 Upcoming
Gold Default
Jim Willie
CB
Jim Willie CB is the editor of the "Hat Trick
Letter"
Oct 31, 2008
Use this
link to subscribe to the paid research reports, which include
coverage of several smallcap companies positioned to rise during
the ongoing panicky attempt to sustain an unsustainable system
burdened by numerous imbalances aggravated by global village
forces. An historically unprecedented mess has been created by
compromised central bankers and inept economic advisors, whose
interference has irreversibly altered and damaged the world financial
system, urgently pushed after the removed anchor of money to
gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds,
and inter-market dynamics with the US Economy and US Federal
Reserve monetary policy.
The COMEX gold & silver
markets are each hurtling down a dangerous path toward default.
The artificial paper price has created enormous physical demand,
and hampered supply production, if not delivery. The gap between
the JPMorgan-led corrupted phony paper price and the legitimate
physical price in actual trading markets has grown sharply, enough
to force a breakdown like in any distorted market. When December
contracts in gold & silver are demanded to be satisfied via
delivery of the metal, it will be clear that the COMEX is running
a scam. A default is highly likely. Of course, they can continue
to deny contract holders the right to benefit from delivery,
as they have been doing for months to 'Non-Economic Customers'
but soon the 'Commercial Customers' will be defrauded. Arrests
are warranted. We will see how this corruption unfolds.
The USFed cut the official
interest rate again by 50 basis points, now to 1.0% on the Fed
Funds target, in utter desperation. Other central banks did not
join in rate cut exercises. The Euro Central Bank is expected
to cut next week, reluctantly. So is the beleaguered Bank of
England. The pressure is building on gold demand. Now with the
official US price inflation at CPI = 5% or so, the real rate
of money cost is minus 4%. The actual price inflation runs more
like 10% to 12%, making the real cost of money more like minus
9% to minus 11%. GOLD RESPONDS TO NEGATIVE REAL RATES VERY FAVORABLY.
GALLOPING RECESSION TO FORCE MORE
INFLATION
If you think the bank crisis
is bad now, wait until the USEconomic recession achieves galloping
speed downhill. The stagflation will eclipse that seen in the
late 1970 decade. Today the economic growth in the GDP was posted
for 3Q2008 at minus 0.25%, even with a hefty 5.4% PCE (personal
consumption expenditures). This is another fairy tale told. The
US consumer activity cut the GDP back by 2.25%, while the government
activity added to the GDP by 1.15% in retrograde style. So the
USDollar has rallied amidst economic decay, doing its death dance.
Bear in mind that the stated admitted price inflation for Q2
was only 1.5% in that GDP corrupt calculation, which avoided
a negative GDP for 2Q2008. They called inflation growth, the
usual corrupted modus operandi. The second quarter was when prices
skyrocketed for everything under the sun, if memory serves properly.
Clearly, the wizards in the USGovt stat-rat offices, employing
advanced techniques, moved some price inflation from Q2 into
Q3, so that a recession would not be admitted all summer long.
With the USFed rate cut to 1.0% again, they are admitting the
recession.
The Shadow Govt Statistics
folks pitch in a comment to provide light upon corrupted data.
"Narrower Than Expected GDP Contraction Is Nonsense.
The difference between the reported 0.3% annualized Gross Domestic
Product (GDP) and the consensus expectation of a 0.5% contraction
is no more than statistical noise, yet the reported result most
certainly was manufactured so as to allow the hypesters on Wall
Street and in Washington to spin their fairy tales of a 'less-severe
recession' in order to help draw the gullible back into stocks,
at least for a day or two before next week's election. This follows
earlier economic scare tactics aimed at the public to help sell
the 'Bailout' package... With a 95% confidence interval of +/-
3% around this morning's estimate of an annualized 0.25% contraction
in real (inflation adjusted), annualized quarterly third-quarter
GDP growth, the number was not even statistically indistinguishable
from growth or contraction in the 3% range. A quarterly contraction
in excess of 2% would have been more realistic U.S. Economy is
in a severe recession. With real retail sales, housing, non-farm
payrolls, new orders for durable goods, and industrial production
all showing quarterly and annual growth patterns never seen outside
of a recession still in deterioration, GDP reporting eventually
should show a string of quarterly contractions, with the recession
dating back to fourth-quarter 2006, long before the exacerbation
of the current systemic solvency crisis."
A simple statement is required
to close the preface. The financial market crises, in numerous
arenas, have come in large part because the banking authorities
have intentionally provided rescues only for New York investment
banks and other big financial firms. Up to a month ago, the USFed
had sterilized most injections into the Wall Street centers of
the banking system by denying the mainstream bank system via
liquidity drains. Drain the national system where households
work and live, and provide subsidies for the financial crime
syndicate. This is a betrayal of government to the people. Elite
gain came at mainstream expense. Attention has gained on the
misuse, false promises, and other misdirection of USGovt funds
even in the bailout packages. The big banks are ordered not to
lend, but to acquire smaller banks.
