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Gold Alternative To Debt and Market Manipulation

Bob Chapman
International Forecaster
Aug 5, 2010

The Keynesians are on the edge of implementing more quantitative easing (QE) as we predicted they would.

No sooner had the ECB President Trichet proclaimed that “stimulate no more – it is now time to tighten,” when the President of the St. Louis Fed informed us that to avoid the Japanese outcome we must extend the QE program through the purchase of treasury securities. It looks like Europe’s Illuminists want to take a different tact than those in the US. After 15 months of reducing money and credit from plus 17% to minus 9.6%, the Fed now believes they have plenty of room to run those numbers back up to 17% again. One of the more interesting aspects of Mr. Bullard’s commentary is that call to have the Fed buy more treasuries, when in fact he knows all about the Fed’s buying of Treasuries and Agencies for the last 18 months clandestinely. People like Bullard must think we are dumb. In addition this is exactly what the Japanese did. They engaged in QE. The difference is they borrowed in yen domestically rather than on the world market. Most of Japan’s debt is owed to Japanese citizens.

For the past 30 years policymakers have based their commitments on interest rates, rather than money supply, which they now refuse to publish. At zero rates the Fed certainly does not have much room for adjustment except for minus rates. Current rates make the alternative gold extremely attractive as a currency. Gold owes no one anything. Dollar creators owe owners trillions. Thus, we see no possible choice. Gold today is the world’s premier currency and has been for the past 15 months. The dollar’s recent rally against a host of equally fiat currencies was just a man-made interlude. The rally versus the USDX was short lived. A move on the USDX from 74 to 89 and back to 81.66 completing a head and shoulders formation that on a long-term basis spells doom for the dollar. Anyone with any sense was selling the rally. Why would anyone with brains accept a 2.9% yield on a 10-year T-note, with real inflation in excess of 7%? World professionals look at the same numbers we do. What will dollar denominated buyers do when the yield is 2.5% or even 2% – hold the depreciating paper for ten years? In the meantime where do you think the Dow rally from 9800 to 10,500 came from? The insiders knew ahead of time what the Fed was about to do. That means Fed announcements and actions have already been discounted in stock prices by the elitists with inside information. Is it any wonder the dollar is falling and more inflation is just around the corner? The public hasn’t caught on yet, but what we are seeing is a replay of the summer of 2007. The dollar and the market fell and gold, silver and commodities rallied. We could easily have a repeat performance.

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Wall Street and Washington continue to tell us a recovery is underway, when in fact that is not true. A second QE is underway and the sacrifice will be higher inflation, a lower dollar and higher gold and silver prices. What will be interesting will be if we have QE3, 4 and 5, etc.? Can it be pulled off? We do not know and neither does the Fed. What we do know is the elitists can have war on demand. You just saw that in Iraq and Afghanistan. When will the war begin and with it deflationary depression? Incidentally, all the polls for sometime have shown that Americans believe that inflation is still with us and do not believe government statistics. They also have fresh in their minds the failed monetary policy of the Fed and the fiscal disaster of the last two administrations and the current administration. The housing bubble supposedly was created to counter deflation and turned out to be an ongoing disaster. The public also is not unaware of the perpetual secrecy in both government and at the Fed and they know it is just a cover and they do not like it at all.

The Fed is about to really reignite inflation. If they do not the whole world financial system fails. Price levels can in no way be controlled nor can inflation by issuing phony numbers. Just like the industry and companies deliberately set earning’s goals lower, so as we just saw 75% of “estimates” were surpassed. People are not stupid. The Fed is really flying by the seat of its pants and so far has kept the financial system afloat. The question is can they continue to do that and what is the price we will have to pay? We have already seen what stimulus did in 2002 and in 2006 when government admitted inflation was 5-1/4%, but in reality was 14-3/8%. That was achieved by the doubling of mortgage credit over a 4 to 6 year period. The tactics of those years, as we predicted, has left our economy and the world economy in much worse condition. No one wants anything to happen on their watch, whether it is in corporate America, Wall Street or in government.

