,287…on huge volume of 114,743 contracts. In silver, o.i . rose only 428 contracts to 101,397…on smallish volume of 20,172 contracts. Ted and I didn’t know what to make of this, as these numbers are ludicrous…unless someone loaded up on short positions in both metals….or are the open interest numbers not being reported in a timely manner? I guess the July 4th long weekend may have slowed them down a little. Let’s see how the rest of the week shapes up. Today [at the close of trading] is the cut-off for this Friday’s COT report.

The Commitment of Traders report [which was released yesterday instead of the Friday holiday] was not hugely positive either. In silver, the bullion banks only improved their short position by 1,509 contracts…and in gold, open interest for the week that was [for the close of trading a week ago today] actually showed an increase in the bullion banks’ short position of 3,388 contracts. There certainly has been an improvement since then…but I start to have my doubts about that when I have the daily numbers that I reported in the previous paragraph so out of whack with what the metal prices actually did.

And from the usual N.Y. commentator..”The [Indian] budget today doubled the import duty on gold and silver to R20 [20 Rupees]…$600/kilogram of gold and R1…30 cents/kilo for silver, effective immediately. The Indian bullion trade is naturally hostile to the duty increases…making dire predictions in this Reuters story filed from Mumbai linked here. In reality, UBS is probably right in suggesting that at about $6 an ounce, the impact on gold is marginal.”

The Comex Delivery Report for Monday showed that 21 gold contracts and 59 silver contracts were delivered. GLD dropped a minor 11,465 ounces and SLV was unchanged for the umpteenth day in a row. The U.S. Mint reported another 7,000 one ounce gold maple leafs and another 225,000 silver maple leafs stamped out. And over at the Comex-approved warehouses, 724,141 ounces were shipped in last Thursday…just before the long weekend.

In other news I noted that the CIC… the China Investment Corporation…purchased a 17% interest in Teck Resources here in Canada. For those of you who are non-Canadians, that’s one of Canada’s largest resource companies. I see in a story posted at Kitco that the Bank of Korea is making noises about buying gold. The headline reads “Bank of Korea to Buy Gold for First Time in 11 years” and the link is here. And I noted an article posted at China Economic Net that’s headlined “China encouraged to further boost gold reserves”. The link is here.

And lastly, I see that GATA was cited on CNBS by Dennis Gartman. He remarked that “‘the conspiratorialists are out there buying gold, the GATA boys are out there buying gold, and gold acts rather poorly. … I’d rather leave gold alone. It still looks like it wants to go lower.’ Gartman speculated that gold could go down to $880.” [Note to Dennis: A nice, safe call...the 200-day moving average. I guess that's why you get paid the big bucks. - Ed]
Last Thursday, Al Korelin of Korelin Economics was kind enough to take the time to interview me. If you care to listen, the link is here.

Here’s a graph that I thank P.S. for sending along. While jobs/job loss is traditionally a lagging indicator, the numbers increasingly suggest that Greenspan’s celebrated “green shoots” are actually weeds.

Today’s first story is from the The Wall Street Journal. “France, Russia and India questioned the role of the dollar as the world’s reserve currency during the weekend, indicating its status is likely to be a strong talking point in this week’s Group of Eight leading nations’ summit in Italy.” It’s entitled “Dollar’s Role Under Debate In Run Up to G8 Summit” and the link is here.

The next piece is from thedailybell.com in Switzerland. This is an interview with James Turk over at goldmoney.com. It’s headlined “James Turk on how the elites always destroy the paper money they value – and why gold wins.” The link is here.

I see that the “vampire squid [Goldman Sachs] with its tentacles wrapped around the face of humanity” was in the news again. It appears that some its proprietary trading codes were ’stolen’ and a lawyer for GS said “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.” I guess Goldman (NYSE:GS) fears infringement of its market-rigging power…and that someone other than they can now do it as well. Why is it that when GS does it…it is seen as a “fair way”…but when the manipulator is someone else…the ways become “unfair?” Just asking. The Bloomberg headline reads “Goldman Trading-Code Investment Put at Risk by Theft” and the link is here.

