"It IS 2008 again. So, what's in PLAY?"
July 27, 2010
1. “The European (stress) tests were a PR exercise just as was America's. They were a waste of time – and journalistic ink.” – Jim Rogers, July 27, 2010
2. “Europe’s prospects brighten as U.S. fades” –Reuters News July 25, 2010. “Here is the MOPE as the "Fat Cats" get ready to see the dollar back at .7200” – Jim Sinclair July 26, 2010.
3. Here’s a look at the US dollar monthly chart. Keep your focus on the low-angle symmetrical triangle in place. The target of that triangle is the .55 zone and has a 66% chance of occurring, based on the reliability of the chart pattern per Edwards and Magee. That doesn’t matter if you don’t make any money out of the move. Charts are a tool to make money, and a break below .70 in the US dollar may signal the beginning of the great accumulation of the US dollar by the major bank families (aka “the banksters”), and the start of an institutional money panic out of the dollar by the bulk of the world’s hedge funds (aka “the fundsters”).
4. It’s critical to understand that the top of the US dollar occurred at the 1.20 level, and was created by the movement of the banks out of the dollar and into the euro, gold, the commodity currencies, and general commodities themselves, in 2002. Just since 2002, the US dollar has lost a staggering 40% of its price on the index, and much more against gold.
5. A move under .70 on the index, which signalling a decline to .55, is also a signal to begin accumulating the dollar as an asset, particularly if such a decline is accompanied by a background of rising interest rates. Where you begin your accumulation is your decision, and you need to prepare yourself mentally now, not later, for the unthinkable; the coming super bull market in the US dollar. The .60-.40 area to me is of tremendous interest.
6. There is a growing probability that the dollar could be backed by gold to some degree as the slide accelerates. I have categorically stated that if you felt fear that the euro was headed to zero at 1.18, you need to be prepared mentally for exponentially more fear, should the dollar begin sliding below .70 on the index.
7. I believe a failure of the .70 area on the dollar index will be fundamentally driven by the institutional money manager view that QE (quantitative easing; buying of assets in exchange for printed money) has FAILED or is at least projected to fail. I want to remind you that the difference between pure money printing and QE is that QE involves an exchange. There is an exchange of one item (mostly OTC derivatives in the case of the current crisis) for another (printed US dollars).
8. Pure money printing involves no real exchange. There is some value to some of the OTCD assets being exchanged now. In the case of money printing, there is no exchange, but simply the printing of money to whatever level is deemed necessary to mathematically raise asset prices. It is not until PURE money printing is utilized that hyperinflation becomes a serious risk.
9. There is a middle step between QE and money printing, and it is gold revaluation. No confiscation is needed in the current crisis to make revaluation “work”, because so few people own gold. The major central banks of the world are already committed to major long term gold buy programs (the opposite of the 1990s), and these buy programs are the mechanism of gold revaluation under a sort of “guise” of currency reserves diversification. The central “banksters” aren’t stupid; they didn’t get the market all wrong and accidentally sell their gold holdings into the end of the gold bear mkt, any more than the current buy programs are “knee jerk” reactions to a rising gold price. The buy program is about gold revaluation, not rushing to buy gold as an asset. As QE is more and more broadly deemed a failure in the fund community, the central banks will step up their gold buy programs, stepping UP the price they pay for the gold, with tremendous vigor.
10. The buy programs of the central banks are not about adding gold as a reserve to diversify their forex reserves, they are about devaluing paper money to raise asset prices, as blown marked to model OTC derivatives can then be marked to market.
11. Because the money involved in the OTC derivatives (OTCDs) exceeds a quadrillion (one thousand trillion) dollars, the amount that gold needs to be revalued in paper money pricing is really unknown. Maybe $1500 works. Maybe it takes $2500. Maybe it takes $10,000. We can’t know the answer, and guessing about it isn’t going to make you one ounce of wealth, which is all that really matters.
12. There is no danger of hyperinflation unless gold revaluation fails. Zimbabwe ended hyperinflation by switching their blown currency for US dollars. The US dollar, however, is the reserve currency of the world in which approx 65% of financial transactions take place. It can’t be switched for any other paper currency, or even a basket of global paper currencies, to end the downward asset price destruction spiral. Only gold, which can’t be printed, can halt the quadrillion dollar OTCD nightmare.
13. Marking to model accounting, while arguably fraud, was a brilliant tactical play by the banks/gov'ts, and may have (at least for this crisis) eliminated the possibility that the Treasury and Central banks go to “Defcon 5”, which is pure money printing. As soon as mark to model was deployed, the BIS announced the total outstanding OTCDs magically dropped from over a quadrillion to “only” the $600 -700 trillion marker.
14. I don’t believe OTCD contracts that were down 70-90% in price, with zero liquidity, magically rose in price to the point they were really liquidated/cancelled, by coincidence at the exact same time as mark to model was unveiled. The odds of $300 trillion in illiquid 90% underwater deals being liquidated without hundreds of trillions in marked to market losses appearing is probably somewhere around 1 in a billion, yet this is one of the most glossed over issues in the entire gold community, let alone the mainstream community.
15. The failed contracts obviously still exist and there are $300 to $400 trillion in losses that have not been marked to market. To mark those contracts to market without imploding the financial system, by definition requires a tremendous boost in asset prices, and there is no way in a billion years that the “banksters”, who hold the other side of the trade of most of those contracts, the winning side, are going to be thinking about anything other than the collection of at least a significant portion of their $300 trillion in winnings.
16. I think the banksters knew they could never collect on hundreds of trillions in paper profits when they invented & mass marketed the OTCDs, but the “we’re too big to fail, if we fail everything shuts down” trump card is how they’ve been able to collect at least tens of trillions.
