The Battle Royale Begins

Let's get it on!!!

Just needed to update things after a truly astonishing day.

Below are the only two charts you need right now. The Battle Royale for gold is a close above $1800. The Battle Royale for silver is a close above and through the $35.50 horizontal resistance area and the $36 diagonal resistance. Is it any coincidence that both metals are aligned to fight and win these major battles at the exact same time? Well, needless to say, you know how I feel about coincidences when it comes to the PMs.

paper_2-23amgoldw_0.jpgpaper_2-23amsilvw_0.jpg

If you think that gold has come too far, too fast, check out these charts that I lifted from Trader Dan. If gold is almost back to the all-time highs in every other major currency, why would you think that it's not about to make the same move in dollar terms?

http://www.traderdannorcini.blogspot.com/2012/02/1800-in-play-for-gold.html

paper_snapshot-1123.jpgpaper_snapshot-1123-1.jpg

This next chart is a 15-minute March silver. I post it for instructional and educational purposes. I mention quite often the old adage of "what was support becomes resistance and vice versa". This chart shows a classic breakout pattern. Note that, overnight in London, silver surged and finally broke convincingly through $34.40. It then drifted lower until it fell back to 34.45. That proved to be a successful test of 34.40 as support and, from there, silver exploded to the upside.

paper_2-23pmsilv15.jpg

And we absolutely have to talk about crude. Now that 103.50 and 105 are in the rearview mirror, $114-115 looks inevitable. Not only does this mean $4.00 gasoline in the U.S. but surging crude will continue to drag the PMs higher along with it.

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/2/22_Fitzwilson_-_Watch_Gold_as_Oil_to_Trade_Between_$175_-_$250.html

paper_2-23pmcrude.jpg

Lastly, a few words on the continuing surge in Open Interest on the Comex. Recall that yesterday gold had a massive, $25 late-day surge while silver struggled to move higher. After considering these moves, I expected OI to contract some in silver as positions were closed out ahead of first notice day but, not necessarily, put right back on in May12 or July12. For gold, I had convinced myself that yesterday's surge was a short-covering event. Therefore, I expected total gold OI to be flat to up just a little. Boy, was I wrong!

The March12 OI fell from 29,215 to 24,966, a drop of 4,249. However, the May12 rose from 36,491 to 41,618 for a gain of 5,127. The question (which we can't answer) is how many Marches were rolled into May? If the entire 4,249 was rolled, then we picked up about 900 new long and short positions for May. Interestingly, we also lost 1,200 contracts in Dec12 but gained 800 contracts in July12. What the heck is going on here???

Anyway, with all that movement, I find it impossible to believe that the 4,429 number was a gross number. It had to be net. What do I mean? In simplest terms, let's say that the real amount of "rolled" Marches was 5,249. This would mean we actually picked up 1,000 brand new March longs for a net reduction of 4,429 OI. See what I mean? OK, maybe it wasn't 1,000 new March longs but it might have been 500. For all we know, maybe it was 2,000? What I'm saying is: There seems to continue to be very odd and unusual activity around the Comex vaults and the delivery process. Importantly, though, whether there is or not is not my primary concern. The main thing is the continued growth of total OI, to levels not seen since pre-MFG. This activity and interest is just the spark silver will need to push it higher after the conclusion of The Battle Royale.

The gold OI is equally significant but not as thought-provoking since we are still 5 weeks away from first notice for the April12 contract. Yesterday, on the late session surge, we saw total OI grow by another 9,200 contracts and, within that number, the April12 grew by 6,100. This is powerful and very significant. For the two trading days of Tuesday and Wednesday, gold surged over $45 and OI grew by an amazing 26,000 contracts or about 6%! Remarkable!! This is liquidity and liquidity drives markets. Expect volatility but, right now, there is no reason NOT to expect gold to win its Battle Royale and then quickly surge to $1900+.

I want to post this again, too, just in case you haven't seen it yet. I saw this late last Friday on KWN and made note of it. The action so far this week has certainly given it added credence. Note that Egon states this:

“Short-term the consolidation is finishing here.  We could see a move higher beginning next week.  Looking at our proprietary cycle system, that move could continue until the end of March and this would be a strong move before we had any correction.”
I would also add that I expect the gold shares to move faster than gold to the upside.”

