Gold: Until the Banks Are Restrained and Balance Is Restored

Gold has apparently broken out of a big inverse Head and Shoulder formation, possibly an ascending triangle if you prefer that for reliability. In combination, as they often are, this is a powerful sign of buying pressure, accumulation and a sharp rise in price.

The targets we saw on the Gold Long Term chart posted here on September 15 call out a range of targets for this leg in the bull market from 1310 to 1350 level.



Here is a closer look at an updated chart showing the successful breakout from the Inverse H&S pattern. The target of 1310 now seems more confident for this leg of the gold bull market.

The formation will be in play as long as the 'secondary neckline' is not violated on a weekly close.



It is always more difficult to move from the charts to a more fundamental macro analysis and ask, "What does this mean? What is the market telling us with these sharp moves higher in gold and silver?"

And of course there is the most common question of all, "How far can it go?"

This is where the controversy begins, because gold is stepping on the toes of those who misunderstand the existing forces of demand deflation and monetary inflation in the United States, who fundamentally do not understand money and wealth, and their differences.

It is also bothering the financial commentators and analysts who, in addition to mouthing the words and sentiments that other people provide for them, sometimes have a thought of their own and must wonder, "Is what I am saying true? And if it is, why is gold doing this? Should I be fearful of my position if the markets fail?"

We have tried to portray some potential causes for the sweeping move in gold. One must first remember that this is nothing new. Gold is in an obvious and sustained bull market, that has it roots when the Federal Reserve under Alan Greenspan decided to print its way out of a series of crises beginning in the mid 1990's, and started rising in earnest with the Fed's monetary and regulatory errors in 2002.

Gold, despite the obvious efforts of the monied interests to disparage it publicly while accumulating it privately, is rising because the US dollar is being used badly, is being weakened by the failing schemes of a corrupt combination of the government and financial interests.

This is why there has been no serious reform, no meaningful investigations or indictments in what will surely be remembered in history as a financial fraud of a magnitude with the South Sea Bubble in England and the Mississippi Bubble in France.

There are going to be more crises, more dislocations associated with this, despite the best efforts of the financial engineers to paper it over, and the captive media to cover it up, dismiss it, and move along to the next asset bubble, this time in stocks.

This is what gold is telling us. It is saying that the era of the US Dollar as the world's reserve currency is over, with all that this implies in the balance of power in the world as it has existed since the end of the Second World War. And it is occurring for some very good reasons which the US media and the Congress seem to prefer to ignore.

Gold is where people put their wealth when they are confronted with uncertainty, with asymmetric information, when they are afraid; when the statists and the crony capitalists are preying on the savings of the people. Gold is a refuge, a safe haven, when there is good reason to be concerned about your currency, your wealth, and your future; when lies are in the ascendancy and truth and justice are scarce commodities.

This is because gold is one of the few stores of value that is compact, universal, portable, and contingent upon the full faith and credit of nothing but itself.

And so the rally in gold will likely continue until the banks are restrained, the financial system is reformed, and balance is restored to the economy. When the media once again speaks freely and truthfully and openly, when justice is done and the guilty are judged, and when the people can more reasonably place their confidence in the words and actions of those who hold the stewardship of their nation under the Constitution which they have sworn to uphold.

Or, when the Constitution is tossed, and freedom is extinguished, because it is no longer convenient to a people given over to self-deception, egoism, greed, mere anarchy, and nothingness.

"In Egypt's sandy silence, all alone,
Stands a gigantic leg, which far off throws
The only shadow that the Desert knows:
I am great Ozymandias, saith the stone,
The King of Kings; this mighty city shows
The wonders of my hand. The City's gone,
Nought but the leg remaining to disclose
The site of this forgotten Babylon.

We wonder, and some hunter may express
Wonder like ours, when thro' the wilderness
Where London stood, holding the wolf in chase,
He meets some fragments huge, and stops to guess
What powerful but unrecorded race
Once dwelt in that annihilated place."

Horace Smith, 1 February 1818

Latvia Goes "No Bid"

This bears watching. It may be nothing on the grander stage, but then again, there is a precedent for small events to trigger larger actions and reactions.

