Sequester This!

In 2012, the total interest expense on the U.S. Government Treasury debt was $360 billion.  For the first 4 months of fiscal year 2013, it's $151 billion.  The Government spent a total of $3.5 trillion in FY 2012.  Interest expense on Treasury debt was 10.2% of the total amount spent by the Government.

It gets more interesting.  Assume the average coupon of Treasury debt is around 2.3% ($360 billion divided by an average of $15.5 trillion outstanding during FY 2012).  Now, what happens if the Fed loses some control over interest rates - for whatever reason, not the least of which is that market forces force the issue - and the average coupon moves up to, say, 4%.  By then assume $17 trillion in Treasury debt.  Then you are looking at $680 billion in interest expense.  Assume the budget remains around $3.5 trillion.  Now interest expense is close to 20% of Government spending.

Apply that math to your own household budget.  If you were spending 20% of your net income before expenses on interest payments, you would have to file chapter 7 bankruptcy and restructure your debts.  The only choice the Government will have is to print more money.  Not only is QE not slowing down or ending, the Fed will unequivocally have to increase QE over time.

Hang on to your gold.

Sequester This Congress/Obama

This Is A Must Read And It's Why You Must Own Gold/Silver

Ben Bernanke has spent the last two days testifying to Congress - under oath - the economy is improving and that his money printing scheme has saved the system without risking inflation.  He really emphasizes the avoidance of deflation.

But what's so wrong with deflation?  If prices of goods and services decline, enabling the consumer to buy more of those goods and services, isn't that a good thing?  The real deflation to which Helicopter Ben refers is the deflation of all of the assets that have been financed by the banking system, potentially rendering the banking system insolvent.   But this would be a good thing too in the long run.

With that said, please take the time to read this commentary below which compares our current systemic with that of late 18th century France.  The parallels are startling:

The French were in the same boat in the 18th century. During the time of Louis XV, no one could imagine how French society could possibly function if they cut the welfare system or defense budget. So they kept spending… kept going into debt… and kept debasing the currency.

Here's the LINK

Back to Bernanke:  either he's complete liar or a complete idiot.  I doubt he's the latter.  No inflation? Anyone out there not paying more for energy, gasoline, health insurance, etc than just 6 months ago? Improving economy?  Government-reported GDP for Q4, 2013 was negative.    Housing is better?  There are 133 million housing units in the U.S., 75 million owner occupied and 40 million renter occupied.  That means there's 18 million vacant homes.  4.3 million are considered vacation homes and 3.9 million are available for rent.  That means 9.8 million homes are vacant (data is from the Census Bureau).  Is that a healthy housing market?  Every month more people move onto Social Security disability and food stamps.  Over 100 million people in this country receive Government entitlement payments.  Healthy economy?  Sure Ben...

"Game On" For Gold And Silver!

The emergence of technical fund and speculative short selling has created the finishing touches to a market structure set up that is good to go in gold and maybe in silver as well... The bottom line is that an important price low is being put in, if it has not been seen already. - Ted Butler

My corollary to Ted Butler's statement is:  outside of 2001 and October 2008, right now is currently the single best time to invest in the precious metals and mining stock sector over the course of this 12-yr - so far - bull market.  What makes now potentially more compelling than 2001 and 2008 is that the fundamental reasons for investing in this sector are stronger than at any time over the last 12 years.

Here's just one example:  back in 2001, the notion of a global currency debasement war was nothing more than the fantasy of gloom and doom conspiracy theorists.  Today, the world is in the middle of a currency war that intensifies with every official pronouncement that denies its existence (see the recent G-20 statement).

I wanted to follow up on my article last week that analyzed the Comex Commitment of Traders (COT) for gold futures. I had suggested the likelihood that the recent increase in the gold futures short position of the large hedge funds, and the concomitant large reduction in the net short position of the commercial traders (mainly the bullion banks), was a signal that this vicious price correction in gold/silver is nearly over.

The COT report released Friday (through Tuesday's cut-off day) was nothing short of stunning. I knew the hedge funds were piling onto the short side of gold and silver, and that's why the metals have been getting slaughtered recklessly like this. But the increase in the hedge fund gold short position is unprecedented, as far as I know.   You can read my latest analysis here:  Holy Hedge Fund Shorting

We probably won't see an immediate "V" type move here (although I wouldn't rule it out).  The large hedge funds have no choice but to defend their massive short position.  But as the physical market off-take intensifies - India and Asia have both been buying hand-over-fist over the last week (and that's physical off-take, not fraudulent paper contracts).  But, as the impending move higher builds momentum and pushes through key technical price points, the scramble by the hedge funds and small speculators to cover their unprecedented short position will ignite a move that will be explosive.

