Gold on the way up, Fasten your seat belts!

Enrico Orlandini, writer of a newsletter I read, had the following to say
Quote
I suppose it doesn’t come as a surprise when I say I am not an optimist. I see real trouble and we won’t have to wait very long before it’s here. Most people don’t own any gold and live with the idea that “somehow” the administration will work it all out. I don’t think so, and the only thing that will make a difference in the long run is gold. If you don’t own any gold, and most don’t, you should be buying the yellow metal right now. If you do own gold, you should be buying more right now. A lot of investors are waiting for the “right moment” but that’s all they do is wait. Gold is still cheap, and silver is even cheaper, but that is all about to change. We are a lot closer to a significant movement in price than most people imagine. If I could make investors do anything, it would be to buy gold this week. No amount of Fed action will save the day, and it isn’t intended to. All the Fed wants to do is complete the transfer of wealth that it began almost one hundred years ago. Your financial well-being is not on their agenda and the last thing they want you to do is buy gold. If you really want to stop them, if you really want to change things, you should buy gold and silver this week.
Unquote
Well dear reader Enrico speaks out of my heart. Of course I am a gold bug but I am a gold bug because I do see that this is the only real and true possibility to have a safe haven investments for the rough times ahead. Although being a gold bug, I do of course know that there will be a time when other investments will outperformance precious metal investments. However this moment is in my opinion still far away. This bull market, although manipulated or managed by the central banks (kept under control) in a way that possibly is against the laws, will last at least another 5 to 10 years.

Following a further comment about gold
Ned Schmidt from THE VALUE VIEW GOLD REPORT made this week the following comment
Given that $Gold is probably short-term over bought and some possibility of Summer doldrums developing, investors should probably simply use weakness to do their buying. $Gold prices below US$900 should encourage all buyers. Price weakness in the AM on New York City time should be used in particular
Summer of 2009 may be the last great buying opportunity for Gold. What we mean is that the prices that develop in the next few months, or weeks, may not be revisited. In the next leg of the structural Gold bull market, US$1,000 is more likely to be a floor than a ceiling. Waiting to buy Gold till the next announcement of purchases by the People's Bank of China may be too late. China's most recent comments on the dangerous economic policies of the Obama Regime remind this author of an old joke. When the wife complained to the farmer for shooting the mule, he turned to her and said, "That's once."


If you like to find out how to invest in gold, sent me an e mail.




Following a MUST READ and some more info about gold

Murray Pollitt: The gold monetization scheme is ending
The G8 appears finished but their policymakers continue to try to bend the G20, and the world, to their will. The establishment, the Fed, the Bank of England, the Bank for International Settlements, the same gang that has been setting policy for decades, is still at it. They appear to remain in charge (with nary a whimper of criticism about the trillions of dollars' worth of damage their policies have caused) but, when it comes to gold, they are slowly losing their grip.

Besides setting the stage decades ago for sub-prime paper, CDSs, and so on, it appears policymakers embarked on a scheme, at more or less the same time, to monetize the hundreds of billions of dollars' worth of gold lying sterile in central bank vaults. The temptation was too much. One-percent income on gold for a central bank was better than nothing, so the argument ran, and for the Lehman types borrowing gold (and selling it) provided lots of money (capital) to play games with.

It was so easy. Besides, the gold carry trade involved selling lots of gold into the market and this helped keep the price down (and hopefully the dollar up), a subject near and dear to policymakers.

It also led to: a) huge mine hedging with the two biggest miners, each with a link to Morgan, together short over 30 million ounces ("making money on gold in the ground" was the argument) and b) significant outright central bank sales, which may have been interventionist or may have been for portfolio diversification, however ill-advised.

And if banks and markets didn't always follow the script, there was always high-level intervention. To illustrate the mindset, in 2004 one William White, advisor to the BIS, talked about the need for "international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful." The idea of rigging markets is as old as the hills, and if the government is on your side. ...