Until the global interest
rate cut was announced, the USFed had not created much new money,
despite the numerous rate cuts on the US side. The policy was
unconventional and deliberate, with a two-fold purpose to aid
Wall Street and to keep a lid on the gold price. Their bad policy, emphasis upon rescue
and redemption for criminal fraud, neglect of the private sector,
have left the USEconomy vulnerable to an extreme breakdown. A
GRAND REFLATION WILL SOON BE ATTEMPTED, TIMED OBVIOUSLY AFTER
THE ELECTION. The effect will be much like blowing up a dam holding
back a lake, where downstream the price inflation will be broad,
deep, and powerful. That day comes soon, and if not, then the
entire US financial system will go dark. That cannot be permitted,
since the aristocrats need the serfs in the public fields to
work, so as to be exploited for gain.
COMMENT ON USDOLLAR PARADOX
As a preface, much response
came from last week's article about the "USDollar
Death Dance" from both the public and analyst community.
No hint of investment in the USEconomy is coincident with the
paradoxical US$ rise. In "Plumbing the Depths of Depravity"
posted on October 29 (Click here),
the intrepid expert forensic financial analyst Rob Kirby, and
erstwhile bond trader, confirmed my view of a twisted engineered
perverse USDollar rally. He echoes one of my major points delineated,
that settlement of credit derivatives, like with the credit
default swaps from failed insured asset backed bonds, has produced
a demand for USDollars in contract settlement payouts. His
website (http://www.kirbyanalytics.com)
contains a treasure trove of information that reads like criminal
indictments, but without the hundreds of obscurely written pages
and weird words.
In the cited article, Kirby
wrote: "What folks need to understand is that the global
OTC derivatives market, measured in tens or hundreds of Trillions,
is virtually all US Dollar denominated. Its SYSTEMIC failure,
which is now occurring, requires US Dollar balances to clear
(settle) the trades (bets). This has created the paradoxical
global demand for US Dollars, the currency of a country that
is fundamentally bankrupt. By rationing credit to hedge funds
that were naturally levered and 'long commodities' (institutions
like JP Morgan routinely took the other sides of their customers
commodities bets, ruining institutions like natural gas player
Amaranth), and propping up the balance sheets of those who were
short commodities [such as] the Banks. The Federal Reserve led
cabal of Central Bankers have ENGINEERED the collapse
in commodities prices while creating the illusion (of a perverse
USDollar rally). The engineered collapse of the commodities complex
became necessary in the eyes of monetary elites because the rush
for tangibles and corresponding repudiation of fiat money was
becoming manic, as so CLEARLY evidenced by the emerging shortages
of precious metals, gold and silver bullion." My rejoinder
is that the crude oil price, and many commodity prices, have
come down right before the election, just like in autumn 2006,
a perception we share.
Kirby went on to conclude that
we are CLEARLY going to HYPERINFLATE. He steadfastly contradicts
shallow assertions that deflation will dominate the scene. Anyone
observing the money supply acceleration in recent weeks can easily
see this, yet deflationists seem unable to observe the human
response in desperation. We two have frequent debates between
ourselves, whether USTreasury Bond default will occur or else
a big Reflation Episode. It is possible both will occur. These
exchanges will contribute toward a key section in the upcoming
November Hat Trick Letter on the weekend of November 9. A topic
raging lately between us has been the failures to deliver USTreasurys.
This extraordinary phenomenon highlights the extreme mountain
of toxic bond (in) securities spewed worldwide by the corrupted
US financial sector, but it also highlights the questionable
legitimacy of USTreasury Bonds. One should remember that over
$2000 billion in counterfeit USTreasury Bonds was probably buried
under the World Trade Tower rubble one dark September day in
2001. The traded volume of USTBonds was recorded to be over $2
trillion above official issuance in USTBonds. So maybe we are
seeing a redux of counterfeit issuance of USTBonds in order to
satisfy unprecedented demand. By the way, USTreasury management
is done, and accounting is done, almost like a money laundering
operation, handled by JPMorgan. The rise, burial, and revival
of supply are all conducted under the convenient accounting rules
permitted by national security agencies.
Could the failures to deliver
USTreasurys, as shown in the alarming graphic below, be a precursor
to actual default? We will see. Kirby maintains a period of tremendous
hyper-inflation is coming. My forecast is for a possible
USTreasury default, as conditions grow out of control,
and economic disintegration catches the nation by surprise. The
collapse of General Motors could trigger a profound change in
perception concerning the effective implementation of USGovt
and Wall Street bailouts and rescues. Either way, disruptions
like never seen before are on the horizon. The settlement failures
bring into question the integrity of the USTreasurys as a legitimate
market. Their counterfeit from more supply than issuance is well
documented, and rings like a loud echo to the naked stock shorting
chapter of US financial markets.
click
image to enlarge
VANISHING OPEN INTEREST IN C.O.T.
