By Jim Willie CB | 20 September 2007
editor of the "Hat Trick Letter"
WOW! What an interesting couple of weeks. A lousy August Jobs Report— even though it exaggerated job growth to the upside! The Birth-Death Model actually added 120 thousand mythical jobs, including construction jobs and financial sector jobs, both clearly in retreat, a blatant deception. The US Federal Reserve finally was given the gun they needed to cut interest rates. Martin Feldstein gave the USFed considerable political cover, urging cuts, claiming they were already 100 basis points too high. So gold is breaking out, crude oil is breaking out, the euro is breaking out, the Canadian looney dollar is breaking out, the HUI stock index of miners is breaking out, and the USDollar is breaking down. HATS OFF TO THE CANADIAN DOLLAR, WHICH HIT PARITY, A LONGSTANDING FORECAST OF MINE! MAY CANADIAN STOCKS BENEFIT FROM US INVESTORS SEEKING REFUGE! The USFed showed wisdom, if not veiled desperation in a rate cut of 50 basis points not only for the Fed Funds rate target, but also for the discount rate. The floodgates are now opened for monetary stimulus, monetary inflation, and higher commodity prices. Central bankers have given inflation full endorsement and approval, sufficient for a gold breakout to extend to wild levels, like $1000 before mid-2008. Nothing can stop it, because central bankers are held hostage to the crippled US financial system. They have become fast converts to monetary doves. By the way, the USFed denies they have begun an entirely new easing cycle. This is of course nonsense, as usual. With the disconnect between S&P stocks and mining stocks, any shock wave to mainstream stocks might be beneficial to the gold community.
The key commodities remain gold as a financial meter and crude oil as a commercial meter. My thesis here is a parallel concept, of vital importance to gold (silver too) and its investment arenas. The central banks have a gun at their heads, which dictates that they continue to flood money into the system without raising interest rates further. The extreme banking, bond, and growing economic distress in the United States [[actually, in the whole world!: normxxx]] prevents further rate hikes widely broadcasted by the Europeans (Germany, France, and Italy), British, and Japanese. They, together with the US and Canada, form the G7 nations of Western world banking.
Rising monetary inflation as the unintentional result of an intended policy, coupled with lowered interest rates in the United States, and stalled economic activity in Europe and Japan, constitute a near perfect scenerio for a gold spree [[especially when the "carry trade" bails out— which may already have begun: normxxx]]. The implications to the USDollar are dire. The fact that a USDX index falling below 79 has not generated much alarm tells us that it must descend closer to 70 than 75 before the alarms are sounded. What alarms are those? Clearly here, the threat is systemic cost inflation in the USEconomy NOT matched by rising wage income. The import of price inflation through the FOREX back door from a weaker USDollar exchange rate will soon become a big topic. Next on the table are bank runs, first in Countrywide, now in England's Northern Rock, and much more to come [[in all those 'non-bank banks' uninsured and unregulated by anybody: normxxx]]!!!
Gold On Notice To Launch
Gold, even as it breaks out above the 730 old highs, continues to be misunderstood. Sure, it catches the attention of network anchors, but their explanations and those from interviewed guests fall short of adequate assessment. At the same time, denials persist on the huge damage to be doled out by the USDollar decline. They have noticed the breakout above 700 and cited gold's favorable technical chart. They have identified gold as an commodity play in the same vein as crude oil and copper, which have all risen in the last couple years. They have mentioned that gold is approaching its beneficial season, as the annual holiday season invites jewelry shopping in the Western world.
But hardly anywhere in the mainstream press is the monetary reason cited in connection with gold breakout above 700. Stories do appear that the USEconomy should not tumble terribly, since the central banks have reacted so responsibly to the banking and bond problems plaguing the system. They report a 20% global money supply growth rate as the proper remedy, but fail to recognize that that is precisely why gold [[and other commodities are: normxxx]] rising. Gold reacts to monetary debasement.
