International Forecaster Weekly

New Risks For A Market Already Under Great Stress

The prices of gold and silver were subdued for so long but no more, greater swings in metals forecast, a new scenario today for this current phase of the metals market, new bumps in the road to look out for, purchasing power robbed with the printing of money, deficits out of control.

Bob Chapman | September 14, 2011

In the case for gold and silver, it has been go long and stay long for 11 years. During that period great gains have been made during what was the formidable first phase of the gold and silver bull market. Gold was $260.00 and silver was $3.50. Some stocks rose from $4.00 to $86.00, some from $0.80 to $42.00. This performance in spite of gold and silver suppression by the US government. In their desire to keep gold and silver subdued all the government really accomplished was to offer an opportunity for buyers to buy at lower prices than they normally would have been able too. In that process buyers have been able to stay ahead of inflation and many have made large profits. We have convinced almost all not to try to trade these markets, because they have not been professionally trained to do so. That concept has worked quite well and will continue to do so. The problem with novice trading is that if you get out you may never get back in. You must outsmart the market ignoring the gyrations and stick to the long-term objective. This bull market in gold and silver, now almost 11-1/2 years old will probably last another 5 to 10 years even if the system collapses. In the end our formula has worked well and avoided commission costs, something we are acutely aware of having been in the brokerage business for almost 30 years.

Each phase of the bull market is somewhat different. It wasn’t all that long ago that we predicted swings in gold prices of $20 to $30 to $100 a day in gold, than $0.50 to $2.00 in silver swings that we have just experienced. Next it will be $100 to $200 to $400 swings daily. Long-term investors may not like volatility, but traders sure do, and that draws more players into the game. A good example is the past few weeks where we saw $200 swings in gold and $5.00 swings in silver. The gold and silver shares, having languished for three years have started to come to life. They have been victims of shorting and naked shorting by the PPT and hedge funds, which appears to be lessening. We also see more institutions as buyers of these issues. Brokerage firms have advised their brokers to use the ETFs, GLD and SLV, as vehicles to play the gold market, when they do not have the physical gold and silver they say they have. They are an accident waiting to happen. The unexpected downdraft mining shares experience three years ago was caused by institutional de-leveraging of positions that were 100 to 300 to one. Even banks got up to 70 to one. That has changed with leverage at 10 to 30 to one and almost all of these participants are either out of the sector or short. The scenario today is totally different and explosive.

The bumps in the road have changed. They are more numerous and larger. None ever said this was going to be smooth and easy. Before it is over your senses will be jarred and it will take all your intestinal fortitude to hold on. The detractors will be many and, of course, the major media will be your constant enemy. The major media is totally controlled by the elitists from behind the scene to feed you disinformation and propaganda.

Gold and silver prices are headed considerably higher as we have said they would be for the past 11 years. The world financial system is being deliberately destroyed and the only safe havens are gold and silver. We have observed over the years many problems, but today’s atmosphere is different. The events are more damaging. There is no lack of world financial and economic problems and citizens worldwide have lost confidence in the monetary system. Remember in investment the trend is your friend. In the case of gold and silver we have an 11 year trend that has a very long way yet to go. Besides where else can you safely invest in such manipulated markets. The way we look at it you simply have no choice. Just look at the stock market and the problems the economy faces. They are worse than in the early 1930s when the Dow fell 90% and most everything else followed except gold, silver and their shares. This time the devaluations and default will be far worse. Today, England is a basket case and Europe doesn’t know whether they’ll have a euro 6 months or a year from now. Asset bubbles like that in the bond market cannot continue forever - a market 100 times bigger than the stock markets.

