My Happy New Year Present To All

The Fiscal Cliff farce will be "fixed" one way or another.  All you have to do is look at where the carrots are hanging in front of the Asses and Elephants.  In fact, Obama just gave the children in Congress a nice pay raise, but they won't get any pay if the "Cliff" kicks in and the debt ceiling limit isn't raised/eliminated.

In the meantime,  most serious students of value/fundamental investing like to focus on long term trends.  The long term trend for gold has been 12 years in a row of gains.  And we all know the fundamentals become stronger by the day to support several more years of gains.

With that in mind, I recently went to the Van Gogh exhibition at the Denver Art Museum.  It is probably one of the best art exhibitions I've ever seen (after spending time in museums in NYC, Chicago, Paris, Italy, etc).  The exhibit uniquely spans Van Gogh's entire artistic career and I learned aspects of his artwork and its development about which I had no prior knowledge (like a heavy influence of Japanese art underlying his color scheme and strokes).  The exhibition truly blew me away in depth, scope AND the fact that it was assembled in Denver (not exactly an art mecca).

In honor of one of the greatest master artists of all time, I have to say that I don't think even Van Gogh could reproduce this 12-year, weekly visual of a raging bull market in process:

(click on chart to enlarge)

Not much to say about that chart - it's pretty much self-explanatory.

Have a safe and happy New Year celebration.  I suspect that the 2013 will be a very happy year for precious metals and mining stock investors.

While "The Cliff" Approaches, Congress/All Federal Workers Get A Nice Pay Raise

According to disclosure forms, Biden made a cool $225,521 last year. After the pay increase, he'll now make $231,900 per year.  (link below)

While most of us watch in complete disgust as our leaders in Government grandstand and play politics before inevitably kicking the can down the road on meaningful fiscal reform, Obama signed an Executive Order this weekend mandating nice pay raises for all Federal employees.   Think about that the next time you are in a Government office waiting for some moron to finish up his/her personal phone call before to do their job and help you:  Obama Orders Federal Pay Hikes 

I suggested about a month ago that the "Cliff" issue would be settled and that spending and debt borrowing would continue to increase at an accelerating pace.  Next up, either a large increase in, or total elimination of, the debt limit ceiling.

To hear some Truth about this whole situation, take the time to listen to what outgoing Congressman, Ron Paul had to say on CNBC on Friday:

What Gold Bubble? Mining Stocks Are Dirt Cheap

When the people fear their government, there is tyranny; when the government fears the people, there is liberty  - Thomas Jefferson

I thought of that quote when I read yesterday that the U.S. Senate has extended the law enabling the Government to search our emails and monitor our cellphones without a warrant.  This country is collapsing...

I wanted to revisit briefly the notion that gold might be in some kind of bubble.  A lot of people have contacted me expressing disappointment with gold's recent behavior and many have dumped their mining stocks or plan to do so.  This is a  mistake.

First, assuming it doesn't drop around $95 on Monday, gold will have completed its 12th straight year of year-over-year gains.  Name one other asset class that has done that.  In terms of reaching a new high, gold did that in August 2011 and the new high was followed by the current price correction cycle.  These cycles typically last an average of 18 months, so we are nearing the end of this correction cycle.

Finally, I was struck by a chart posted by Chartsrus.com which shows the serial decline of gold demand in the western hemisphere.  I wrote about that  HERE  As you can see, based on demand metrics gold is decidedly not in an investment "bubble."

From a fundamental standpoint, the mining stocks, as represented by the HUI Amex Gold Bugs Index of unhedged mining stocks, are as cheap relative to the price of gold as at any time over the last three years. This is actually true going back 10 years. As you can see from the HUI/gold chart I posted in the linked article, the HUI/gold ratio chart has consolidated just above a 3-yr low, after testing the 3-yr low twice. To reinforce the potential bullishness of the mining stocks, the momentum indicators represented by the RSI and MACD are moving higher from an "oversold" condition.

My prediction for 2013 is that it will be a very happy year indeed for anyone aggressively invested in the precious metals and mining stock sector. 
 

Wash, Rinse, Repeat: Is The Latest Pullback In Gold/Silver Over?

You play to win the game...You don't play to just play it  - Herm Edwards, when he was head coach of the NY Jets LINK

In order to win the gold/silver game, spotting critical information and knowing how to use can give us an edge over the rest of the market.  Using the COT report as source of information has proved useful over the last 10 years.

Last  week I suggested that the COT report might show that hedge funds have started to chase the momentum of the gold market lower by shorting gold contracts, while the bullion bank cartel used the extra selling from hedge fund short-selling to cover their shorts. I suggested this dynamic would likely mark a bottoming of this latest bullion bank paper market take-down of the price of gold/silver.

The CME/Comex Commitment of Traders report released Friday, which shows long/short open interest positions by trader category through the previous Tuesday, shows that indeed the hedge funds began to short Comex gold futures in decent size and the bullion banks continued to aggressively cover their short positions.

We've watched the banks cover their shorts quite aggressively for the past few weeks, but when the short-covering by the banks continues, aided by additional hedge fund shorting, it has over the past couple of years signaled that the metals are bottoming and getting to move a lot higher.  You can find my analysis, with data links, here:  LINK

It might not happen quickly, and this next week or two is usually characterized by low-volume, directionless trading, but it is likely that gold and silver are now set up technically to move a lot higher.  As we all know, this technical set-up is reinforced by unprecedented fundamentals.

I've been doing my best to not gloat about the Denver Broncos' season, but it now looks like the Denver will likely emerge as the odds-favorite in Vegas to win the Super Bowl after that total thrashing San Francisco took last night (SF had been the prior odds favorite, Denver was #2).  Have a Merry Christmas/Happy Holiday. 

In Case You're Wondering About Gold And Silver

There is no subtler, or surer means of overturning the existing basis of society than to debase the currency.  The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which only one man in a million is able to diagnose  - John Maynard Keynes, "The Economic Consequences of Peace"

 That quote right there is the foundation of Keynesian  economics. 

In response to several email inquiries, I wrote an explanation for the current price correction in gold and silver, since we might have expected that gold and silver would take off to the upside after the FOMC expanded its QE program.

The fact of the matter is that we saw very similar price action in mid-December last year, prior to a big rally in the entire precious metals/mining stock sector in January.  There's a lot of reasons for this and I don't want to pontificate about the illegal manipulation and corrupt nature of our financial system.  Instead, I wanted to focus on a little-known technical aspect of the paper trading on the Comex - tied in explicitly with said manipulation, as has been affirmed by Bart Chilton, one of the CFTC commissioners. 

I highly recommend reading this article.  You will understand an aspect of the gold and silver market that very few people are aware of and even fewer understand:  Comex Open Interest Liquidation Manipulation

The Gold/Silver Hit Is A Trap - This Too Shall Pass

Just because the future you expect and have prepared for hasn't yet materialized, don't think it won't. The very structure of the world's financial system has been fractured beyond repair, as have the foundations of the largest economies. The only thing holding it together is the fiat-currency system that was behind the fracturing in the first place and that is now being taken to an extreme and extraordinary level in an attempt to keep the whole shebang from literally collapsing.  - David Galland, Casey Research

Before I get started on my topic du jour, I wanted to link a stock investing article I wrote on Gold Resource Corporation (GORO) that was published on www.seekingalpha.com today:  LINK  I think GORO is a particularly attractive risk/return mining stock play right now and my write-up goes into detail on that view.

As for this latest take-down in the precious metals, it's more wash, rinse, repeat.  What makes this latest charade so transparent is the fact that the SPX has gone straight up for past two days and the dollar has tanked.  Sorry.  There's just no fundamental basis for this and it can't and won't last.

This action in gold and silver reminds me of the action in October 2008 when the sector was being mercilessly pounded with Comex paper.  Recall, that bottom in the metals preceded the banking system collapse and new era of QE and Government deficit "stimulus" spending.  I believe we're on the cusp of a lot more of that than the market is expecting and the big paper shorts in gold/silver are desperately trying to get the illegally large short positions covered before the market takes off again.

Think about the the Fiscal Cliff situation for a moment, outside of all of the rhetoric and media blow-hards.  They are going to come to an agreement sooner or later.  There's no way in hell that agreement possibly does not entail more deficit spending.  The Government spending deficit has already hit close $300 billion for the first two months of fiscal 2013:  LINK  That was as of the end of November, so the Government is well over $300 billion by now.