I see in a GATA dispatch that Austrian silver euro coins are being used to beat German taxes. The headline…in a story filed in spiegel.de from Germany…reads “Quick Silver: A New Austrian Coin Trick”…”Hot tip for German investors: an Austrian silver coin that can be smuggled legally. It’s music to the ears of Germans who bank in Austria. But how long can the party last?” It’s a very interesting read…and the link is here.

I place [the] economy among the first and most important virtues, and public debt as the greatest of dangers to be feared…we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty…or profusion and servitude. – Thomas Jefferson

The liquidation of the spec longs in gold and silver is proceeding like molasses in January. The bullion banks are obviously in no rush to get this done. It appears that they have all the time in the world…and are drawing the process out for as long as possible. A manufactured ’summer doldrums’ if you will. Even though gold is down $65 from its high…and silver over $3…the 200-day moving averages are still quite a ways off…and there hasn’t been very much short covering by the bullion banks during this decline. If JPMorgan (NYSE:JPM), HSBC USA (NYSE:HBC) et al really put their minds to it…it could get ugly, as we could get another monster sell-off like last year. Ted Butler and I spent part of yesterday talking about this scenario…a scenario that I’ve spoken of several times during the last month or so. But can they…or will they? Here’s hoping they can’t…but based on past history, I don’t like the odds.

See you tomorrow.

Source: And Then There’s This…Tuesday, July 7, 2009

From that point it rose right into the Comex close…and was taken down and closed below $940 once again in the electronic market.

Silver’s chart pattern was virtually identical to gold’s. The only major difference was that silver’s low of the day was a few minutes before the close of electronic trading in New York around 5:15 yesterday afternoon.

There wasn’t big volume in either metal yesterday…as the ’summer doldrums’ are now upon us. But it’s plain to see the trading by the New York centre banks controls the price. As I’ve said before…well over 90% of all trading volume in the gold and silver markets occurs during Comex hours in New York. It’s wonderful to watch the metal prices rise in the Far East [as they're doing as I write this]…but all the bullion banks have to do is throw a bunch of contracts into the New York [Globex] Access Market and they can drop the prices in a heartbeat…which they do…when overseas markets are showing any kind of “irrational exuberance”.

Friday’s down-day in both metals produced some rather predictable drops in open interest in both metals. In gold, o.i. fell 1,850 contracts to 378,433… on volume of 80,641 contracts. In silver, o.i. fell as well…down 854 contracts to a total open interest of 102,788. Volume was a very chunky 52,694…mostly spreads and switches. I would expect Monday’s open interest numbers to show further declines when they’re posted on CME website later this morning.

Monday was the last delivery day in the June contract. There were 81 gold contracts delivered…and five in silver. Today is the first notice [and delivery] day for the July contract in both metals, so we should see some pretty big numbers when I report on them tomorrow morning. There were no changes reported by the U.S. Mint yesterday. They might report their past week’s activity today…being the last day of June and all. But I would bet dollars to donuts that whatever they’ve minted in the last five business days of June will be reported as July production. We’ll see. There were no changes to the alleged holding of the either the GLD or SLV on Monday. But over in Switzerland at Zürcher Kantonalbank, they added the real deal to their ETFs during the past week…64,928 ounces of gold…along with a substantial 484,769 ounces of silver. As always, I thank Carl Loeb for those numbers. And lastly, over at the Comex-approved warehouses, another 244,051 ounces of silver were withdrawn from their inventories.

The usual New York gold commentator had the following to say…”World gold rallied some $8 during the European morning, prompting Mitsui-London to remark: ‘We are trading for a new quarter today, and without the recent sales that have capped the market, there is a distinct possibility that gold resumes its path higher.’ [As you know, the N.Y. bullion banks put an end to that optimistic comment later in the day. - Ed] This, of course, concurs with the analysis of The Gartman Letter which repeated [a previous] thought: ‘As far as gold and the other precious metals are concerned, as we have said, there is someone or something as a willing and large seller of gold between $980-$990, with that level having turned back the gold bull three times over the past year…We are small mice in a field of large elephants at war, and it is best that we watch from the sidelines of their field of battle…’ The forces opposed [to] gold may not be TGL’s elephants, but they are certainly resolute.”