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/2/17_Greyerz_-_Gold_to_Begin_a_Major_Advance_Starting_Next_Week.html

Lastly, our pal Mike Krieger has penned another great email newsletter. It's reprinted below for your convenience. You should read it when you have a moment or two.  (Please be advised. The opinions listed below do not necessarily reflect those of The Turd or TurdMediaManagement. Reader discretion is advised.wink)    TF

It's like a ride in an amusement park and when you go on it you think it's real, because that's how powerful our minds are. The ride goes up and down, round and round, it has thrills and chills, and it's very brightly colored and it's very loud. And it's fun for a while. Some have been on the ride a long time and they begin to question: Is this real, or is this just a ride? And others have remembered and they come back to us and they say: Hey, don't be afraid ever, because this is just a ride. And we kill those people.
Shut him up, I've got a lot invested in this ride, shut him up. Look at my furrows of worry, my big bank account, and my family. This has to be real. It's just a ride, but we always kill those good guys who try to tell us that and let the demons run amok. But it doesn't matter because it's just a ride and we can change it anytime we want. No job, no savings money, just a choice right now between fear and love.

- Bill Hicks 1961-1994 (great quick little clip here

)
 
The Playbook
It was always going to be a scary thing when the American Empire decided to turn its sights inward.  Americans like to look at “shock and awe” and cheer.  They think murder is fun and games.  They think we are winning when we lose a little bit more with every new bomb we hurl.  They think we are killing “the enemy” when in reality we are killing ourselves.  The truth is that all the shadow government in the U.S. (you know the unelected guys that never leave and tell the elected guys what to do) has been doing is what corrupt elites have been doing since the beginning of time.  Protecting their commercial interests.  While many here in the United States have been lulled back into another complete coma state by the garbage that spews from the television set and a stock market that marches higher every day with no volatility, the shadow government is using this time wisely.  They are passing laws such as the NDAA, which as we know allows for the indefinite detention of American citizens without trial.  In case you haven’t seen some of the commentary by several Senators on the matter take a quick look for yourself
Joseph Lieberman is one of the most despicable and downright evil Americans to have ever “served” this country.

 
Beyond the NDAA, TPTB are rushing to silence the thing they fear the most.  The internet.  As I have said for years now, the internet is the game changer and the reason I believe TPTB cannot win this fight using the same strategies that have been used by immoral control freak elites since the dawn of human civilization.  This is because the “playbook” has been exposed.  There are many plays in this book, and over the years I have outlined many of them, but the two that they like the most and the ones we need to be most aware of are.  1) Divide and conquer. 2) Problem, reaction, solution.
 
First to divide and conquer.  This is employed mostly within the U.S. on geographic lines.  These are represented by the “coasts” and the “heartland.”  These different segments of the population are then divided into different political parties, the Republicans (red team) and the Democrats (blue team).  As I have demonstrated time and time again, and as is readily apparent if you are paying any attention whatsoever, these particles are identical on all of the major issues although they talk a big game during the election season.  As of late, people have started to realize that on the big issues they are the same so here is where the all important “social issues” come into play.  TPTB could not be happier than Santorum is doing well in the Republican primaries.  Why?  He is a big government Republican just like that last thug we had in the White House before the current banker puppet.  Santorum is extremely divisive.  They LOVE that.  He gets people riled up on social issues which then shoves the people reluctantly back into their respective teams like good little proles.  Think about it.  Santorum’s big issue is birth control.  I mean really?  Anyone that falls for this game gets what they deserve I suppose, but my role is to show you the game.  Remember, it is Ron Paul that doesn’t fit into any mold.  Ron Paul is someone that unites rather than divides.  He reminds America that we are one culture based on one Constitution (remember Justice Ginsberg publicly stated her disdain for it recently http://communities.washingtontimes.com/neighborhood/talking-sense/2012/feb/10/justice-ginsberg-publicly-denigrates-constitution-/).  This is why they hate him.  This is all very intentional.  Speaking of which, here is a great summary of politics in America today
It is no surprise that shortly after he aired this segment his show was canceled.  1.2 million views already though.  Not too shabby.
 