The economy, despite the b.s. being reported by homebuilders and the Government, is tanking - hard:

(click on chart to enlarge)

That chart shows the business "sentiment" of independent businesses in this country.  It's a literal cliff-dive in November and it's consistent with true unemployment, the real wage decline and real retail sales declines.  It is worth reading the accompanying commentary on Zerohedge:  LINK

My point here is that even if the Cliff agreement includes higher taxes, that won't raise more revenues to cover increases in deficit spending.  That means the Treasury is going to have to issue even more debt.  Who is going to buy that debt, given that the Fed has been buying close 100% of all new issuance over the last 18 months?  China and Japan are not going to make up the difference.  The debt ceiling is going to be raised significantly, if not entirely removed, and the Fed will have to print even more money in order to prevent the market from driving interest rates to the moon in order to attract new marginal buyers.

Bottom line:  Gold and silver are going a lot higher, as are the mining stocks.  Just like in late 2008.  In the context of big price corrections that we get in this sector, this one isn't close to being as severe as the one in 2008.   That one took silver down almost 60% from top to bottom.  This one so far has been 47% top to bottom for silver.  In the context of duration, this one so far isn't as long as the one in 2008, which lasted over 2 years before silver climbed over its 2008 peak.

BUT, the undisputed fact remains that, If you had bought silver at the top of the 2008 market ($21) and held til now ($32.20), you are still up 53% over 4 years.   That's worst case.  Unless the Fed and the Govt have decided to address the real deficit spending variables and will stop printing money and issuing debt, the smart money is buying the metals here and will be holding when the metals make another run at a new all-time high.

I'll leave off with an email inquiry to Jim Sinclair (www.jsmineset.com) from a worried reader:

Dear Jim:  How should I read the negative pressure over gold and gold stocks? What’s going to change this negative scenario?

Dear reader:  This is capitulation everywhere. This event has been a manufactured market move since $1800, with clearly planned and executed intervention. The gold price take downs during low volume periods internationally is a known price moving only tactic. I simply shut off the machine because all the regular causes for the gold price will make themselves effective with time. A manufactured market event will not change the trend. Even the most professional can be reduced to sheeple by their emotions.  I refuse emotions and emotional people in a market context. To save yourself from all this that has happened and will continue to happen requires commitment and courage. You have it or you do not. Admit who you are and act accordingly. Like every mistake made by Westerners, what you see today is simply driving gold into Asian control.

Industrial Production, The Fiscal Cliff And Socialism

It has become crystal clear that Detroit automobile manufacturing employees who live in a home in which the mortgage is underwater are going to be in an economically advantageous position when the Fiscal Cliff is resolved.

The Federal Reserve released its monthly industrial production report for November today.  It came in at a "hot" up 1.1% vs. .3% expected.  As has been the pattern for almost all economic reports this year, October's number was revised lower from -.4% to -.7%.   It high highly probable that today's report will also be revised lower next month.  Here the actual report:   LINK

It is always important to analyze the "sub-index" components that go into producing the headline-grabbing overall index that has the financial media doing cartwheels.  Once you look at the "guts" of the report, you'll see that the overall number is of low quality and not sustainable without a lot more Government spending.  On a side note:  this is one reason I fully expect that one way or another a Fiscal Cliff agreement will be hatched to kick the spending deficit/debt accumulation catastrophe down the road some more.

If you pull up that report and scroll down, you'll find a section called "market groups."  There you'll find this note in reference to automotive products: "the index for automotive products rose 3.4 percent, its first increase in five months."  If you scan through the rest of the footnote, it's obvious that auto parts were the most significant factor in fueling the November over October gain in industrial production.  The November number that will be revised lower next month.  I say this because if you look at this chart posted by Zerohedge earlier this month, you'll see that General Motors has essentially "stuffed" its dealer inventories with a record amount of inventory in November:  LINK

Please understand that General Motors is controlled by the Government and therefore is incentivized to use taxpayer dollars to support sales at General Motors in order keep the massive union labor force employed.  In fact, the Government subsidizes every part of GM auto production from the factory floor to the end buyer.  GM subsidizes production by subsidizing sales.  It does this because the floor financing used by dealers to take delivery of unsold cars is provided by the old GMAC.  GMAC is owned by the Government.  A sale at GM is recorded when the car leaves the factory floor and goes to the dealer, not when the end user buys it.  After the sale is recorded, GM could give a crap what happens because it has received a transfer of money from  GMAC (Ally financial which is owned by the Treasury) and now the dealer is on the hook for unsold cars.

Then, the dealer uses floor financing from GMAC.  If the car never gets sold, GMAC  the Treasury  the Taxpayer is on the hook.  You see how this works?  The fact that there's record inventories of GM cars piled up on the dealer floors is likely the result of the Government triggering production in excess of end user demand.  This is why, in my view, a big part of the reason that the industrial production number looks so robust for November.  I only have the dealer inventory data for GM because that's all Zerohedge tracks and I don't have time to hunt down numbers for Chysler.  But  I would bet that there's a similar dynamic for Chrysler, which is 6% owned by the Government.

This is all part of the insidious socialism that is engulfing our system.  It's a massive transfer of taxpayer wealth that is going into the bank accounts of the upper management at GM and to the giant auto union at GM.  This is not an anti-Obama/Democrat or anti-union rant.  I'm just pulling back the thick cloud of gray smoke away from the headline data to show you what's going on.   Not only does the economy look stronger from a production standpoint, but monthly auto sales also appear to be a lot more robust.

There's a lot more issues with the data in this latest IP report that are highly problematic.  If you are interested you can surf around the site in the "About" section and see what I mean.  I did that and it would put you to sleep if I wrote about it here.

In addition to the massive wealth transfer going on in Detroit, I found a news item earlier this week that I did not see widely reported by the mainstream media.  It turns out that House Democrats are trying to attach legislation to the Fiscal Cliff agreement that would provide mortgage principal reductions for underwater homeowners:  LINK

Interestingly, the biggest impediment to Obama's implementing FNM/FRE mortgage principal reductions, Edward DeMarco, head of the Federal Housing Finance Agency, is about to get replaced by Obama:  LINK  Make no mistake about it, Obama wants this guy around about as much he wants his Portuguese water dog to take a dump in the Oval Office

I don't really know what to say about this other than if everyone wants socialism and a massive transfer of privately earned and taxed wealth to go to underwater homeowners and Detroit auto manufacturing executives and union workers, so be it. But regardless of how you want to view this issue from a public policy standpoint, if they implement widespread FNM/FRE mortgage principal reductions it will be a huge negative for economy and our entire system.

Here's Why Gold Is Going MUCH Higher In Price

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation  (Ben Bernanke on curing deflation,Before the National Economists Club, Washington, D.C., November 21, 2002 LINK)

You know, I've read that speech several times and today is the first time that I noticed that he prefaced that particular passage with "like gold."  Truly remarkable when you let that sink in.

We've seen today from one fundamental standpoint just why gold is going to go a lot higher in price, as it will become significantly more "scarce" in supply relative to the supply of fiat currency being printed up.

HOWEVER, largely unnoticed and distinctly not commented on or analyzed, was another key fundamental factor:  the enactment of the Basel III Accord.  I've written an exclusive article for www.Seekingalpha.com which explains why Basel III will unequivocally mean much higher values for gold (and silver).  You can read that article here:

Gold will be de facto reasserted into the global financial system as a currency. This should add a new dimension to the ongoing bull market in gold and silver, as banks globally now have incentive to accumulate and hold gold as a valuable, liquid asset which can be leveraged as an operating asset.

Here's the link:   THE BASEL III ACCORD AND HIGHER GOLD
   
              

Government Waste In Extremis

Just so everyone is clear, "in extremis" is a Latin phrase that essentially means "to the point of death."

Our Government is growing, spending and transferring private wealth to the point at which our system is nearing its death.  Just to be clear, I'm not referring directly to the tax policy debate or the so-called "class warfare" discussion.  My own view is that the tax system is so irrevocably convoluted that nothing short of a full "reset" will fix that problem.

What I'm referring to is the fact that the Government is taking taxpayer money and paying many of its employees an absurdly egregious amount of compensation.  Here's two examples that hit the news in the last 24 hours:  " $822,000 Worker Shows California Leads U.S. Pay Giveaway"  LINK  Pay for State-sponsored psychologists and school Administrators seems to be leading the way.  Psychologists? Give me a break.  I never signed up to pay for that.

We all know that including retirement benefits, the average pay per employee for Government workers is a little over $100k/year.  For now, all of that is guaranteed.  Contrast this with the average private sector all-in compensation which a little over $60k/yr, with nothing guaranteed.

But here's a fact that is even more outrageous:  the top 90 employees for Fannie Mae and Freddie Mac get paid an average of a little over $1 million/year LINK  That figure just blows my mind given that FNM/FRE exist only because of trillions in taxpayer subsidies.  I can guarantee you that at least 90% of those people making an average of $1 million per year could never in their wildest dreams make even 1/3 of that amount in the private sector.  No way.  I would bet the life of my dog on that.