What conditions would precede
a default in gold & silver COMEX futures contracts? Tough
question. These are unprecedented times. Surely, a widening between
physical price and paper price reads like bold billboard graffiti.
That invites a queer arbitrage, to buy in one location and sell
in another, of course practiced only by the privileged insiders
like Goldman Sachs and JPMorgan. One other characteristic of
imminent default could be a vanishing act in the open interest
(OI) seen in the Commitment of Traders for futures contracts.
The gold OI has reduced sharply since late spring when it ranged
between 400 and 460 thousand, now to 319.5k on 21 October 2008.
The silver OI has reduced sharply since late spring when it ranged
between 125 and 140 thousand, now to 95.8k on 21 October 2008.
The severe drop in open interest is highly unusual, not at all
normal!
If these illicit paper markets,
intended as devices for price discovery, when just devices for
price suppression, are heading into default, then the movement
among many players might be to exit the stage before the brown
stuff hits the fan, and embarrassment is heaped upon trading
firms. JPMorgan might be isolated. Also, and more importantly,
if a default occurs, the settlement of existing contracts comes
seriously into question. The players might wish to exit the crime
scene before major doubt distorts contract settlement. Who would
want to have hundreds of $thousands tied up in a market with
yellow police 'Crime Scene' tape cordoning off the zone? By
the way, the shrinkage in large commercial net short position
usually means a big powerful upsurge in the gold price is coming,
as in very soon. They have little more to liquidate,
and never liquidate all, since they delivery from production
facilities. [???]
BACK TO GOLD LEASE RATES
The gold lease rates have jumped
significantly. Lease rates have more than tripled in the last
month alone! They have not subsided. The last time rates on the
one-month lease were in this neighborhood was over a decade ago
in another crisis. It means that vault owners who control large
quantities of gold are much less willing to permit other parties
to borrow it, plain and simple. The paper fraud center COMEX
might not be able to acquire much needed gold from central bank
vaults and other bullion bank vaults in order to satisfy delivery
requirements. Vault owners must expect higher gold prices to
come. Clearly, the gold market is experiencing shortage. The
lease market is an excellent forward indicator on physical price
movement. Silver lease rates have also tripled, just like
gold, and not subsided either. The lease game is thoroughly perverse.
One effect rarely noted is that short sellers within the futures
contracts might be squeezed due to leasing challenges. If they
have a harder time to roll over contracts, by means of higher
required posted margin or higher cost of leased gold, then they
must cover. A price rally ensues.
Steven Isenberg, chief executive
officer of M Partners in Toronto pointed out that the cost of
borrowing gold rose dramatically in March 2001, when central
banks were making less bullion available to speculators, mining
companies, and jewelers. Gold promptly rallied more than 12%
in the following two months. He said, "This [the lease
rate for gold] usually precedes a sharp move in the gold price."
Ross Norman, director of TheBullionDesk.com,
said the latest lease rate spike "is indicative of perhaps
an even tighter market still yet to come." While gold
miners and jewelry groups are the most frequent borrowers, central
banks are the traditional lenders. Fat Prophets offers an excellent
interpretation on lease rates, given on October 12. "Today's
commentary concerns the last carry trade left in the markets,
i.e. gold. Gold peaked at $1032 in March this year. However,
since then it has fallen steadily, trading as low as $734. While
this fall has been in line with a rising USD dollar, it has also
been orchestrated. The current spike in gold lease rates indicates
that demand for physical gold is extremely high and growing quickly.
We may well be witnessing the first seeds of the gold price breaking
free from the short sellers and the end (death) of the gold carry
trade, which so many bullion banks made such large profits on
in the 1990s. The lease rates (available on TheBullionDesk.com)
will be the key indicator to watch."
The margin requirements at
COMEX have been increased. Could this move be intended to hinder
gold investors? Yep! Is the move consistent with rising gold
lease rates? Yep! Will the devious maneuver halt a gold price
response? Nope! Margin collateral demands in a general sense
have risen by 500% in many hedge fund accounts. The pressure
extends to India, where withholding credit from major buyers
has inhibited gold buying. The trend is clear, as pressure by
authorities has been to reduce leverage by force. When liquidation
is late, price reversal comes swiftly.
PEPTALKS, ANECDOTES & SHORTAGES
Two interviews have been cited
in recent past articles. They are so important, a repeat must
be provided in case readers missed them. In a rare event shedding
light on the positive side of the gold market, CNBC interviewed
Jurg Kiener, CEO of Swiss Asia Capital. He points out the stark
contrast of the two markets, paper gold versus physical gold.