There is no question gold and silver have been great performers and they will continue to be. Gold, by our calculations, over the past 3 years has replaced the US dollar as the world reserve currency. Presently few realized this, but they will catch on when our next reserve currency is named and the contingent element in those currencies backing is gold. Then there is the inflation factor. The government says it is 3.6%, but real inflation is 11.2% and it may be 14% by the end of the year. What we have seen over the past three years is the bailout of the financial sectors in NYC, London and Frankfurt and the US Treasury to the tune of more than $20 trillion. Lying beneath nothing has been attended to or fixed. It is the same old rusting economy with higher unemployment, as we continue to see good paying jobs move offshore. Major corporations buy labor saving equipment and continue layoffs. Small and medium sized companies either cannot get loans or do not want them, because they see no help coming from Washington in getting the American economy moving again; 60% of companies have lost faith in Washington’s ability to reinvigorate the economy. They look at markets and see gyrations. They see gold and silver have performed the best by far and they question the future of the economic situation. They also have to be disturbed at government’s interference in all markets. They face regulation after new regulations. They look around and see nothing but a sea of debt, and at the same time they also see gold trying to break out over $2,000, and silver ready to again test $50.00. As bad as the system is panic is a ways off. Do not rush it, you will see it soon enough. The system has been under pressure since the 1960s thus; it is not going to collapse in a day or two. The public is in the process of realizing that corporate America, the financial sector and government are a criminal enterprise where fraud and criminality goes unprosecuted. Where the Constitution is considered a wrinkled piece of paper – useless in today’s world of professional criminality. It reminds us of the Yeltsin years following the break-up of the Soviet Union, particularly in the financial sector.

Then there is the endless creation of money and credit creating inflation, which robs every American of their purchasing power. The stimulus is a fraud because it creates more debt with inadequate temporary results. In the meantime in reaction to this debt creation, which creates insipient inflation is gold and that in addition to reflection of inflation exposes further dollar dissipation. Of course, the Illuminists do not want gold moving higher in price, nor do they want a gold standard because it stops them from the uncontrolled creation of money and credit. The strength in gold and silver not only reflect the problems in the US and the dollar, but it is also affected by problems in England and Europe as well. We have just seen the American president present another impossible scheme to create jobs and fix the economy, which we will get into later. It is not a serious plan. You have the super-congress cutting $1 trillion mostly in Social Security and Medicare and at the same time moving those cuts over to cover the loses created by the jobs program. There was no attempt to stop the massive loss of jobs over the last 11 years caused by free trade, globalization, offshoring and outsourcing. The never is any discussion of the re-imposition of tariffs on goods and services. Nothing serious is going on. It is all politics and smoke and mirrors. There is no change in the budget deficit of $1.7 trillion for fiscal 2011. Europe has the same problem, plus six insolvent countries and trillions hidden by the Fed, which was given to these countries and banks to bail them out. It is not surprising Germans have rejected further bailout funding, which is really to save the euro zone and the EU and the dream of world government. As this transpires governments and central banks attempt to suppress gold and silver prices, which are reflecting all of this monetary chaos and inflation. We call it an exercise in futility. Keep in mind how can you have a super-panel cutting $1 trillion and another group adding $500 billion? What we are watching is insanity at work. This, while tax revenues continue to fall, and the president exceeds the debt limit. Such concoctions are dreamed up in cloud coo-coo land. If you hadn’t noticed $1 trillion in debt creation has been pushed into the first quarter of fiscal 2012, which could mean a budget deficit in 2012 of $2.5 to $3 trillion. That is what we call out of control. We see little chance of an increase in the debt limit, so that means the additional funds, or debt limit allocated won’t last until the next election. Government will have a hard time coping as one scandal after another unfolds. The Illuminists have a rough journey ahead. As “Red Buttons” once said, “strange things are happening.” Mr. Gaddafi is no longer in power, nor is leaderships throughout the Middle East. Who would have ever thought that the Swiss and Japanese would have deliberately demeaned the value of their currencies? Bank of America just might go under. Greece, as we predicted two years ago probably will go under as well. Will Germany risk revolution by the Parliament approving more bailout funds. Will some of the US, UK and European banks go under? Will Mr. Blankfein, CEO of Goldman Sachs end up in jail? He is the crook who said he was doing God’s work.

