When the Incoming Tide Turns to Tsunami

Not a matter of if, but when.

The Times
Gold price could treble if China divests dollars, warns mining boss
Jenny Booth
January 29, 2009

The gold price is likely to hit record highs in dollar terms as fears grow about the stability of the US currency, the chairman of Barrick Gold said today at the World Economic Forum (WEF) in Davos.

The founder of the world’s largest goldmining company said that there was even a possibility that central banks, including China’s, might start to switch from dollar holdings to gold, which could cause the price of the metal to treble.

“Gold is at record levels in every currency except dollars," Peter Munk told Reuters at the WEF meeting.

"Even within dollar terms it is within a few percentage points of an all-time high, at a time when all the other major commodities are falling.”

Mr Munk said: “Whether it’s the currency effect or a reaction to a feeling of uncertainty, gold, in my opinion, is more likely to go up than down.”

The gold price was up today, trading at about $890 at 1500GM. At present the record high is $1,030.80 an ounce, achieved in March last year.

Mr Munk emphasised that he was merely weighing the odds.

“It would be stupid to assume commodities prices can only go one way,” he said, adding that physical demand for gold jewellery was not high during the economic downturn.

Gold has been one of the best-performing assets of recent months, rising in value by nearly 17 per cent since late October even as the price of other commodities, such as oil and copper, has dropped sharply. (This is because gold is more monetary than commodity. Silver is a more even mix but it is still monetary as well as industrial. - Jesse)

Investors have bought heavily into physical bullion in the form of coins and bars, and physically backed assets, such as exchange-traded funds, as a safe store of value at a time of increased volatility in other asset prices.

Mr Munk said that downward pressure on the dollar, partly due to massive US spending and printing money to stimulate the economy, would increase gold’s attractions as an investment even further.

Gold usually moves in the opposite direction to the dollar, as it is often bought as a hedge against weakness in the US currency. (Gold has been moving with the dollar as foreigner flee out of other currencies and begin to treat gold as a safe haven alternative with, not in lieu of, the dollar - Jesse)

“My personal feeling is that with the rescue packages calling for trillions, not billions ... the value of the [US] currency has to go down,” Mr Munk said.

He said that there was a possibility that central banks, including that of China, a major dollar asset holder, might start buying gold. (Rumour is that the physical market is so tight they have been calling quietly around looking to lock in major sources of supply - Jesse)

“If they decide to diversify, we assume into gold, then we start to talk about a trebling or quadrupling of the gold price," he said. "It could be followed by Russia or Kuwait." (They could just be jawboning Tim Geithner back with a credible threat as well - Jesse)

“I don’t think it’s likely, but it’s more likely. I would not have said it two years ago — I’m not a gold bug — but it’s more likely than it was two years ago.”

He added that his company did not now hedge its output — meaning use derivatives to insure against a fall in price — and relied on the price climbing.

In the past its successful hedging allowed it to make key acquisitions.

“It would be dumb to hedge,” Mr Munk said. (Bill Murphy told you that when gold was at $300 per ounce, and he was right - Jesse)

SP Futures Hourly Chart Update at Noon

The SP futures failed at the resistance target and have rolled over to near support at 850.

We are still in the end of the month tape painting but earnings are deteriorating badly, causing some of the major players to start edging towards the exits, taking their profits from this double bottom rally off the table.

As an interesting change, there is a groundswell of interest among the wealthy to own physical gold bullion: not paper, not miners, not ETFs, but the actual gold. This was even referenced several times today on Bloomberg Television and in interviews from Davos. There are also fresh examples of delivery problems from Comex, and in particular with regard to 1000 oz. bars of silver which is something new. Previous shortages from commercial sources had been reported in the smaller unit bars only, with the Comex seen as a steady source of the big bars.

Part of this seems to be a swirl of talk coming out of London that there is going to be a bank holiday, and a major government action to shore up the financial system.

We do NOT have any particular insight into what is driving this and the specific short term timeframe. Rumours are easy to ignore since in the short term the technicals on the chart are most important to us, and specific news events. The macro events are on our 'radar screen' and are looking for any specific data or potential trigger events.

As a reminder, GDP for 4Q comes out tomorrow. Wall Street is bracing for the worst print since the Great Depression, on the order of -6%. Given the lags, and the monkey business that the Government plays with the numbers, we're not willing to bet on 4Q, although it does serve their purposes to come out badly, justifying the stimulus program.

"The wind blows where it will, and you hear the sound of it, but you do not know whence it comes or whither it goes"

SP Futures Hourly Chart Update for Market Close

There was a picture perfect breakout, at the intersection of our horizontal breakout resistance and the outer bound of the big downtrending diagonal channel.

So what next? While the futures remain in this tight channel a trader will not fight the tape, and no new shorts should be put on.

Now having said that we sold most of our straight up index longs into the close and did buy selective shorts into our hedge. Our bias is now short for a pullback potential off that touch on the big resistance at 875 which is now a very key level.

Trade this with care as the situation remains volatile. But as a rule of thumb when we see such a nice straight ramping pattern in the SP futures we assume that some big banking players are walking the index higher into a short squeeze. Its hard to miss as the will clearly signal their intention to the market.

Volatility remains high. The most important change is that this breakout has shifted the bias of the market from the bears to the bulls, and so now we are in rally mode until it fails. The failure points are obvious on the chart, at least for now.

The Fed Statement

Good News! The Fed stands ready to buy Treasuries, but not yet so don't worry about monetization. Will they or won't they?

Oh by the way:

The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant.

As you may recall, the foreign central banks have been dumping Agency debt en masse and using the proceeds to buy Treasuries, generally in the five to ten year duration of the curve.

So the Fed is buying those Agencies, but not buying Treasuries which would be monetization right? But somehow buying Agency debt is not monetization if it is the foreign central banks who are buying the Treasuries, right?

If the Fed uses its Balance Sheet to buy financial assets at above market prices, essentially providing a subsidy to the holders of those assets, this is not inflationary since that debt already existed, right? Oh, as long as it is at a loss, because as everyone can figure out buying them at 1000 times more than they are worth or marked on the holder's books would surely be inflationary, right? If the Fed buys my stamp collection at 1000 times it true value, that would be inflationary unless they sterilized the transaction. Is the Fed sterilizing all their transactions? Hah!

Will they or won't they indeed. They already are, indirectly. More misdirection from the transparent Fed.

From Tinker, to Evers, to Chance.


Press Release
Release Date: January 28, 2009

For immediate release

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level.

The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant.

The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.

The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.