I had thought that the SP 500 would fail at a slightly higher level, the blue resistance trendline, but apparently that is not the case, at least for now.
Earnings misses in the banks and key tech bellwethers is driving the selling, and not coincidentally on the option expiration Friday for July. Michigan sentiment came in at a very low 66.5 which was well below expectations. At least for now belief in the recovery is off the table.
I beefed up my short positions in the financials as part of the short stocks / long gold & silver paired trade the other day, and this appears to be working reasonably well, giving me some room to play behind the shorts to add selectively at throwaway prices in the better miners and in bullion.
I am looking for a move down to the 1050-1060 area before the SP tries to back and fill itself on support. If it breaks down from there then the 1000 level looks possible. Keep in mind that this is a trader's market, and fundamentally it isn't telling us much of anything, except that a lack of financial reform has made the US a nation dominated by frivolous speculators who add no value and tax real GDP through price distortion.
Gold and silver were hit very hard with yet another bear raid, with the paper crowd trying to trigger selling by smashing prices with program selling at key moments and price points, running the stops and scaring the weak hands out. This is how the game is played, and particularly so in this environment of big players and lax regulations.
I don't think this precious metals selling will last much longer, but we have to keep one eye on stocks to see if there is a great move to a general sell off and act accordingly. That means little or no leverage, conservative positions, and hedging against loss. Or better yet, don't bother with the market at all except in long time frames.
Despite the rumours and rationales spread by hedge funds and trading desks like this commentary here, this was obviously a bear raid tied to today's stock options expiration. No profit motivated professional trader dumps positions like this and sells against themselves unless the motive is to drive down the price and run the stops, clearing out the weak hands and taking profits from short positions in related trades. Now that 'sales by the IMF' has gotten tired through repetition it looks like 'liquidation by John Paulson' (JP) is the new bear trade precious metals boogeyman. More likely "JP" is in reality "JPM."
A Modest Proposal
16 July 2010
SP 500 September Futures Daily Chart and Gold Chart at the Close: Option Expiry Bear Raid
ShadowStats: CPI-Alt Running 4.3%, Gold $2,382, Silver $139
Something Weimar this way comes?
There is almost no doubt in my mind that we will see these prices of $2382 for gold and $139 for silver. I am just not sure exactly how we will get there, and when. But we should expect the unexpected, or at least that which is not expected by the many.
The gold / silver ratio between those prices is 17, which is close to the historically important ratio of about 16. The legal ratio of gold to silver set in France in 1803 was 15.5, and this was emulated in England and later in the US.
Obviously I am thinking of a possible return to a bi-metallic 'weak standard' through the inclusion of both gold and silver in the basket of currencies that will be replacing the US dollar as a unit of value in international trade. There are also several movements in the developing world to adopt silver for domestic use as a store of value and at least partial backing for their currency when the more prominent fiat currencies begin to hyperventilate. I think these movements will gain some traction as the currency wars intensify.
The current ratio is about 67. I cannot help but feel that silver is going to be simply amazing when its time comes, in part due to the decades of price suppression by US banking institutions.
According to the latest report from Shadowstats:
Alternative Consumer Inflation Measures
"Adjusted to pre-Clinton (1990) methodology, annual CPI inflation was roughly 4.3% in June 2010, versus 5.4% in May, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, was about 8.4% (8.37% for those using the extra digit) in June, versus 9.2% in May.
The SGS-Alternate Consumer Inflation Measure adjusts on an additive basis for the cumulative impact on the annual inflation rate of various methodological changes made by the BLS. Over the decades, the BLS has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard of living, to something that no longer reflects the constant-standard-of-living concept. Roughly five percentage points of the additive SGS adjustment reflect the BLS’s formal estimate of the impact of methodological changes; roughly two percentage points reflect changes by the BLS, where SGS has estimated the impact not otherwise published by the BLS.
Gold and Silver Highs
Adjusted for CPI-U/SGS Inflation. Despite another recent all-time high in the price of gold in the current cycle, gold and silver prices have yet to approach their historic high prices, adjusted for inflation. Even with the June 28th historic high gold price of $1,261.00 per troy ounce, the earlier all-time high of $850.00 (London afternoon fix, per Kitco.com) of January 21, 1980 has not been breached in terms of inflation-adjusted dollars. Based on inflation through June 2010, the 1980 gold price peak would be $2,382 per troy ounce, based on not-seasonally-adjusted-CPI-U-adjusted dollars, and would be $7,689 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars.
In like manner, the all-time high price for silver in January 1980 of $49.45 per troy ounce (London afternoon fix, per silverinstitute.org) has not been hit since, including in terms of inflation-adjusted dollars. Based on inflation through June 2010, the 1980 silver price peak would be $139 per troy ounce, based on not-seasonally-adjusted-CPI-U-adjusted dollars, and would be $447 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars.
