So when I hit the ‘On’ button on the computer yesterday morning, I was hoping and praying that we would be away to the races when the Kitco gold chart came up…and we were. I’m encouraged by the fact that gold managed to finish on its highs in electronic trading after the Comex had closed for the day. The markets are very thin there…especially on Fridays…and it would have been easy for JPMorgan to have crushed the price if they’d wished to. But they didn’t.

Silver had a little harder time of it, and both Ted Butler and myself were somewhat disappointed in its performance vis a vis gold. However, volume in silver yesterday was pretty light considering the run-up…so I guess I should be thankful for small mercies…and I am.

Open interest in gold on Thursday fell a largish 5,117 contracts, whereas silver’s o.i. rose a smallish 194 contracts. The Commitment of Traders data published yesterday turned out to be nothing worth mentioning. I guess I shouldn’t have been surprised. When you’re standing at the bottom of the barrel, it just means that there are no spec longs left that the boyz can take out….and the bottom is in.

So, where to from here? I’m expecting a big run to the upside from this point. Gold closed right at its 50-day moving average and silver closed slightly below its 20-day moving average. Once these key averages are penetrated convincingly to the upside, it’s almost a certainty that the technical funds (in the Non-Commercial category of the Commitment of Traders) will be in this market going long in a big way. But the $64,000 question you have to ask yourself is this one…”Will the bullion banks (JPMorgan/HSBC USA Ltd.) be there to go short against them as they always have?” That will determine how fast and how high this rally goes. If they show up, it will be the “same old, same old” garden variety rally that we’ve always had. But if they just fold their arms and stand aside…then the tech funds will be buying into a vacuum…and we’ll have a 10/10 “reverse” waterfall to the upside that will take your breath away. Ted Butler says (and I agree) that the bullion banks have just spent four months beating the living crap out of the tech longs in all commodities…especially the money commodities…and that now that they have covered every short position that they can, they won’t be back to put their heads in the lion’s mouth again. We should know pretty soon what they’re going to do…and the price action will tell all.

In a report at ino.com, I see that “the Italian parliament will consider a long-discussed plan to use the Bank of Italy’s gold reserves to lift the country’s economy…Previous attempts by European Union governments to use proceeds from central bank reserve sales to support political goals have met with resistance. Moreover, the Bank of Italy is bound by an agreement among European central banks that strongly limits its freedom to sell its gold and foreign exchange reserves.” (Note to Finance Minister Giulio Tremonti: Call Beijing…they’ll cut you a cheque so fast it will make your head spin…and not one ounce of that gold would ever hit the markets. – Ed)

In other news…Warsaw (Reuters) “Poland’s financial and securities regulator KNF said on Friday it had filed a complaint with local prosecutors accusing a ‘person acting in the name of JP Morgan Securities’ of possible market manipulation…A spokesman in London for JP Morgan Securities, a unit of JPMorgan Chase, declined to comment.” (Guilty as charged, would be my bet. – Ed). New York (Reuters) “Citigroup Inc. will probably get rescued by the U.S. government after a crisis in confidence erased half its stock market value in three days…Citigroup has more than $2 Trillion in assets, dwarfing companies such as AIG.” (But its market cap at the close of trading on Friday was $21 billion. One wonders what these “assets” are really worth…tee hee! – Ed)

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Two stories today. The first was posted at Kitco yesterday morning. It proves beyond a shadow of a doubt that the demand for physical bullion by the public is not only world wide…but now well beyond the capabilities of all the world’s mints to satisfy. It’s the result of finite refining and production capacity on one hand…and a finite amount of good delivery bars to supply that demand on the other. The story…posted at theaustralian.news.com.au…is entitled, “Perth Mint suspends orders amid rush to buy bullion” and the link is here.

The second story is a sixteen page monster that will keep you off the streets for a bit. It’s in (of all places) the December issue of Vanity Fair. The author (who writes under the pen name Niall Ferguson) is Laurence A. Tisch, Professor of History at Harvard University and a Senior Fellow of the Hoover Institution at Stanford, and the author of The War of the World: Twentieth-Century Conflict and the Descent of the West. The essay is entitled “Politics & Power: Wall Street Lays Another Egg”…and the link is here.

A man in the audience who identified himself as a Comex gold trader asked how he could protect himself against U.S. government intervention to obstruct delivery of gold due on the December contract. I replied that unfortunately the only defense against such lawlessness by the government might be the Second Amendment. – Chris Powell, Secretary Treasurer, gata.org

Today’s ‘blast from the past’ is another one from the 70s. I can’t believe I actually had a ‘hair do’ like that way back then. I looked ridiculous. Those were the days…sigh! Turn up your speakers and click here.

