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Manipulation? Or simply deleveraging?

Bob Moriarty
Sep 7, 2008

On March 16th I wrote an article about what I saw for the near future of gold/silver and the dollar. I said, "Gold and silver are at bullish extremes; the dollar is at a bearish extreme. In any normal time, we would expect to see a correction, probably violent."

We had it. Gold peaked at about $1030 on the 17th; the dollar hit a bottom at just under 71 the same day. On Friday the 5th of September, the dollar index hit just over 79. There was a 10% move in the last six weeks. That's a lot.

chart courtesy of INO.com

Oil hit a high of about $147 on Friday the 11th of July. On Sunday the 13th of July I posted the following, "Oil is about to crash for similar a reason. The only thing keeping it elevated at these prices is an impending war on Iran. If that takes place, $147 oil is going to look pretty cheap."

Oil crashed since then in the same way gold and silver did as the dollar rocketed. Must be manipulation? Yeah right. Either I'm the guy doing the manipulation since I called it to the day both times or there has to be another answer.

Investors love theories of manipulation. After all, manipulation can be anything so no one can disprove the theory. I have a couple of problems with manipulation. One is that even if it's true, it's noise, not signal.

Let's say you believe gold is being manipulated down and that's the only factor in its price. Gold closed at $803 on Friday, do you buy or do you sell? Me, I wouldn't touch a market with a ten foot pole if manipulation was the only factor in price. What? You think you can outspend the Fed? I don't think so.

Even if it's true, manipulation generates no clear buy or sell signals. Are financial markets manipulated? Are you kidding? Even the guys screaming about manipulation the loudest are trying to manipulate the market. All financial markets are manipulated, big deal.

The second problem I have with manipulation theories is what I call the green socks and the tiger problem. I'm wearing green socks and there is no tiger in the room. Both statements are perfectly true and both are perfectly meaningless.

Three banks have shorted more silver than ever produced since Christ was a corporal and silver has gone down. Saddam Hussein was a bad person and 3000 brave Americans died on 9/11. I'm wearing green socks and there is no tiger in the room.

Do you see the problem? When someone wants to confuse you, he tells you perfectly true and perfectly meaningless statements. I was just listening to a radio show where the speaker was convinced gold has been hammered down and the only reason was the Fed shorting gold.

If it was true, and it's not, it would be the most important buy signal in history. Here's why. All shorts have to be covered. If the Fed is short 10 trillion contracts of gold, you should get on your knees and thank Bernanke. Because if they shorted 10 trillion contracts, they have to cover 10 trillion contracts and that's going to drive the price of gold from here to Jupiter.

Manipulation exists and it's meaningless. But I have showed, both on March 17th and on July 14th that there are more valid signals. The most valid buy or sell signal that you can possibly get is emotion. When everyone is fearful, you should buy and when everyone is greedy, you should sell. It's that simple. Everyone hates hearing it but markets are not complex, they are simple. You should buy when things are cheap and you should sell when they are dear.

But what really did drive the price of the dollar and gold and silver and oil? Something beyond simple emotion had to take place. On September 3rd we posted a piece from the Guardian in England titled, "Ospraie fund to close after August hit" The article answered a lot of questions for those who actually understand what is going on.

The single most important number to any investor today should be the amount of OTC derivatives outstanding. The Bank for International Settlements posts updated numbers every six months. The latest numbers show $596 trillion dollars in derivatives. That's up from $460 trillion a year ago.

That's what's driving everything and that's what you need to understand if you are even going to survive in this market. Derivatives are highly leveraged investments in everything. People aren't going out of business because they made bad investments, they are going out of business because they were levereraged 30-1 up to 100-1. It would take less than a 1% loss for the FDIC to blow through all their capital. Is it going to happen? Of course, they are leveraged 130-1.

Ospraie was long gold, long silver, long oil, long natural gas and short the dollar. That's five different investments, right? Actually not. That's one investment; I'll call it the Anti-dollar.