As shown on page 22 in the Hyperinflation report, over the decades, the price of gold has more than compensated for the loss of the purchasing power of the U.S. dollar as reflected by CPI-U inflation, while it has effectively fully compensated for the loss of purchasing power of the U.S. dollar based on the SGS-Alternate CPI."
Consumer Metrics Institute: Growth Index Update Vs. US GDP
The relationship between CMI's Growth Index as an indicator of US GDP is interesting. If it continues its correlation the US GDP is in for a serious slump, if not a double dip. The Fed is likely to initiate a new round of quantitative easing in response, although they will try to jawbone their way around the monetization issues.
Growth Index Past 4 Years
The Consumer Metrics Institute's 91-day 'Trailing Quarter' Growth Index -vs- U.S. Department of Commerce's Quarterly GDP Growth Rates over past 4 years. The quarterly GDP growth rates are shown as 3-month plateaus in the graph. The Consumer Metrics Institute's Growth Index is plotted as a monthly average.
Consumer Metrics Institute's Contraction Watch
The comparison of the 91-Day Growth Indexes during the 'quarter' immediately following the commencement of a contraction. The quarterly GDP growth rates are shown as 3-month plateaus in the graph. The Consumer Metrics Institute's Growth Index is plotted as a monthly average. The contraction events of 2006, 2008 and 2010 are shown against the same scale of annualized contraction.
Charts by the Consumer Metrics Institute
15 July 2010
The Problem of Unresolved Debt in the US Financial System
Michael David White has painted some dire pictures of the US housing market, but this one is shocking in its implications.
Chart fromA Blistering Ride Through Hell by Michael David White.
I enjoyed the synopsis of this chart that was done by Automatic Earth in Is It Time to Storm the Bastille Again:
"That is, what Americans' homes are worth, their equity, decreased by $7 trillion -from $20 trillion to $13 trillion, from spring 2006 to spring 2010. In the same period, mortgage debt, what Americans owe on their homes, went down by only $270 billion. Yes, that's right: US homeowners lost more, by a factor of 26, than they "gained" through clearing mortgage debt. Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333."
Nine out of ten Americans will notice that there is a significant gap that must be closed here. What makes it even more chilling is that the gap is continuing to widen as home prices continue to correct to the mean.
This debt must be resolved. There are two major ways to do it: repayment and default.
Repayment is probably a fantasy, if not beating a dead horse. The homeowners do not have the money with which to pay the loans given the current state of employment and wage stagnation, and the mortgages are for the most part on houses whose value is significantly under water compared to the debt, as in ' just mail in the keys.'
Straight up default, writing off the debt even through foreclosure, is also probably out of the question, because it would essentially vaporize the balance sheet of the US banking system which is also insolvent, to a greater degree than most understand, and if they understand it, would admit.
Automatic Earth references an essay which we also had linked here by Eric Sprott called Wither Green Shoots that points out the unfortunate fact that of the 986 bank holding companies in the US, 980 of them lost money last year. The lucky six were the TBTF banks on major government subsidy.
So, where is the government going to liquidate the debt? And what effect will it have on dollar assets when they do it?
The Japanese solution was to ignore their bad debt and insolvent kereitsu, because admitting it would cause significant loss of face, not to mention financial loss, to an elite that does not permit such things to happen. So instead they arranged for their single party LDP system to drag the debt like a ball and chain through what came to be known as 'the lost decade' while they tried to make it go away by export mercantilism and crony monetarism wherein funds were given to the same kereitsu in a remarkably ambitious (and expensively wasteful) series of public works boondoggles.
Do you think the US can follow this path? As if. Japan started from a base as a net exporter with a huge trade surplus and little debt. Scratch that idea.
Someone has to end up 'holding the bag.' And the consumer cannot rise to the occasion, the banks are all insolvent and a sinkhole until they change their business models. So what will be 'the last bubble?' Bernanke has managed to monetize about 1.5 trillion dollars so far. Only 5.5 trillion more to go, if housing prices can stabilize at current levels, and employment return to pre-crash levels quickly.
A few European readers have expressed their relief, and some noticeable pride, that their banking and political system resolved its own debt crisis so quickly and easily. To the extent that their banks are holding dollar denominated financial assets, they have merely stopped the table from shaking for the moment, as their sand castles await the next mega tsunami to come rolling across the Atlantic.
Consider this well, and you will understand what is happening in the economy, and why certain things occur over the next 24 months, despite the fog of wars, currency and otherwise. And bear in mind that the only real limit and effective constraint on the Fed's ability to monetize debt is the value and acceptability of the bond, and the dollar in payment of interest, by foreign debt holders, as domestic debt holders are under legal compulsion by the law of legal tender.