At precisely 3:00 p.m. Eastern time, some mysterious entity (probably Hank and the President’s Working Group) starting buying S&P futures by the bucket full. The short covering rally that followed was a sight to behold. If you think for one second that what happened in the last hour of trading was free markets in action…I’ve got a bridge I can sell you!

Source: And Then There’s This… Monday, November 24th, 2008

“It’s getting increasingly evident that this is a once-in-a-century type of phenomenon,” he told the ever-fragrant Maria Bartiromo in an interview with CNBC this week, “not the standard type of liquidity crisis that we have seen in the past.

“It’s verging on the issue of solvency.”

To gauge the true scale of this crisis, Greenspan went on, just consider the fact that it took sovereign credit to stabilize first the UK and then US financial systems. When Northern Rock (NHRKF) went belly-up last Sept. and then Bear Stearns (BSC) blew up this spring, Treasury bonds had to be lent out like adjustable-rate home loans circa 2006, covering short- term black holes with government debt.

Without these loans of government bonds, the banks simply wouldn’t lend to each other. They needed securitized tax payments to gain the credibility needed for raising new funds in the market. Short of offering government debt to put up as collateral, they found the cost of borrowing money – when they found any money to borrow – simply too high to bear.

“It’s still very evident from [inter-bank lending] spreads that we have not gotten closure yet,” Dr.Greenspan continued, pointing to the ongoing premium charged for loans backed by anything other than sovereign credit. So to fix the problem – or at least tease it out for months if not years – clearly the world needs more government bonds for the big banks to borrow and put up against cash loans in the market.

“It’s essentially, fundamentally the price of homes in the United States which are determining…the ultimate collateral of mortgage- backed bonds, pretty much around the world.”

Looking ahead, he concluded that “we’re still nowhere near the bottom of the home-price thing” – the word “thing” standing in for “crash…collapse…crisis…deflation” and all the other phenomena Greenspan must still believe can never apply to real-estate prices.

As key contractor, if not the architect, of today’s pan-global banking crisis, he chose to keep US interest rates way below the rate of inflation – making debt pay and savings a suck of real value – for three years straight starting in August 2002.

That period marked the first run of sub-zero returns paid-to-cash since the inflationary ’70s, back when loose money worldwide led to a bubble in prices that needed 20% interest rates to revive the world’s faith in the Dollar.

The start of this decade also saw the gold price- dormant-to-dead ever since the US took that strong medicine at the start of the ’80s – double inside five years.

“First warning,” as Marc Faber wrote in his Gloom, Boom & Doom Report of Sept. ‘07, of trouble ahead.

“Ultra-expansionary US monetary policies with artificially low interest rates led to bubbles all over the world and in every imaginable asset class. The price of Gold more than doubled in nominal terms and against the Dow Jones Industrial Average.”

So why didn’t gold take a dive when Greenspan’s successor – Ben Bernanke – tip-toed his way back to 4% real rates of interest in late 2006…? Because early gold buyers never believed the Fed would succeed in keeping rates there. With housing now a political issue – and home ownership a god-given right for even the flakiest debtors – the first sign of trouble would cause a collapse in real rates, destroying the value of money in the hope of achieving “Reflation Part II”.

Hey, it worked after the Tech Stock bubble blew up. Why not again? And faced with a much greater crisis, or so Ben Bernanke believes, he’s managed to out-Greenspan the Maestro…pushing real US interest rates way down to minus 3% and worse.

Take gold as a marker of stress, and the true extent of today’s crisis becomes clearer still. Bear Stearns’ fire-sale to J.P.Morgan in mid- March – which required an open-ended loan of $29 billion from the Federal Reserve – saw gold jump to $1,032 per ounce. We think it’s signal that Alan Greenspan ignores it.

“Central banks, of necessity, determine what the money supply is,” as he told Congress in a 1999 hearing. “If you are on a gold standard or other mechanism in which the central banks do not have discretion, then the system works automatically.

“The reason there is [now] very little support for the gold standard is the consequences of those types of market adjustments are not considered to be appropriate in the 20th and 21st century. I am one of the rare people who have still some nostalgic view about the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue.”

Today, almost a decade later, the Federal Reserve and its peers across the world are trying to prevent the money supply from shrinking again. That was the fear amid the “Deflation Scare” of 2002, which caused the Fed to ordain sub-zero rates, creating not only the bubble in housing but also the collapse of true money values against oil, food and pretty much all raw materials.

The world’s nostalgia for gold, in response, has seen it treble in price vs. the Dollar and more than double against the Euro, Yen and British Pound. But the cheerleader for cheap money when running the Fed, Alan Greenspan points instead to government bonds when gauging the size of today’s crisis. A true policy wonk, Greenspan thinks only of political bail-outs to protect the system, rather than considering how private investors might choose to protect themselves and their wealth.