Market perceptions and expectations are for ever higher inflation. That means QE inflation will continue to be with us until we have a Weimar like event and then the game will be over. Inflation is now looked upon by most as an occupational hazard, which is accepted, because the alternative is too horrible to contemplate.

Under these rules monetary expansionism becomes a religion and bubbles become normal – all the time avoiding the solution, which is to purge the system of inflation and malinvestment.

You cannot make commentary on monetary and fiscal policy unless you understand that there are forces that control government from behind the scenes. If you do not strongly factor that in and the goal of world government you do not have a chance of figuring out what really is going on. Economists and analysts continue to avoid these factors and are doomed to being wrong 2/3’s of the time. We are in the same trap that Japan is in, and we will be lucky to do as well as they did since 1992. It will be an inflationary policy as usual. What else can it conceivably be? If we have inflation we get another temporary reprieve. Thus, most people are inflationists. They do not want to face the music. Who wouldn’t want inflation as apposed to standing in a bread line?

Weeks ago we forecast a move by the Fed to inject $5 trillion into the economy and we are happy to say other journalists are agreeing in greater numbers. The question is will the Fed move in August or after the election? There are no rules anymore so it could be at any time. Whenever they move there is not question in our minds that gold will then sell for $2,500 to $3,000 an ounce.

We wonder what the reaction will be of those holding dollar denominated assets, such as Treasuries and Agencies? Will they hold and be cheated of a just return, or will they accelerate abandonment of the dollar? We see the latter and in part a move to gold. We have to believe that bondholders have to see the theft of their dollar purchasing power, but they still hold on. Dollar forex holdings are down from 64.5%, 15-months ago to 59.5%, which has to mean some of the nations are catching on, but on the other hand Treasuries are at a high. Be as it may, there will be many dollar losers when the economy finally succumbs to deflationary depression. Gold and silver related assets will be the only place to be.

The Fed’s interest rate policy. The government pretends inflation is close to zero when in fact it is much higher. That is caused by government manipulation. We just saw the same thing in GDP figures, which are explained elsewhere in the issue. This obfuscation isn’t fooling anyone. This inflation is caused in part by low interest rates and monetization by the Fed and to some extent by fiscal profligacy. The high inflation has been used for seven years to offset high deflation and it has not been too difficult to make inflation and GDP appear normal on the surface by just lying about the statistics. The problem the Fed has is that it must always create more inflation than deflation for fear they’ll lose control of the game and deflation, which once in command is impossible to stop. Underneath this game is a boiling cauldron of instability that could break loose at any time raising havoc with the system.

This effort at normality allows gold to perform as a safe haven under both inflation and deflation. It is irrelevant whether it is inflation or debt duress. Gold moves upward to protect the owners of gold as others perceiving the same problems purchase gold as a safe haven. This effort of the last 11 years has effectively over the past 15 months allowed gold to become the world’s premier currency as the dollar wallows in debt. Capital destruction has overtaken the dollar leaving it second best. Just look at the USDX run of the dollar from 74 to 89 to 80. It proved to have little staying power versus other currencies and particularly a very sick euro. We see dollar denominated asset prices continuing to fall. Look at real estate, both residential and commercial, if you need visible proof. Then we have the misguided fighting for perceived safety in US Treasuries as the dollar plunges in value against a number of other things of value, such as currencies and gold. Capital destruction has been in process for years, but many do not seem to notice, or don’t want to notice, as the world financial system slowing implodes. Even with all the propaganda and bailouts banking, the center of this problem still is far from retaining public confidence. We do not see it returning until a new system is in place. Just saving the financial world is not enough. The whole system has to be saved and those in power, which can do that, refuse to do so. Negative return is what it is – a loss of purchasing power that can only be offset by owning gold. You cannot go on indefinitely with negative returns in spite of government lies to the contrary. The road we believe the monetary powers have chosen is one that ends in hyperinflation. That is why no matter how hard the Treasury and the Fed try to resuscitate the system, it cannot be done and every effort to suppress gold is met with failure. The fiat dollar is collapsing and they cannot stop it.