And it was all unnecessary, attributable to the dishonesty and greed of a remarkably small number of men in New York and Washington who managed to rig the markets and the political process, with the acquiescence and support of a public grown complacent and in far too many cases, soft headed and corrupt.These are the same people, along with their enablers, who are now preaching the virtues of austerity for the many, and free and easy markets for themselves. All gain, no pain. While the game is going it must still be played. Obama has been disappointing, but what comes next may well be worse, much worse.
Bernie Madoff was lying and cheating and taking money until the day he closed his doors.
Perhaps they are in denial, but surely they must hear the footsteps of history approaching. And their bravado is yet another bluff, and hides the rising stink of fear.
Gold Daily Chart, Overhead Resistance, the 50 DMA, and GLD Option Expiry MaxPain
Gold is struggling to overcome some fairly well defended overhead resistance. That much is obvious.
The bullion bears took gold down hard below the 50 Day Moving Average in early July when it was threating to break out through key resistance at 1260, and have been holding it down below that 50 DMA ever since. The price selling is obvious and determined.
Seasonal selling? It does not look anything like selling by motivated investors or actual holders of positions. It does not even look like liquidation under duress.
I think it is more like a trading gambit by the hedge funds, who planned for seasonality in their cross trades with miners and other pairs, and are determined to make it happen. The 50 DMA is a logical place for traders to make their 'goal line stand.'
This could be tied to the option expiration tomorrow in the GLD ETF. This has become a major trading instrument for cross trades in the metal, and is convenient because it has a tenuous relationship to the physical bullion market.
This is important because if it is just hedge funds they are more likely to get stuffed badly and have to scramble to unwind, as compared to a big bullion bank working with the FED, BIS or IMF determined to maintain control of the currency markets.
Gold Spot Daily Chart with 50 DMA
GLD July Options Expiration 'MaxPain' 
MaxPain looks like about where it 'should be' going into the expiry.
MaxPain Chart from OptionPain
Why the BIS Gold Swaps Are Important and the Failure to Reform
In his recent commentary, Gold Derivatives Update: BIS Swaps, Reg Howe notes:
"Not surprisingly, revelation of these swaps has generated considerable discussion, comment and analysis by students of the gold market. What appears to have happened is that one or more central banks loaned gold to one or more bullion banks, which then swapped the gold with the BIS for cash, leaving the physical metal in place. Under this arrangement, the accounting conventions promulgated by the International Monetary Fund allow the central bank or banks to continue to count the gold in official reserves while the BIS enjoys a high level of security on the gold side of the swap."This is how I described the swaps in a July 6 blog entry:
"Some parties have mistakenly asserted that since a swap is not a lease for accounting purposes, which is quite correct, then the gold could not have been sold. That is just a simplistic misconception. A swap transfers the benefits of the assets from one party to another for a period of time in exchange for interest paid, generally on forex received. Its does not sell the property but it transfers the mineral rights for a time, if you will.Quite a few of the usual suspects and industry bottom feeders have questioned the significance of these swaps, while admitting they do not understand them. So confusing, who would care. Move on, nothing to see here. By the way, strike those nutters off the guest interview lists, and make sure people know that they are persona non grata.
The party that then holds that gold asset can just hold it, or they can utilize it in some way, such as leasing it out for a period of time to another party, like a bullion bank, who can subsequently sell it. These types of 'three way deals' were very commonly seen when Lehman and Bear Stearns started to unravel and they needed to be unwound, and were a key component of the whole issue of hidden counter party risks. Remember that?
So on the books of the first party there are in fact no leases or sales shown, just swaps of varying duration and terms. But the swap has delivered an asset, in this case gold, into the hands of a party who may have no qualms about leasing that asset out to a third party to obtain funds, and that third party is likely to sell it. I would of course agree that this does not PROVE anything. How can it when the books of some of the parties are still opaque, and audits rarely conducted to verify ownership. But after what we have just seen over the last three years in these games of asset merry-go-round, how can anyone just blatantly dismiss that can and likely is happening, where there is an easy profit to be made. Especially considering the past history of transactions between the bullion banks and the central banks.
Personally I would view this report as bullish for the price of gold, since it is past history, and almost certainly an indication of concerns about Comex offtake. In other words, shortages are appearing, and fresh sources of bullion are becoming increasingly difficult to find."
The significance of these swaps seems almost transparently obvious to anyone who is following the commodity markets, but Reg Howe says it quite well, and has been illuminating this smarmy little scheme for several years.
"...an integral part of gold banking in recent years has been the suppression of gold prices, not least by increasing the ratio of paper claims on gold to the underlying amount of available real metal. In this sense, if the new gold swaps disclosed by the BIS are just the latest technique for giving official support to an increasingly shaky gold banking business, they might be viewed as a short-term negative for gold prices. But in a larger sense, the growing reluctance of central banks to part with whatever gold they have left can only be a positive development for committed gold investors."