This type of rampantly out of control Government waste could NEVER occur with a democratic capitalist system using a true gold-backed currency (as opposed to the defunct, phony Bretton Woods system).  Never.  This is why the Government will never revert to a real money currency until our system hits the wall.

The only thing to prevent our system from slamming into a wall is a huge amount of additional QE. There's an invisible depression going on beneath the surface.  48mm people on food stamps as of the end of September.  That's one in every 6.67 people.  If the Government/taxpayer wasn't putting food in their mouths, what would it be like in the streets?

A lot more QE is coming and so are much higher gold/silver prices.  Keep that in mind if you are irritated, as am I, by the blatant paper raid on the metals today.

More On Real Unemployment

Just walk into any Starbucks in any urban area after 11 a.m. and see who's using the free wifi -  a thoughtful, long-time friend of mine on the credibility of the Government's employment report

Although it gets mentioned in non-mainstream media sources of analysis, the ever-shrinking size of the U.S. labor force has become serial in nature, to the point at which this economic defect has become endemic to our system.  Huh?

Every month embedded in the Government employment report is a statistic called "civilian labor force participation rate."  This number is basically the number of people who are employed PLUS the number of people looking for a job divided by the population.  The result is the "labor force."  So the headline unemployment rate would be the number of people looking for a job divided by the size of the labor force. This number was reported to be 63.6% last Friday.  This is lowest it's been since 1981.

The headline unemployment rate every month is highly anticipated, scrutinized and discussed by everyone.  Part of the Fed's latest QE program is tied to this number.  It is a highly politically-charged number. But the headline unemployment rate is also as fictitious as Santa Clause. The reason for this is the insidious and misleading manipulation of the how "looking for work" is defined by the Government.

As it turns out, there is a huge pool of a potential job-seekers who have simply given up looking for a a job for one of several reasons.  For this reason the actual labor force is likely much larger, and thus the real unemployment rate is much larger.  John Williams in his Shadow Statistics report covers this topic exhaustively.  You can source it here:  www.shadowstats.com.  His alternative unemployment rate is over 20%.

I found a short article which does a good job of describing the demographics of the "invisible" unemployed:

While it's true that the unemployment rate is falling, that doesn't include the millions of nonworking adults who aren't even looking for a job anymore. And hiring isn't strong enough to keep up with population growth.

Here's the LINK

One more data observation completely invalidates the Government's unemployment numbers:  over 607,000 Americans applied for food stamps in September, bringing the number of Americans using foodstamps to a record 47.7 million.   This number increased by over 1 million in August and September combined.  You can read more about this HERE

IF unemployment were truly falling - meaning that more people are really working every month as implied by the reported recent decline in the unemployment rate - then the use food stamps should be declining.  But more "invisible unemployed" become eligible for food stamps every month,  completely invalidating the Government's monthly employment report.  I find it to be exceedingly absurd that educated people in the form of market analysts actually discuss and analyze the employment report as if it is real...

I really hate to be right about something as much as I'm right that the economy is a significantly weaker than is being represented by manipulated Government economic reports, Wall Street analysts and the mainstream financial reporters.  It's tragic but it's the truth.  Our system is going to hit the wall sooner than many understand.  Until that happens expect a lot more "spin" from our political/business leaders and a lot more printed paper currency from the Fed.  The latter will translate directly into much higher prices for the precious metals and mining stocks.

Non-Farm Payroll Report - Seriously?

73% of all jobs "created in the last 5 months are Government jobs:  LINK

These are not GDP-producing jobs, as jobs created by the Government are a result of tax revenue generated by the economy:  In fact, it can be argued that every Government job created subtracts from the wealth of this country.

The Bureau of Labor Statistics should be re-named the Bureau of Laughable Statistics.  I wasn't surprised when the headline number was reported to be an increase in jobs during November of 146,000, well in excess of the forecast increase of 80,000.  But I was shocked by the reaction to the number by the cast of clowns on CNBC, who were in total disbelief.  I was shocked because typically CNBC hypes and promotes a good number and "spins" a bad number into a good number.  To me that is emblematic of the extreme degree of implausibility with the BLS jobs report now assumed by everyone.

Of course, as usual, it doesn't take much digging below the surface to find serious holes and inconsistencies:  BLS report  Right off the top, the BLS posts a disclaimer saying that Hurricane Sandy did not affect the sampling results.  Well, if that's the case, then why bother mentioning it other than in a footnote, like everything else?  The Government has qualified every other weak economic report released since the beginning of July as being affected by the hurricane.  This one isn't? LOL

The real shocker was the downward revision to October's reported headline number.  Originally coming in at 171,000, it was revised down to 138,000.  31,000 jobs disappeared with computer keystroke at the BLS.  Recall, very few analysts were not skeptical of the 171k reported and the BLS just confirmed why.  I would suggest that we will see a massive downward revision to the number released today when December's headline is reported next month.  Please note that the revisions are not typically reported in mainstream media news reports.

But I don't have to shoot holes in this report.  The Census Bureau released a report yesterday in which it measures the unemployment rate at 8.3% vs. today's BLS' reported 7.7%.  Furthermore, Gallup's index which measures the intentions of small businesses to hire in the next 12 months plunged to -4.  The matches the all-time low for this index, which was hit previously in November 2008.  You can see the details HERE

The truth is that we'll never get the truth out of the Government.   If you delve into the depths of the BLS employment report, even their own more comprehensive measurement of the level of unemployment in this country shows 14.4% unemployment.  The way that metric is calculated more closely resembles how the unemployment was calculated 30 years, before the real statistical manipulation of economic numbers started occurring.

Just one more point about this.  It won't be too long before the number of people receiving some form of Government support payment will outnumber the number of people paying for those payments (taxpayers).  The payees will outnumber the payers.  Make no mistake about it, as tragic and catastrophic as this is for our system, it is going to get worse.  I can guarantee you that it will mean more debt accumulation, more money printing/currency devaluation and much higher prices in store for precious metals.

Have a great weekend.

Regarding Gold: Follow The Money

Before I address my topic du jour, I wanted to follow-up quickly on my post about the weakening economy earlier this week.  Gallup released a report that was picked up by Zerohedge which showed that unemployment mysteriously jumped higher than previously thought after the election.  You can read about it here:  LINK

Of course, Hurricane Sandy will be blamed for this, but I would suspect that Gallup knows a little more about constructing statistical studies than to make that sampling error.  More likely is lackluster holiday hiring and the release of temporary Government workers hired to help out with the election.  As for the likelihood that holiday employment was weaker than usual, it turns out that not only were Black Friday sales less than forecast, but post-Black Friday sales actually dropped over 3%:  LINK

The reader is free to draw his own conclusions, but it appears as if the data coming in now supports my thesis on the economy.

To transition this into my title topic, there is no question in my mind that the Fed is going to expand its newly-minted QE3 program.  This has been well-telegraphed, but I believe what is ultimately implemented over the next 6 months will exceed expectations, as printing money is the time-honored strategy of attempting to prevent economic depression AND to finance Government spending.

The best way to take advantage of this imminent further devaluation of the dollar is to move as much of your investable funds into physical gold and silver as you can.  Also, you can create rate of return leverage with this by investing in mining stocks (which are egregiously cheap right now).  To implement this strategy, you would be piggy-backing an investor class with the best look at "inside" information regarding the issues of money printing and economic health:  the world's Central Banks.   As chronicled by this report, Central Banks globally have purchased a record amount of over 500 tonnes of gold during 2012:  LINK

To put this in perspective, the world's annual production of gold is around 2500 tonnes, give or take a few tonnes.  This output, despite the rise in China's gold mining production, is in decline - some would say serious decline.  So if Central Banks are buying at least 20% of annual production (it is thought that China is actually buying a lot more gold than they care to report), and likely will increase that off-take in 2013, and if every other source of demand just stays constant, there's only one way the price of gold can go.  There will be plenty of other factors that will drive the price higher, but this is just the sheer supply/demand dynamic.

Given that this is the case, you have to ask yourself why the Central Banks are now hoarding gold.  To me the answer is obvious:   the entities that are in control of the money supply are taking advantage of this powerful position by buying the one asset, in advance, that will rise in value as the supply of printed money rises.  And that would only occur if they intend to print a lot more of it.

Please note that, as always, I advise against using paper ETFs in lieu of buying real physical gold.  Although beyond the scope of this commentary, ETFs are not the same thing as owning real gold for many reasons.  I plan on updating my research report on GLD sometll post it here when that happens.

