Flip Flop Switch
Yesterday’s stock market relief rally, one of the biggest in history, seemed to indicate that some confidence is coming back to Wall Street and that the fear trade in gold may be over for a while. If the latest high wire acts do provide some stability to the financial markets and the banking system, even if temporary, the theme in gold may have to flip from flight-to-safety to inflation-hedge, or rather hyperinflation-hedge. Depending on the length of the transition or switch period, gold and silver may remain range bound for a while with silver between $10 and $14 and gold between $800 and $925. It is important to watch for breaks above and below these levels as they could indicate further movement in that direction. In particular, should gold break below $800 at the same time that silver breaks $10, it is possible that gold is headed back down to the $730 area to test the September low and that could possibly take silver down to the mid-$8s. I don’t view this as a likely scenario but the possibility is there. A report that further explores the technical situation in silver from a modified Elliott Wave perspective will be made available to Founding Members soon.
I am still testing and refining the silver option strategy I mentioned last Friday and hope to have it ready for Founding Members of www.metalaugmentor.com shortly. I’ve attempted to run a test order on a portion of the strategy but unfortunately the option market is a bit thin right now so it will probably be necessary to adjust the order to get a fill. In any case, I’m not going to goof around with it any longer at this point so I will e-mail a discussion of the strategy to Founding Members shortly.
Getting back to the latest Fed and Treasury plans, apparently the first $250 billion of the $700 billion bailout will be used to partially nationalize U.S. banks by acquiring preferred shares in the 9 (so far) largest financial institutions. See http://www.federalreserve.gov/newsevents/press/monetary/20081014b.htm. The plan apparently would involve auctioning Treasury securities and using the proceeds to buy the preferred shares, which is not itself inflationary. As I mentioned in the past, temporary bank nationalization was the most popular recommendation by literally hundreds of U.S. economists to the Fed, Treasury, Congress and everybody else who would listen. Well, these Keynesian socialists have now apparently gained favor. And even though the initial purchase of bank stock will not itself be inflationary (assuming the funds are raised through Treasury auction), there is a good chance that the injected liquidity will become ingrained and entrenched over time, making it impossible to withdraw the funds if and when the inflationary pressure from the cumulative bailouts starts to expand out of control.
The decision to partially nationalize U.S. banks follows the path adopted by several governments on Monday including the U.K. and member countries of the European Union as part of a $2.3 trillion bailout package. Only a few years ago it was a big deal when a bailout was measured in the single digit billions. How far we have come! And yet gullible pundits and reporters are saying these efforts will not be inflationary because they are temporary and the liquidity will be withdrawn as soon as it is no longer needed by financial institutions. Yeah right! History shows that governments only undo largess under two circumstances: (1) the temporary measure words immediately and there is intense political pressure to unwind the meddling or (2) the temporary measure becomes semi-permanent but can be withdrawn many years or decades later when inflation has made it cheap to do so.
Also, we have a bit more information now on the commercial paper program that the Fed plans to launch in the next two weeks, which does have the capability to immediately inflate the money supply. See http://www.federalreserve.gov/newsevents/press/monetary/20081014a.htm. The required margin or discount on commercial paper held by the Fed is small and therefore if the Fed was going to monetize a particular class of credits, this would be it. Thus, I am presuming in advance that the initial funding for this program will not come from the Treasury Supplementary Financing Program (which has provided almost $460 billion to the Fed as of last week) but rather from newly printed money via helicopter drop.
There seems to be some issue with the comment section. Hopefully I’ve now fixed it.
Tom,
would you mind saying at least a few words with respect to the rather unexpected silver crash last Friday?
Would anyone wanting to deleverage sell a large amount of asset at one go, thus causing a deep price drop hurting even himself, instead of selling in more or less moderate portions? I have no idea how to interprete the brutal event. Was it the Hung Brothers, that means an intended action?
Tom,
‘The Chicken’s aren’t coming home to ROOST’ but are coming home to be ROASTED !
ATTENTION!
US treasury bond default dead ahead.
Keseri…..I can now comment on your last question in the previous blog. The reason why Silver’s price is influnced more by the cheap oil FIESTA is due to the fact that more of silver’s production comes from BASE METAL MINING. Also, Gold is found more with copper, Silver is found more with Zinc and Lead.
Back in the day…..HUMAN LABOR was used to mine the easy to get to and easy to find ores. These were concentraded ores in veins. Today, we are scooping up TONS of ORE with grams per ton. Even though the production ratio of Gold to Silver is 1 -7, the production cost is far less….as I stated it was 60 - 1 in 2004.
Keseri….I do not make up these COSTS and I do not make up the VALUE of GOLD and SILVER. The market is making that VALUE….which I am in totally disagreement. The market is pricing gold not for its monetary value….but its VALUE as a COMMODITY in JEWELRY and others such as DENTAL FILLINGS. This is the same with SILVER.
You and I can go round and round on this issue, and in all reality it matters not. This world is beginning its collapse in its world economy and its population. Cheap Oil has made both of these possible. When you can’t grow your ENERGY….you cannot grow your GDP. When the GDP contracts, then all those DERIVATIVES IMPLODE as they are only functional in a GROWING ECONOMY with INCREASING VALUES.
Again….the PAPER price of both SILVER and GOLD are becoming more meaningless today as they were a day before. Silver is FLYING off the shelves….even the 1,000 wholesale bars. APMEX that had 200 of the 1,000 bars only have 50+ left…..and if these prices keep heading lower, these 1,000 bars will be in shortage.