Latvia on the brink
By MarketWatch
Oct. 7, 2009, 10:04 a.m.

LONDON (MarketWatch) -- It's never good news when a government bond auction fails. It's particularly bad news when an auction fails for a note maturing in just six months. And it's really bad news when there isn't any bid at all.

Yet that's what happened Wednesday when Latvia tried to sell close to $17 million of paper. It's not hard to figure out why.

The Baltic country is squabbling with Western -- mostly Swedish -- leaders over spending cuts, and it's a very real possibility that the country may be forced to devalue its euro-pegged currency if emergency global funds don't arrive.

Were Latvia to devalue, that would hit economies in neighboring countries like Lithuania, and Swedish banks would rack up additional losses on the loans they have made throughout the region.

The real nightmare scenario would be the Swedish banks then pulling down other European banks, and then triggering Credit Crunch: Part 2.

There is, of course, a long way before that unwieldy scenario comes to pass. Latvia hasn't devalued -- yet - and, even if it does, that doesn't mean it would drag the Swedish banks under.

Lenders like Swedbank which has more branches in the Baltic countries and Ukraine than in Sweden -- have endured plenty of losses, and Swedbank, for one, just raised more than $2 billion to weather stormier times. See earlier story.

Still, investors might recall a minor matter involving teaser loans that only took down the entire world economy.

Not every domino falls. But there's one that's looking shaky.

Guest Post: Tavakoli On the Reserve Currency Discussions

Here is a commentary from Janet Tavakoli on the Robert Fisk article in yesterday's Independent.

It is remarkably well grounded and thoughtful in its analysis and is well worth reading.

This is a guest post at Le Café Américain, but links to her site and other important essays are contained herein.

Her insights are a welcome palliative to some of the astonishingly shallow commentary we have seen and heard from the financial media.

Of course we would agree that this discussion has been ongoing for many years, as such a discussion fills the void in the evolution of global finance after the breakdown of the original Bretton Woods Agreement, and the closing of the gold window by Richard Nixon.

The point which we have made, perhaps no nearly so well, is that the actions of the Fed and the Treasury over the last ten years have brought the world to what appears to be a tipping point, something that will finally precipitate a change in what has long been a de facto equilibrium; a sea change if you will.

A major precipitant to the current action appears to be the quinquennial rebalancing of the SDR, which will be occurring in 2010. That, and the widespread financial fraud which Wall Street perpetrated on foreign investors, which has been seriously underplayed by the American media.

This is the scenario which was forecast here in 2005, when it became apparent that Greenspan and his governors, together with the Treasury, were not going to act in a manner that would promote a sustainable environment for the status quo.

And further, that the serial sociopaths on Wall Street would keep pushing their luck to the limit, face-ripping their way around the world with our trading partners and creditors until they hit the wall in the form of a break in confidence and an irreparable loss of trust, triggering a significant financial blowback.

Although there was some hope that Obama and his economic team might be able to turn the tide, that hope is fading quickly. And so here we are today.


China Defaults, Currency Basket Threatens Dollar
TSF – October 6, 2009
By Janet Tavakoli

Robert Fisk exposed revived discussions by the Gulf States, China, France, Japan, Brazil, and Russia to replace the dollar as the benchmark oil trading currency with a basket of currencies including gold within 10 years.

This proposal is not new and discussions have been ongoing for decades. But other extraordinary moves in the capital markets suggest we should take this threat to the dollar’s position very seriously. For example, China has $2.3 trillion in currency reserves (about 70% in dollars), and China knows how to get its way.

In November 2008, Chinese banks said they would no longer play by our rules. Top tier banks (Bank of China and Industrial and Commercial Bank of China) reneged on derivatives contracts. They failed to come up with billions in collateral on dollar/yen FX trades, which were out of the money after the yen’s October appreciation. This should have been headline news in every financial newspaper, but it wasn’t. Chinese banks defaulted.

They may have been partially motivated by U.S. malfeasance in the capital markets that caused losses in Asia. The U.S. squandered its credibility and our cover-ups have done nothing to restore it.