The Economy Is Weaker Than Government Reports Show

Someone is going find out sooner or later that what they thought they were going to get, they're not going to get - Eric Sprott in reference to the massive and accelerating deficit in U.S. Government entitlement promises.

It's interesting to note that the above quote from Eric Sprott can also be applied to everyone invested in the various forms of paper gold/silver and who tragically believe that the custodian of the trusts and exchanges (Comex, LBMA) actually have the gold/silver in the amounts represented by the paper securities outstanding.

In fact, to tie that into my subject title, one could say that Americans are not getting the economy that the Government, and the Wall Street charlatans who own the Government, is representing through fraudulent, Orwellian data reporting.  But let's take a look under the hood...

I want to start off with a study reported yesterday that showed the net worth of American households hit a 43-year low:  "The median net worth of American households has dropped to a 43-year low as the lower and middle classes appear poorer and less stable than they have been since 1969"  LINK  You can read through the details and needless to say - so I'll say it anyway - I'm sure that news report failed to make most mainstream media outlets.

I'm sorry, but there's just no way in hell that the housing market can possibly recover with that fact about household net worth being the case.  I've been threatening a big update post on the housing market, and it will happen soon, but not only does that net worth report contradict the view popularly promoted by the mainstream that housing values are climbing again, but if the average American household net worth is declining, it would be impossible to forecast anything but a lot more downside for the housing market.  More later on that topic...

Yesterday the ISM manufacturing report was released.  It came in at 49.5, well below the 51.4 reading expected and the 51.7 reading and was the lowest reading since July 2009.  Note that when the index is below 50 it indicates economic contraction.  The actual production aspect of that number is skewed higher by the prices subcomponent, which was 55.

On Friday the Chicago Purchasing Managers index came in at 50.4, a slight miss of the expected 50.5.  HOWEVER, to sub-component readings make this report somewhat disastrous.  The prices paid index jumped up to 65 and the new orders index plunged to 45.3, the lowest reading since June 2009.  Both the ISM and the Chicago PMI reports reinforce the view that the economy is slipping into an inflationary recession mode.

Last week also the Government released its durable goods order report for October.  While it showed that  the September to October level was flat (unchanged), the revision for the September report was revised lower.  If you look at the numbers on a quarterly basis for 2012, they show quarter-to-quarter contraction for the first three quarters of 2012, before and after inflation is factored in.  This means that unit orders have been in decline for all of 2012, despite the bright picture of the economy being promoted in the mainstream media. 

Please note that durable goods are the "stuff" people buy to use in their homes that are supposed to last a long time.  If housing really is what it is supposed to be then the durable goods order metric should be increasing, not in decline.

One last note, the Treasury will hit the debt ceiling limit at it's bi-monthly bond auction next week.  Even assuming that Geithner once again taps into the various custodial pools of capital like Federal pension money and social security in order to keep the Government funded until Congress gets around to raising the debt ceiling limit again, it's very safe to assume that the Fed will have to significantly expand its money printing program in order to help fund the new flood of Government debt without driving up interest rates. 

Higher interest rates would be the final death nail in our system at this point...Needless to say, so once again I'll say it, this current manipulated price correction in the precious metals market is purely a paper-driven wash, rinse, repeat event.  Everyone who "gets it" should not be intimidated by price action and should take advantage of accumulating this with both hands.

Nothing But Counterfeit Political Rhetoric And Hauser's Law

Governments will spend as much as the tax system will raise, plus as much more as they can get away with  - Milton Friedman

Politics is nothing but the insidious term applied to those voted into office who spend their time conspiring to find ways to annex economic wealth and redistribute it for their own gain.   Fiat currency is the mechanism used to accomplish this act of legal theft.

What is going on in this country - and has been for the better part of 99 years since establishment of the Federal Reserve - is the slow disintegration of our system.  Just like the accelerating increase in the money supply since 1971 resulting from the final decapitation of the gold standard,  the rate of corruption and legal theft from the middle class has started to rise at a parabolic rate.  This, my friends, is the final stage of the collapse of our country and system.  There is no other explanation for what is happening.  Anyone who refuses to acknowledge that this is happening or admit that what I just described is factual is either hopelessly naive and in denial or tragically ignorant.

I bring this up because here we go again with another wash, rinse, repeat cycle of the debt ceiling circus of a little over a year ago.  That political abortion did nothing more than delay facing the real problem of too much Government spending relative to the amount of revenues annexed by the Government.  The so called "Fiscal Cliff" (FC) is this mythical event that will supposedly automatically slash Government spending and raise tax rates across the board.  Does anyone really think that the politicians will let their ability to spend be reduced like this?  Really?

Occasionally I like to wander over to a blog called The Economic Collapse because the author usually has some nicely written posts with excellent data and factual analysis.   With regard to the FC, he had this to say:

Please keep in mind that the "$1.2 trillion in automatic spending cuts" is not for a single year.  When you break it down, the cuts to spending would be somewhere around 100 billion dollars a year.  And a lot of those "cuts" are actually spending increases that would be cancelled.  So those spending cuts would not really put much of a dent in our yearly budget deficits at all.  LINK  (I highly recommend reading the blog post)

As he explains, the attempt to raise revenues to help cover the spending is more severe than the cuts.  But what everyone needs to remember is that if Government raises tax rates, the best case is that it will be revenue neutral and will more likely cause a tax revenue decline.

This statement is backed by something known as Hauser's Law, which states that regardless of the tax rates, the amount of revenue raised by income taxes is constant at 19.5% of GDP:  LINK  Despite a thorough grounding as an Economics major in undergrad and an MBA from the economics heavyweight University of Chicago, I had never come across Hauser's Law until I read this article in the Wall St Journal: LINK

To add a little analysis to this 19.5% of GDP tax revenue phenomenon, it is also the case that raising the marginal tax rate will most likely cause a decline in GDP (we're talking real, inflation-adjusted GDP here, not the fraudulent Government concocted number).  In other words, regardless of what kind of political "deal" is hatched to enable the massive spending deficit to continue to grow while kicking the catastrophe down the road some more, if marginal tax rates are raised, revenues will decline in an amount likely in excess of any real annual spending reductions.

What we do know is that the Obama Administration is now floating the "trial balloon" idea of permanently doing away with the debt limit ceiling.  Tim Geithner talked about this in a recent interview on Bloomberg TV and yesterday Obama floated an FC resolution proposal which included the elimination of debt ceiling limitation rules.

You see where this is headed?  I don't care what type of rhetorical position is being assumed by Boehner and Harry Reid, they both want to maintain the unfettered ability to confiscate the public's wealth and keep funneling it to their wealthy constituents who put them into office.  The easiest path to this end is to enact a big increase in the debt ceiling limit, which enables the Fed to print up a lot more fiat currency needed to fund that extra debt load.  Make no mistake about it, when this political rhetoric regarding the FC settles, we are going to see a huge increase in the debt ceiling limit AND a massive amount of QE/Govt stimulus.  I will guarantee that outcome.

If you want to protect your hard-earned wealth from this mess you need to start moving as much of your wealth as possible OUT of the system and in to physical gold and silver.  This current pullback in the market is the perfect time to start doing that.  Given that November was the biggest month this year for gold eagle sales by the U.S. Mint, I would say a few more people are starting to understand why - et tu, Brute?....Have a great weekend

The Unmistakable Sign Of Illegal Market Manipulation

I preface this remark by saying that it is just a theory, but could Wednesday's Comex paper raid possibly be a signal of desperation by the cartel? We have been hearing countless reports out of London - the nexus of the world's physical bar market - that delivery supplies of gold and silver are getting tight.  Was Wednesday's raid an attempt by a desperate bullion bank to trigger open interest selling by longs in order to reduce the number of potential accounts that hold for delivery in the face of a tight physical bar market?

Wednesday right after the Comex opened, a total of 35,000 gold contracts were sold almost at once, with one order reported to be nearly 8100 contracts.  This is roughly 104 tonnes and 24 tonnes respectively.  It caused a "cliff-dive" in the price of gold/silver that was not cross-correlated with any other commodity market or equity/fixed income index. Why would someone, using paper, sell so recklessly and abruptly like this, flooding the market with an inordinately heavy supply of paper "gold."  Any veteran trader knows that if you are trying to unload a disproportionately large long position - that is, large relative to the price and volume context of a given market - you have to bleed your offers into the market and not give away your size in order to try and maximize your sell proceeds.  If you are not operating in this manner, you are either irrational or illegally attempting to influence the price lower.  In the absence of any other credible explanation or theory being offered - and an open admission that a "computer mistake" was not the catalyst, this was clearly an attempt to exert manipulative - illegal downward influence on the price of gold.  There is no other explanation for what happened on Wednesday morning.