As we said 11 years ago no matter what happens gold and silver are a lock for higher prices. At that time gold was $260 and silver $3.50. We have been dead on and have never wavered, because the game is not over, and as long as the public allows such a corrupt monetary system, it may never be time to exchange gold for anything. You do not worry about the end game, and the exit. We will know when that event occurs, and it may never occur. You just want your assets in the game. Why, because you have no other alternative. We see no other positive alternative in the face of a breakdown in sovereign debt and rampant inflation. QE will be a backbreaker sending inflation right through the roof. This will be the end of sterilization and the beginning of monetization by banks, which are sitting on more than $1 trillion and it will begin soon. This will begin another round of monetary debasement, which will further lower the value of the dollar. There can be only one reason that bankers have leveraged the way they have and have wrecked the financial system. They have done so at the major banks deliberately, by again using QE of $5 trillion. A new level of breakdown is being established that will bring sovereign debt into closer focus as gold and silver reflect this monetary mismanagement.

Weeks ago we forecast a move by the Fed to inject $5 trillion into the economy and we are happy to say other journalists are agreeing in greater numbers. The question is will the Fed move in August or after the election? There are no rules anymore so it could be at any time. Whenever they move there is not question in our minds that gold will then sell for $2,500 to $3,000 an ounce.

We wonder what the reaction will be of those holding dollar denominated assets, such as Treasuries and Agencies? Will they hold and be cheated of a just return, or will they accelerate abandonment of the dollar? We see the latter and in part a move to gold. We have to believe that bondholders have to see the theft of their dollar purchasing power, but they still hold on. Dollar forex holdings are down from 64.5%, 15-months ago to 59.5%, which has to mean some of the nations are catching on, but on the other hand Treasuries are at a high. Be as it may, there will be many dollar losers when the economy finally succumbs to deflationary depression. Gold and silver related assets will be the only place to be.

U.S. local governments may cut almost 500,000 jobs through next year to cope with sliding property taxes, a decline in state and federal aid and added need for social services, according to a report. The report, a result of a survey by the National League of Cities, the U.S. Conference of Mayors and the National Association of Counties, showed local governments are moving to cut the equivalent of 8.6% of their workforces from 2009 to 2011. ‘Local governments across the country are now facing the combined impact of decreased tax revenues, a falloff in state and federal aid and increased demand for social services,’ said the study. They called on Congress to pass a bill that would provide $75 billion in the next two years to local governments and community-based groups to stoke job growth and forestall deeper cuts.

Americans in the second quarter tapped the smallest amount of home equity in a decade. Owners took out $8.3 billion while refinancing prime home loans. Twenty-two percent chose to reduce loan principal, matching the third-highest rate since records began in 1985.

U.S. apartment landlords are seeing a surge in rentals as mounting foreclosures reduce homeownership and an improving job market for young adults encourages them to find their own places to live.  The number of occupied apartments increased by 215,000 in the 64 largest U.S. markets in the first half of the year, according to MPF Research, almost twice the units added in all of 2009 and the most since the firm began tracking the data in 1992. The vacancy rate declined to 6.6% last month from 8.2% in December.  ‘Overall demand is pretty stunningly strong in the first half,’ Greg Willett, a vice president at the research firm said.

U.S. state governments project revenue will climb in the current fiscal year after they raised taxes and cut spending to close budget gaps of $84 billion, a report from the National Conference of State Legislatures found.  Revenue will increase 3.7%, after falling 1.5% in fiscal 2010. Even so, deficits of more than $12 billion may open for at least 29 states should Congress fail to extend extra aid, while two-thirds already forecast fiscal 2012 gaps of $72 billion. The revenue chasm was so deep that climbing out of it is going to take some time.