As we predicted it wouldn’t be long before gold takes out $2,000 to $2,200 and silver breaks through $50.00 in spite of government manipulation. Keep in mind that gold is the only currency that owes nothing to anyone. We thought the American public would have been starting to move into gold and silver by now, but generally speaking they haven’t. The longer they dither the more they’ll pay. We guess this a tribute to the propagandized brainwashing they have received for so many years. Perhaps it is a combination of hope and denial. Be as it may, nothing is going to stop the upward path of gold and silver, as they reflect growing inflation and the place of gold at the heart of the monetary system.

Late last week the US Senate, in an unusual procedure, cleared the way for the government to lift its borrowing authority by $500 billion to $15.9 trillion to keep the federal government functioning until next February. The vote was 52-45, as Republicans tried to slow down the process. Money has become an afterthought as we pointed out some time ago. The real reason of the delay from May 16th to August 2nd was to allow Standard & Poor’s to downgrade government credit based upon a bogus claim Social Security and Medicare had to be cut because they were insolvent. S&P knew the original act stated if funds were not available, that government would have to sell bonds to supply the funding requirement, yet they not only lowered the rating, but also threatened to lower it further in November, if the cuts they demanded were not forthcoming. The other miscarriage was the Obama Enabling Act of 2011, which allows a 12-member panel to set legislation to be sent to Congress, that cannot be altered. That means no amendments, debate or filibuster is allowed, only a straight up and down vote. This is the same legislation passed by the National Socialist Party in 1933, which allowed Adolph Hitler to become dictator of Germany. In essence Congress becomes a rubber stamp and relinquishes almost all of its power. These items were what the debt expansion Act was really all about.

As the enabling super-Congress cuts trillions the president wants to spend $447 billion. He would cut the employee payroll tax for 2012, increasing the previous cut by 2% or $240 billion and cut the employer payroll tax by 50% in 2012 for the first $5 million of payroll and eliminating tax for new hires. He would extend unemployment benefits for another year for $62 billion. For $50 billion build roads, bridges and rails; $35 billion to prevent teacher and police layoffs; $30 billion to modernize schools, $100 billion for an infrastructure bank and a $5 billion tax break for companies so they can extend plant and equipment. Last time around they used it to buy labor saving equipment. The president said he’d get the needed funds from spending cuts from the long-term deficit reduction proposal. What he means is deeper cuts in Social Security and Medicare. Fascism goose steps onward.

 

Last week the Dow fell 2.3%; S&P fell 1.7%; the Nasdaq 100 fell 0.2% and the Russell 2000 fell 1.4%. Banks fell another 2.1%; broker/dealers lost 3.7%; cyclicals fell 1.6%; transports 3.6%; consumers 1.2%; utilities 1.7%; high tech 0.5%; Internets fell 0.6%; semis rose 2.0% and biotechs were unchanged. Gold bullion fell $27.00, the HUI, the gold index, rose 1.6% and the USDX rose 3.3% to 77.20 due to problems in Europe.

The 2-year T-bills fell 3 bps to 0.17%, the 10-year T-notes fell 7 bps to 1.92% and the 10-year German bunds fell 24 bps to a record low of 1.77%.

Freddie Mac’s 30-year fixed rate mortgage rates fell 10 bps to 4.12%, the 15’s fell 6 bps to 3.33%, the one-year ARM’s fell 5 bps to 2.84% and the jumbos fell 7 bps to 4.80%.

Fed credit expanded $5 billion to $2.841 trillion, and yoy it is up 24%. Fed foreign holdings of Treasury and Agency debt fell $9.3 billion. Custody holdings for foreign central banks rose $127 billion ytd and $257 billion yoy, or 8%.

M2, narrow, money supply jumped $30.4 billion to a record $9.570 trillion or at a 12.4% pace ytd and 10.3% yoy.

Total money fund assets rose $6.9 billion to $2.644 trillion.

Total commercial paper outstanding fell again by $32 billion, a harbinger that tight money is on the way. The 8-week decline has been $171 billion to $1.066 trillion.