Anyone reading this site knows I think the future of the dollar is grim and if you want to survive, you need to be invested in gold and silver and energy. That's the anti-dollar investment. It's one investment, not five. Ospraie was in the right place at the wrong time and way too highly leveraged. They lost $1 billion in a month from July to August. And what was really happening was $30 trillion dollars worth of Anti-dollar bets were being unwound, deleveraged.

That's what clobbered gold and silver and the metals shares. And ordinary investors understood it and stepped up to buy what was obviously on sale, gold and silver. That's why there was a shortage, deleveraging, not manipulation, caused artificially low prices.

So where do we stand today on gold and silver and energy and metals shares? I'm going to climb way out on a limb. I've talked to Bob Bishop last week and read what Bob Hoye has to say. I know that Eric Sprott and Rick Rule all agree. Metals and shares will be lower in a month. That's the time to buy.

I disagree. Ruben Varela, of TheGoldenBull, kindly revised for me his version of the following monthly XAU chart and I follow it. The chart from Friday is below.

Since the XAU started in 1984, the very lowest ratio was last Friday at .1561, lower than the .1575 recorded in the summer of 2001. It was the low last Friday. So in the 8760 days between when the ratio began to be measured and today, Friday was the single most pessimistic day.

Could investors get more pessimistic? Of course they could. But I did a radio interview with Al Korelin on August 14th and he asked when we would see a low on gold. I told him on the air it would be the next day. And while we can't know if it's the low until some time passes, gold hit a low of $772 on August 15th and hasn't been lower since.

There are a lot of things that affect the price of gold. Manipulation is not one. Deleveraging is very important. I wrote about it in energy last month. The 9,000 hedge funds are far too highly leveraged. When commodities go through perfectly normal and desirable corrections as gold and silver and the dollar did, those who are too highly leveraged are going to lose their shirts in the deleveraging process now ongoing.

This is going to create total fear. But total fear also means total opportunity if you are listening to the signals and not to the noise. I happen to really like Bob Bishop and I have a world of respect for Bob Hoye and Eric Sprott and Rick Rule. But I have to respect them even when they are wrong. They are wrong today. I said gold and silver were going to crash in March. Well, they are going to rocket. Right now, this month.

Look at the following chart. What does it say?

chart courtesy of MRCI

Today, Sunday September 7th, the US government announced formal nationalization of Fannie Mae and Freddie Mac. A big reason was that the Bank of China was screaming like a stuck pig because they are sitting on $1 trillion in Fannie Mae and Freddie Mac bonds and treasuries. What does that mean for gold and for the dollar?

Here's what to consider. Let's say a nice couple in Miami with an income of $100,000 bought a $600,000 home two years ago with a $500,000 mortgage guaranteed by Freddie Mac. Those are all perfectly reasonable numbers.

The husband lost his job and now they can't keep up with the mortgage payments and are in foreclosure. The house is now worth $400,000. The government steps in to help. But who do they help and how? The couple really couldn't afford a $500,000 mortgage on an income of $100,000 in the first place and the husband is now collecting unemployment. How can the government help them? It can't.

The house is now worth only $400,000 with a loan against it of $500,000. How can the government help?

Answer: they can't. The government should let the homeowner lose the house they can't afford and the bank lose the money they shouldn't have loaned.

But the US government doesn't want anyone to feel any pain, much less the Bank of China that loaned us every cent to pay for a useless war in Iraq. So the government is going to bail out Fannie Mac and the Bank of China. At your expense.

The US government isn't collecting enough taxes to pay for all the money they are spending; we are $100 trillion in debt. So they are going to print dollars until they are totally worthless. Fannie Mae and Freddie Mac will pay off their bonds that the Bank of China owns.

In Zimbabwe dollars.

March 17th was the best day this year to be selling gold. Any time now at all would be a great time to place another Anti-dollar bet. Don't think you need to wait. There is something really bad about to happen. I am not sure what it is. But it's going to rocket gold and kill the dollar.

Sep 7, 2008
President: 321gold

321gold Ltd