I know that some analysts like to see some sort of proof that the manipulation occurred for the purposes of heading off a possible physical delivery squeeze. But you can't make trading profits without analyzing the "dotted lines" and anticipating future events based on what is likely unmistakable evidence. The motive for uneconomical selling like this is to derail potential stoppers (accounts who stand for delivery) as a means to avoid a physical squeeze.
 
In this case, the event has a long history and many experienced eyeballs and brains looking at the evidence of cause.  We know that China and several other Central Banks are accumulating physical gold which, at the margin, puts total global demand well in excess of annual mined supply.  We also know that several countries have either issued or are threatening to issue a recall of their sovereign-owned gold being held by the Fed, Bank of England and Bank of France (mostly those three custodians).  We also have first-hand accounts from several hands-on operators in London who are telling us that the global physical supply of gold is getting very tight.  Finally, the open interest in the December gold and silver front-month contracts has persisted at an unusually high level relative to the fact that today is first-notice day for December.  This means that any account that is long contracts is legally entitled to receive physical delivery of Comex gold bars from the counterparty who sold the contracts.  Usually the open interest starts declining starting a couple weeks before first notice as paper speculators either roll forward or exit the position.  But this time the open interest remained quite stubbornly high.

The success of this operation is evidenced by the fact that the uncharacteristically high open interest for the day before first notice of a little over 97,000 dropped precipitously by over 65,000 contracts. I can't recall seeing gold open interest this high the day before first notice or a percentage drop in open interest like this in one day. The 65,000 drop would cover the 35,000 contracts sold to trigger the raid plus account for 27.2k overall drop in open interest yesterday LINK.   From the standpoint of reducing the degree of delivery demand today, this illegal manipulation was a resounding success. There will come a time when it will fail...

Is the physical market finally getting to the point at which demand for delivery is starting to overwhelm the amount of paper claims "issued," the amount of which far exceeds available delivery supply?  There's no way of knowing for sure but, proverbially, if it looks like and duck and quacks like a duck...

Housing Recovery? Yeah Right.

The debt crisis could transform into a currency crisis. That would create a surge in demand for gold. The source of new metal is junior mining companies.  - Morris Hubbert, Precious Metals Market Analyst, Trading Risk Specialist

New home sales for October were released today at 368k "seaonally annualized" contracts for new homes.  This number missed badly vs. the expected 387k.  Worse, the previous month's report - September - had a huge downard revision to 369k from the originally reported 389k.  Please note that these are "seasonally adjusted annualized" numbers and not true new home sales.  Here's the Census Bureau report:  LINK

In fact, the actual number of new homes "sold" was 29,000.  I say "sold" becuase the Census Bureau counts a "sale" when the contract is signed, regardless of whether or not financing is in place.  Of that number, 9,000 were not yet started, 10,000 were under construction and  10,000 were finished but not necessarily delivered.  From my last post on this, the cancellation rate of new home contracts was, in general, in the low 20%  range. Based on subsequent homebuilder quarterly reports, the cancellation rate is closer to 30%, with Beazer reporting a 31% cancellation rate.  This means that OF THE 29,000 CONTRACTS SIGNED, it is highly probable that only 20,000 will actually close and be delivered.  If you annualize this number straight up, you get 240,000 actual homes sales.

A straight up annualization is probably not a bad guestimate as October is a "tween'er" month - i.e. in between the seasonally strong period and the dead period.  At most maybe you could say that the statistically adjusted annualized run is 260,000.  This is 28% below what is being reported.  If you are keeping track, you'll note that new homes as counted by the Government (368k for Oct) are starting to decline again.  It is highly likely, for several reasons to be discussed in a more comprehensive post on housing, that the "recovery bounce" in housing has run its course and we will see the resumption of the bear market in housing.

Folks, the housing bear has only lasted for 5 years at this point.  The Government and Fed combined have dumped several trillion of "stimulus" in various forms into the housing market and they can't even stimulate the annual home sales number up to the its level going all the way back to 1963 (560k), when they started compiling the data:  LINK  Bear markets typically last a lot longer than 5 years and require a long time to wring out the excesses, fraud and corruption that created the preceeding mania.

Just for the record, I am not cheering for another housing decline.  But I am dancing on the grave of everyone who participated in the massive fraud and Government/Fed intervention which spawned the housing bubble to begin with (Clinton, Robert Rubin, Alan Greenspan, Bush, Congress etc).  A fraudulent, corruption-riddled housing finance system created the bubble, it was chased blindly by mindless individuals who made terrible, sub-prime debt fueled investment decisions and it fostered one of the biggest mechanisms of misallocated capital and wealth-transfer in the history of the planet (derivatives and Treasury bonds/US dollar will prove to be bigger).   Unfortunately, we are now going to suffer the consequences of this and printing money is not a viable "Plan B" (see my sidebar at the top).

Expect Wall Street's Crime Spree To Continue Unabated

Bottom line: Walter has never worked at a private sector productive job her entire life. That Obama is nominating her means that she will play ball with Wall Street crony insiders and crush any upstarts trying to crack the oligarchy. She has the perfect resume for this.  LINK

As everyone who reads this blog knows, the rate of enforcement and prosecution of financial markets crimes under Obama has declined by over 25% from the Bush administration.  This is not political demagoguery or biased commentary, this is black and white numerical fact.  And this decline comes despite some of the most grand scale big bank open theft of customer funds in the history of this country.

Today it was announced that SEC head jester, Mary Shapiro, is leaving the SEC and stepping down from her scandal-laced chairmanship.  One would think that it would be an ideal time for Obama to make amends with his voting supporters and undertake steps to completely overhaul the SEC, right? Instead, we get a retread from the Bush administration as Obama's new appointee, Elisse Walter.  This particular appointment will not require Congressional (Senate) approval as she is already a Commission member.  What reinforces the bad decision on this appointment is the fact that apparently Harry Reid recommended it (Harry Reid, the guy who went from being a pauper with a failed law practice to being worth millions once he was elected to the Senate by the good-gaming State of Nevada and no doubt a big beneficiary of Steve Wynn's political largesse).

You can read about Ms. Walter's background here:  LINK  Yes on the surface her educational credentials make her look impressive.  But note that she is clearly connected to both the Bush dynasty via Yale and to Obama via Harvard Law School.  Harvard Law has successively bred some of the most corrupt financial markets operators in history (see Robert Rubin's history).  In fact, Ms. Walter was involved with the CFTC when Rubin ran the Treasury Dept and Shapiro ran the CFTC.  That time period lives in infamy with financial market historians as being the time when Brooksley Born attempted to reign in and regulate derivatives, but was promptly stuffed and politically punished by Rubin, Greenspan and Shapiro.  Ms. Walter was a complete non-event as a regulator at FINRA.

Even more troubling is the fact that it appears as if Ms. Walter, in her capacity as one of the SEC commissioners under Ms. Shapioro, was nothing more than a rubber-stamp vote for Shapiro's policy proposals:  "Ms. Walter was often the only reliable vote for Ms. Schapiro’s rule-making effort."  What rule-making efforts?  The SEC refused/failed to enforce the rules that are already on the books. You can read about Ms. Shapiro's failures as the chief securities industry regulator and Ms. Walter's affirmation of these failures here:  LINK

While Obama supporters and Romney haters are still wallowing in their victory 3 weeks ago, I'm sure this Obama appointment will get buried by the mainstream media and overlooked by the few credible analysts who try to report the facts.  But the truth is that Obama further demonstrated his true lack of desire and ability to reform our system.  Either that or he reaffirmed that fact that he is largely a Manchurian President, a mere dish-rag for those elitists who paid for his election both times around.

Got Gold? Central Banks Are Getting Large Quantities

With investing, if you are not early you are late - Hal, long time friend and colleague

Brazil's Central Bank announced the purchase of over 17 tonnes of gold in October.  Here's the commentary on this from UBS precious metals strategist Ed Tully:

There may be a flutter of excitement in the market today with news that Brazil's official reserves of gold rose 17.2 tonnes in October, according to IMF statistics. This follows on from the 1.7 tonnes of buying in September and brings total Brazilian gold reserves to 52.52 tonnes. This is a chunky purchase by a central bank, and the gold market will likely sit up and pay attention to today's news, not just because of its size but because this is a central bank that has not been active in the market for some time. Gold struggled in October, and without this official sector buying the move below $1700 would likely have been much more severe than the short lived dips transpired to be. Today's news confirms much of the market chatter at the time that official sector buying was taking place and was one of the key factors that gave prices a reasonable floor last month.