Extreme Capitulation

Gold discoveries from 1990 to 2011 have replaced only 56% of the gold mined during that same period  -  Metals Economic Group

Think about that statistic for a minute in the context of the fact that over the last two years eastern hemisphere Central Banks have been accumulating collectively more than half of the mined supply of gold in those two year.   China and India combined account for about 50% of the mined supply over the last two years, and that assumes the published numbers from China are accountable.  Most observers are certain China understates its published import numbers for gold (I can't imagine any Government not telling the truth).

The past couple of weeks have left many precious metals investors bordering on terrified.  The good news is that, based on long term sentiment indicators which have proved to be 100% accurate buy signals over the last 12 years, this price correction is largely over:

My view is that the precious metals and mining stock sector is forming a big bottom and is getting ready to start a move that ultimately will culminate with new highs for gold, silver, and the mining stock indices. I would be so bold as to say that next to October 2008 and early 2001, this is probably the single best entry point that investors will get during the course of the precious metals bull market.

You can read that entire commentary and see some incredible charts that show just how dismal the investor sentiment with regard to the precious metals has become here:   Extreme Capitulation

The bottom line is that the fundamental factors supporting the relative value of the precious metals in relation to paper currencies become stronger by the day.  To give you and idea of a possible price target for the price of gold over the next 12-24 months, here is a superb chart from The Daily Market Summary -  LINK:

(Click on chart to enlarge)

Is The Fed Serious?

The Fed minutes for January were released today and it suggests that the Fed will consider changes to the current QE policy of buying $85 billion of Treasury and mortgage bonds per month.  But does anyone really think this will happen?  Really?

Let's "play the tape" on what would happen.   To begin with, the Fed holds 41% of all 30yr Treasury bonds issued since 2009.  This month, the Fed purchased 75% of the recently issued 30yr Treasury auction.  Assuming the Fed continues buying at least its stated policy of $45 billion in Treasuries every month, and assuming the Treasury will be issuing roughly $100 billion per month (this is actually likely a low-ball estimate based on the annual increase in Federal debt over the past 4 years), the Fed will buying nearly 50% of all new Treasury debt issued. 

Imagine what would happen to interest rates if the Fed were to curtail it's Treasury purchases.   Imagine what it will do to the Government's interest expense if the Fed stops buying Treasuries and the market adjusts to a much higher "natural" interest rate.

How about mortgage paper?  I have written recently about the amount of money being thrown at the housing market by both the Fed and the Government to try and stimulate housing sales.  We're already seeing a significant slow-down in housing market activity based on mortgage application data and non-seasonally adjusted housing data.  If interest rates spike up, the housing market will be decimated.  In fact, the entire economy will fall further into a recessionary abyss.

The minutes also reflected the "view" that the economy was on a moderate growth path.  And yet, based on data that has been released since January, it is obvious that retail and housing sales have - at best - stalled.  In absence of the possibility that the FOMC members are idiots, the only conclusion we draw from the statements in today's released FOMC minutes is that the Fed is playing a dangerous game of political rhetoric.

Let's not forget that the FOMC co-chairman, Janet Yellen, has openly advocated using a negative nominal short term interest rate policy as a mechanism to stimulate employment.  The Fed is painted into a corner.  Unless Bernanke wants to go down as the guy who was at the helm of the Fed when the worst depression in U.S. history hit, I can guarantee that not only will QE continue but that the path of least resistance for QE is to increase its size.

Physical Vs. Paper: Is The Gold/Silver Price Correction Over?

Big movements take time to develop  - Jesse Livermore

Looks like I've got good company:

While the mainstream media continues to spew out bearish news and headlines on precious metals and (especially) mining shares, SAC Capital Partners LP, a $20 billion dollar group of hedge funds founded by Stephen A. Cohen, quietly positioned itself in over $240 million dollars worth of gold, silver, and mining share investments during Q4 2012...Of great interest is the structure of those positions. They are indicating, that the firm is expecting a massive spike in both gold and silver, as well as a staggering move higher in the mining shares.  LINK

It may not seem like the most auspicious day to post commentary outlining why I believe that the correction in the precious metals has just about run its course.  However, considering that all the downward movement this month in gold/silver has occurred exclusively during Comex trading hours, today further bolsters my conviction that this particular moment in the precious metals market is the pinnacle of a "contrarian's" play.