Kiener expects soon the US 'gambling price' gold market in COMEX
and LME to eventually default after a titanic battle that began
years ago has reached fever pitch. By that he means a return
suddenly to physical price determination will come for gold.
He concluded that when such an inevitable event occurs, THE GOLD
PRICE WILL DOUBLE VERY QUICKLY, LIKE IN DAYS. Watch the brief
clip (Click here).
John Embry of Sprott Asset
Mgmt focuses on the extreme amount of nationalization and other
bailout funding by the USGovt, as a prelude to a potential gold
futures default. He said to watch the December COMEX futures
contract. The old saying is that gold responds to the medicine
applied, but not the prescription written. Sadly, not much
of any medicine has been administered to the public or the mainstream
USEconomy yet. Almost nothing has occurred yet for applied medicine
on mortgage workouts, rewritten home loans, loan balance forgiveness,
and ample new funds for new home loans that would truly assist
the pain in the mainstream. Instead, a sham of a voluntary bank
program has resulted in little more than a 'Revolving Door' that
returns distressed homeowners to the foreclosure center. Embry
makes great points in his article "Rescue Will Send Gold
to Surreal Price Level" (Click here).
[pdf] But notice the title has the future
tense. He implicitly agrees that the rescue for the system outside
the banking sector has not begun, that the USDollar debasement
is a process only just begun, although Pandora's Box has been
opened. He says in the interview, " the US authorities
will not hesitate to debase their currency in an attempt to salvage
the financial system. In the fullness of time, this will be wildly
inflationary and should propel gold and silver prices that would
be viewed by many in today's context as surreal."
Gerald Celente of Trends Research
Institute is a superstar. He commented on how the USGovt bailouts
will result in enormous upcoming supply of new money creation.
It is all funny phony money in my view, requiring protection
from the imminent guaranteed runup in price inflation. NEVER
DOES A DEBT RELATED SOLUTION FIX A DEBT RELATED PROBLEM. He regards
the USGovt bailouts, rescues, and mergers to be a colossal failure
of policy, which will not prevent a USEconomic depression. The
absence of realistic assistance to the American people who struggle
with mortgages is what is missing in glaring manner. He points
to most bailouts giving subsidy aid to CEOs and preferred stock
holders. Gold will surpass the $1000 mark in the near term, but
probably not until the liquidation engineered by the corrupt
bank authorities has subsided. His comments came immediately
after an important global interest rate cut that involved numerous
central banks, which joined the embattled US Federal Reserve.
Celente wrote: "Beyond
the $1 trillion subprime problem that has been erroneously targeted
as the prime culprit behind the credit crisis are more serious
financial catastrophes that are barely reported, mostly overlooked
and cannot be remedied. The Fed cannot print enough money to
paper over the $531.2 trillion in derivatives and credit swaps,
the trillions in the overbuilt commercial real estate market
ready to collapse, the multi-trillions in leveraged buyouts going
bust, and other exotic financial instruments that have turned
toxic. Yesterday's lowering of interest rates and the continual
Fed action to flood the markets with money will lead to an era
of hyper-inflation, the likes of which no living American has
ever seen. Gold prices shot up some $24 after being down over
$20 earlier in the day. We continue to forecast gold $2000. And
once again, we urge you to take precautionary measures in view
of a worsening global market meltdown."
THE HAT TRICK LETTER
PROFITS IN THE CURRENT CRISIS.
From subscribers and readers:
(At least 30 recently on correct forecasts regarding the
bailout parade, numerous nationalization deals such as for Fannie
Mae and the grand Mortgage Rescue.)
"You seem to have it
nailed. I used to think you were paranoid. Now I think you are
psychic!"
(ShawnU in Ontario)
"Your analysis is of
outstanding quality, the best I have read. In particular, as
a person on the spot, I can confirm the accuracy of your bleak
assessment of our prospects in the UK."
(JanB in England)
"I just subscribed
to your services and must say that your insights are so eye-opening
that it is like having a window to the future. I never thought
that they would in so much detail encompassing the entire world.
With all that is going on, I still wonder how you are so in touch
with it all."
(ChrisB in Australia)
Oct 30, 2008
Jim Willie CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
Willie Archives
website:
Golden
Jackass
subscribe: Hat
Trick Letter
Jim Willie CB
is a statistical analyst in marketing research and retail forecasting.
He holds a PhD in Statistics. His career has stretched over 26
years. He aspires to thrive in the financial editor world, unencumbered
by the limitations of economic credentials. Visit his website
at www.GoldenJackass.com. For personal questions
about subscriptions, contact him at JimWillieCB@aol.com.
321gold Ltd
|
