When?

It has been 11 months that gold began to drop. We have enough proof that gold prices have been manipulated. We also know that the longer a price is manipulated, the larger the reaction will be. The question is WHEN?

First, let's be thorough. Is it possible that the Obama regime will fix the economy, fix the fiscal mess and that Europe will return to sane fiscal management? Very unlikely. The Western world is in a deflationary spiral and there are only two cures for that: 1. more prudent governments that spend less and 2. printing more money.Europe and the US has not done either effectively.

There are important meetings this week by the FED and by the ECB. Sec Treasury Gaithner is in Europe today conferring with his counterparts. Will they actually do the printing or will they continue talking about it? The Market is quiet, waiting. Here is the graphic on the gold price which will react to decisions. The descending curve can be drawn two ways: 1. in one way (lower line) the breakout will occur shortly after 1,630; 2. the other way (upper graph) the breakout will occur above 1,700.

And Larry says? He thinks that a change in the Market (i.e. gold market) will come in the first two weeks of August. His numbers and equations call for a drop in gold price, because he does not believe that the Central banks will print untill their backs are to the wall. Here is the graph of gold.

Is it a breakout this time?

Using the data on how long it takes for a correction in gold price (as related to the size of the correction) I calculated that the correction was to be over at the end of May. It wasn't. It seems again that the gold price is breaking out of the wedge. Here is the graph:

The breakout is still modest, though this morning's gold price is up another 10 bucks or so. Some traders say that if the gold price goes above 1,700, it will initiate a large short covering and restore the rally. We know that the paper contracts to deliver are huge and so are the shorts.

The Euro: Preservation efforts get serious.

It is important to understand the problems of Europe and the US and note the difference. In the long term, both face the debilitating effects of Socialism; Europe more so than the US. Europe faces a liquidity problem (the fiscal crisis) from too much debt, the US faces a problem of a Socialist elite that wants to crash the economy so we have a revolution.

I have been commenting mostly on the European debt crisis. The crisis continued because Europe's leadership was unwilling to do what it needed to do in order to solve the liquidity crisis before tackling the long-term problems.

This is changing. Comments by Ewald Nowotny (Governor of Austria's Central Bank and Member of the ECB Council) has come around and threw his weight to the idea of letting the ESM become a bank that can 'print' money to rescue the banks of Spain. That alone buoyed stock markets in Europe and in the US and dropped the US Dollar below 83(just as Larry's forecast of the Dollar going to 86 came out). In addition, Mario Draghi, President of the ECB, declared that the ECB will do whatever is needed to preserve the Monetary union (meaning the Euro) within the EU mandate.Dire predictions of European hyperinflation are not in order as the Euro was clearly deflating.

The FED is meeting again and may ease though it is not likely that they will call it QE3. As I pointed out, the FED need not print, simply allowing the banks to reduce reserve requirements and use that to make loans 2-10X more than the reduction in reserve, is sufficient to act as a stimulus. Spanish and Italian bond rates dropped on the news.

Widening differences.

We are starting to have wide differences in forecasts, earnings and opinions on predictions.

Larry Edelson vs John Embry.

Larry is doubling down on his forecasts for a drop in gold and especially silver prices. In his opinion, economic and financial matters will have to get very desperate and then the FED and the ECB will have to act in concert at easing and that will propel the gold prices and inflation.

John Embry is forecasting a looming shortage in physical gold maybe as soon as August, which will propel the precious metals and mining shares. These people have long histories in the business. Why the diametrically opposite views?

The rating agencies also differ.

Moody has downgraded the outlook of France and Austria in February. This was followed by a downgrade in outlook for Germany, Netherlands and Luxembourg, leaving Finland stable.

Standard and Poor has left all four alone and reaffirmed their Aaa rating.

Meanwhile Italian 10 year notes hit 6.337% today (up 2.77%) and Spanish rates hit 7.498%, up 3.18%. Spanish regions are being downgraded, because they are out of money.

Some German figures.

They talk lightly of Greece leaving the EU and quitting the Euro. These folks are whistling Dixie( more precisely, they are whistling Deutchland, Deutschland über alles). The moment Greece leaves the Euro, it will default on its loans and there go a whole bunch of banks. That will be very costly.