The OCC’s [Office of the Comptroller of the Currency] Quarterly Report on Bank Trading and Derivatives Activities for the First Quarter of 2009 was just released. And before your eyes glaze over and you skip down to the next paragraph, please bear with me on this. Firstly, I’m only dealing with the derivatives on precious metals…and which U.S. banks have the most. It’s so simple…and I’ve talked about this before. In gold, four [4] U.S. banks [out of thousands] have $116.9 billion in outstanding gold derivatives. The other thousands of U.S. banks have $140 million between them. That’s right…million, not billion!!! So the grand total, including all U.S. banks, adds up to…wait for it…$117.0 billion…the thousand of other banks, and their piddling $140 million, are [barely] a rounding error!!! But these four U.S. banks have a concentrated short position in gold that’s off the charts…and they’re all the ‘usual suspects’. And it gets worse!!! Of that $117.1 billion in gold derivatives held by all U.S. banks, a whopping 79.3% are over at the Fed’s bank…JPMorgan (NYSE:JPM). HSBC USA (NYSE:HBC) owns 16.7% of them, Citi (NYSE:C) has 3.2% and Bank of America (NYSE:BAC) owns a piddling 0.7%. But what about the other ‘thousands of U.S. banks’…well, between them, they own a magnificent 0.1%. The really cute thing is that the U.S. Treasury’s bank…Goldman Sachs (NYSE:GS)…doesn’t have a dollar in the precious metals derivatives market at all. Go figure!

And now for the balance of the precious metals derivatives…the vast majority of these would be in the silver market…way over 90%. Only the ‘usual suspects’ have any derivatives in this category. The thousands of other U.S. banks don’t play in this sandbox at all. JPMorgan has 56.2%, HSBC USA has 40.3%, Citi…1.9% and BofA…1.6%.

Let’s cut right to the chase…JPMorgan and HSBC USA hold 96.0% of all gold derivatives and 96.5% of all silver derivatives in the entire U.S. banking system…as of March 30th. And don’t forget…the latest Bank Participation Report issued on June 2nd. It showed that ‘3 or less’ U.S. banks in gold and ‘2 or less’ U.S. banks in silver were net short 123,100 Comex gold contracts [12.3 million ounces] and net short 27,500 Comex silver contracts [137.5 million ounces] respectively. Can you, dear reader, figure out which two U.S. banks they might be??? This is not rocket science…is it???

JPMorgan is the custodian of the SLV ETF…and HSBC USA is the custodian of the GLD ETF. And you wonder why I use the word “alleged” when I talk about how much silver and gold they have in them. Wonder no more.

The OCC derivatives report is linked here. The small chart [Table 9 on page 30] is the only item on the page, and is simple to read…so you can check it out yourself. The June Bank Participation Report is linked here. You have to scroll about two thirds of the way down the page to find silver and gold…in that order. The numbers are presented in a way that any person with a room temperature [in degrees Fahrenheit] can understand.

So why don’t the CFTC and/or the SEC do something to put an end to this grotesque situation…which has been going on for decades? The reason is that both these organizations are there to protect these banks…not enforce the law. But what about the gold and silver mining companies…and their fiduciary responsibilities to their true owners…you, the shareholder? Go ahead and ask them and see what kind of answer they give you. As John Embry over at Sprott Asset Management said years ago…”The mining companies are either ignorant, naive…or complicit.”

In other gold news, I see that the Canadian Mint is still looking for about 17,500 troy ounces of gold that has vanished into thin air. “The corporation says that the un-reconciled precious metals only relate to metals owned by the Royal Canadian Mint and not the stockpile owned by the mint’s customers stored in its Ottawa headquarters.” The full story from the Ottawa Citizen is linked here.

