Economic troubles of the Western world and China.

1. Socialism and Social Democracy.

At the bottom of the economic troubles lie the Universities (Academia), the Media and arts communities that have become dominated by the Left. These folks teach and promote various types of Socialism; whether actual government ownership or 'merely' directing economies - they teach a less efficient economic practice.

2. Less production to go around.

Why is Socialism so inefficient? Because Socialists do not prize efficiency, they prize equality. They also promote the growth of government. The resulting inefficiency reduces the amount of money people can be paid. Politicians promise more. The 'more' comes from printing money. Deficit financing, in other words.

3. Accumulating debt reduces funds available for investing. Why? Because there is interest being paid on the debt.

4. Printing money causes inflation.

Years of Socialist economy produces days of reckoning when the governments can no longer manage the debt and things implode.

A. Exploding debt by Central Banks. Central Banks print money then buy things like bonds. The banks then consider these "assets." Since the current crisis began the ECB's assets increased 200%, the FED added 400% and the Bank of China 800%.

B. Banks become over leveraged. In addition to the printing of money, Central Banks allow banks to become over leveraged. Take the big, German banks, the most solvent in Europe. They are leveraged by a factor of 30. Consider what this means. A bank that has 10B in reserves can loan out 300B. If times are good, the loans are bringing in interest. But, if recession hits and 5% of the loans become non-performing (customers can't pay), the bank's assets lose 15B and the bank is insolvent. And that's just the German banks, others are even more leveraged.

C. Banks are losing gold. The suppression of the gold price (orchestrated by the FED and the ECB), is promoting the transfer of gold to the East. The lower prices also lower bank reserves.

Some day heads will roll for all the manipulation. We know that English banks manipulated LIBOR (London Interbank Overnight Rates) increasing the bank distress in Europe. We know that gold price is being manipulated, causing gold production to decline and mines to shut down. Some of the perps will not escape scrutiny.

The Twin Financial Hurricanes.

Two storms are battering the financial world: 1. the European banking crisis and 2. the FED's intentions. To be sure, both are linked to the failure of Soft Socialism, or Social Democracy as it is called in Europe. It is the idea that the government knows best and can allocate funds from taxing away over one half of citizens' income and run education, health care, transportation and welfare. When productivity falls, the shortfall is made up of deficit financing. The problem is that Socialism kills individual incentive, so deficits have become a way of life. Add to this the chorus of Krugmans that deficits do not matter and Central Banks should print huge amounts of money and the current plight is certain.

Here is the latest on the twin financial crises:

1. The European banking crisis.

The EU finance ministers met in Luxemburg and produced a great failure. Then they met in Brussels which meeting has just finished this week. It took 7 hours to negotiate how to handle failing banks. These are the decisions:

1. they discussed the use of the European Stability Mechanism.
2. shareholders and creditors are liable first if a bank fails
3. want to allow governments to nationalize failed banks
4. want to stop the contagion from banks to nations.

"Bail in" is the way to go. In other words, the Cyprus model that strips large deposits. This will not calm the nerves of bank depositors. Will it start a bank run? Almost certainly.  So far, market reaction has been positive. However, the big question is 'what will the Germans do?' Merkel must look tough for the September election and without German help these agreements do not mean much. Another question is the consent of the EU Parliament. The system is so complicated that it is unwieldy.

The FED's intentions.

FED Chairmen used to be terse, close mouthed and prone to obfuscate. Bernanke tried to change this. In his latest news conference he raised the possibility that the FED would "taper" (meaning slowly phase out) the bond buying (QE), but maintain low interest rates. The Market does not buy it, after all, there is a connection between the bond buying and interest rates. Treasury rates increased and bond prices fell steeply.

Where will people put the money that comes out of Treasuries? What will China do?

Larry's latest prediction of gold bottom.

Would you believe between 1170 and 1200? We are almost there.

What is driving the banking difficulties in Europe? Banks are insolvent and Germany will not step in because there is an ELECTION in September and Angela Merkel does not want to defend Germany being stuck with bailout costs. Can the European banks last out the Summer?

What will drive the gold price?

A post on Seeking Alpha states that improving economic statistics will continue to drive gold and silver prices down. Larry Edelson claims that financial pandemonium centered in Europe (and the crash of bonds) will drive gold prices up.

Italian and Spanish banks are once again under pressure and the meetings called to shore them up have produced little so far. Tomorrow's meeting in Brussels may decide to implement the Cyprus model of confiscating large deposits (above 100,000 Euros).