In fact, several non-Fed/BOE Central Banks increased their gold holdings by over 40 tonnes in October.  We know that China, in addition to retaining 100% of the 25 tonnes per month it produces, has been importing bullion hand over fist.

Gold and silver have been unusually resilient in the face of one of the more overt attempts by the U.S. bullion banks to trigger a COT open interest liquidation sell-off.  For those of us who have been trading and researching the metals market for the past 11 years of the bull market, the attempted manipulation has never been more transparent, nor has the ability of the market to withstand this big bank flagrancy.

Here's the Bloomberg report of the October Central Bank buying spree:  LINK  Without bloviating on the significance of this aggressive and rampant CB accumulation of bullion, please note that several countries besides Germany are now making noise about repatriating their gold being "safekept" by the Fed, BOE and Bank of France.  Switzerland has proposed legislation being introduced in order to force the issue, The Ecuadorian Government has called on its banks to repatriate 1/3 of their foreign-held gold and the Netherlands is starting to make noise about doing the same.

The name of the game is "accumulate physical - not paper (GLD, CEF, GTU, etc) and make sure you have trustworthy custodian."  That would be either a private domestic depository or under lock and key in your own house, with Smith and Wesson are your guard dogs.

More Housing Hype/Hope

If you tell a lie big enough and keep repeating it, people will eventually come to believe it - Joseph Goebbels, Hitler's Propaganda Minister

Many of you woke up yesterday to news that existing home sales for October were higher than expected and that the homebuilder sentiment index had reached a 6-yr high.  This morning, housing starts were reported and were better than expected, although this reading was achieved by revising last month's data report lower.   All three data points are being promoted as evidence that housing was recovering. See the quote above.

To put a "truth" dent into the existing home sales report, the data as it's being promoted is not supported by fundamental evidence.  For instance, with existing home sales, although there was an increase, it would look to be as a result of investment in rental buyers and maybe some speculators.  If you review the mortgage purchase application data for September and October, there has been a definitive downtrend.  "Organic" buyers who are buying a home to live in as a primary residence - the bread and butter of a healthy housing market - require mortgage financing in order to purchase a home.  The data being reported on mortgage purchase applications does not indicate that the existing home sales are being purchased by this type of buyer.  Here's what I'm talking about:  LINK

As we know, there has been an accelerating trend of hedge fund/private equity investors who are going into areas and buying up "blocks" of vacant homes.  These are cash buyers, or buyers who have access to credit that is a lot cheaper than mortgage financing.  A preponderance of this type of buyer in October would explain a possible jump in existing home sales.  Interestingly, it was reported about a month ago that one of the first big hedge funds to jump into this type of deal, Ziff-Ochs, is in the process of trying to unload 80,000 homes in northern California.  They discovered that being a landlord does not justify the cash on cash return on investment.  It probably won't take long for monkey-see monkey-do imitators to discover the same thing, and at some point  the existing homes being bought now will be reintroduced to the inventory pool of homes for sale...

As for the homebuilders sentiment index, it's just that:  sentiment.  If there's a prototypical "touchy feely" economic indicator, it's any of the sentiment index reports.  After  six years of getting their ass kicked by the market (Dow Jones Homebuilding Index is down 60% from it's 2005 peak), this index would be reflecting a dead-cat bounce in "hope."  I would rename that housing market indicator as "the builder hope" indicator.  Think of it as a "hope" box, or a "god" box - lol.

Finally, with regard to whether or not the average middle class person even has the income to support buying a home, we know that personal income, especially on an inflation-adjusted basis, has been declining for several months now.  Furthermore, if you look at the best grassroots indicator of business formation and potential hiring - capital expenditures - it would appear that big corporations are not only NOT spending money on capital formation, but bona fide hiring is not taking place and we'll probably see an acceleration in corporate layoffs.  How can the middle class be buying homes right now when many of them know they might not have a job next year?  Here's an article from yesterday's Wall Street Journal that sums it up best - "Investment Falls Off A Cliff:" LINK

Quickly, with regard to today's housing starts number, suffice it to say that it was a "seasonally adjusted annualized" number that hit the headlines.  As we've seen in previous posts, these seasonally adjusted numbers could also be called "robustly manipulated fallacious statistics."  If you peruse today's full release from the Census Bureau:  LINK, you'll discover that the headline number was actually below the revised number for September.  Moreover, you'll see that actual construction starts are lagging permit applications - badly.  Last, I have discovered by perusing the latest homebuilder quarterly reports that cancellation rates are starting to spike higher.  They have been - in general - running in the low-high teens, and now they are running in the high 20% to low 30% range.  This factoid is not being reported in the headlines or in the main stream media.  What this means is that new home sales reports and housing start reports are egregiously overstated, since new home sales data are based on contract signings, which now have a 30% chance of being cancelled.

Bottom line is that housing is not only NOT recovering, but the elitists in NYC and DC are putting their best spin possible on what is being reported.  The truth is that housing is getting ready to follow corporate capital investment off the cliff...

IRA/401k Confiscation Coming?

To start, I would like to report that my MBA alma mater, the University of Chicago (class of '91, Dean's list 1990), just received the #1 business school ranking by Businessweek:  LINK  Unfortunately, the professor I had for a high level "forensic" accounting course is not longer there. His course was the best course in any MBA program anywhere and made the 2 years there worthwhile.

An article about Obama starting the process of nationalizing the private retirement fund system went viral in the blog community yesterday.  The truth is that the these "genius" bloggers are about 4 years behind the curve on this.  Here's the report:  LINK

Let me make one thing crystal clear before the world erroneously blames this on Obama.  The IRA confiscation movement started at least during, if not before, the Bush administration.  Four years before the recent hearing sponsored by the Treasury/Labor Dept, there was a Congressional hearing On October 7, 2008 sponsored by the House Education and Labor Committee at which pension reform academic Teresa Ghilariducci presented a paper on her Guaranteed Retirement Account program.  Her idea is to replace IRA/401k accounts with a Government administered program which would provide retirees with a guaranteed annuity stream annuitized by good old U.S. Treasuries.

This symposium was held before Obama was elected.  In fact, I warned 10 years ago, that the elitists (note: real elitists, as in the handful of men who pull the strings) would print money and keep our system from collapsing until they had swept every last crumb of middle class wealth off the able the table and into their own pockets.  Note:  "middle class" = everyone who is not wealthy enough to buy their own Congressman;  in my view this would be anyone with a liquid net worth under $100 million.

This movement to de facto seize your private retirement plan was started years before Obama was even a local politician in Chicago.  Regardless, once these movements begin in the Government they happen slowly and then all at once (sound familiar?).  Anyone with two operational frontal lobes will do what I did 6 years ago and cash out their IRA, pay the 10% penalty plus any income tax for that year on the proceeds and put the money into physical gold and silver outside of the system.  Over the next 4-5 years you will more than make up for the 10% penalty/taxes with the appreciation of the bullion AND your wealth will be safe from the Government.  Capito?

Look Out Above?

When too many investors are rushing for the doors at once and everyone is looking down, it usually marks a turning point for a market that has been dropping pretty quickly.  The precious metals and mining stocks have been in a sharp decline since September 21 for the miners per the HUI and since early October for gold and silver.  This week I've witnessed several seasoned metals and mining stock investors capitulate and either exit their positions completely or put on hedges.  The time to put on a hedge was a 3-4 weeks ago.  Although this isn't necessarily the absolute bottom, the probabilities are that - barring some unforeseen exogenous event that hammers all the markets - we've seen 80-90% of the downside movement.

Brief interruption here.  I've been saying for weeks now that Capitol Hill would figure out a way to avoid the Fiscal Cliff by kicking it down the road.  It turns out that the can is sitting in front of the White House and Obama's leg is in a backswing:  http://www.zerohedge.com/news/2012-11-16/fiscal-cliff-can-about-be-kicked-2013  This means more debt, more printing and higher prices for gold and silver...

At any rate, with regard to the current price correction in gold and silver and hammering of the mining stocks, I'm not saying we've bottomed, but I will go on record saying that the worst is over based on indicators I've observed over the last 11 years in this market.  I'm cutting and pasting some comments that I sent earlier to Bill "Midas" Murphy at www.LemetropoleCafe.com:

The most significant indicator is the number of seasoned and unseasoned metals market participants who have either bailed on their positions or put on fear hedges. Just yesterday a long time silver futures trader I know, who recently began trading the mining stocks and who goes by fairly sophisticated technical signals, announced she had bailed on her stock positions on Wed. Another fellow I know announced that he had hedged his bullion with puts on GLD. Quite frankly, I can see getting scared out of the miners, but it's clearly late in the game to be buying puts on gold and he clearly does not have the access to information which shows that India has been buying gold in the low 1700's and China buys hard anytime gold below $1700, thereby putting a floor under the gold market (we pay a lot of money for this particular research).  If you are going to hedge positions, you need to do it BEFORE the top is in, otherwise the drop happens so quickly you miss at least half the move before you capitulate and hedge near the bottom - been there, done that.