Anyway, the great gold monetization (mobilization?) scheme appears to have started in the 1980s and the following events that, in part, characterize it are not necessarily in sequence.
Please read on
http://www.gata.org/node/7415

Obama honeymoon rally

"And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place." … Senator Richard J. Durban



In this post you will find
- Stress Test. Several banks will need additional capital (according to WSJ Citi would need 35 billion BoA more than 50)
- Credit Default Swaps, Derivatives, a lot of thin air
- Economy: Global Crisis ‘Vastly Worse’ Than 1930s, Taleb Says
- Unemployment rate. Real unemployment rate is 20% according to shadowstats
- Manipulation, a comment from a savvy analyst
- Gold, James Turk, a history of the gold cartel
- Equity, PE ratios are high, there was never a real rally with such a high PE ratio
- USD,
- Oil demand will fall according to the latest Reuter Poll


Before going into more details, let’s start with something about todays mother day following with, as usual with the overview from www.prudentbear.com





For the week, the Dow jumped 4.4% (down 2.3% y-t-d), and the S&P500 gained 5.9% (up 2.9%). In just five sessions, the Banks surged 36.1% (down 1.3%), and the Broker/Dealers jumped 10.7% (up 30.3%). The Morgan Stanley Cyclicals rose 8.3% (up 21.3%), and the Transports increased 6.3% (down 5.3%). The Morgan Stanley Consumer index gained 4.3% (up 1.9%), and the Utilities increased 2.6% (down 7.7%). The broader market remained strong. The S&P 400 Mid-Caps jumped 5.0% (up 9.0%), and the small cap Russell 2000 gained 5.1% (up 2.5%). Technology lagged this week. The Nasdaq100 was little changed (up 15.1%), and the Morgan Stanley High Tech index dipped 0.8% (up 23.1%). The Semiconductors declined 3.3% (up 17.7%), while the InteractiveWeek Internet index added 0.8% (up 35.2%). The Biotechs increased 1.2% (down 2.0%). With Bullion surging $29, the HUI gold index rallied 13.9% (up 13.5%)

and




Stress Test

Well dear reader it seems that the stress test showed that several banks will need additional capital. Although they say that some of the banks are OK, my guess is that all are in dire need of new capital. Well, a Wall Street Journal article mentioned that the banks in fact need 7 times more capital as officially published. The banks and the government agreed to down play these numbers. Taking into consideration that the stress test were done with, in my opinion a too rosy scenario (10.3% unemployment, a GDP contraction of 3.3% for the year and another 22% fall in housing prices), it would of course look worse if one would take a more realistic scenario (some say that Geithner’s worst case scenario looks almost like their best case scenario).



Well there are several ways to get to new capital. Apart from the official mentioned ones some will receive it in a camouflaged or hidden way (for example using AIG to funnel the funds to the banks that need it). If all banks would follow proper accounting rules and would have to include the real risk that are still kept in their off balance vehicles, the banks would not only be in dire need for huge amounts of new capital but possibly part of the public would find out that all these banks in fact are already dead. Yes dear reader, bankrupt, dead, kaput, or whatever other words you would like to use.

As I believe that the economic situation will further deteriorate (see more on that below), I see the big banks with international exposure in deep troubles. Therefore my recommendation is to diversify and have some of the assets with smaller, sound banks with no international risk exposure. If you would like to know more send me an e mail.




By the way, and this it seems is no news anymore, in 2009 the FDIC has already taken over 29 banks. Yes this is not a typo, the number is 29. I bet that this number will increase substantially for the rest of the year. Stay alert, there will be more negative news from financial sector and especially from the big banks.

http://finance.yahoo.com/news/About-10-US-stress-test-banks-rb-15128885.html?sec=topStories&pos=main&asset=&ccode=

“"Owners of capital will stimulate the working class to buy more and more of expensive goods, houses, and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism." Karl Marx, "Das Kapital," 1867
Seems like some are following the blueprint


Banks and banksters

There is no way to resolve a debt crisis with more debt. The only solution is to write it off and no one is willing to do that




Credit Default Swaps

Found on http://jsmineset.com
quote
"The credit world has become a hall of mirrors, where nothing is necessarily as it seems. At best, this makes it very difficult to tell how corporate defaults will affect banks; at worst, it creates the risk of needless value destruction as creditors tip companies into default."

