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Gold and silver popped with stocks today, but gave up most of their gains into the close.
I think this is a period when they pause, and will tend to follow stocks at least for the short term as the markets move up and down with rumours and headlines.
The fundamental trend is still very much intact. And the recent Fed activity in providing more dollars to Europe will at some point trigger a rally in gold, and silver, as priced in US Dollars. I have not recently calculated the lag in this. It does vary with the markets and seasons, the meddling of the banks in the precious metals markets being what it is.
I am informed that Greg Weldon sees gold's breakout level around 1804. You may read about that here. It makes some sense since that is roughly the high from the last big gold rally prior to the option expiration smackdown. Personally I see a breakout test around 1830 depending on what point we hit that angular trend channel top. But these are just quibbles. The big prize will be when gold takes out 2000, and then sticks a close above 2100. At that point the public might wake up and smell the burning paper. But perhaps not even then. It depends on what takes us there. It may turn out to be a 'blip' in a greater move higher.
I remain convinced that at some point the gold and silver bulls are going to 'break the bank,' and they will be using brooms and dust pans to carry out the punters on the wrong side of that trade. But perhaps the exchanges will just close down and settle cash at a dictated price, after confiscating the accounts and the positions of small specs. Oops, already did that last one.
If you have not yet read it, you may wish to at least glance at today's report on Eurodollars posted earlier. It helps to demonstrate the expansion of dollars in the world, based largely on artificially mispriced derivatives and financial instruments, setting up the dynamic of the financial crisis and this phase of the currency wars.
This is the second day in a row that the SP 500 has 'popped and flopped' in a failure to advance its admirable weekly gain on the back of the Central Bank initiative to make more dollars available globally.
The big drop in the headline unemployment percentage was totally misleading. And we took some shorts near the apex of that pump and dump, flipping them into the close.
So what next?
The SP needs to close the year around 1250-5 in order to end the year 'flat.' There is some political-economic desire to make this happen, so this will not be counted as a 'losing year' for US stocks.
The headwinds are a tremendous headline risk out of Europe, and a somewhat hidden Bank instability of the insolvency and the liquidity kind. The game plan to date has been to patch up the liquidity problems in the short term, and to hope that inflation, time, Fed monetization, and phony accounting help to avoid the insolvency problems.
The SP 500 managed to fight its way back into the small symmetrical triangle, but remains in a larger one from 1160 to 1255. They may end up at the top end of the range into year end, but the risk is that it breaks down again, and falls through 1160, which sets up a decline of about 130 SP points from there to retest the lows of the year and then some to 1030ish.
These figures are from the Preliminary BIS Reports of November 2011 which reflect reporting bank positions as of the Jun 2011 quarter. Obviously therefore they do not yet reflect the recent Fed expansion of the swap lines for dollars. The first chart represents the total dollars held by banks as 'foreign currency.'
As you will recall, a 'euro dollar' is any US dollar being held overseas, in currency or in electronic digits, whether in Europe or Asia. I should add that a certain amount of physical dollars in private hands overseas are held outside the official banking system, particularly in the illicit substances and materials sector.
The 'Euro Dollar Gap' Chart which is the second chart reflects the difference between the reporting banks Liabilities and Assets in foreign held dollars. This gap can cause a Eurodollar short squeeze such as we had seen in 2008, and to a lesser extent in 2010. We are also in a eurodollar short squeeze now, as exemplified by the recent Central Bank effort to make more dollar swaps available to Europe. The BIS figures have obviously not yet caught up with this yet, but they will in time.
As discussed previously, one of the reasons that European Banks require Dollars is because customers were demanding the return of their dollar deposited financial instruments while the Banks dollar assets had markedly decreased in value because of bad investments in Dollar denominated Collateralized Debt Obligations.
In the third chart I compare the Fed's Eurodollar figures in the series that was discontinued in the beginning of 2006. Although the lines are relatively similar, it should be noted that the magnitudes of the numbers just do not match, with the BIS reporting significantly higher numbers even though the relative changes in the lines are similar. I do not know, for example, if the Fed was including Central Bank Reserves or not.
But I think one takeaway is that the amount of Eurodollars are significantly higher now than they have ever been as a result of the growth of the dollar bubble in US financialization of debt, much of which had been purchased by European banks.
The gap between Dollar Assets and Liabilities creates short term demand spikes, as we have just recently seen in the actions by the Fed and a few other Central Banks to make more US dollars available in swaps.
There is another set of BIS reports I am examining that render higher figures with current Eurodollars in the neighborhood of 3.2 Trillion. I am trying to figure out what these amounts include that the other measurements do not. In the interim I am using the lower of the two.
The bigger picture is that this enormous growth in Eurodollars is a result of the US financialization, more colloquially known as 'The Credit Bubble' and the US ownership of what is still the world's reserve currency.
I have some queries into BIS to understand if these figures include official reserves held by Central Banks. I do not think they do.
However, IF the dollar is supplanted by something else, or some combinations of things, as the world's reserve currency, there are obviously going to be an excess of US dollars looking for some place to go from their current havens overseas. And it is mostly likely that they will come home to roost.
I am sure that the Fed has a plan to sterilize this expansion in dollars available for domestic use. Whether that plan can work is another matter altogether. I do not believe that there is any precedent for it.
But one thing that is clear to me is that since 2002 'we aren't in Kansas anymore, Toto,' at least with respect to the growth of the US dollar overseas. And I think there is a linkage between this and the rather impressive bull market in gold and silver.
I changed the weighting of the long gold - short stocks pair back to 'neutral' to slightly short.
There might be some tax loss selling in early December and headline risk remains highly elevated.
Still it is wise not to underestimate the Fed's willingness to debase the currency for their friends.
As a reminder, the Non-Farm Payrolls Report is tomorrow.
I still think the Europeans should nationalize their troubled banks and let the US take care of its own. But that seems rather unlikely.