Finally, I'm getting several comments on my blog of newer gold market players who are pissed off, taking shots at guys like Embry and Turk and dumping their positions. This is usually a perfect indicator that a bottom is near. I usually don't post most of these comments because they are abusive and profanity-laced, but if you're curious at a sampling, I posted one from last night along with my response.

I also sent Bill this:  Part of the action this week in metals has been influenced by it being the "roll" period, when the front month longs either have to sell, take delivery or roll to the next front-month. Usually during the roll period the open interest declines and the cartel uses this as an opportunity to hit the market. Yesterday, however, was different. Yesterday was an unusually large roll from Dec gold to Feb gold, 17,212 dropped from Dec but 17,281 added to Feb. In addition, another 1,330 added to June gold. A big drop from the front month accompanied by an outright increase is rare - beyond my recollection when the drop from the current front month is this large.

Same deal in silver. 4,268 silver carts dropped from Dec and 5,386 added to March, silver's next front month. The silver o/i increased to 1,263. The open interest in silver is 145k. As Dan Norcini pointed out the other day, something different is occurring right now. Despite the big cartel-led sell-off in silver over the past 6 weeks, the silver open interest has persisted in the 140k area. Historically the o/i has been liquidated down to 100k or less in pullbacks like this. Furthermore, for those intimidated by the 140k o/i, my partner pointed out that the high in open interest since we've been keeping track of it - going back to around 2003, was 189,151 back on 2/19/2008 with silver at $17.53. That leaves a lot of room for the specs to add longs and drive the price a lot higher.

So before anyone gets worried about what seems to be high open interest in silver and that big COT liquidation run is coming, they better examine the facts. I really get sick and tired of all of the misinformation between tossed around, especially by gold/silver site aggregators, bloggers and blog commenters. As I said earlier, I'm not officially saying this pullback is over, but it sure is starting to smell like it could be...

As always, the market is governed to a large degree by random probabilities. Measuring the past is a function of math - a science. But taking those results and projecting them forward is where the "art" of money management and market speculation takes place. Based on past market behavior and the probabilities associated with those behaviors, I would bet that the risk of getting short/hedged right now and missing a big upside move is greater than the risk of the bottom "falling out" from here. Have a great weekend!

Systemic Collapse: The Corzine Factor

In the end, more than freedom, they wanted security. They wanted a comfortable life, and they lost it all – security, comfort, and freedom. When the Athenians finally wanted not to give to society but for society to give to them, when the freedom they wished for most was freedom from responsibility, then Athens ceased to be free and was never free again.  - Edward Gibbon, English historian and acclaimed author of "The Decline and Fall of the Roman Empire."

I hope everyone has a chance to meditate on the quote above, as it applies to the state of our society here and now.  History may not exactly repeat, but it sure does seem to rhyme (to paraphrase Mark Twain).

Before I get started on my source of irritation today,  I wanted to point out that Bernanke is giving a speech right now in which he is stating that the Fed will do what it can to support the housing market and that the pace of mortgage financings  is as low as it was in 1995.  Now, why on earth would he make that latter remark if the housing market was in a state of recovery?  Furthermore, it was reported by the Wall St. Journal that the FHA is on the verge of insolvency.  How can this be if the housing market is recovering?  Finally, it was reported today that the U.S. Postal Service is also on the verge of insolvency and it has been borrowing heavily from the Taxpayer to sustain itself.  If you take all three of these factors into consideration, in aggregate, it can only mean that either the Fed is going to let the housing market collapse and the U.S. mail service will have to be drastically reduced, OR there is a LOT more QE coming.  The precious metals and mining stocks are extraordinarily cheap here...

The John Corzine issue has been a perpetual source of disgust and irritation for me (not continuous as I've accepted that our system is entirely corrupt, but it sneaks up on me).  Quite frankly, if there was any ONE reason to vote against Obama in the election, it was because of his profoundly abysmal failure to crack down on Wall Street corruption, and specifically his refusal to prosecute Jon Corzine despite the overwhelming evidence of Corzine's overt and blatant role in the collapse of MF Global and the loss of over a billion in dollars in customer assets that were supposed to 100% legally protected.  The actual numbers support the fact that Obama has failed to prosecute the financial industry, as litigation by the Justice Department has declined substantially during Obama's tenure even though the evidence of events of lawbreaking and corruption has soared.  This, despite Obama's explicit promise in his 2008 campaign to "clean up Wall Street."  It's hilarious/pathetic to me that this topic was never any part of any of the debates this year...

The latest irritation stab from the MF Global/Corzine issue surfaced when the House issued a report yesterday which blames Corzine for the collapse of MF Global.   What is beyond absurd is that the House Democrats refuse to endorse the findings, saying "ummm, we need ummmm more time to study the findings."  Here's a news release of the report:  LINK

The bottom line here is that anyone who has any Wall Street experience AND knows the regulations governing the brokerage business KNOWS that Corzine is not only guilty of violating several SEC and FINRA regulations but should be sitting in a jail cell waiting his trial.  Over a $1 billion dollars was stolen.  Martha Stewart was put in jail for a just a small percentage of that amount.  This has become an an egregiously inexcusable case of  bi-partisan politicizing by the Democratic Party - led by Obama - as the Government has refused to crack down and go after Corzine.  Corzine, a former Democratic Governor of, and Senator from,  New Jersey has been one of Obama's biggest campaign fundraisers.

I have outlined on this blog where and how Corzine broke the laws.  The Trustee of the MF Global bankruptcy has finally joined in with private groups in suing Corzine.  I still can't understand why Obama hasn't forced Eric Holder to do the same.  Well, let me revise that, it's obvious why Obama has refused to go after Corzine just as it's obvious why the House Democrats refuse to endorse the House report.

We live in a system that is collapsing and the overt corruption permeating from every institutional sector of our system is entirely indicative and supportive of my "collapse" premise.  Just remember, how does a system collapse?  First slowly and then all at once (to paraphrase Hemingway).  The only issue in my mind is where our system sits relative to the proximity of "all at once" on the collapse timeline...

It's Getting Ugly

The declining state of the economy, as I've been explaining for a while now, is starting to finally manifest in economic and financial reports.  As most of you know, corporate earnings for the 3rd quarter have been pretty dismal, with lots of earnings "misses" occurring.

Second, the Government released its "income statement" for the month of October, the first month of the Govt's Fiscal Year 2013.  It showed a $120 billion deficit, substantially higher than was expected and estimated and higher than October 2012's $98.5 billion.  Here's the LINK  The Government is saying "technicalities" led to a higher deficit.  But the OMB didn't seem to know about those technicalities when it projected a $113 billion deficit a couple of weeks ago.  Where were these seasonal "technicalities" last year?  I smell an accelerating spending deficit coming, which means more printing!

Also, retail sales for October were reported this morning and, not only did the headline number "miss" expectations, but the monthly print was negative - a sequential decline from September.  The Obvious "explanation" for this is Hurricane Sandy.  But the Government statistical geniuses typically make adjustments to smooth irregularities like that out of the number AND one would have expected to see a pop in retails sales, as areas expecting to be affected would have experienced a "run" on groceries, hardware items and propane.  That excuse does not fit.  Nevertheless, below is a chart sourced from Zerohedge, with the data sourced from Bloomberg, which shows monthly retail sales:

(click on chart to enlarge)

 

Anyone notice anything interesting (the red arrow is my edit)?  Not only is the trend for retail sales declining pretty quickly, but it was also declining during the "all-important" back to school season, July - Sept.  I think this chart encapsulates the picture of the average American's finances and lack of disposable income.  The holiday season spending this year could be exceedingly ugly.  It will be interesting to see if the banks roll out some incredible revolving credit deals for the season.  If you do see that know that the Federal Reserve is behind that and, ultimately, the Treasury/Government.

Finally, I know I've been threatening to post a big report on the housing market, showing its impending demise.  I have been collecting data for this and it will take some time to write something meaningful.  Since I don't get paid to write this blog, I need to find the time - I'm hoping some time in the next week.  What I can say is that, based on looking at the data I've compiled already, the "under the hood" data for the housing market is startlingly weak.  I say "startlingly" because the Fed has driven mortgage rates to record lows, the banking industry in conjunction with the Government has prevented a lot of the "shadow inventory" from hitting the market and the Government has rolled out, thru FHA, a massive mortgage purchase and refinance program which is a "sub prime" quality lending program designed to try and really stimulate "organic"/primary residence purchases. All of those measures combined have barely stimulated a "bounce" in the numbers and the market is getting ready to do another big cliff-dive.  To be continued...