"Financial companies have used their agents, U.S. lawmakers, to pressure the FASB to relax fair-value accounting rules. The result has been the official endorsement of fair-value lying. The other hand tax evader and Treasury Secretary Timothy Geithner has constructed a framework whereby politically privileged banks with worse than worthless toxic assets sell them for cash at an inflated fair value lying price to a self-funded Special Investment Vehicle (SIV), a similar entity as Enron used, that receives a non-collateralized loanfrom their government puppets."

"Company M is completely evaporated and thousands of workers lose their jobs.

Total profit for Banks G and J: $2.85M-$1M-$30k-60k=$1.76M. Nice pay for a day’s work slaughtering and cremating a slight hobbling but otherwise generally healthy going concern."

At a Cambridge House Investment Conference I received a question about Bear Stearns. In my answer I alluded to the possible financial benefit of some from its implosion. When pressed I had to explain how credit default swapsworked and then we were out of time. Because the owners of the majority of the financial press have too much money to make from bankruptcies this topic is sparingly covered. But the Financial Times editor let an article wiggle through.

On 6 February 2009 the Kazakhstan Tenge went poof and was devalued by 18% in a single day. The currency has continued falling from 110 to the current 150.60241:FRN$1. The free-flowing credit to Eastern Europe stopped gushing months ago. Although BTA, Kazakhstan’s largest bank, was taken over by the government, it still serviced its loans. BTA currently has total liabilities to credit institutions (.pdf) of 863,688,000,000 Kazakhstani tenge or about $5.7B. As the Financial Times reported:
But last week Morgan Stanley (MS) and another bank suddenly demanded repayment. BTA was unable to comply, and thus tipped intopartial default. That sparked fury among some other creditors and shocked some Kazakhs, who wondered why Morgan Stanley would havetaken an action that seemed likely to create losses. One clue to the US bank’s motives, though, can be seen on the official website of theInternational Swaps and Derivatives Association. One page reveals that just after calling in the loan Morgan Stanley also asked ISDA to start formal proceedings to settle credit default swaps contracts written on BTA.

CREDIT DEFAULT SWAPS
A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults. In effect, the owner of a credit default swap is short the underlying going concern.

Many of the largest Wall Street banks are heavily involved in the derivative markets with reported (.pdf) notional amounts outstanding as of 31 December 2008 for JP Morgan (JPM) at $87.4T, Goldman Sachs (GS) at $30.2T and the single digit midgets of Bank of America (BAC) and Citigroup (C) at $38.3T and $31.9T, respectively.
The Financial Times reported,

As a result, speculation is rife that Morgan might have deliberately provoked the default of BTA to profit on its CDS, since a default makes the US bank a net winner, not a loser as logic might suggest. Morgan Stanley, for its part, refuses to comment on this speculation (although its officials note that the bank does not generally take active “short” positions in its clients). And I personally have no way of knowing whether Morgan is short or long, since Morgan refuses to disclose details of its CDS holding. Right now more than $700 million BTA CDS contracts are registered with the Depositary Trust & Clearing Corp. in New York.

This represents about 12.3% of the total liabilities to credit institutions. But later in the article the key point is hit upon:
But the rub for regulators and investors is that BTA credit risk has not entirely disappeared: Somebody right now is holding the other side of Morgan Stanley’s contracts, and unfortunately there is little way for outsiders to know exactly who. Worse, the presence of those CDS contracts makes it fiendishly hard to work out what the true incentives of any creditors are. In theory, lenders should have an interest inavoiding default. In practice, CDS players do not. The credit world has become a hall of mirrors, where nothing is necessarily as it seems. At best, this makes it very difficult to tell how corporate defaults will affect banks; at worst, it creates the risk of needless value destruction as creditors tip companies into default.