The point is that some of the central banks, led by the example of the Fed and J.P. Morgan, have been leasing out their gold inventories to the bullion banks at very low rates, without reflecting those leases on their books. Technically this does not violate any prohibitions against selling sovereign assets without the oversight and consent of the people. In the case of Gordon Brown, when you do it, you invoke the secrets act and hide the details as well.The bullion banks have been selling that bullion into the market, artificially suppressing the price, and occasionally having to be bailed out when there is a short term 'run' on their paper obligations as in the case of the sale of England's gold by Gordon Brown.
The reason, more properly rationale, for this 'arrangement' is the linkage shown in several economic papers, including an important one co-authored by Larry Summers, that leads them to believe that their is a linkage between lower gold prices and lower interest rates on the long end of the curve. I believe they have it wrong and are ultimately mistaken, but they believe it, and that's what counts. And this will be their cover story when they are brought to justice, the Greenspan defense for his own unindicted offenses. I thought I was doing the right thing, but I was mistaken, and I am sorry.So why should we care? For two reasons. First, this is clearly become a reverse Ponzi scheme, wherein large paper claims exist for a shrinking pool of an available physical resource, ie. central bank and bullion bank gold. The same applies for silver.
The derivatives short positions held by a few banks, like JPM and HSBC, are enormous. If the market ever breaks free of this scheme by the shorts, it is going to leave a crater in the international banking system.
And second, when one has a scheme started from good intentions that gets out of hands and is covered up by official government actions, it festers into corruption. That corruption spreads, and undermines the integrity of the institutions that it involves, namely the Treasuries and Central Banks of many of the developed countries.
"Corruption is a tree, whose branches are
of an immeasurable length: they spread
Everywhere; and the dew that drops from thence
Hath infected some chairs and stools of authority."
Beaumont and Fletcher, The Honest Man's Fortune
Sounds a little crazy huh? The SEC dismissed the whisteblower in the Madoff scandal as a cranks for years.
At least some of the monied interests, the privileged, and their demimonde of enablers have called it such. And yet the evidence keeps coming out and confirming it, little by little. The revelation of the fractional reserve nature of the world's largest bullion exchange was a blockbuster. The Fed resists audits of their dealings in gold, and an independent audit of the gold held by the Treasury and Fed with a full and clear disclosure of any obligations on those inventories has been resisted for years.
Like Enron, the tech bubble, the housing bubble, the Madoff Ponzi scheme, financial deregulation, OTC derivatives, relaxed pension fund rules, and the financial assets bubble, this bullion bank scheme is going to blow up and collapse, and the public is going to be asked to pay the bill, and ignore all the wrongdoing for their own good.
That is why this is important. And there will be hell to pay when the day of reckoning arrives. And that is why there is such moral hazard in the policy of not seeking indictments of key figures in this financial fraud because the perpetrators think they will be able to just keep the scheme going, and then lie and deny if the time of discovery comes, as their fellows have done already.
But it hasn't happened yet. And the pigmen live life on the edge, doing what they will, with a confidence that they can talk their way out of any difficulties that may arise, maybe make a few phone calls, call in some favors from the powerful. They are just that good.
I have known several of that type personally. This is how they think, and their actions follow their beliefs in their own power, and the distance they enjoy from common humanity. This is why deterrence is an even more important factor in intellectual or white collar crimes, because belief in the con is such a pivotal element.
This is what makes Obama's reluctance to take an aggressive stand against fraud, to follow through on the will of the people in their desire for justice, such a fatal flaw. His moral ambiguities and desire to go along respectfully with the desires of the powerful, shown clearly in his appointments and key decisions, makes him a nice guy to pal around with perhaps, but a tragic failure as a leader for reform, and an American president.
And they often have a good run of it. But eventually they have trouble talking their way out of trouble, especially when they are figuratively swinging from a lamp post, or hoist with their own petard.
"Watch therefore and pray always, that you may escape all these things that will come to pass, and be among those standing with the Son of Man.” Luke 21:36
14 July 2010
Gold Daily Chart and an Elliot Wave Count
This shorter term chart and E-wave from Lannie Cohen of Capitol Commodity Services.
I have provided a short-term chart on gold, which suggests a potential low in place.
In my opinion, even if the low is taken out, it will show positive divergence, which would suggest a buying opportunity, a perfect scenario for the "scale-in" strategy.
Remember, Gold is a currency and is certainly acting as such. The outlook for higher prices into year end remains the same."Betting against gold is the same as betting on governments. He who bets on governments and government money, bets against 6,000 years of recorded human history." Charles de Gaulle