So now onto Problem, Reaction, Solution.  This was employed in the U.S. in 2008 to consolidate power at the top by bailing out the elites and bankrupting the rest of us.  People instinctively know this, hence the emergence of the Tea Party movement and then OWS this summer (notice how they used divide and conquer tactics on the population as soon as each of these movements came onto the scene).  So as we know back in 2008 the “problem” was financial crisis, the “reaction” was plunging financial markets and total fear on behalf of the population, while the “solution” was bankster bailouts and the a further consolidation at the top.  The Federal Reserve now has more power and the Too Big To Fail banks are a bigger part of the financial system than they were before.  How’s that for a solution!
 
In any event, they are not done with this playbook by any means.  We need to look to Europe now to see what TPTB have in store for us.  This is the consummate problem, reaction, solution game being played for all the marbles.  First, you get the problem “spiking interest rates for the peripheral countries.”  Then the “reaction,” financial panic and fear.  Finally the “solution.”  The placement of unelected technocrats as the leaders of Greece and Italy with ties to all the power structure’s institution such as the Trilateral Commission, the Bilderberg group and of course Goldman Sachs.  It is like a coup that takes the shadow government from the shadows and puts them in your face.  The reason that this is so key is because we are next.  They don’t want to roll up everything at once.  If they can get Europe safely consolidated then they will move here.  That is when interest rates in the U.S. will spike (problem), and we get panic (reaction) and then the solution (bankster technocratic committees in charge and the IMF to the rescue, ie loss of sovereignty).  This is the plan and I see it as clear as day.
 
The Internet                      
So back to the internet.  Just because what I outlined above is the plan it doesn’t mean it will succeed.  Although many will disagree, I am 100% convinced that TPTB are way behind schedule and experiencing considerably more problems than they thought in implementing their agenda.  I also think the internet is the main reason for their issues.  The internet is the printing press on steroids.  In fact, it may be the most significant event to have ever happened in the evolution of humanity as a species in the last 5,000 years.  What has been done since the days of Babylon is tiny groups of elites have been able to control populations and dominate them via the “playbook.”  The other thing they use is advanced technology that they do not share with the public, but that is another topic entirely.  In any event, the internet allows us to connect like never before and expose their tactics and criminality in a way that was unimaginable in prior eras.  Humanity is using it to connect with one another and we are saying to each other: “hey, my government tells me you are my enemy and I should hate you but you are just like me.  You have fears and dreams and all you want is to be happy and live a good life.  Maybe my government and your government are actually the problem.  We shouldn’t hate each other.  We should get rid of the bastards manipulating us.”
 
That is why they want to censor the internet, but it is too late.  The cat is out of the bag and they have lost.  However, they will keep trying until they kill themselves because they are not used to losing.  Did you catch the recent article from the Wall Street Journal about how the UN is trying take over monitoring the internet.  Yep, it’s all right here.  http://online.wsj.com/article/SB10001424052970204792404577229074023195322.html?mod=WSJ_Opinion_LEADTop
   
Coming to America: 30,000 Drones
Did you know that a bill passed two weeks ago that allocates $63 billion to the FAA to increase the existence of drones operating in U.S. airspace to 30,000 by the end of the decade.  Here is an article on it http://digitaljournal.com/article/319564#ixzz1nD1SasR3.  To all those that say things are “getting better” I say watch what they do not what they say.  What the shadow government is doing is scrambling like little rodents to get the police state fully in place for the inevitable unraveling of this sick world they have created and to protect the fruits of the theft they have committed.  Watch what they do not what they say.  Watch closely.  
 