FAIR VALUE ACCOUNTING AND GEITHNER’S PLAN
Financial companies have used their agents, U.S. lawmakers, to pressure the FASB to relax fair-value accounting rules. The result has been the official endorsement of fair-value lying. The other hand tax evader and Treasury Secretary Timothy Geithner has constructed a framework whereby politically privileged banks with worse than worthless toxic assets sell them for cash at an inflated fair value lying price to a self-funded Special Investment Vehicle (SIV), a similar entity as Enron used, that receives a non-collateralized loanfrom their government puppets.

HYPOTHETICAL
For the sake of argument and simplicity assume that Bank G loans Company M $1M in either a leveraged buyout or some other type of deal that was common over the past few years when credit flowed freely. Then Bank G purchases a CDS on Company M’s loan for $30,000 from Bank B and the CDS is reinsured by Insurance Company A.

Company M deteriorates because its free cash flow and a little more all goes to service debt and Bank G sells 90% of its loan to Bank J. Because credit risk has increased Company M’s bond now trades in the market for $25,000 and Bank J purchases a CDS from Bank L for the current market price of $60,000 and reinsured by Insurance Company A. Banks B and L go bankrupt, the trader at Bank L who sold Bank J the CDS now either goes to work at Bank J or receives consulting fees and the privileged creditors of Banks B and L, such as subsidiaries of Bank J and G, receive government bailout payments through Insurance Company A.

Company B, while still able to service its debt, does violate some provision of its debt covenant.
First, being friendly competitors Bank G and J decide to both press for default proceedings and then initiate settlement of the CDS they own.

Second, they fund a SIV with $25,000 of cash which borrows another $825,000 from the Bank’s government puppets.
Third, the SIV pays Banks G and J $850,000 of cash for the Company M loan which, while trading for $25,000 in the market is being carried on their balance sheet for $600,000 and consequently results in a $250,000 gain on the income statement for the quarter after having written down a couple quarters ago.

Fourth, Banks G and J receive $2M in bailout funds for the failed CDS contracts.

Fifth, Company M is completely evaporated and thousands of workers lose their jobs.
Total profit for Banks G and J: $2.85M-$1M-$30k-60k=$1.76M. Nice pay for a day’s work slaughtering and cremating a slight hobbling but otherwise generally healthy going concern.

FINANCIAL WMDs AND FINANCIAL TERRORISTS
As the great credit expansion continued it culminated in hundreds of trillions of dollars worth of derivative instruments. Some of these are registered while many, if not most, are not. These instruments are at the evaporating top of the liquidity pyramid while gold and silver are at the bottom tip.

Just imagine what the GLD ETF Authorized Participants, including Bear Stearns & Co. Inc., Lehman Brothers Inc., Citigroup Global Markets Inc., Merrill Lynch, Goldman Sachs, J.P. Morgan Securities, and Morgan Stanley & Co., will use the language in the prospectus to do.

These derivatives, with their fiendish counter-party risk, infest the balance sheets of almost every publicly traded corporation along with many local, state and national governments. Financial terrorists are greatly incentivized to detonate these financial weapons of mass destruction.

POTENTIAL REMEDIES
When confronted with these type of financial terrorists society has often had to take powerful measures. For example, when John Law co-opted the French economy and tried to prevent its credit contraction by outlawing the use of gold and silver with the death penalty, the French Revolution was sparked.

In the United States of America Section 19 of the Coinage Act of 1792provided,
That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.
Under Section 9 of that Act a Dollar is

to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.
While the USA has 303M people about 2.3M are incarcerated or more than 1 in 100 American adults and it officially executed 59. On the other hand, the police state China has about 1.5M incarcerated adults and officially executed 3,400.
While China has had its problems it has not appeared to have had any serious problems with their domestic banks and derivative instruments. Perhaps a reason is because of how they deal with financial crimes. For example, the New York Times reported that Zheng Xiaoyu, former head of the State Food and Drug Administration in China, admitted to taking bribes to approve untested medicine and he was swiftly executed.