And lastly is a comment that comes from one Mr. Orlandini at DTAnalysis.com out of Lima, Peru…”This morning Barclay’s Capital came out and said that the rally in silver is overdone and there will be a significant correction. They advised everybody to sell short the December silver futures contract and look for a decline down to $12.00. By association, that means gold should go a lot lower as well. I have other thoughts on the subject.” The last time I checked, Barclays ran the silver ETF…SLV. Very strange coming from the likes of Barclays. By the way, $12 silver would take it below its 200-day moving average and clean out all the spec longs. Gold’s 200-day m.a. is at $875…and we’d have to close below that…and stay there for a few days/weeks to get all these longs to puke up their positions. The ‘4 or less’ traders shown in the COT report are short more than 20 million ounces of gold and over 230 million ounces of silver. They can pull it off any time they want…as I [and Ted Butler] have been going on about for the last month. It’s just the timing that’s unknown.

Wow! I see that I’ve really been on a soap box today. But there’s been lots to talk about. I have three stories…once of which is a repeat from Saturday. My editor and I were have problems getting the hyperlink to work properly on this one, so it wasn’t posted until much later on Saturday…long after CDR+ was loaded on the Net. The only reason I’m reposting it is because it’s important that those of you who missed it, read it. I’ve just ‘cut & paste’ the appropriate paragraph from Saturday’s commentary below.

In their latest “Markets at a Glance” commentary, Eric Sprott and David Franklin, from Sprott Asset Management conclude that…”the future solvency of the United States as a nation state is currently in jeopardy. It is in far deeper trouble than the mainstream press cares to admit. There are simply not enough new buyers of debt on this planet to support the spending programs of the United States government – and it appears that current holders of debt are beginning to sell.” It’s entitled “The Solution…is the Problem”…To access it, first go here. Then on the “Manager Insights” drop-down, select Eric Sprott. Click on the May/June link.

The second story is an offering from Bloomberg…with thanks to Craig McCarty for sending it along. The headline is chilling…but no surprise to me…”AIG Discloses New Risk on Derivatives Sold to European Banks”…”The risk of losses on the derivatives may last ‘longer than anticipated’, the New York-based insurer said late yesterday in a regulatory filing updating the ‘risk factors’ in its 2008 annual report.” [No 'green shoots' here! - Ed]. The link is here.

Lastly…if you’re not already fast asleep…is silver analyst Ted Butler’s latest commentary. For those of you who don’t know, Ted was a commodities traders for many decades…and since his retirement from that, he has focused the last 20+ years on ending the manipulation of the silver market. Here he spends a great deal of time discussing the US Senate Permanent Subcommittee on Investigations’ 247-page report entitled “Excessive Speculation in the Wheat Market”…and how it applies to what’s going on with silver [and gold]. The story, entitled “The Senate Report”, is buried in a GATA release, because I feel that the preamble…written by GATA’s secretary treasurer [and senior editor of Manchester, Connecticut's Journal Enquirer]…is worth reading, and the link is here.

It is the nature of protracted Credit Bubbles to impart deleterious effects upon the underlying economic structure. As the master of “activist” monetary management, Mr. Greenspan’s reign at the helm of Fed saw a move into uncharted territory with respect to marketplace interventions and manipulations. – Doug Noland, prudentbear.com, 26 June 2009

I see, as I put this commentary to bed for another day, that a not-for-profit seller showed up in late Hong Kong trading. This activity has now moved into London…which has just opened as I file this. It could get wild and wooly in gold and silver today.

See you tomorrow.

Source: And Then There’s This…Tuesday, June 30th, 2009

Then from 10:40 a.m. New York time, until shortly after 2:00 p.m…both gold and silver put on quite a show to the upside. From their lows, gold tacked on a little over $18…and silver around 43 cents. Then, from about 2:15 p.m., both metals flat-lined and have done virtually nothing since. Gold volume yesterday was estimated to have been 158,056 lots…including switches. That’s quite a bit.