My targets for gold are becoming more vague. They depend upon continued USFed rate cut action, any surprises in hedge fund blowups, massive writedown losses for major banks on mortgage bond holdings, debt ratings agency downgrades, any credit derivative backfire, sudden hit of the brick wall by the USEconomy, continued decline in housing prices, continued rise in home foreclosures, foreign central bank decisions, and breakout of military war on the Iran front. The onset of a USFed rate easing cycle presents a $1000 gold price target in the next 18 months, regardless of these numerous ongoing ingredients in a giant cauldron. Clearly, gold is heading toward $800 very soon, and probably to $1000 within one year.
- [ Normxxx Here: But recognize that at any time that the CBers want to bring its price down, they can unload tonnes of gold into a very thin market! ]
Click Here, or on the image, to see a larger, undistorted image.
We finally have a breakout on the HUI stock index of unhedged precious metals mining stocks. Gold responds to the monetary medicine, and mining stocks respond to the filtering through the system of that medicine. On a weekly open & close basis, we have an HUI index breakout. My target is 440 in the near term and 470 in the intermediate term. The filter down to Canadian junior stocks will take a few weeks or couple months, as investment institutions take action, investors return with an all clear signal, and many deal with basic fear to wade back into waters which have not been friendly this summer.
Click Here, or on the image, to see a larger, undistorted image.
The globally furnished fuel for considerable follow-through to the gold advance in breakout will be USDollar doubts, reserves defections by foreign institutions, gradual economic decline in the US, and response to the housing asset destruction [[which, despite all the furor, has scarcely slowed!: normxxx]]. Alternatives to traditional reserves investment, led by the USTreasury Bond instrument, are actively being pursued. This is the foundation to the next Mania Phase for gold. When it gathers speed and force, it will become breathtaking, attracting the enlightened individuals, then the fund managers, and finally the public. On some day in the next 18 months to two years, gold will rise by nearly $100, yes, on a single day!!! The Plunge Protection Team is slowly losing control of the situation, as new chambers show strain, like commercial interbank paper and money markets. The foreign perspective will increasingly be a witness of a desperation to prevent a USEconomic recession. That will be highly destructive to the USDollar as well, motivating flight. My forecast made several times one year ago, was that the USEconomy will be the weakest, perhaps in recession mode, in stark contrast to the global economy powered by Asian expansion. We are here. The implications for a weaker USDollar are huge, profound, and ongoing.
- [ Normxxx Here: Needless to say, I do not concur. I hardly think things have yet gotten out of control of the CBers— and as BB himself has said, the possibilities for Fed intervention in the markets are almost unlimited. I expect things to settle down into a more or less chronic monetary and economic deterioration (and, though gold may yet break $1000, it will not break $1500 any time soon). 2008 and early 2009 are still looking up to be middling to good for the stock market, gold, and the economy. Indeed, at this point, the stock market is as likely to rise as gold— for the same reasons, namely, devaluation of the dollar relative to other currencies. ]
The Asians, with their huge trade surpluses, will direct increasing amounts of funds into gold, crude oil stockpiles, metal ore stockpiles, properties which produce the same, and entire companies which own such properties. The new trend of government sovereign funds is an important vehicle with which to manifest those investments. They are looking away from the traditional knee-jerk USTBond investments. Look for China to increasingly purchase gold, not just for their own best economic benefit, but also to send a message to Americans deliberately intended to rattle their financial cages. At the same time, the Asians will soon begin funding their own credit market(s) for regional development. Continued reliance upon the USTreasury Bond as the entire superstructure for the financial system, even in just Asia, now seems highly impractical. GOLD STANDS READY TO ANSWER THE INVESTMENT CALL BY ASIANS AS MORE STABLE AND PROFITABLE ASSETS ARE SOUGHT.