CONCLUSION
Because the great credit contraction has begun, capital has started burrowing down the liquidity pyramid to safety and liquidity. Individuals, companies and governments have more leverage than they can sustain.
With the Federal Reserve refusing to comply with Bloomberg’s FOIA request for where trillions of dollars have gone and with JP Morgan, Goldman Sachs, Bank of America and Citigroup all acting like Morgan Stanely and ‘refuse to disclose’ it does beg the questions: What are the next companies to be destroyed? How many hundreds of thousands of jobs will be lost as a result? What will the American people do about it?



Unquote


Economy

Global Crisis ‘Vastly Worse’ Than 1930s, Taleb Says
The current global crisis is “vastly worse” than the 1930s because financial systems and economies worldwide have become more interdependent, “Black Swan” author Nassim Nicholas Taleb said.
http://www.bloomberg.com/apps/news?pid=20601080&sid=aYijnS7fUBRc&refer=asia



The European Central Bank joined the quantitative easing (QE) club. Europe's central bank cut short-term interest rates, as expected to just 1%. (which is a 325 basis points since last October).
Following the ECB's rate cut decision, Trichet says the ECB will launch quantitative easing and buy euro-denominated covered bonds. The ECB will aims to improve liquidity in some market sections and aims at easing funding for companies. Trichet says inflation expectations remain firmly anchored, expects inflation to increase at the end of the year after going negative mid-year
It looks like the ECB is following the rather unsuccessful examples out of the Anglo Saxon area.

Video to watch. This guy is one of the few who says as it is.
http://www.youtube.com/watch?v=lnb1qXhXOas&eurl



Unemployment

Well dear reader the economy cannot improve as long as the unemployment rate is increasing all over the world. Taking out all the hocus pocus of the official numbers the real unemployment rate in the US is 20%. Following a part of shadowstats.com, Williams comment
Quote
The April 2009 seasonally-adjusted U.3 unemployment rate, however, still showed another statistically-significant increase, to 8.87% +/- 0.23%, from 8.54% in March. Unadjusted U.3 eased to 8.6% in April from 9.0% in March. The broader April U.6 unemployment rate rose to an adjusted 15.8% (fell to 15.4% unadjusted) from 15.6% (16.2% unadjusted) in March. The less than proportionate seasonally-adjusted increase in the U.6 measure, versus the U.3 measure, again reflected seasonal factor distortions. The adjusted U.3 unemployment rate likely should have been reported higher than 8.9% and should catch-up in the reporting of the next month or two.
During the Clinton Administration, "discouraged workers" — those who had given up looking for a job because there were no jobs to be had — were redefined so as to be counted only if they had been "discouraged" for less than a year. This time qualification defined away the bulk of the discouraged workers. Adding them back into the total unemployed, unemployment in line with common experience, as estimated by the SGS-Alternate Unemployment Measure, rose to about 20.0% in April versus 19.8% in March.
unquote



Manipulation

Following a comment found on the net
Quote
"This government will stop at nothing even including manipulation. What the Fed does not want is a swooning stock market, surging gold, or sinking bonds. I think all three are now being manipulated. Pressure from various sources continues on gold, and we know the Fed is buying bonds. When an item is manipulated, the aftermath always ends unpleasantly. I expect "unpleasantness" ahead. In my opinion, big money and veteran investors have joined China in worrying about the dollar. It's a major reason why they trust this market."
unquote
Well dear reader, I couldn’t agree more. Regarding precious metals to me it seems like they want to hold a beach ball not only below water but furthermore at the same level below and this while the water level is rising. As the water level is rising so is the up pressure from the beach ball. There will be a moment when the up pressure will be so strong that the ball will move up, pop out of the water before falling back to the water level which if course will be much higher than today. The question in my opinion is only how long it will take to happen. Maybe in 2011 more on 2011 later.