Quick Market Commentary
I actually can’t believe the nonsense I am hearing lately from people in the financial markets lately.  People that know better.  People are definitely drinking the kool-aid again in this business.  Now I am not saying that means a stock market crash is imminent since they can create all the counterfeit fiat money they want and goose things further.  What it does tell me is that something is coming.  Could be a bond event.  Could be a precious metals explosion.  Could be a false flag terror attack followed by war with Iran.  I don’t know, but something is coming that will wake people up violently and suddenly.  Liquidity always makes people lose their heads because at the end of the day we are herd creatures.  Take all of this how you want but I have noticed this change.  Go back to sleep America.
 
31 inches in the last seven days up here in the mountains.  I’ll be riding powder tomorrow.
 
Peace and wisdom,
Mike

185 Comments

bellyacre's picture

FIRST

FIRST

achmachat's picture

ha!

i like battle royales!

sounds like fun!

(especially if you're pretty much sure that in the looooooong run, you can only win!)

ReachWest's picture

Interesting Day

Wow - that was interesting to watch. Silver, Gold and Crude - lots of action on the NetDania graphs today.

(Still have to loop back and finish reading Turd's post, but wanted to submit this Newscast video, first).

Midday News for February 23 discusses the possible confiscation of Greek Gold, interviews a Greek citizen about the Greek debt repayment plan and touches on the COMEX Gold and Silver battle that is now underway.

survivalwstyle's picture

baTTle tested

BagOfGold's picture

Turd?...

Unfortunately...I didn't make first...because I was in the "urinal"!!!...

Bag Of Gold

Ubergrinch's picture

Bond event?

A bond event, you say? Can Bill Gross do anything about this?

Be Prepared's picture

It is a Battle and It has only Begun!

Yes... Indeed!

The Bugle Call has been sounded and the Song is ringing..... Gold shall be my freedom and Silver shall be my lance..... into the belly of the Dragon shall I take my fight!

Norrin's picture

Looking for some downside volitility

I've been on the side lines for the past month, waiting for some sub-30 prices. I purchased a few rolls when it was $29 but I've been itching to add to my stack. Bring on the Battle Royale!

Mudsharkbytes's picture

Hard to complain about today's action in silver…

…but I'm gonna do it anyway. (post moved from the bottom of the previous thread)

At least a small complaint.

They just couldn't let it close about $35.50 could they? Had to make sure to nudge it just a bit under at the end.

Any other day and silver would be trading pretty much flat at the point where the mini raid was instituted.  But if they'd done nothing today, then silver would have closed at nearly $35.70!

Of course there's still time for it to claw back above $35.50 before the market closes today, but I seriously doubt that'll happen.

Oh well, seems more likely now a silvery waterfall will occur in the next 24 hours or so, but that's okay with me as I was planning a trip to the LCS tomorrow anyway.  

I'd be happy to be wrong though.

 
Titus Andronicus's picture

Thanks, Turd.

Thanks, Turd.

SilverFocker's picture

WTH ?

Who roasted the PIG.........how the hell does the Euro get a snap at 133. I feel a fooking gonna happen.

At least someone could have brought the BBQ sauce.

Larry's picture

Turd, a response

question's picture

@Fr. Bill

Your bible would be something to read!yes

Thanks for that most enlightening translation; how real it could be I guess we'll never know.

Is there not one "real" biblical scholar willing to share the truth?

turfmac's picture

subscription fee

Turd, O.K. You win. Have been wondering if I would sign up monthly.  Your opening and follow up videos were the nut. I will pay just for that and  your PM  brain will be the gravy.  I read allot and  you got good gravy. May the force be with you.

Turd Ferguson's picture

Thanks, Larry.

MODERATOR

Very helpful info.

Turd Ferguson's picture

Thanks, turf

MODERATOR

I think you'll find it surprisingly affordable.

Still at least a month away, however.

Response to: subscription fee
Hayman's picture

You posted Two Yen charts Turd.

Just to let you know that instead of one Yen-gold chart and one Euro-gold chart like trader Dan posted, you copied two yen charts.

Thanks for another great post turd!

joehappen's picture

Nice day, second post... Let me say hello a little bit more.

Silver was a nice ride for the day...

Heres something Sean and I did late last summer. Some of you may have already watched it. Remember guns are good too!

Krugerbug's picture

A little more ACTION!