The HUI reacted predictably to the gold and silver price declines and sold off rather heavily once the equity markets began trading at 9:30 in New York. However, once the metal prices began their upside moves, the stocks recovered…but I was not overly impressed with the fact that such large price moves only resulted in a 1.55% increase in the HUI. I suppose, considering the overall rout in the general equity markets, that I should have been thankful for small mercies, but the 3-year HUI chart does make me stand up and take notice. The RSI is now at an even 70.0…and even though neither gold nor silver are in overbought territory themselves, they are close. What happens [price action wise] in the next few days is worth keeping an eye on…especially as it relates to the HUI…as the HUI rarely gets above 70 without some sort of correction. So be on your guard here.

click to enlarge

Wednesday’s nice price rise in gold resulted in a huge increase in open interest…as o.i. rose 12,005 contracts to 379,936…on the back of 178,209 contracts traded. Ted Butler and I were not amused. It’s obvious to us [and, by now, should be equally obvious to you] that as the tech and small trader longs pour in and drive the price up, it’s the U.S. bullion banks that are taking all the short positions against them. Wednesday’s rally was nothing compared to the rally we experienced yesterday, so I’m expecting an even bigger deterioration in gold open interest when the numbers become available later this morning. The warning flags in gold are now flying high. Silver, on the other hand, showed a 360 contract decline in open interest to 95,719 contracts. Volume was a very respectable 19,818. I’m expecting a big deterioration in silver o.i. when that number becomes available as well.

Not a lot of silver and gold news yesterday. The Comex delivered 60 gold contracts and 14 silver contracts. There were no changes at the U.S. Mint or in silver stocks at the Comex-approved warehouses. Neither were there any changes in GLD or SLV…although after the last three or four days, these ETFs should be owed some pretty big amounts…especially in silver. Ted says that the boyz may engineer a price drop just so they can get out of their obligations to deliver physical metal to the ETFs. This is entirely plausible, as the ETFs are forced to short their own shares if they do not have the metal to deliver right away. Since the custodians are JPMorgan (NYSE:JPM) in silver…and HSBC (NYSE:HBC) in gold…and since these guys are the ringleaders of the gold cartel…it’s no problem for them to arrange that. They’ve done it before, and they can do it again…and probably will. That’s why Ted and I are [as I've said before] as nervous as two long-tailed cats in a room full of rocking chairs, about the huge deterioration in the COT report and the share price action. We could still rise in price from here in both metals…but if we did, then we’d be way overbought in the metals too…along with the HUI. Then there’s no question in my mind that the gold cartel, seeing all the mice in the trap that they could get, would pull the lever and ring the cash register. As I’ve said since I got back from holidays…it’s the “same old, same old” routine. Could they get overrun? Sure…but if they do, it will be for the very first time.

I’ve got quite a few stories today…and I hope you find some of them of interest. The first is from The Guardian in England. In a story filed from San Francisco is this headline…”GPS system ‘close to breakdown’: Network of satellites could begin to fail as early as 2010″. I thank Craig McCarty for the story, and the link is here.

The next story is from Lloyd’s List…which is probably Lloyd’s of London. The headline reads…”Half of all listed shipping companies may go bust”. “The grim assessment was issued by Paul Slater, chairman and chief executive of First International, who forecast that the next 12 months would be ‘really painful’ for the three main shipping sectors of containerships, dry bulk and tankers.” I thank Donna B. for sending me this story, and the link is here.

Here is another offering courtesy of Craig McCarty. It’s a Bloomberg piece entitled “U.K. May Lose AAA Rating at S&P as Finances Weaken”. “Britain would become the fifth western European Union nation to lose its rating because of the economic slump, following Ireland, Greece, Portugal and Spain.” In commentary yesterday, PIMCO’s Bill Gross said that a U.S.A. credit rating downgrade was “inevitable, but not imminent”. With the US$ falling…and bond rates rising…the USA’s AAA rating has already been downgraded by the market. Nobody is waiting for the offical word from S&P before reacting. The link is here.

In another Bloomberg story that dove-tails with the last piece, is this no-holds-barred commentary by one of their own columnists, Mark Gilbert. The heading pretty much says it all…”Dollar is Dirt, Treasuries Are Toast, AAA Is Gone”. Not too many shades of gray in this…and the link is here.