Economic recovery is not going well either. The US growth in QII has been revised from 2.5% to 1.8%. We are told that the second half of the year will be better. China has tightened its lending and economies that are linked to Chines growth (i.e. Australia, Brazil) are sputtering. In addition, China may have to do its own QE to increase liquidity. The US economy is now dependent on injections of cash and profit comes from laying off workers. This is not a model for growth.

Meanwhile, the bond market is heading for a crash and gold is being suppressed by constant shorting in the paper market. The last episode of shorting (i.e. before the current one) resulted in a drop of $60/oz and no trade of actual metal. No figures on the current drop yet.

Once again, deflation rears its head.

Greece: continuing instability.

Greece has ushered in a new government. This government reshuffle was necessitated by the leaving of the Democratic Left Party, so the ruling coalition (Antonis Samaras' Party and PAQSOK, the Socialist Party) needed to re-divide the ministerial portfolios. The new government has 153 seats out of 300, so one no confidence vote or a few defections will bring it down. This crisis was brought about by the closing of the government run TV (ERT), which is like rolling NBC, CBS and ABC into one.

Greece now faces negotiations (in reality getting orders) re the next packet of bailout funds. Ironically, it is Greece's turn to chair the EU. How is that for symbolism? It is reported that Samaras insisted that  the coalition government's aim "was from the start, and continues to be, the exhaustion of its four-year term." Which sounds Greek to me.

Write downs in the gold field.

Bllomberg news is bursting with joy and sarcasm as big gold miners are writing down assets. They talk as if gold in the ground is worthless and gold mining is about to cease. Actually, gold and silver are groping for a bottom before they take off.

The world is straining with financial problems.

1. The buck has less bang than it used to. But, the FED is scared to reduce QE, because if the wealth factor is reduced, the economy will take a big hit. Interest rates are beginning to rise as inflation is near 9%. Look at the price of beef! Three fifty for a pound for hamburger (mince, for you in England).

2. Chinese numbers are like a Holloween custume. Fifty percent of Chinese debts are rolled over every 3 months and 75% is rolled over every 3-6 months.Credit has exploded from 9T to 23T and housing prices are clearly in bubble stage. China has a high rate of inflation and a credit shortage to top it all off. One Yuan printed now produces .15 whereas it used to produce .85.

3. If China is in a bad spot, Japan is even worse off. Japanese population is imploding and there is no prospect that the young will be able to pay for the cost of the Japanese social democracy. Higher interest rates, a collapsing bond market and a collapsing Yen point to increasing strain. Japanes problems have sunk below the point of redemption.

Don't let rising interest rates fool you.

We are starting at ridiculusly low rates. Larry puts it this way:

1. These are not normal times, so do not expect normal reactions
2. The Dollar will soar and so will commodities along with interest rates.

Who to believe?

Fresh on his forecast for the bottom for the gold market, we saw another attempt to break the back of the gold price. It is said on KWN that the takedown was orchestrated by the FED. The mechanism was no different than the last takedown: an avalanche of paper sales at the worst possible time. The perps are not bothering to cover their tracks.

Larry's prognostication is right on for the predicted low between 1240 and 1310. His forecast for the next leg of the gold bull is to $5,000/oz and for the DOW to go beyond 25,000.

On the other side, Harry Dent of Boom and Bust forecasts gold to drop all the way to $750 and the DOW to drop to 3,500.

Who will be right?

We are having the Detroit default coming and perhaps California as well. Greece slipped a bit in stability (one coalition partner walked out), but the imminent threat of Eurochaos has diminished. Let's remember that the production cost of gold is nearing 1,300 so a gold price of $750 would shut down the miners. Wide scale sale of gold would complete the transfer from West to East and perhaps that is what the FED wants. Only time will tell.

Larry raises gold market low.

Larry Edelson is a forecaster of gold markets par excellence. His previous forecast for the low for gold was between $1,000 and $1100/oz. He has now raised the forecast low to between 1,244 and 1,310.

Why the change? I tell you. I don't know.

What I do know is that Larry expects gold to go up as the European situation deteriorates. And there are reports of interbank loans just about frozen in Europe. Physical gold is doing well (paper gold not so good) and miners have been inching up.

Larry's forecast was for gold to turn around before the end of QII, 2013 and we have two more weeks for that.