Is Larry right that the ECB will wait untill the EU is in tatters to print? Spain and Italy need cash infusions big time and Germany, Holland and Luxembourg do not have enough to do the rescue. Only the ECB can do a rescue or the ESM can be raised to the status of a bank. What is plain to Larry is also obvious to every one else.

What will be the Black Swan event?

A Black Swan event is defined as an unexpected event that throws the Market(s) into a swoon.

We have a wide choice of Black Swans in Europe: 1. Greece leaving the EU, 2. The Eu kicking Greece out, 3. Spain entering default, 4. Italy entering default, Al Qaeda attacking the London Olympics. Then we have candidates outside of Europe: an Egyptian civil war, Iran closing the Strait of Hormuz and Syria deploying chemical weapons.

There are plenty of candidates in the US: the Press getting hold of Obama's use of cocaine, the murders of his homosexual friends and church members in Chicago, the FED declaring QE3 or turning loose the banks to quadruple the money supply, economic numbers deteriorating, etc.

The grand daddy of all black birdie would be the repudiation of the US Dollar as an international currency. Then there is the formation of military police deployable in the US to quell disturbances (Three battalions now exist), etc. These will be adventurous time, as of the Chinese curse.

It is raining debt in Spain.

Spain has 17 regions. They owe E140B, of which E36B has to be refinanced this year. Valencia has appealed for help from a liquidity fund set up by Spain (contains E18B) and now Murcia is considering to do likewise. It is raining debt in Spain.

Fed is looking for new tools.

There is an interesting report in the Financial Times on the FED's efforts to boost the economy:

http://www.ft.com/intl/cms/s/0/7015fcfc-d419-11e1-942c-00144feabdc0.html?ftcamp=published_links%2Frss%2Fworld_us%2Ffeed%2F%2Fproduct#axzz21PTO8FeF

Reducing rates has now become ineffective. Why? Because the rate is now 0.25% so it can not be lowered much more. Buying up assets has also been tried. The only thing that has not been tried is stopping paying the banks for their excess reserve and allowing them to really pump up the money supply. Theoretically, the banks can leverage their $1.5T into $15T! That would start inflation rolling.

Some experts conclude that Europe and us have only two ways to deal with the huge debt: 1. explicit default or 2. default via inflation. These experts believe that the US is two years behind Europe. However, we are now at 100% National Debt expressed as GDP. Together with unpaid obligations incurring, the deficit is nearly $5T annually.

Gold price manipulation nearing end.

Says London Trader. The London Bouillon Market Association (LBMA) is beginning to admit that the unallocated gold it claims to have is not there that even some of the allocated gold is not there either. In fact, it has been admitted in 2010 that the LBMA treats the gold market as a 'fractional system,' meaning that only a fraction of the gold contracts traded are actually covered by physical metal:


http://inthesenewtimes.com/2010/04/06/lbma-bullion-market-ponzi-scheme-financial-manipulation-in-the-gold-and-silver-markets/



We have, in fact, seen that every time gold rallied recently, it has been beaten down by large sales of paper gold. The reference contains an early admission that the LBMA is in fact does not have the gold it claims to have.

Since, customers are beginning to demand the gold they bought with contracts, you might think that this would set off a short squeeze. London Trader thinks that the positions  (contracts) will be paid off in cash and then the gold price will start going through the roof.

Since, the PM market is no longer driven by supply/demand, I see no point to produce TM untill such time as the short positions are unwound.

Crunch time ahead.

You can gage sentiment by looking at the bond rate a country has to pay to investors. While, Germany's 10 year bond now yields 1.17%, Spanish rates soared to 7.27% and the 30 year rate went to 7.35%. The public knows that without massive intervention, Spain's finances are about to implode. Greek bond rates went above 25%. German politicians are now openly saying that Greece has to leave the EU. And if Greece leaves it will also default bringing down German and French banks.

What about the highly touted Agreement of the EU finance ministers? Just so much words. The ESM is not funded and may not be funded till next year. By then it will be too late.

Here is a quote from a British businessman: "Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London, said in an interview yesterday. “It’s cold-hearted reality. The great blag and bluff of the euro zone has always managed to kick the can down the road, but it is no longer a viable strategy. We’re getting to a crunch point.”