Americans and other western countries are just beginning to realize the world around them is crumbling. The next BUBBLE to BURST besides the Housing, Credit Default and Banking, will be the BOND MARKET. Once this occurs, you will see HUGE MOVEMENTS in both GOLD and SILVER physical prices.
If any Sliverax readers are perplexed by recent dollar strength should have read this following article back in 2004:
‘A Day Late and A Dollar Short’
By George J. Paulos & Sol Palha
The dumb hyper-speculator hedge funds are still liquidating big time.
SRS: OK let us call it a truce. you are right, we can go on arguing for ever without reaching an agreement.
however on everything else, I am with you.
truly yours
Keseri
Just in hot off the presses folks…..
2008-10-15 17:47:15 story 2641005
Romania’s BCR bank launches gold-linked deposits
BUCHAREST, Oct 15 (Reuters) - Romania’s biggest bank, BCR, owned by Austria’s Erste Bank, has launched a deposit facility for individuals with an interest rate tied to increases in the price of gold.
Commercial banks in central Europe have so far shown more resilience to the global credit crisis compared with their western peers, thanks to their reliance on local deposits and limited exposure to toxic real-estate related instruments.
In Romania, where consumer spending has been particularly rampant, some banks have cranked up interest rates to some savers by 2-3 percentage points in recent months, often exceeding the central bank’s benchmark interest rate of 10.25.
Over the last year, the central bank has raised interest rates by 325 basis points in a bid to douse rising inflationary pressures which had brought the annual price growth to a three-year high of 9 percent in July.
“We introduced this product in October, in a bid to diversify our retail products and boost savings and investment,” said Sorin Mititelu, head of BCR’s business development and retail products department.
The bank said the product would only be available in the month of October.
The deposit would have a maturity of six months and would pay an annual interest rate of 30 percent of any percentage increase in the price of gold on the London market. A fall in the gold price would mean no interest would be paid on the sum deposited.
Spot gold was trading around $846 an ounce on Wednesday, only slightly higher than at the start of the year and 18 percent below its record high of $1,030.80 an ounce struck in mid-March.
Interest rates levied on leu deposits in Romania, which joined the European Union in 2007, average around 9 percent for the six-month maturity.
(Reporting by Radu Marinas; Editing by David Cowell) Keywords: GOLD ROMANIA/BCR
tf.TFN-Europe_newsdesk@thomsonreuters.com
With all the new money joining the gains of the last bubble the stage is set for the next big bubble - the mother of all bubbles.
The big question is: What will it be. Unlike SRSrocco I think that bonds will not be the next big one. I guess that bonds only will have a temporary function as a parking lot for money until the dust settles. As soon as you see the bond raising the next bubble will take off.
I hope that it will not be energy or food related (oil, soy, wheat etc.) as this will effect the poor and instantly will produce angry masses. Bad intentions just could make these agricultural commodities a target …
What remains are the PMs, gold, silver etc. The physical demand for the PMs just seem to indicate this and I think, the current psychological undercurrents as wll. I think that we there will be a red hot ride coming - maybe beyond all imagination.
Freddy Krugerand: I hoped that this deleveraging/liquidating would find an end around the mid of this month. As so often I seem to be at least one month early with my guesses - unfounded hope often outlasts the right timing way beyond the point which would be dictated by a rational assessment (on the side of the speculators). Anyway, the dust settles when the dollar drops considerably. Currently almost anything sellable is sold and converted to $$. Just don’t look at the charts [of the PMs]. In these exceptional times standard chart interpretation does not seem to make any sense [to me].
Any comments?
DiscreetSILVERBUG,
I repeat have you or any SILVERAX readers read this article written in 2004:
‘A Day Late and A Dollar Short?
By George J. Paulos & Sol Palha
Because if you did not, you must be surely be licking your wounds !
take a look at the rise in the monetary base:
http://research.stlouisfed.org/fred2/series/BASE?cid=124
Krischan: The latest drop was very similar to the prior ones, so I think we have liquidations, margin calls, and probably professional scalpers (Hung Brothers) in the mix. The difference this time was that the drop corresponded much better with weakness in the commodity sector overall so it was likely to be linked more directly with liquidations.
Freddy: Regarding the Romanian bank offering gold-linked deposits, it is actually everbank in the U.S. that started this out and I believe still offers the product. Regarding default on U.S. treasury bonds, I wouldn’t count on it unless you mean that the U.S. will print enough dollars to buy most of them back, in which case I would tend to agree. Regarding the “A Day Late and A Dollar Short”, see my comment in a more recent post but basically these guys got the timing so wrong that it is embarrassing. On the other hand, some of the things they discuss are quite dead on and I have also been known to say much of the same things but with somewhat more balance.
DiscreetSilverBug: I think they will probably keep bonds meandering and I don’t see an acceleration in the bond bubble unless we have true deflation. My guess is they will keep printing money which will require an expansion of the Treasury market and this will most likely reverse the 25+ year decline in bond prices. The only way this is possible without destroying debtors is to inflate the debt burden away, which is precisely what I think will happen. In that environment we should see gold and silver trade at new prices well above the current highs.
T Rob: Yes, as I’ve noted almost 2 weeks ago the monetary base was headed for a rise over $1 trillion.
Monday I was searching for sites related to Marketing and specifically timing stock market investment and I found your site.