Gold

The battle continues with gold and the US dollar as central banks have their hands full trying to support the US dollar while capping the advance of gold.

James Turk: A short history of the gold cartel
http://www.gata.org/node/7401

More about gold
http://seekingalpha.com/article/135561-the-gold-war-china-and-the-u-s-treasury-market


source www.lemetropolecafe.com


Equities

Obama Honeymoon rally

As it seems that the actual rally is due to the manufactured positive news it looks like a Obama Honeymoon rally. Well the question is when will the honeymoon end?

Well dear reader No one seems to care that stocks are extremely overvalued by anybodies standards. The Dow with a PE ratio of 32 shows this clearly. It looks like some investors are being drawn to the market because recently the market did well. These investors will happily enter the slaughter house without being aware of it. Those that sat like frogs in a pan with water getting hotter and hotter will hold on and will not feel the heat that will increase again until it is too late to be fried. Although, as mentioned in my last post, the Dow could go up to 9,000 or even a bit higher, please be careful. Keep in mind that in 1929 after the initial crash, the market rebounded almost 70% before it fell to the floor.

In regard to 1929 Robert Rhea, the great Dow theorist of the 1930's wrote: "It is almost certain that a panic rebound will recover 40 percent or more of the preceding decline." Mr. Rhea goes on to say "Whenever a panic decline occurs, the market thereafter seems to need a resting period during which it appraises the damage to its structure. Prices frequently back and fill for several months in such areas. The action somewhat resembles that of a pendulum which, oscillating slowly as it seeks equilibrium, gradually comes to rest. The direction taken after equilibrium is attained is generally significant."

Of course, my crystal ball does not give me a clear indication. However, as mentioned before, to me it seems that a structured plan to reduce positions might be a move to consider. In a market that could rise but has the risk to fall further, putting stop loss orders is another solution to consider. If you put stop loss orders, do not forget to rise them step by step whenever the markets move up.

Well dear reader, I still expect by 2011 at the latest to see the price level of the Dow being equal to the price of one ounce of gold. My price target is above 2,000 for both. I do not know if it will be 2,000, 3,000 or 4,000. However personally I have no doubt that gold will go up considerably while stock prices will head south.

Holding gold is, in my opinion, a protection to consider


Currency

The dollar index dropped 2.4% this week to 82.53 (up 1.5% y-t-d). For the week on the upside, the New Zealand dollar increased 6.0%, the Mexican peso 5.6%, the Brazilian real 5.4%, the Australian dollar 5.2%, the Swedish krona 5.1%, the Norwegian krone 3.3%, the Canadian dollar 3.0%, the South Korean won 2.9%, and the Euro 2.8%. On the downside, the Taiwanese dollar dipped 0.3%. In the emerging currencies, the Hungarian forint gained 6.4% and the Romanian leu rose 4.1%.



May 4 - Bloomberg (Lilian Karunungan): "Confidence in the U.S. dollar is 'fraying' and a shift away from the greenback after the financial crisis is inevitable, Nobel Prize-winning economist Joseph Stiglitz told Emerging Markets newspaper. The question is whether the move will be chaotic with regional swap arrangements, semi-currencies or multiple reserve currencies, or done in a more organized way, Stiglitz told the newspaper... The dollar won't remain the world's reserve currency as the inflationary impact of a rapidly expanding Federal Reserve balance sheet has undermined confidence in the greenback, he told the newspaper."


Oil

World oil demand is forecast to fall this year by much more than previously expected, as growth stalls in China and India and fuel consumption declines in the developed world. The latest Reuters poll of 11 analysts, banks and industry groups shows oil consumption is expected to decline by an average of 1.56 million b/d in 2009 to 84.10 million b/d

For more news click on the following link
http://www.aspousa.org/index.php/2009/05/briefs-5/