Spain: even more troubles.

The situation in Spain reminds me of the Russian joke:

PESSIMIST: things are so bad they can't get any worse.
OPTIMIST: oh yes they can.

Ten year Spanish bonds interest rates junped to 7.04% yesterday. Today, the rate jumped to 7.15%. How come? Speculators? No. Valencia, a semi-autonous area of Spain essentially told the central govt that it needs financial help. No, not a bailout, just help. So, the lemmings are jumping off the cliff onto a ledge of US Dollars which is soaring again.

Predictions: will they really happen?

I figure that by now everyone has heard about the Mayan Calendar predicting the END OF THE WORLD on Dec 21 this year. Will it happen? I do not have the faintest, but if it does, Christmas will be cancelled.

Then there is the book about devaluing the dollar: a Conspiracy between China and the FED. Believable? When you read the book, you find that a very credible prediction can be made. Will it happen? Well, it is happening, sort of.

There is the work of the Weiss Research in general and Larry in particular. They predict a drop in the Stock Market and gold then a huge upsurge. It hasn't happened. Larry is now predicting an upsurge in stock prices. That hasn't happened either.

KWN predicts a large increase in precious metal prices and that hasn't happened. At least they admit that Central Banks, in Concert with governments, now control gold price by virtue of selling ten times as much paper gold as the actual sale of gold. Both gold bulls and bears are frustrated as the tug of war continues.

Then there is James Dale Davidson. He predicts that on Sep 21, 2012, the USD will reach its "Use by Date" figure. According to Davidson, the Faustian bargain between Pres Nixon and King Saud will have run its course and the PETRODOLLAR trade will come to an end. What is this trade? Nixon and King Saud agreed that oil would be sold for Dollars. So, the rest of the world had to work and scrape to earn US Dollars to pay for petroleum. We only had to print them. The Dollars would then be recycled by countries buying US Treasuries to finance America's deficit spending.You think it was bargain? Hardly. In exchange for cheap consumer goods, the US got rid of a good portion of its manufacturing. While, Obama shrieks that Romney outsourced jobs while at Bain, Obama has outsourced rocketing US Astronauts into space. And the advisor on jobs is from GE, that produces half of its products overseas.

Davidson wants to warn us about the coming catastrophe. And, btw, he has a bargain for us: a one year subscription to Strategic Investment for a paltry sum of $59/yr. And two free books. But if the Mayans are right then it does not matter.

How long can this go on?

Communism fell because its intellectual defenders could no longer sustain the lies it was built on. Just before it fell, its defenders and Liberal collaborators declared it to be "the wave of the future." We may be coming to a similar junction with soft Socialism we call "Liberalism."

In that genre we have the article of Catherine Boyle at MSNBC that asks the question: How Close Are We to a New Great Depression?

Her answer? Decoupling money from gold allowed Central Banks to flood the world with credit. As more credit is added, its ability to stimulate is reduced. She figures though that another and huge round of stimulus may hold off Depression for another ten years.

We seemed to have arrived at a temporary plateau of sorts, where the EU crises is being treated with half measures, the American economy is slowly sinking, gold is being restricted to the 1,550-1,620 range and the whoppers the Media tell get bigger and bigger. For example, we are being told that the Deficit totalled $900B during the first 6 months and is expected to rise only by $200B till the end of the year. Really?

Larry is still sticking with his prediction that gold will sink before the big increase. And KWN reports that gold swap dealers turned net long in anticipation of a big rally in gold. Go figure.

What free market?

Here is an article by Daryl Montgomery, which appeared in today's seeking Alpha. It gives further details about the distortions in the European Markets.

"The Finnish finance minister has said all eurozone countries are making contingency plans in case the currency union breaks up. With debt downgrades, bond market anomalies, troubled bailouts, and austerity packages with their associated riots becoming the new EU norm, their worries are obviously justified."




"Last night, Moody's downgraded Italy's government bond rating two notches from A3 to Baa2. This is just above junk status. Moreover, the outlook is negative with further downgrades possible in the near future. So what happened in the Italian government bond auction this morning? Did buyers demand higher interest rates to buy Italy's increasingly risky debt as basic economic principles would predict? No they didn't. Italy sold €3.5 billion of three-year bonds at an average yield of 4.65%, much less than the 5.3% it had to pay last month. How is this possible? Apparently Italian banks couldn't resist an urge to grossly overpay for their government's newly issued debt. The ECB was most certainly backing them up behind the scenes. If this is how Italian banks do business, can we assume that they're solvent?"