The latest PPI for May was 0.5% vs the expected 0.1%. This on top of the rise in interest rates on Treasuries. To me this is an indication that the FED is losing control. Add to this that the deficit had "unexpectedly" increased (along with the unemployment) and brave words about "tapering" QE are whistling past the grave yard. The Stock Market is kept up by the hot air from QE 3 and 4 and any attempt to reduce the money flow will have serious repercussions.

We know that artificially low interest rates bring on deflation (a la Japan and its lost decade) and Japan has now been joined in that folly by the US and Europe.

One more thing about Larry's forecast: he expects the Dollar and gold to rise together as the Euro and the EU go into terminal decline.

The FED mucky mucks meet next week so we will see.

And the announcement was?

If you were waiting for Larry to announce to be "all in" re gold and silver miners, you did not get that flat out. But, you got something close to it. He is no longer bearish on gold and he feels that we are so close to the bottom of the correction (or the end of the gold bear market) that "I can taste it," said he. As to what to do and when, subscribe to his services and he will tell you. Naturally.

Of importance is the REASON why the correction is ending. Gold is not going up because: 1. money printing; 2. inflation or 3. the collapse of the US Dollar. Gold is going up because of 1. the financial and economic collapse of Europe; 2. trillions of Euros looking for a safe heaven and 3. the coming collapse of countries and sovereign bonds.In fact, these factors will drive up the US Dollars as well- at least for a while.In the end, the US Dollar is doomed as well untill new currencies will emerge.

I have noted two posts ago that GDX has bottomed and so did GDXJ. This means that the miners are beginning to recover the territory lost during the correction. Larry estimates that gold will go to over $5K and silver to $125 in the next phase. The profit opportunities boggle the mind.

"Historic announcement on gold" - Larry

Larry Edelson told us that he will have a historic announcement on this coming Tuesday, the fourth of June. This will be his most important announcement in 37 years he says. Leading to the most profit, he said. Don't try to anticipate he says.

OK. There are two possibilities: 1. he has given up on gold and joined the numerous pundits calling for the end of the Gold Bull market or 2. announce the end of the correction in gold price.

Besides certain pundits trying to persuade investors that gold will soon be worth a lot less, we had seen a forceful takedown of the gold price by the gold raid at the end of April. Some pundits called it an 8 sigma event (that spontaneously occurs once in a million years), others called it a 7 sigma event (once in 4,500 years). Even if it were a six sigma event (that occurs every 13 years), it is now clear that it was orchestrated.

Did it achieve its aim of scaring people out of gold? NO!!! On the contrary. Sale of physical gold has skyrocketed. US Mint sales are up 1000%, Canadian Mint sales up by 128%, Chinese purchase are up 300% and Indian purchases are up 100%.

The fundamentals of the fiat currencies are horrible. The FED is now buying 75% of the new Treasuries. World debt totals 250T and if a third of it is bad, that is more than the GDP of the whole world. World debts can not be repaid so Central Banks will continue to print untill fiat currencies lose even more value.

Will Larry agree with the Dunces who proclaim the demise of gold? I hardly think so.

What will Larry say Tuesday?

Larry Edelson had a Conference call Thursday. We all waited for his statement. Would he tell us that the gold correction was over? No, he did not say that. What he told us is how he calls the start of a gold Bull and when to get out. He told us that he will give us a further update this coming Tuesday?

I will try to anticipate. Let's first look at some facts. Here is the graph of the gold price and the gold miners' index (GDX).

 

Let's look at the chart for gold first. There was a price jump Thursday which took gold over 1,400 in what was almost a gap. This followed an up-day Wednesday as well. Friday was a down day but only the increase in Thursday was wiped out.

 

Let's look at the changes in GDX. This had a strong up day Wednesday and it actually gapped up Thursday. While GDX was also down Friday, it merely lost part of the increase of Thursday. This was then the reverse of what we saw with the miners on the way down: GDX would respond to gold going lower but hardly respond to gold going up. The explanation is that some people are expecting gold turning around and so they are buying the miners, which respond more.

 

What will Larry say Tuesday? As Larry explained, the situation is very similar to what it was in 2008: enthusiasm in the Stock Market and pessimism in the Gold Market. So, the determinant is his cycle theory calculations. He last reported that the calculations pointed to gold bottoming in mid July between 1000 and 1100. He also wrote that the correction will end before the end of the second quarter, which is at the end of June. Will he tell us to continue sitting tight and wait for his signals to shift? Then why did he say that he will give us detailed instructions? We do not need detailed instructions to sit tight. What we see is the coming end of the correction. And some of the signals are contradictory.