- [ Normxxx Here: Stable is why gold is such a good investment in unstable financial times, but (since it pays no interest, and costs 'overhead' to insure, protect, and store) is a lousy investment in stable financial times. ]
Gold and Dollar Decoupoing
A grand decouple is coming, as the world financial system has begun to separate from the modified "Bretton Woods Agreement," also known (in part) as the "floating Bretton Woods" or (in part) as "Bretton Woods II", whereby the asiatic currencies (and many other weak currencies), at least, remain pegged to the dollar, but most of the 'stronger' currencies "floated". They realize that their own currencies can and must be managed to realize greater stability than remaining pegged to the dollar. This stands in contrast to unchecked credit growth, unbridled financial leverage, and the machinations of Wall Street and the G7 financial machinery. They have come to realize that pegging to the dollar is a two-edged sword that permits too much financial risk to be 'exported' from the US.
Money will soon flow into the gold sector at an accelerated pace, on a global basis. The Fed will continue cutting interest rates, will expand its balance sheet in monetized assets (that nobody else wants), and start to print money at a faster rate than the 14% of recent months [[actually, the Fed has been adding at less than 3%, or around the inflation rate— the rest has been 'credit' money, added by various banking and pseudo-banking enterprises.: normxxx]]. A two week growth, when annualized, pressed toward 50% in money supply growth was just registered in September!!! [[That's true!: normxxx]] Other governments, now reluctant to be accommodative, will eventually engage in a race to the bottom, to outdo each other in creating money. Political participation is not far off, with even greater deficit spending measures and consumer debt relief proposals, to climax in rescue packages to save BOTH housing prices and mortgage bonds. House values must be halted in their decline, while mortgages bonds must find a strong buyer of last resort[!?!]
Foreign Central Banks Frozen Solid
European and Japanese central bankers stand on similar conflicted positions. In the first week of September, the Euro Central Bank held steady at 4.0%, and did not hike interest rates as originally intended, but simply talked in stern tones about their vigilance against price inflation. The Bank of England also held pat on rates at 5.75%, as did the Bank of Canada and Australia. Citation of 'financial market turbulence' sounds simple, but banking distress and reluctance to see their native currencies appreciate are other, more germaine, motives, given the huge problems facing the United States [[and hardly just the US!: normxxx]]. We see a cooperative move to offer assistance to the USFed, cornered and facing an urgent need to cut rates.
Debate over monetary matters in Brussels and London ended suddenly when the USFed cut the Discount Window rate [[but this was done to forestall total seizure of the European banks!: normxxx]]. The banking world took notice, as a gigantic distress flag emerged. None of the major and secondary nations can alone reign in their vast money supply growth. The reversal in USFed monetary policy will have broad global implications not only on continued money supply growth, but also add to the speculative fervor in alternatives like gold and other commodities.
The problems of the [Too Big To Fail Bank] Northern Rock in the UK highlights the ongoing intractable situation, a story of insolvency free of US subprime roots [[not entirely; it is being brought down by failure of the international commercial paper market, which has caught the contagion from those sub-primes: normxxx]], a disaster on British soil. Bank of England head Mervyn King declared that bad practices in the banks should not be rewarded, but may have reversed his position. [[The spreading cancer of lack of CREDIBILITY has suddenly rendered central bankers into monetary doves.: normxxx]] The entire Western world banking system, especially the US and England, is a house of cards [[built on FAITH: normxxx]], built on the quicksand of a housing bubble!
The rally in gold and related mining stock investments will quickly enter the next phase, powered by global inflation, easier terms for money, and defensive desperation by central banks to ward off recession and massive asset deflation. Whether the USDollar will be harmed and sent lower will be of secondary importance, in the larger sphere. The key is keeping unbridled retail inflation in check in the US, Europe, and Japan, in coordinated fashion, while providing enough stimulus for the various economies. The stimulus to prevent profound economic reversals is always of the higher priority.