"There is little need to pose that question for Spanish banks. Recent data indicate that they borrowed €365 billion in June from the ECB - a record amount. This compares to €325 billion in May. These numbers indicate that Spanish banks have been closed out of the interbank lending market (a good indication of insolvency). The highly troubled Spanish banking sector, which has €3 trillion in debt on its books, will be receiving an immediate infusion of €30 billion in bailout funds from the EU and another €45 billion in November. This represents 2.5% of its total debt and that amount is supposed to fix the problem. The actual funds needed will be many times that. It is impossible to say exactly how much because the financial numbers for Spanish banks are not reliable."



"Spain seems to be following Greece's descent into a self-reinforcing economic collapse. This week Prime Minister Rajoy announced further budget cuts of €65 billion over the next two years. VAT was raised from 18% to 21%. Almost a quarter of the Spanish work force is unemployed, even worse than Greece's 22.5%. Spain though seems to be making a more serious effort at fiscal austerity than Greece. According to reports in the German daily Rheinische Post, the troika on its latest visit found that the Greek government failed to implement 210 of the 300 budget savings requirements it had agreed to in exchange for its bailout money."



"While interest rates are pushing against unsustainable levels in Spain and Italy, they have gone to theoretically impossibly low levels in northern Europe. Negative interest rates first appeared in government debt in Denmark and the Netherlands last December. Then Germany paid negative rates on some of its short-term bonds starting in January. This week, France sold six-month Treasuries at a yield of -0.03% and two-year bonds at -0.001%. Below zero yields are a sign of severe market stress."



"The euro this week has traded below 1.22 to the U.S. dollar, but is slightly higher today (FXE is its ETF). Investors should watch the 1.20 level. If the euro breaks and stays below this area of support, it could drop to parity with the dollar. The major central banks would intervene to prevent this though, so the ride down wouldn't be smooth."



"Stock markets reacted bullishly in late June and early July to the news of further bailouts in the EU. Most traders didn't ask where the money would come from, nor if the plans were even legally possible. They may not be. The German constitutional court will be ruling whether or not Angela Merkel's promises to participate in the ESM (European Stability Mechanism) can go forward. Even if they rule favorably, there is little actual money committed to the ESM. More money printing (and the ECB has already done quite a bit) is the only option left to fund the various bailout schemes to save the euro. Of course, it's logically absurd that a fiat currency could be saved by producing excess amounts of it. The same is true for trying to solve a debt crisis by taking on more debt. But hope reigns eternal in the land of euro make believe."



This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security

Will gold break down this time?

Gold is under assault again. The mechanism of how it is done may be the next financial scandal. Some banks or governments are selling a lot of paper contracts for gold they do not have. Others, are borrowing gold from banks that hold gold for customers. The body of evidence is growing, because customers who request gold delivery are stalled untill the holding bank can buy some newly minted gold. Others find that the gold that is returned is not the gold that they had on deposit.

Gold and US Dollars vary reciprocally during times when the markets are flat, such as now. We saw gold correct from Sep 2011 and that correction was finished in May. Indeed, my charts predicted an end to the correction at the end of May. It did not happen. Instead, gold fell into a wedge pattern a little lower. Gold has come under pressure again with the 1,550 support being challenged. So far this level held.

Another factor is the US Dollar Index. In 2008, the Index reached 90 and in 2010 it reached 89. The Dollar Index is on the rise again. Should it reach above 84, it has no resistance till the 89-90 region. Most of this is due to the inept maneuverings of the EU in handling the debt crisis. The Euro has been sinking and people buy Dollars. The FED insists that its policy is to produce low inflation, but it fails in doing so. I believe that the FED is waiting to see if a Republican gets elected in November and then unleash a tide of money now held in deposits in the banks. However, the slow or non-existent recovery of the economy, along with the rising price of the Dollar may force the FED to do it sooner. Anyway, the FED has that as a mechanism to goose the Stock Market, increase inflation and promote export.

Spanish banks: another meeting.

