Gold and Silver Weekly Charts - Explosive Silver Situation Intensifies

Gold Weekly

Gold held against two determined bear raid this past week, centered around 'announcements.' The first was the re-announcement of the IMF gold sale, and next was the largely symbolic gesture by the Fed in raising the Discount Rate to 75 basis points, without touching the target rate. That announcement was made AFTER the bell, rather than before as is more usual. There was noticeable front running of the miners before each announcement.

There is likely to be another bear raid, since this coming week is metals options expiration, and there is a cluster of contracts around 1100. There is also something brewing under the surface which is creating tension on the tape, with a violent back and forth motion in the spot price of gold. We can only speculate for now, but choose to wait and see what is revealed.

The most interesting speculation is that metals bears target is not gold, but rather silver.

Silver Weekly

Silver is in a potential inverse H&S formation that targets $30 per ounce. There are two or three big bullion banks that are massively short silver, that cannot possibly cover their short positions without significant pain, including a risk of default if a higher price fuels demand and breaks the confidence of the paper market.

If this is true, it is a big problem for the US government, because unlike gold, the central banks have no ready store of silver to sell into the markets, having exhausted their strategic stores some years ago.

If silver explodes because of a paper default, gold will follow. The central banks view that as a very risky development since several of the banks are already breaking ranks with the ECB, BofE, and the Fed over this issue of the de facto dollar reserve currency regime.

We do not anticipate a resolution of this quickly. DO NOT try and trade this for the short term. The 'beta' of the silver market could be terrific. The forces aligned around this market are determined and not easily moved. The small specs can get crushed if the titans start shoving.

These sorts of big changes tend to drag out over long periods of time. But we are aware of the situation. The breakout is at 19.50 and the pattern is negated with a drop below 12.

Look for more old arguments of the metals to resurfaces, and nonsensical arguments to be put forward by those banks and funds talking their books through contacts in the media and analyst community.

I cannot stress enough that if there is an all out stock market crash and liquidation both gold and silver will get deeply sold off, with everything which is what happens in a general liquidation of assets. Then we would begin to look for opportunities to buy in as the dust settles.

Miners 'Gold Bugs Index' Weekly

If silver breaks the paper shorts, the miners will break out, targeting 600 on this index. The silver plays would be remarkable.

What could trigger this? We suspect it would have to be a strong indication from the nations of the developing world for a bi-metallic content in the proposed SDR replacement for the dollar reserve currency.

Since central banks currently do not hold any significant silver bullion positions, the resulting buying panic could rival that of the 'Hunt corner' in the silver market. Therefore we would expect a maximum effort to control it ahead of time. A default on paper positions is certainly within the realm of probability.



Keep an Eye on the Long End of the US Bond Curve

This has been a long trend change as can easily be seen from this chart. The trend is bottoming and may be starting a reversal. Again, these things tend to play out over long periods of time. Don't expect to start day trading this next week.



Disclosure: I added initial positions in the gold and silver miners last week. I expect to add to them if the markets confirm. I have been hedging them against a 'market crash' in US equities such as the panic selloff in late 2008 which took us into the market lows.

"How Could I Be So Selfish and So Foolish"

Were Lloyd and Jamie and the pigmen of Wall Street and Washington taking notes during Tiger Woods' apology?

Doubtful.

No one is perfect, of course. Everyone makes mistakes, everyone sins. We are all weak, and insufficient in ourselves. And yet we attempt great things, in fear and trembling. The spirit endures and abides.

But there are moments in history that are epidemic with excess, a pathological pursuit of lust, greed, and deceit with a nihilistic determination that is more like a fashion of the age than an aberration. Chic to be above conventional morality and the law, lacking all proportion. Accepted, and even admired.

Tiger himself is what they call 'small potatoes,' the personal foibles of a star athlete. What is more significant is the festival of fraud going on in the financial world, centered around Chicago and New York.

Tiger's words could be the new American Anthem for a generation of reckless, selfish, and self-destructive behaviour by those most blessed by its freedom, offered the greatest opportunities and privileges, sometimes undeserved, and most often paid for by the sacrifice of others.

Most of them still have no regrets, except of course for the fear of discovery. They will have to somehow grow a conscience for that. Or face the withdrawal of support by their sponsors. In the case of Tiger it was Nike. In the case of the Banks it is the US government. And in the case of the US government it is a gullible and complacent public.

"Many of you in this room know me. Many of you have cheered for me, have worked with me, always supported me. Now, every one of you has good reason to be critical of me. I want to say to each on of you simply and directly I am deeply sorry for my irresponsible and selfish behaviour I engaged in. I know people want to find out how i could be so selfish and foolish.

I knew my actions were wrong but I convinced myself that the normal rules didn't apply. I never thought about who I was hurting. Instead, I only thought about myself...

I felt that I had worked hard my entire life and deserved to enjoy all the temptations around me. I felt that I was entitled.

Parents used to point to me as a role model for their kids. I owe all those families a special apology. I want to say to them that I am truly sorry.

I recognize I have brought this on myself and I know, above all, I am the one who needs to change.

I was wrong. I was foolish. I don't get to play by different rules."

Managing Perceptions: Fed Raises Discount Rate After the Close

"The last duty of a central banker is to tell the public the truth." Alan Blinder, former Vice Chairman of the Federal Reserve

In a largely symbolic move, the Fed raised the Discount Rate after the bell by 25 basis points to .75%.

As you know, the Discount Rate is the interest rate that the Fed charges banks who borrow from them short term on an emergency basis.

This is the shaping of perception by the Fed. It does not raise rates for the consumer or businesses, and does not affect the rates and guarantees in the many Fed and Treasury programs which are still supporting the commercial banks.

One has to wonder why the Fed chose to jawbone at this time. Is this a move to help them with next week's $100+ Billion Treasury auction? We are discounting rumours that the nose counts among the Primary Dealers showed the risk of another 'failed' auction was rising.

Or was this mainly to provide another opportunity for the bullion banks to take the prices down ahead of their option expiration next week? Plan B stands for Bernays.

"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K." Eddie George, Bank of England Governor to Nicholas J. Morrell

Its all about managing perception.

When the Fed starts backing off on quantitative easing, we will know that things are truly changing. Bernanke is all too aware of the Fed's policy error in 1931 of raises rates prematurely, which caused the second leg down to the trough of the Depression in 1933. So let the Fed wave their hands all they want, but watch the Adjusted Monetary Base. In other words, its not what they say, but rather what they do.

One wonders if Obama is also aware of Hoover's policy error in trying to balance the budget as the nation slid into the most serious part of the Great Depression. He is certainly no FDR, and the nation is unlikely to be on the road to recovery during his hapless Administration. Will he, like Greenspan, later confess that he erred for a theory, a mistaken belief? A small comfort for those they have ruined.

Man wird nie betrogen, man betrügt sich selbst.
[We are never deceived; we but deceive ourselves.]
Johann Wolfgang von Goethe

WSJ
Fed Raises Discount Rate Quarter Percentage Point
By LUCA DI LEO And JON HILSENRATH

WASHINGTON— The U.S. Federal Reserve Thursday raised the rate it charges banks for emergency loans by a quarter percentage point, but emphasized that the step didn't represent a broader tightening of credit.

In a widely expected move, the U.S. central bank said the increase in the discount rate to 75 basis points from half a point was part of its step away from its emergency-lending efforts. The increase will be effective from Friday.

"Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities," the Fed said in a statement...