EUROPE: The USFed requires foreign central banks to halt their rate hikes, a process evidently begun, but not without risk. If the USFed cuts rates while Europe continues to hike rates, the USDollar will enter a profound decline. The Euro Central Bank is embroiled in a battle with French President Sarkozy. The ECB [[(read: Germany): normxxx]] wants more rate hikes to deal with price inflation. Sarkozy wants politicians to have a role in such decisions, and to be able to halt them. The European Union Monetary Affairs Commissioner Joaquin Almunia on Sept 3rd made an important public statement.
- "The current cycle of Eurozone interest rate tightening is nearing its end. The main part of the interest rate rise is already done. I do not think its is going to rise much more. In the very short term, rate cuts will not be announced, but for sure, in the medium term, interest rates are going to fall because the Spanish, European, and world economies are fundamentally solid."
On the other side is pressure to cut rates, obviously from the French, but also from the European Trade Union Confederation. Stress reverberates throughout German banks, where US$-based subprime loans have roiled the banking system. Gold is seen as a vote in response to discontinued ECB rate hikes. Regardless, the euro currency will rise further, from the start of a USFed easing cycle, if it's not joined by Europe. Gold psychology is rising in Europe. It finds a strong bid as a vote that Trichet is bluffing. After their next and possibly final rate hike, the ECB will implicitly give the green light signal for buying gold [[I very much doubt the ECB would buy gold; they are far more likely to sell it. Europeans, on the other hand, are likely to buy. As a whole, they are more sophisticated in this matter than Americans.: normxxx]].
BRITISH: The British pound sterling money supply is growing at an annual rate of 12.8%, year over year in August. It fuels their housing bubble. Given the decline in North Sea oil production, the English economy is more reliant upon phony monetary inflation for growth, a reflection of the US situation where dependence upon home value appreciation is crucial. With an official rate of 5.75%, fully 50 basis points above the USFed official rate, England encourages bond speculation while it inhibits borrowing through higher cost. At that last hike in July, they cited limited spare capacity, elevated price pressures, and an upside balance of risk to price inflation. But England is now heading for a housing bust and economic fallout. New UK prime minister Gordon Brown explained the heretical position justifying political input in July, when he said "Rigid monetary rules that assume a fixed relationship between money and inflation do not produce reliable targets or policy." The pound sterling is basically tracking the euro currency lately. Like their ECB counter-parts, the BOE cannot hike rates when the USFed cuts, since doing so would revalue the pound sterling significantly and harmfully.
JAPAN: The Japanese, on the other hand, have been cooperative for over a year, have held rates steady since July 2006, and are grumbling about their urgent need to increase the official rate from a lunatic 0.5% now [[That's the BOJ complaining; the Ministry of Finance and the Government want no higher rates!: normxxx]]. Bank of Japan board member Atsushi Mizuno points to the loan crisis as justification for higher rates in Japan. He cites excesses that enabled unchecked borrowing helped to trigger the US subprime mortgage crisis. Mizuno sees continued Japanese economic growth, especially with billion$ in newly injected funds by central banks, with no reason to lower forecasted growth or inflation [[however, the Japanese, still recovering from well over a decade of DEflation, welcome INflation, in moderation: normxxx]]. Risky mortgage related bonds have been dumped in recent months, many funded by cheap yen loans. The Japanese yen has witnessed quite a runup. It had risen by 20% versus the New Zealand Dollar, and by 9% versus the USDollar since June and July, event before the recent activity.
What Mizuno did not mention is the dilemma facing the BOJ. The Japanese yen currency has begun to rise WITHOUT a BOJ rate hike. The USGovt and Wall Street constantly pressure Tokyo not to hike rates, and to continue funding the global carry trade. In just the last couple weeks, more chatter was heard that Tokyo financial warlords are prepared to intervene to support the USDollar. The USFed Discount Window decision also froze the Japanese central bankers. Fukui said, "If the Fed were to take some kind of policy step in September, we will closely examine whether our views match those of the Fed. There is a possibility that US growth will be restrained. That is the point we need to watch. We do not have any preset schedule on when to act." There is your green light for the yen carry trade to be revived after a stall this summer when the yen currency rose almost 10%. Easy Japanese money has been an important source for speculative investments, which might include gold more than we are aware. The yen will pull back from here [[which would be bad for gold: normxxx]].