While I happened to have penned my commentary last night, it turns out that Zerohedge posted a piece a few minutes ago that reinforces my claims:

It appears that from the open of US equity trading pre-market to the close of Europe's equity markets (~0730ET to ~1130ET)[Comex trading hours, basically], Silver has been offered non-stop. Outside of that four-hour window, on average, Silver has not moved in the month of February.

Here's the LINK for the whole posting.  As you can see visually from the Zerohedge piece, 100% of the selling in silver (and gold) market has occurred in the paper trading market.  Meanwhile, China and India continue to hoover up physical gold while the Comex crooks sleep off their booze.

I've learned over the past 12 years to never call a definitive bottom to a rigged, corrupt market like the Comex.  However, I am willing to make a "the market is bottoming" prognostication.  I've explained why in this article posted by Seeking Alpha:  Market Is Bottoming

While an entry today is not a risk-free proposition, it is impossible to pick bottoms and those who make the claim that they can are charlatans.  However, buying nasty price corrections during the last 12 years of the precious metals bull has been richly rewarded and I will make the claim that this year will be the 13th.

Starting To Feel Like A Bottom

I can go to sleep at night and know one thing–the Fed will not allow deflation. The reason is simple, according to Harris...Debt based societies cannot absorb a deflationary spiral. - Yra Harris, legendary and longtime commodities trader.

 It's been a rough period of time since the beginning of October for precious metals and mining stock investors.  In fact, its been a rough 22 months, dating back to the end of April 2011, when Sunday night paper ambush on silver started the current price correction cycle in the precious metals sector.

I have to say, while this current bull market correction has been the longest so far since 2001, it hasn't been even close to the worst.  In 2008, the HUI index dropped  70% in the space of 6 months.  Ironically, if you had the courage to buy that drop, you are still sitting on a 250% gain.  The first correction I lived through back in 2002 took the HUI from 148 down  to 95  - 36% - in the space of a little more than a month.  The next one started in December 2003, lasted 18 months, and took the HUI down 34%.   For the current HUI correction (which started after silver peaked) dating to August 2011, the index is currently down 40%.  Please note and to reiterate, if you had bought (or added to positions) near the bottom in 2008, you are up 250% on that capital.

For comparison purposes, the SPX index is up 227% since its bottom in early 2009.  I think the fact that the HUI has outperformed the SPX since both indices' respective bottoms, which heralded the banking system collapse and the subsequent transfer of trillions of dollar of public wealth into the banking system to bail it out.

Before you lose your gold, silver and mining stock positions, you need to ask yourself this question:  Has anything gotten better?   Be honest.  Obviously, if look at the Treasury's balance sheet and the Fed's balance sheet, the fundamentals have deteriorated significantly since late 2008.  How about the Government's income statement?  That's gotten worse too.  Housing market?   If you believe the b.s. being thrown at you by Obama and the complicit media, you should read, or re-read this:  LINK  After you're done with that, read this:  LINK  And then read this:  LINK  The latter article is Obama's promise to transfer more money from the general public to the homebuilding companies and mortgage banks and to home buyers who otherwise can't afford a home.

The bottom line is that the fundamentals underpinning our economic and political system continue to deteriorate, masked only by trillions in funny money coming from the Fed and from complete Orwellian diarrhea of the mouth coming from Obama and both sides of the aisle in Congress (note: both Dems and Republicans).  It's those very fundamentals that vary inversely with same fundamentals driving the price of gold and silver.

Here's the only difference between now and 12 years ago when the bull market in the precious metals sector started?   Back 2001, it was primarily the deteriorating fiscal and economic situation in the U.S. and Europe driving gold and silver;  now, it's the deterioration of those same fundamentals globally that will lift the precious metals sector out of the current price correction and on to even higher price levels than the previous highs.  One more important factor.  Back in 2001, up until 2010, Central Banks globally were selling and leasing out their gold.  Now, except for the U.S., British, and European Central Banks, the rest of the CB's globally are accumulating gold - some of them hand over fist.

Have a great weekend.