As we have warned for months, survey bias is perverting PMI surveys. The Chicago PMI unexpectedly increased to 62.3 from 59.1; 56.0 was expected. There is no other data that supports this increase. The only credible explanation for the jump is GM’s decision to produce cars over the summer, when they normally retool for the next year’s models.

The Goldman Sachs Analyst Index fell 6.1 points to 55.4 in July, indicating less widespread economic growth than in June. This decline is consistent with recent weakness in other recent economic indicators. The GSAI now stands at its lowest level since November 2009.

Most of the movement in the GSAI this month is attributed to significant declines in the sales and new orders indices, which fell 12.3 and 9.7 points respectively.

Ambrose Evans-Pritchard: Hot political summer as China throttles rare metal supply and claims South China Sea The United States and Europe have been remarkably insouciant about supplies of rare earth minerals so crucial to frontier technologies, from hybrid engines to mobile phones, superconductors, radar and smart bombs.

China’s commerce ministry has cut export quotas for these metals by 72pc for the second half of this year. It is perhaps the starkest move to date in the Great Power clash over scarce resources.

The July ISM Manufacturing Index was 55.5 versus June’s 56.2. Prices paid were 57.5 versus 57.

June construction spending rose 0.1%, up from May’s minus 1%.

CDR Financial Products Inc. and three of its employees aren’t entitled to early access to prosecution evidence in a U.S. antitrust investigation of the $2.8 trillion municipal bond market and more indictments are expected, a prosecutor told a federal judge in New York.

Lawyers for the CDR defendants went to court yesterday to ask U.S. District Judge Victor Marrero to direct the government to give them early access to the evidence and identify material that might help clear their clients. Rebecca Meiklejohn, a lawyer with the Justice Department’s antitrust division, said the government’s investigation is still moving ahead.

“This is a very expansive case,” Meiklejohn told Marrero. “Just this week the government indicted more individuals in connection with this investigation. This is a continuing investigation and we expect there to be more indictments.”

CDR and the three employees are charged as part of an ongoing probe of bid- and auction-rigging in the municipal bond market. Three ex-bankers with a General Electric Co. unit were indicted on July 27 in the same federal probe.

The federal probe already has drawn in more than a dozen banks and financial services companies, including JPMorgan Chase & Co., Bank of America Corp. and UBS AG, according to court records and regulatory filings.

A grand jury in New York in October indicted David Rubin, founder of Beverly Hills, California-based CDR, the firm’s former chief financial officer and a vice president, for allegedly taking kickbacks for running sham auctions for the investments. All three men have pleaded not guilty to the charges.

Just because being the most corrupt organization in the world was not enough, the SEC decided, courtesy of Donk (aka Frankendodd), that it is beyond accountability to anyone, even the constitution, after it was recently made public that the world’s most incompetent and bribed regulators will continue watching kiddie porn, instead of regulation, only do so in complete opacity from now on, as in the future the SEC would be exempt from FOIA responses. And with retail investors saying “no more” to trading stocks in a rigged casino that shares the same level of integrity as its regulator, and is programmed to generate profits for the house and the computers on 99.9% of trades (except of course for those newsletter and subscription peddlers who catch every single inflection point ever, and can predict what the market will do not only tomorrow but a week, a month and a year from now) the market will soon be a ghost town. Recent attempts by Senator Kaufman to bring some honesty to stocks have so far been met with failure as the Sisyphean task is far too great for any one individual. Which is why we are glad to learn that Ron Paul has joined those few who still hold the long-forgotten dream that the market should be fair and impartial for all (and yes, that means eliminating discount window access for the chosen few Bank Holding Company hedge funds out there) and has introduced the SEC Transparency Act of 2010 (HR 5970), a bill designed to force greater transparency in the Securities and Exchange Commission. Little by little, every single “intervention” by the world’s two most corrupt politicians is being overturned: first the rating agency accountability provision which nearly destroyed the shadow market with a complete lockup of all new ABS issuance, and now the SEC’s exclusion from that simple concept known as “checks and balances.” Soon FinReg will finally be exposed for the fraud it has been since its inception – the much touted Obama financial regulatory reform is nothing but a scam designed to allow Wall Street to steel what middle class wealth remains faster, bolder and in ever greater amounts, as the point where the system breaks is now months away, and the Wall Street-DC joint venture is all too aware. As a result all must be done to allow theft to be bigger than ever, all the while the “regulator” is no longer held responsible for looking the other way.