The finance ministers met yesterday and agreed on the following:

1. The conditions of Spanish bank bailouts;
a) estimated cost E100B;
b) banks will accept rules and supervision;
c) this agreement has to be approved by the legislatures of Germany, Holland and Finland;
d) Spanish bank executives will have salaries capped and no bonuses;

2. They will meet again on July 20 and hope to have legislative approvals by then;

3. The bailout will be done in two steps;

4. Spain has till 2014 to bring its deficit down to 3%.

The mechanism of funding the ESM is left for later meetings.

The yoke of deficit spending remains. Even at 3% annual deficit, the Euro will lose value.

The screw turns.

Spanish bond rates on the 10 year note rose to 7.08% while the Euro dropped to $1.228. Some traders anticipate that the Euro will drop into the $1.21 range. European stocks are also dropping.

Meanwhile, the finance ministers of the EU are meeting in Brussels. Their main topic of discussion is how to gather the power to regulate banks, so that this power is shifted to Brussels. Oh and the sorry state of the Spanish banks. At present, they are sticking to the timeline of next year on funding the ESM. The finance ministers could decide to declare the ESM the European bank, allow it to digitize Euros and lend to banks directly. Is it going to happen?

What the FED might do.

Investors anticipate more money creation. That is what can be concluded from the USD graph. However, the FED can create excess Dollars without printing any. Since 2008, the FED has demanded higher deposit from banks and paid them 25 basis point interest. That was like a field of corn to a herd of pigs. Banks like to earn money while taking no risk.

But, federal spending is having a negative effect on the economy, causing deflation. The FED CAN increase the money supply by stopping payments to the banks and maybe even charging interest on excess deposits. That would put a lot on money into circulation. And because of the fractional rule, the banks can use the $1.5T reserve to loan (or invest) $15T theoretically.

That may end gold correction.

Markets anticipate QE3.

The unemployment numbers continue to "disappoint" people. And no doubt will be rrevised downward next month.If the FED needed economic cover, this is it. In fact, one pundit points out that QE3 is anticipated. How? While the Dollar Index is rising, its MACD is falling. Fewer people buy dollars.

The Devil is in the details.

The artificial euphoria of the latest EU Summit has now dissipated and we are back to doom and gloom. Ahgela Merkel has been castigated by German Media about her "capitulation" to the idea of bailing out Spanish banks. That, of course, made her rise in the polls.

Is either move justified? NO. There are two insoluble problems: 1. There have been constitutional challenges to any ECB action in Holland, Germany, Finland and another country; the ESM will not be operational (i.e. funded) untill 2013 or maybe 2014. Just the rules on how to bail out Spanish banks won't be finalized untill later this week. So, how is the bailout going to happen? Finland has blocked the purchasing of Spanish bonds by the ECB and threatens to leave the EU unless Spain comes up with suitable collateral. Ten year bond yields, meanwhile, jumped over 6% in Italy and 7% in Spain. Neither country can afford those rates.

We can see a worsening of economic conditions in Europe and in the US. Nearly 50% of the earnings of the S&P 500 companies come from Europe, so the EU troubles effect US companies.

The political vacillations have so far stymied everything. The ECB dropped their interest rate to 0.75% with little effect. Another drop is forecast. That won't solve the problem of debt either. Unless all debts are monetized, budgets balanced and services privatized the EU can not survive.

The response of the investment community to events is perplexing. There is a strong movement into the US Dollar and gold dropped over $30/oz Friday. The Dollar Index has now reached 83+ and the Euro/USD ration sank to 1.22. Why do I say that investors act irrationally? Because Spain may be racking up a 6% deficit, it is in trouble. But the US is running a deficit of 40%. Go figure.

Insalata Caprese.

It is Summer, the time when vine ripened tomatoes, freshly picked cucumbers and basil are available. I must confess to a weakness: fresh basil leaves are like catnip is to cats for me. But, I digressed. This is a simple recipe, but it needs fresh ingredients and a good quality extra virgin olive oil.