And lastly is another Bloomberg story. This could have spooked the bond market and the US$ as much as anything else yesterday. The piece is entitled “Fed Officials Raised Prospect of More Bond Purchases”. In the minutes of the April 28-29 FOMC meeting, the following comment was noted…”Members also agreed that it would be appropriate to continue making purchases in the total amount of $1.75 trillion previously announced.” Wow! I had no idea they were considering monetizing that much debt. It’s my opinion that before this depression is behind us, they will probably have to monetize a lot more than that. I thank one of my readers, Richard Benkert, for sending me the story. The link is here.

I haven’t had a decent cartoon for a long time, so I thought I’d include a photo taken in the screaming hot days of January in Australia. How hot was it? Well…click on the photo below and find out. I thank reader Paul Bowman for sending it along.

click to enlarge

There is all the difference in the world between treating people equally and attempting to make them equal. – F.A. Hayek

I note, as I fire this off to my editor, that the London gold market has been open for an hour or so, and silver is down a dime…and gold a few bucks. I wonder what kind of battle we’ll see today? Both metals [and the HUI] are getting a hair overbought, but overbought conditions can last for quite a while…just like oversold conditions can. With the long weekend almost upon us, it could be an interesting day in the Comex gold and silver pits in New York.

I wish all my American readers a safe and happy Memorial Day long weekend…and I’ll see you on Saturday.

Source: And Then There’s This…Friday, May 22nd, 2009

I note that, despite the despair in the gold market, the price didn’t go down much yesterday…although the shares got hit pretty good. It wouldn’t surprise me if there has been some serious short selling going on during the last couple of trading sessions. The sentiment is very bearish…which is what you almost always find when you’re approaching a major market bottom. And despite all the wailing and gnashing of teeth in the gold world yesterday, I also noted that gold’s 200-day moving average has still not been violated.

The silver price was comatose. The price was almost ruler-flat all through Far East trading. But, it too got smacked at the same time as gold during early morning trading in London. From there, in a series of small stair-steps, silver closed below $11.90…a new low for this down-move.

As Ted Butler keeps saying…and I totally agree…silver is the centre of the bullion banks’ universe. The real purpose of the attack on the gold price was to get at the silver longs…so JPMorgan (NYSE:JPM)/HSBC (NYSE:HBC) could cover as many of their short positions as possible…and their plan is working just fine. Not only are the Non-Commercials and Nonreportable traders selling their long positions…but they are going short as well…in both gold and silver. The bullion banks may also be going after the hedge funds that are still long in the OTC market…which is obviously who they were after in the last quarter of 2008. The last derivatives report from the OCC proved that.

The open interest numbers for Thursday were very revealing In the face of huge price declines, o.i. numbers in both metals rose. In gold, o.i. rose 3,614 contracts to 339,757…and silver o.i. rose 374 contracts. Huge price declines, combined with rising open interest, is almost always a sign that the Non-Commercials and Nonreportables are selling longs and going short…while JPMorgan/HSBC USA et al cover short positions and go long. Friday’s open interest numbers [when available on Monday] will most likely show a continuation of this pattern.

However…because all this activity occurred on Thursday and Friday…it won’t show up until the Commitment of Traders report next Friday…April 24th.

Talking about the COT, the new one on Friday was underwhelming. I wasn’t happy about it, and Ted told me to take another pill. After some explanation, I must admit that he was right…the real price declines in silver didn’t start until Thursday…long after Tuesday’s cut-off for yesterday’s COT report. Silver actually rose most of the time during this past COT reporting period. The real improvements won’t show up until next Friday’s report.

In this latest COT…the bullion banks decreased their net short position in silver by 723 contracts while the tech funds in the Non-Commercial category decreased their net long positions by 835 contracts. The other 112 contract increase in net long position [don't forget...the longs and the shorts must balance] came from the small traders in the Nonreportable category. The link to the full-colour silver COT report is here.