In continuing with the trivial approach of actually caring bout fundamentals instead of merely generous (and endless) Fed liquidity, we peruse the most recent RealPoint June 2010 CMBS Delinquency report. The result: total delinquent unpaid balance for CMBS increased by $3.1 billion to $60.5 billion, 111% higher than the $28.6 billion from a year ago, after deteriorations in 30, 90+ Day, Foreclosure and REO inventory. This represents a record 7.7% of total outstanding CMBS exposure. Even worse, total Special Servicing exposure by unpaid balance has taken another major leg for the worse, jumping to $88.6 billion, or 11.3%, up 0.7% from the month before. And even as cumulative losses show no sign of abating, average loss severity on CMBS continues being sky high: June average losses came to 49.1%, a slight decline from the 53.6% in May, but well higher from the 39.6% a year earlier. Amusingly, several properties reported loss % of 100%, and in some cases the loss came as high as 132.4% (presumably this accounts for unpaid accrued interest, and is not indicative of creditors actually owning another 32.4% at liquidation to the debtor in addition to the total loss, which would be quite hilarious to watch all those preaching the V-shaped recovery explain away. Of course containerboard prices are higher so all must be well in the world). Putting all this together leads RealPoint to reevaluate their year end forecast substantially lower: “With the combined potential for large-loan delinquency in the coming months and the recently experienced average growth month-over-month, Realpoint projects the delinquent unpaid CMBS balance to continue along its current trend and potentially grow to between $80 and $90 billion by year-end 2010. Based on an updated trend analysis, we now project the delinquency percentage to potentially grow to 11% to 12% under more heavily stressed scenarios through the year-end 2010.” In other words, the debt backed by CRE is getting increasingly more worthless, even as REIT equity valuation go for fresh all time highs, valuations are substantiated by nothing than antigravity and futile prayers that cap rates will hit 6% before they first hit 10%.

U.S. bank failures reached 108 so far in 2010 on Friday as regulators seized five small banks in the Pacific Northwest and the Southeast, none publicly traded.

The banks seized on Friday were LibertyBank of Eugene, Oregon; The Cowlitz Bank of Longview, Washington; Coastal Community Bank of Panama City Beach, Florida; Northwest Bank & Trust of Acworth, Georgia; and Bayside Savings Bank of Port Saint Joe, Florida, according to the Federal Deposit Insurance Corp.

The five banks would cost the agency’s deposit insurance fund about $335 million, the FDIC said.

The largest of the five banks was LibertyBank with 15 branches and about $768.2 million in total assets and $718.5 million in total deposits. The smallest was Bayside Savings Bank with just two branches and $66.1 million in total assets and $52.4 million in deposits.

Although failures are still occurring at a rapid pace, it is mostly smaller institutions that have been collapsing recently.

The biggest bank failure of the crisis was Washington Mutual, which had $307 billion in assets when it was seized in September 2008.

The annual level of bank failures has not reached the levels during the savings and loan crisis, when 534 institutions were seized in 1989 alone. In the current crisis, the problems dogging the banking industry have migrated from home mortgages to commercial real estate, especially for community banks that tend to have higher concentrations of commercial real estate loans.

Regulators have not publicly revealed estimates of how many bank failures are still to come, but the FDIC has said it expects the cost to hit $60 billion from 2010 through 2014.

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