Heaven knows they won’t get any help from Bernanke’s repeat of the Maestro’s “reflationary” error.

Adrian Ash
for The Daily Reckoning Australia

Source: Gold Standard Doubles as the Greenspan Fed Makes Real Interest Rates Negative

“The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity,” the policymaking Federal Open Market Committee (FOMC) said in the statement announcing the interest-rate move. Central bank policymakers also said that “recent information indicates that economic activity remains weak” before going on to say “uncertainty about the inflation outlook remains high” and noted that the Fed would continue to monitor both economic growth and inflation closely.

The Fed launched this rate-cutting campaign on Sept. 18, not long after it became clear that the U.S. subprime mortgage meltdown was having a global impact. The reason: Banks in Germany and France had – for whatever reason – invested in debt obligations that were backed by subprime mortgages. And when the subprime market blew up, so did the holdings at those foreign banks.

Before the crisis broke, and even in its early weeks, Fed Chairman Ben S. Bernanke and other U.S. leaders repeatedly maintained that the problem was limited in scope and that no real “crisis” would evolve. Today, an estimated $312 billion in write-downs and credit losses later, the central bank has slashed interest rates seven times and helped engineer the bailout of The Bear Stearns Cos. (BSC) by JPMorgan Chase & Co. (JPM).

Yesterday marked the seventh time since mid-September that the U.S. central bank reduced the Federal Funds rate, the interest rate that banks with excess reserves charge one another for overnight loans. The Fed Funds rate also serves as the benchmark for the Prime Rate, the base rate that commercial banks use to price loans to their best and most-credit-worthy customers. Wachovia Corp. (WB) and other lenders pared their Prime Rates by a similar quarter point – reaching 5% – shortly after yesterday’s Fed action.

Stocks soared in early trading. But then the markets shed those gains following the announcement of the expected quarter-point cut and ended mostly flat. The blue-chip Dow Jones Industrial Average Index was down 11.81 points (-0.09%), to trade at 12,820.13. The tech-laden Nasdaq Composite Index shed 13.30 points (-0.55%), to reach 2,412.80. And the broader Standard & Poor’s 500 Index decreased 5.35 points (-0.38%), to hit 1,385.59.

“The markets pretty much knew what was coming and what we wanted to see were the changes in the statement,” said Joel Naroff, president and chief economist of Naroff Economic Advisors, in a note to clients. “There were some, but the Fed still left itself plenty of wriggle room to do what it pleased.”
 
Central bank policymakers have slashed the Fed Funds rate by a total of 3.25 percentage points from its starting point of 5.25% level in mid-September, and the comments that accompanied yesterday’s announcement seemed to indicate the committee was content to step back and allow rate reductions to work their way through the U.S. economy.

The committee also reduced the lesser-known Discount rate (the rate charged at the Fed’s discount window) by a quarter point to 2.25%.

A Look to the Future

The committee did leave some room for future cuts by stating it “will act as needed to promote sustainable economic growth and price stability.”

Some analysts took the statement as a clear signal the Fed plans to pause.

“We do not expect to see a rate cut at the next few meetings without a substantial contraction of the economy,” Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, told Bloomberg News. “We are not yet to Memorial Day weekend, but the Fed effectively told us today to take the summer off.”

But the language was ambiguous enough to leave the statement open to some interpretation.

Ian Shepherdson, North American economist at High Frequency Economics, sees it differently. The Fed may “intend” to stand back and take a breather, but if a series of reports show that the U.S. economy is weakening, all bets are off.

“If the data deteriorates further, as we expect, the Fed will ease again,” Shepherdson said in a note to clients. “Today’s statement is important – [but only] today. Tomorrow, the numbers are back in charge.”

Steve Gallagher, chief economist at Societe General SA (OTC: SCGLY) in New York, called the statement a “soft non-binding pause.”

Not a Unanimous Move

Two FOMC policymakers reprised their dissenting votes. Both Richard Fisher, president of the Federal Reserve Bank of Dallas, and Charles Plosser, president of the Federal Reserve Bank of Philadelphia, had opposed the last rate reduction. Yesterday, they were again the only voices of dissent against yesterday’s rate cut, opting instead to hold rates steady.

“The two dissents show they are still worried about inflation,” Diane Swonk, chief economist at Chicago-based Mesirow Financial Holdings Inc., told Bloomberg “This is a Fed ready to watch from the sidelines.”

Playing to a Global Marketplace

The real question investors have now is this: What happens next?

Whatever the answer turns out to be, it’s almost certain to have a global spin – and a global impact. And that answer is likely to contain two other terms: Inflation and the dollar.

In its commentary, the Fed did warn that “some indicators of inflation expectations have risen in recent months.”