In gold, the bullion banks actually increased their net short position by a smallish 286 contracts. The tech funds in the Non-Commercial category went longer still…increasing their net long position by 2,083 contracts. To balance it all out, the small traders increased their short position by 1,797 contracts. As with silver, the real damage didn’t start until after the Tuesday cut-off for yesterday’s COT report. The easy-to-read, full-colour graphics-intensive gold COT report is linked here.

In other gold news, the usual N.Y. commentator had this to say…”The GLD ETF dropped another 13.45 tonnes [432,400 troy ounces] in reported gold holdings…to 1105.98 tonnes. This means that in two days, 21.7 tonnes has been shed. To find similar declines, one has to return to the tumultuous days of early September last year. Those who lay weight on the timing of GLD changes will be negatively influenced…UBS (NYSE:UBS) cast some further light on the Indian situation today: Yesterday, UBS sold the largest daily amount of gold to India in 2009…a quantity large enough to be called “good”, if not quite “strong”…Vietnam reported a sharply higher local physical gold premium of $19.48. Smuggling demand is certain. The Shanghai Gold Exchange bounced back to a premium of $5.32…Today The Gartman Letter considered adding to its short, but decided to wait until Monday.”

And lastly…in palladium news…I hear that “New legislation has been passed by the U.S. government which will allow the U.S. Mint to produce 0.995 fine one ounce palladium versions of Saint-Gaudens’ ultra-high-relief bullion coins. All the palladium is to come from the Stillwater Mine in Montana.” I get the distinct impression that the palladium coin will only be issued in a set with the ultra-high-relief gold bullion coin…and cannot be purchased on its own. In an interesting comment at the bottom of the article it said the following…”Figures suggest that 28,173 gold 2009 ultra-high-relief $20 double eagle coins were sold by the Mint on their first day of release, with that total now rising to 56,527.” If you combine that mintage with the 415,500 one ounce gold eagle bullion coins that the U.S. Mint has already produced this year…there’s some really large gold consumption occurring. I thank Brad Robertson for sending that info along.

I have three stories today. The first is from Bloomberg where Bernanke finally admits that the “collapse of U.S. lending will probably cause ‘long lasting’ damage to home prices, household wealth and borrowers’ credit scores.” [Note to Bernanke: Ben, you have a keen grasp of the obvious. Now do the world a favour and resign! - Ed] The link is here.

The next story is from the April 16th edition of The Economist. It’s another story about South Africa. This one bears the headline “South Africa’s Elections: Voting for the people’s man”. The outcome of this election is not in doubt, but many Africans are nevertheless deeply worried about what might happen to the country under the new President and an all-powerful, perhaps even vengeful, African National Congress. The story is definitely worth the read, and I thank P.S. for sending it along. The link is here.

And from The Times in London comes this story. The headline reads “Israel stands ready to bomb Iran’s nuclear sites”. We’ve been hearing stories/threats like this for years. Does this one have any more credibility than the others? Time will tell. I thank Craig McCarty for the story..and the link is here.

One would be forgiven for concluding that the assumed benefits of financial innovation are not all they were cracked up to be…The damage from this turn in the credit cycle — in terms of lost wealth, lost homes, and blemished credit histories — is likely to be long-lasting. – Federal Reserve Chairman Ben Bernanke, Bloomberg, 17 April 2009

Today’s ‘blast from the past’ is one of these ‘one hit wonders’ that ensured that this artist would forever have a place in the sun. The year was 1974…and what a song it was! Turn up your speakers and click here.

Well, Ben Bernanke said it all. Absolutely nothing has to be added to that above quote. He knows perfectly well…like you, dear reader…just how black it’s going to get as we move farther down the economic, financial and monetary road we’re travelling. As for gold and silver…the current gold cartel-inspired shit-kicking will end soon enough. It’s always darkest just before dawn…so hang in there.

I hope you enjoy what’s left of your Monday…and all of us here at CDR+ will see you bright and early on Tuesday morning.

Source: And Then There’s This…Monday, April 20th, 2009