With respect the Government's spending and debt accumulation situation, I fully anticipate that some way, somehow, after a lot of political grandstanding and accounting chicanery, an agreement to kick the fiscal deficit can down the road will be reached.  We already know that the Democrats in the Senate, via Harry Reid's comment last week posted above on the right side of this blog, plan on asking for a $2.4 trillion bump in the Treasury debt limit ceiling.  That tells you right there we can expect a deficit of at least $2 trillion for FY 2013.  My personal view is that the politicians in DC do not have the mettle required to let the "fiscal cliff" event occur - neither does the President, nor would Romney have either for that matter.  As history has shown time and again, the Government will spend and print until the currency ultimately collapses...

Entitlement Nation

The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.  – Alexis de Tocqueville

The monthly Government report for August on food stamp usage was conveniently released, on a delayed basis supposedly because of the storm, after the election.  The food stamp usage numbers are beginning to go beyond shocking.  August saw close to half a million more people added to the food stamp usage list, the largest increase in a year.  47.1 million people and 22.6 million households in this country are now using food stamps.  Zerohedge has compiled some nice charts, which you can see here:  LINK

According the latest Census reports, there's 311 million people in this country and 114 million households.  As of the August food stamp report, 15.1% of the population and 19.8% of the households are using food stamps.  Nearly 1 out of every 6 people and nearly 1 in 5 households are using food stamps.  To put this in perspective, next time you are driving thru a standard middle class housing development, know that roughly 1 out of every 5 homes is using food stamps.  I don't know about anyone else, but this fact blows my mind.

Even more staggering is that food stamp usage is becoming more common among college students:  LINK  Please note that the linked article is from the Washington Post, so know that any possible positive "spin" has put on the facts.  What the article does not talk about is the fact that student loan usage hits a new record every month - with $1 trillion in outstanding student loans guaranteed by the Government now.   In essence, it's becoming more common that the taxpayer is now financing 100%  of the entire college experience for a growing number of students. 

I guess in an ideal world, it's great that someone who can't put food on the table is able to get assistance from the Government for this purpose.  Please note:  "an ideal world."  Unfortunately, not only do we not live in an ideal world, but the financial condition of the country we do live in is approaching catastrophic conditions.  Not only can we not afford to pay for food stamps and finance college tuition, but even if  the Government stopped all spending except that which is "mandatory" it would still be operating at a deficit.

Blogger Simon Black has written an excellent piece which puts the raw numbers into black and white.  Mandatory Govt spending encompasses anything required by law and everything else is "discretionary."  Surprisingly, "discretionary" expenditures include:  "nearly everything we think of related to government– the US military, Air Force One, the Department of Homeland Security, TSA agents who sexually assault passengers, etc."

He goes on to run the math on the mandatory vs. discretionary spending, and if we cut out all spending except for things like social security, medicare and Treasury debt interest we are still left with a $250 billion spending deficit.  Just think about that for a minute and understand that military spending is not part of the "mandatory" category.

I recommend that everyone read Mr. Black's brief essay:  LINK  He's an ex-pat living in South America. I've been reading his work for quite some time and it's excellent analysis usually devoid of any hyperbole or political spin.  After you read it, you'll understand why neither Romney or Obama could articulate some kind of gameplan to address this country's catastrophic fiscal condition.  I honestly believe that voters voted Obama back into office because they figured his puppeteers wouldn't loot the system quite as quickly as would Romney his handlers. 

The bottom line with all of this is that either the Government is going to have to print a whole helluva lot more paper money over the next four years or our economic and financial system will collapse.  Moreover, and probably an even stronger argument for the "more printing" view, unless the Government keeps printing there's 47.1 million food stamp recipients who will start rioting in the streets.  That's why Mr. de Tocqueville, the quote at the top, said what he said about the United States and that's why gold and silver are going a lot higher in price...

Avoiding The Fiscal Cliff = QE To Infinity

There is no reason to expect that renewed efforts at federal budget deficit reduction will result in anything more than the usual smoke and mirrors, further increasing, not reducing, long-term U.S. sovereign-solvency risk.  In reality, the U.S. economy has not recovered, and no recovery is pending.  Consumer liquidity remains severely impaired, and broad business activity continues to falter anew.  As a result. the actual federal budget deficit going forward will be much worse than the relatively rosy numbers being used as the basis for government negotiations - John Williams, www.shadowstats.com

Everyone can draw their own conclusions about how this so-called "fiscal cliff" situation will play out, but the only way it can possibly be "resolved" is by postponing the inevitable.  As Williams states:   "Accordingly, global market reaction—to a severely deteriorating outlook for U.S. fiscal conditions—increasingly should reflect massive flight from the U.S. dollar and movement into gold and the stronger Western currencies."

The big news yesterday was the fact that a couple of "official" - supposedly professional - organizations issued a statement proclaiming that if the U.S. goes off the fiscal cliff that it would lead to a recession.  This revelation would be funny if it weren't so completely pathetic. Talk about understating the obvious.  Notwithstanding the fact that on a real inflation basis, not Govt CPI basis, our economy has remained in contraction since at least 2008, if Congress and the President were to allow the "fiscal cliff" mechanism to occur, it would throw our system into economic armegeddon.  I went over the numbers earlier this week as to why this would be the case.

The truth is that not only will the fiscal cliff scenario be kicked down the road like the proverbial "can" (anyone know if that's supposed to be a beer can or a soda can?  Maybe a can of beans?), but the increasing chasm between expenses and revenues will have to be filled with even more Treasury debt issuance.  Tautologically, this means more QE.  More QE means even higher prices for gold and silver.  The reason more QE will be needed is the same reason the Fed has continued and expanded QE since its inception in 2008:  1) the banks need liquidity or they will collapse; 2) the Treasury needs a new source of cash or interest rates will go to the moon.

To address the Treasury funding requirements, I've got a graph from Zerohedge which shows the steady decline in foreign Treasury purchases since 2009:

(click on chart to enlarge)

Foreign funding of Treasury paper has declined by 55% since 2009.  I have not seen this fact reported anywhere in the mainstream media.  It should come as no shock, however, as foreign investors are not idiots.  They know that money printing devalues the dollar, so they want less of it.  China has somewhat maintained its level of Treasury buying lately, but that's because if they are perceived as fleeing the dollar, the dollar would collapse and China would be, in a sense, shooting itself in the head financially.   That will change eventually.

The decline in foreign participation in Treasury auctions has been replaced by the Fed's participation, aka QE.  The next chart, which I hypothecated from www.clusterstock.com, shows this fact nicely:

(click on chart to enlarge)

This is an interesting chart.  Not only does it show graphically the fact that the Fed is increasing the size of its balance sheet by buying Treasuries in order to make up for the loss in foreign participation, but it shows the concomitant correlation of the price of gold.  The orange line shows the projected growth in the Fed's balance sheet if it just maintains the existing QE policy.  The red line shows the trajectory of the Fed's balance sheet if it implements the highly telegraphed next phase of QE.  Everyone can draw their own conclusion as to the expected trajectory for the price of gold under the "red line" scenario.

And the truth is, the red line scenario is the expected policy move given what is already written on the chalkboard in terms of the giant locker room on Capitol Hill.  What about when the impending debt ceiling increase has to be increased again by next summer?  See where this is headed?  QE to infinity.

The metals/miners market seems to have reverted from "sell the rallies" to "buy the dips."  What's even more interesting, the metals have had more days recently in which they go higher when the S&P 500 is getting hit.  I think the hedge fund margin calls related to the mini-crash in AAPL have run their course, so I think the SPX will get a trading bounce here and the metals will move with it.  As the media hype and political show connected to "The Cliff" intensify, the stock market has a lot of downside risk and I fully expect a portion of the money that leaves stocks will flow into the metals.

As for the NFL, the season is maturing and the favorites are starting to distance themselves from the rest of the field.  Up until now, the point spread underdogs have been outperforming the favorites.  I think this weekend and forward will see the point spread favorites starting to cover a lot more frequently.  The most interesting game is the Houston/Bears game.  This is must-watch TV.  I like the Texans to prevail.  Of the mediocre teams, the Tampa Bay/San Diego game will be interesting to watch.  And, of course, I like the Broncos to easily cover the 4 1/2 point spread over Carolina.  Have a great weekend.