Indeed, many would argue that the Fed itself – with its ambitious rate-cutting campaign – has actually fueled domestic inflation and exacerbated the decline of an already weak greenback.

Here’s why some analysts believe that. The central bank’s preferred inflation barometer – the personal consumption expenditures price index – rose at only a 2.2% annual rate in the first quarter. But that indicator excludes food and energy prices – the most volatile and steeply climbing portion areas in the U.S. economy.

Officially, the U.S. inflation rate stands at about 4%, though many experts – including Money Morning Contributing Editor Martin Hutchinson – believe the actual U.S. inflation rate is much higher.

In fact, with yesterday’s latest rate cut by central bank policymakers, anyone who has closely followed the steep-and-steady increases in energy, food prices, commodities, healthcare, and a university-level education may find it tough to argue that prices aren’t headed even higher, still.

Because interest rates abroad are higher than they are in the United States, capital has moved out of the U.S. market and into the higher-yielding regions. The result: The dollar has dropped precipitously.

The fact that most central banks abroad have held rates steady even as the Fed pared U.S. rates has only exacerbated the greenback sell-off.

All of the above was helped along by the US$ ‘rally’ and the drop in oil prices.

Even though both gold and silver showed small increases in price on Monday, the open interest in gold was down 1,317 contracts…and silver o.i. dropped a smallish 102 contracts. Volume was pretty heavy on Tuesday with first day notice for May deliveries being today. If they report the o.i. numbers like they’re supposed to, Tuesday’s activity should be interesting. We’ll also hear about interest rates following the FOMC meeting as well.

How long can the ‘8 or less’ traders keep this up, is an open question. They don’t seem to have liquidated a lot of contacts in this latest take-down that started a couple of weeks ago, as the total open interest hasn’t gone down very much. Normally, there would be huge liquidation, but the numbers don’t back that up. It’s obvious that someone is providing physical gold to this market…and in size. It could be from the ECB…or maybe it’s all coming from the GLD ETF, as another 11 tonnes got sold out of it yesterday, bringing the total to more than 60 tonnes in the last week or so. As of yesterday, SLV…the silver ETF…hadn’t sold a single ounce.

The GATA gang have never been fans of the gold and silver ETFs, as we believe that Barclays is one of the “8 or less” traders…as are JPMorgan and HSBC USA…their primary bullion custodians. James Turk over at goldmoney.com is highly critical of the prospectus for both ETFs.

I see in Bill Murphy’s MIDAS commentary over at lemetropolecafe.com that a serious long-time observer of the Middle East/Far East bullion markets has noted that there are rumours circulating of “abrupt and objectively unwarranted contractions of credit lines in the physical bullion trade: some say precipitated by American banks. These stories come from Turkey to India.” When I asked him to clarify this, he said…”Direct efforts to restrain gold buying by the Middle East…which fears, probably correctly, some kind of US action on Iran.”

In other news, I was reading Doug Noland’s latest CBB over at prudentbear.com, and he had this to say about today’s current credit/financial situation…” I am, at this point, more convinced than ever that only a severe crisis will instigate the necessary adjustment to the distorted and imbalanced U.S. and global economies. One is then left with the disconcerting view that Stage II (of the current financial crisis) will lead our authorities to exhaust all policy measures in a futile attempt to sustain the unsustainable. The obvious question: how long does the lead up to Crisis Stage II last? I would today guess a number of months, although I wouldn’t at all be surprised if it was rather short. What will be the impetus for Crisis Stage II? A spike in interest rates, a run from U.S. Treasury and agency debt, a disorderly drop in the dollar, another bout of derivative and Credit market implosion, or acute global financial tumult should be considered leading candidates based upon Stage II ramifications. Or it could easily be something completely unexpected, perhaps even war.”

That’s the first time I’ve ever seen the ‘war’ word show in any of Doug’s writings.

A couple of stories today…the first being silver analyst Ted Butler’s latest commentary entitled “An Interesting Week”. The link is here.

The second story is about this wonderful new oil discovery off the coast of Brazil that everyone has been talking about…the one that will save the world. The following Bloomberg story throws a little ice water on that idea. The title of the article is “Brazil Oil Trapped by 500-Degree Heat, Salt Barrier” and is linked here.

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists. – Ernest Hemmingway

It’s pointless to discuss the firestorm of never-ending bad news that keeps pounding away at us with the dawn of every new day. Besides which, it doesn’t matter at the moment, as Paulson & Co. are there to make sure that “everything is fine” regardless of what happens. Today is the last day that the Wall Street boys have to ‘mark ‘em up’ for month end. The interest rate news may not be what the markets (both equity and bond) are looking for…so blow the froth off a cool one (even if it’s a little early in the day) and let’s see what happens.

Talk to you tomorrow.

Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.