17. The fund/gov't losses exceed the net worth of the world and the entire money supply of the world in US dollars, and Ben Bernanke himself is on record as stating that the release of which banks got the bailout money would cause a catastrophic run on the banks, so that information couldn’t be released.
18. Ironically, many have called for the release of the information, while keeping their own money with the very banks that would be destroyed if the information was released; bizarre, surreal & financially suicidal action.
19. I’m not sure how anyone can seriously believe the US dollar is about to start a bull market here, while Ben Bernanke is employing stronger and stronger tools to fight asset price destruction, and I don’t think that most investors understand that the entire policy of all the world’s major central banks is solely focused on devaluing paper money against asset prices, and has been for years.
20. Jim Sinclair, the world’s largest gold trader in the last bull market, has compared the chart of the US dollar to Enron. The great error being made by investors is the move out of US dollars now into euros, instead of into gold. The entire policy of the world’s central banks is about devaluing paper money against gold, yet most of the world’s investors are on the other side of that trade, and focused on the relative movements of one paper currency against another. How an investor can believe that the main target of multi-year central bank policy, paper money, is a safe haven, is absolutely mindboggling.
21. Those claiming it is 2008 again are 100% correct, except that the asset in play for price destruction is: Paper Money. The 2008 team is betting directly against the world’s central banks. At a minimum, they are betting against QE, and they soon will be betting against global central bank official gold revaluation policy. Small investor paper money versus central banks and gold. You decide which team you want to be on. The small investors team, or the gold/central banks team. Since 2002, it’s been a wipeout by the gold/central banks team. My view is you’ve seen a conventional weapons war so far, public investor and fund manager paper money pop guns versus central bank gold battleships. Gold Revaluation is basically the paper money bunker buster bomb, and pure money printing is all out nuclear war on paper money. How can any sane person seriously believe paper money is going to devalue gold? The “2008 again” team is way, way out of their league this time. 2008 was about stock market devaluation. Late 2010 and 2011 are about paper money devaluation. What’s coming to most of the world’s investors is much worse than 2008, except the target is paper money, and question is: Are you prepared?
22. As the US dollar breaks under 70, panic will begin to set into the bond market. There will tremendous pressure to raise interest rates, as creditors demand higher interest rates to buy bonds. Raising rates is the last thing on the minds of the “central banksters”. QE will be ramped up and that will put even more pressure on the dollar.
23. Most investors and non-institutional analysts have not studied central bank policy carefully. They are focused on charts alone. The banks are capable of creating charts through their buying and selling of millions of ounces of gold daily, like a woods person cuts a trail thru the bush with a cutlass. What you see on the chart is what the banks want you to see, and no more. Theories of “bond defaults”, “new 2008s”, “another Dow crash any day now” are predicted by many technical analysts, but the odds of such predictions actually playing out is tiny, due to the 100% track record of central bank action in other similar crises, a track record going back hundreds of years. All such crises are met with lower rates, QE, gold revaluation, and money printing, in that order, because the tools are in order of strength. Each weapon is progressively stronger than the other. All global gov'ts throughout history, including the Chinese gov't, have a 100% track record of devaluing paper money when there is a debt crisis. Rome did it by cutting the amount of gold/silver in their coins. Nothing has changed in the fear-greed spectrum of the human being since the Roman Empire. The only change in the human condition is technology; all else is the same. The gold community can’t understand why the Chinese gov't owns so little gold, despite thousands of years of historical experience with such crises. The answer, sadly, is that to all gov'ts, gold is a tool to devalue the net worth of their citizens’ paper money, and nothing more.
24. Diversify over price in the most solid assets first, to manage your risk of going OFF THE BOARD. While gold juniors offer the most upside going forwards, don’t fall into the trap of ignoring the near-infinite risks in the juniors, as compared to the seniors. It is true that in the rises and falls in the market since the Dec 1225 area gold high, the GDXJ has not been much more volatile than the GDX itself. That is volatility risk, and the confusion comes from mixing price volatility risk with risk of the item going off the board permanently. It’s critical to buy juniors in a pyramid formation to zero with a series of pre-set price points, to reduce price volatility risk. But that does not reduce the risk the item goes off the board or is diluted to infinity. Mainstream investors moved to paper money cash and bonds in 2008 in what will go down as one of the greatest market errors of all time. The risk in play in 2008 was system failure risk, not equity price volatility risk, nor corporate earnings risk, and that system risk theme is still in play today, only much more so. The correct move in 2007 to manage the horrific OTC derivatives fuelled system risk, was a move to GOLD. Managing paper money system risk with a move to 100% paper money is 100% ludicrous. Those moving to paper money now to reduce price volatility risk are making an even worse error than they made in 2008, much much worse. Here’s a look at the monthly gold chart. You can see that if you bought gold in the spring of 2007 (see where I highlighted it on the chart) as Morgan Stanley stepped forwards and issued their famed and ultra rare triple sell signal on the paper money RISK markets (Not on Gold!!!) you were in at breakeven or in the BLACK on your gold on the day of the bottom at $680 in Oct 2008! Don’t make an even worse error now, than you may have made then, as the central banksters now ramp up their stated policy of paper money devaluation to boost asset prices. The way to manage price volatility risk on your juniors is with a pyramid of buys that extends to zero, booking profit on a trading position into strength while holding a core, and the way to manage the next phase of the paper money crisis is to own gold bullion now, to be on the buy now, also with a pyramid of buy points. It’s 2010, not 2008, and story is not a price volatility mini-crisis. It’s a paper money super-crisis. Are You Prepared?
July 27, 2010
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