Ingredients:

A few ripe tomatoes
1lb mozzarella
4 or five leaves of washed basil leaves
extra virgin olive oil
salt and pepper to taste
a plate with slightly elevated edges

Method:

1. warm the cheese to room temp
2. cut the tomatoes into 1/4 inch slices
3. slice the mozzarella likewise
4. alternate slices of tomatoes with slices of cheese around the plate, the two slightly overlapping
5. chop basil leaves and sprinkle on tomato/cheese combo
6. sprinkle with olive oil
7. add salt and pepper to taste and a few drops of lemon juice

I bet Italians eat this with fresh bread

France's Disasterous plan.

There is an observation in economics: those things you tax, you get less of and those things you subsidize, you get more. That puts France on a path to disaster.

France's new Socialist government lost little time to bring forth its redistributionist plans. New taxes totaling E7.2B were announced yesterday. New bank taxes, taxes on energy companies and a tax on wealth were announced. All that to keep budget deficits to 4.5%. The marginal tax rate of 75% on incomes in excess of $1M/yr is now scheduled.

That's supposed to promote growth?

This is the experience with taxes like this: people will try to avoid income that puts them over the limit and the wealthy will transfer their wealth to places where they tax less. And the deficit will grow.

How can the debt crisis be fixed?

There is a cardinal rule of politics, which applies to economics as well: WHEN IN A HOLE, STOP DIGGING. The general consensus of economists (and I exclude Socialists, who have caused this crisis, not that people like Bush did not contribute) I consulted is this: 1. moneytize all debts by setting the value of the US Dollar to gold (the figure varies between 10,000-25,000/oz) and pay off the debt 2. balance all budgets. This will require privatizing such things as pensions, transportation, medical care, education, etc.

Europe and the US can no longer support govt spending at current levels. By privatizing functions efficiency would increase. By paying off the debt, growth would resume.

One more thing is needed: reduced taxes, especially in Europe.

Attempts to solve the Euro crisis.

First, why is there a crisis? A: because nominal GDPs are smaller than the liabilities of European (and American) countries.

This can be solved in only two ways: 1. By reducing liabilities (i.e. govt payments and programs) or 2. by introducing inflation.

People will vote down solution "1" so solution two will be applied. Since, the ECB does not have a mandate to print money, inflation can be instituted by the European Stability Mechanism(ESM). If the ESM is declared a Bank, it can print paper certificates, pretend that these are money and sell them to the ECB. This way, the ESM can leverage the E500B into many more Euros.

This will work in the short run, but not in the long run. Experience tells us that no country succeeded by debasing its currency. NONE, without exception. The current crop of Socialists (whether called Social Democrats in Europe, Communists in China or Liberals in the US) believes it can succeed because it is smarter and more caring. Untill the world disposes of such nonsence (probably by disposing of the people that spread it), the crisis will grow and grow.

Cross Currents.

BARCHART must be run by Liberals. That would explain why they are trying to project the idea that the US economy is doing well. Today's headlines reflect this coloration. But, some of the folks on BARCHART can not help but report facts. Today is a good example. One title says "Markets remain buoyed by euro summit deal," while another title says "Oil falls below $84 amid waning EU euphoria."

In fact, the Markets are not buoyed. They reflect the uncertainity that remains after the European summit. Questions remain about where the needed money will come from. how the proposed solutions will be done and wheather this will be in time.

BTW, did you notice who won the European cup? Germany was knocked out by Italy and they in turn lost to Spain in the finals. The worse your finances, the better the soccer team.

The LIBOR scandal of Britain.

First, what is LIBOR? A: It is the London Interbank Offered Rate. The rate banks pay for borrowing money.

What is the importance of LIBOR? A: A lot of consumer credit is fixed by LIBOR.

The nature of LIBOR. A: There are different rates depending on how long it takes to repay the loan.

What is the LIBOR scandal? A: A lot of banks have been allowed to set up consumer units and investment units. The investment units write derivatives in LIBOR rate. They call it insurance, but essentially these derivatives are betting slips. The banks manipulated the LIBOR rate in order to profit from the derivatives.

What is being offered to fix the problem? A: A Commission suggested the separation of the consumer and investment branches.

Will that solve the problem? A: NO. The problem arises from there being derivatives. As long as there are derivatives, the rates will be manipulated. Since, the banks can set the rate, individuals in the banks can inform investors (bettors) on what the rates will be. The way to stop the illegal activity is by NOT allowing derivatives.