Socialized Price Inflation
The USEconomy will next socialize price inflation as a sickening unpalatable trade-off to avert a recession, with an acceleration of job losses, home foreclosures, and careening asset declines [[stagflation!?!: normxxx]]. Rate cuts will do little to repair the housing slow motion free fall and mortgage bond quicksand. The single easiest to understood price to observe for as an inflation index, is the price of gasoline [[also food; but neither appear in the 'core' CPI index: normxxx]]. It is a surefire lock to jump past $3 per gallon by next spring and thus focus public attention. Food prices are on the rise, from energy feeder costs, from farmers' decisions, from the national movement toward ethanol fuels and away from feed corn.
Refinery constraints will worsen the problem. We may enjoy a repeat of the 2002 to 2005 runup in costs systemically, squeezing businesses' profit margins unmercifully. This time, a further corporate response by outsourcing jobs and cutting costs generally is not likely to be available. The benefit, if there ever was any to the United States as a whole, from Asian participation in globalization (mostly by providing cheap labor), is reaching a critical impasse. Thank the trade protection battles for that. A US economic response might be a sizeable push through the pipeline of some wage increases to meet the higher cost of living. Watch for this, since it might well mark the end of this round of globilization.
Oil Confirms Gold Breakout
Confirmation of resource inflation is the record crude oil price, now over $82 per barrel. Confirmation of currency debasement and monetary inflation is the approach of a record gold price, now over $742 per ounce. It is interesting. The justification of the record crude oil price is the frequent supply disruptions from numerous corners, desire by OPEC producers to exploit income revenue streams, and a powerful Asian economic expansion accompanied by strong persistent demand. These miss the mark. The crude oil price is rising from the threat of an even weaker USDollar. When the USFed announced the change in the Discount Window rate, both energy stocks and the crude oil price jumped up. Exxon Mobil (XOM) stock rise by 4.3% on the day. Crude oil on a volatile day had a 1.60 range but rose half a buck. The rise in crude oil price came before the USFed rate cut. More importantly, the OPEC nations are slowly moving toward an abandonment of the PetroDollar. The current downleg in the USDollar is likely to do irreversible damage to the PetroDollar defacto standard and invite difficult friction with key Arab nations!
The Saudis might be the last remaining pillar to that important support mechanism to the USDollar and related banking system. If the Saudis hold to their own monetary policy, they might easily deliver formidable blows to the USDollar in hidden ways. Saudi money supply growth is running at 22% with higher price inflation than seen in 30 years. A refusal to cut interest rates is seen by certain keen analysts as a precursor to a full break away from the US$ peg, an absolutely crucial move! Hans Redeker of BNP Paribas summarized well. "This is a very dangerous situation for the dollar. Saudi Arabia has $800 billion in their future generation fund, and the entire region has $3500 billion under management. They face an inflationary threat and do not want to import an interest rate policy set for recessionary conditions in the Untied States." The Saudi central bank said Thursday that they will take "appropriate measures" to halt huge capital inflows into their nation. The policy is not sustainable and will inevitably result in a resounding collapse of the US$ peg which is vital for the PetroDollar.
The United Arab Emirates still leads the movement for the entire Gulf Cooperative Council of nations to de-peg from the US$ and halt the import of price inflation into their smaller economies. UAE bankers want the entire group to depeg together. Persian Gulf economies almost all have much more commerce with Europe than the US, and a PetroEuro now makes more sense. The current UAE price inflation threatens to hit 10%.
Americans take the USDollar and its international support for granted, either out of ignorance, or out of arrogance by those "in the know". Yet, both will become victims in the next phase, from higher retail costs to [eventually] higher borrowing.
Normxxx
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