Most credit support annex agreements would say that closing out these trades would be an event of default, and then the cross default on all the trades would kick in with the same counterparty. But the credit of the Chinese banks was better than many of their counterparties. Everyone was forced to renegotiate contracts with the Chinese banks.

From the perspective of the derivatives markets, this is earth shattering. What would have happened if AIG had done the same thing? (Hey, Goldman, UBS, and others…you want your collateral? Well…Stuff It!)

At the end of August 2009, China signaled that state owned oil consumers: Air China, COSCO, and China Eastern could default on money-losing commodities derivatives contracts.

If we had been paying attention, the U.S. should have done everything in its power to correct our mistakes, clean up the mess in our financial system—instead of sweeping it under the carpet—and turned our efforts to maintaining the credibility of the capital markets and the credibility of the dollar.

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides
consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008).

Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

SDRs and the Endgame for the US Dollar Reserve

Our take on this is that there is NO question that the US dollar will lose its reserve currency status, and the Treasury and the Fed are aware of this.

The game being played now on the international stage, largely behind the scenes until recently, is with regard to what will take its place and how it will be implemented.

The talking heads on US financial television are largely talking their books even today, taking the position that nothing can replace the US dollar for the next fifteen years at least (Robert Altman-Bloomberg).

Most of the anchors and house commentators are just shallow, nervous in a giggly sort of way, and astoundingly naive which may be attributed to their relative youth and lack of relevant experience in anything beyond looking good and being often wrong but never in doubt.

The US and UK are pushing for Special Drawing Rights (SDRs) from the IMF as the replacement, with very minor rebalancing. There are those who prefer something that they feel is less neo-colonial, or at least more neutral, and reflective of a changing economic reality.

Much of what is hitting the news now is political jawboning ahead of the next realignment of the SDRs in 2010 after the recent summit in Istanbul to discuss this very topic that the news people in the US are denying ever even occurred.

"The basket composition is reviewed every five years by the Executive Board to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems.

In the most recent review (in November 2005), the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies which were held by other members of the IMF.

These changes became effective on January 1, 2006. The next review will take place in late 2010"

The current composition of the SDR, as calculated in 2005, is:

"The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar."

"With effect from January 1, 2006, the IMF has determined that the four currencies that meet both selection criteria for inclusion in the SDR valuation basket will be assigned the following weights based on their roles in international trade and finance: U.S. dollar (44 percent), euro (34 percent), Japanese yen (11 percent), and pound sterling (11 percent)".

Here is a commentary from Max Keiser, an ex-patriate based in Paris. His analysis will seem harsh at times to American ears, more conditioned to the evening news. But this represents what a significant portion of the world now thinks, and it is worthwhile to at least listen to it.

Why would the US resist this? Because there is a huge overhang of dollars in the world, far beyond what can be sustained at current valuation if the dollar was NOT the reserve currency., artificially incenting countries to hold dollars, and to use them for some essential purchases such as oil.

The strong dollar is a huge benefit to the US financial sector and the government. It is a significant drawback to US industry and the non-military productive economy. This is why the Europeans are opposed to the Euro becoming the world's sole reserve currency. Their financial sector has not obtained a dominant influence over the government, and their predisposition to military adventurism is still tempered by their experiences with war in the 20th century. That could change, but not yet.

People talk about an artificial short in the dollar because of debt. That concept only works if the Fed does not exercise its printing press, which it said it would do, and is now doing. But the dollar overhang exists, and has become precariously unstable, and unsustainable.

Max Keiser is hearing that the target composition will be weighted to 50 percent gold, in a return to a system more in keeping with the original Bretton Woods agreement. This is most likely the position being taken by France, China and Russia. The US and UK are adamantly opposed and will fight a delaying game with 2020 as a target for a phased in approach that continues to favor the dollar.

He starts going 'off the rails' for my taste about four minutes into this interview, but it is a viewpoint that is becoming more widely held in parts of the world that are starting to matter to the US economy, blowback-wise, and Americans need to be more aware of this perhaps for practical considerations.



See Also: The Decline of the Dollar as the World's Reserve Currency