I honestly don't mind at all "a little more (upward PM) action"! cool

GoldMania3000's picture

I get a feeling...

That this is entering a major turning point for the PMs. Break through these points and were are entering the zone that moves us closer and closer to the big prize

Magpie's picture

re: subscriptions

Please tell me there will be an annual option. 

Dr G's picture

I want to be clear and

I want to be clear and upfront with everybody: I like my Battle Royales with cheese.

donnojackshit's picture

GSR in 2012? How?

GSR 20 in 2012? How?

What will cause the GSR to head down to extreme outlier points of 20 in 1.) 2012 (postulated Oct/Nov) and 2.) 110 in (postulated late 2013)?

1. GSR 20

 To get a GSR of 20 means a disproportionate relative value of silver to that of gold (at least in the Cartel's suppression of Silver paradigm).

Ie. A very high silver price or corresponding lower gold price, or expensive silver, cheap gold.

So, the highest price of gold and silver for 2012 by the "expert" commentators is as per 

http://www.tfmetalsreport.com/sites/default/files/users/u5265/gold__silver_in_2012_-_predictions_from_the_pros.jpg

silver $59.29, gold $2242 yielding a  GSR = 38

So per the experts, from the two predictive respective 2012 highs, we don't get that close to GSR of 20, although what we are looking for is a higher silver, lower gold ratio.

(Most of the expert price predictions are about 20% on top of the 2011 highest price achieved ).

For a GSR of 20, Gold would have to be almost twice the above experts highest at $4500 with silver then needing to be at $225 (almost 4 times more their average call), or maybe silver at $125 (silver twice as much as their average call )with gold at around $2250.

(Or even scarier still for gold, something like $1400 gold with $70 silver? Is this possible or even likely this year again? Jim Sinclair said to expect massive volitility around his angel of $1764 up and down!)

What events or Cartel motives would contrive to drive gold and silver up to the levels above or the lower gold of $1400and higher silver at $70?

i) A collapse of the Crimex price discovery mechanism would likely simultaneously drive up the prices to more like $4500 gold and $1000 silver, however, it is likely that in this scenario that silver would vastly outsrtip gold and the GSR would likely top 100+.

However, the EE probably won't lose control this year or even until late in the following year, to enable silver and gold reach these much higher than the maximum highs plus 20% !

ii) War in the Middle East? Usually a spike in the oil price which would lead to a spike in the gold price (just based on production costs) but maybe not enough to reach these highs, and I guess, dragging silver along too?

During the Iraq war (the second one of 2002), prices really didn't explode in gold, and then only until about 12 months later.

However, Iran would be a whole different ball game with 40% World's oil going through the Straight of Hormuz.

My money is still on an early 2013 invasion, as Russia and China haven't  done a deal yet to sell Iran out, and this should take considerable time to put together.

Time needed for China to increase strategic oil reserves to cover the disruption and get "something" major in return for tacitly allowing the USA to go ahead. 

What deal does Russia get? (Maybe those pesky Islands offshore Alaska as referred to on previous posts?)

  mmm so maybe this scenario not so much!

iii) Maybe false information released concerning hundreds of thousands of tonnes of gold from the Dragon Family been falsely verified, at the same time as Sprott tryng to get more PSLV offerings filled with difficulty due to silver physical shortage, causing gold to plummet momentarily and silver to radically increase or at least stay the same? 

The hundreds of thousands of tonnes is on the balance of probabilities -bullshit. I mean if the current World's total gold is around 150 000 tonnes mined for the last 5000 years, how does many multiples of this amount somehow magically show up?

I don't think this pig will fly

iv) Maybe a country like China, makes a radical move to secure the bulk of the World's production, through share acquisitions, causing an instant shortage, and a price spike?

Nah, they stealthily acquire and work slowly and patiently.

v) Maybe the Morgue decides just to show who is in control, and needing to make a shit load of money quickly by going short gold and long silver at the same time, as a once off rarely seen gold/silver price combo, smoking all the outside speculators? 

Maybe this volatility is what they do to further destroy the sheeple's confidence in getting into bullion as a seemingly too shaky an investment, just as confidence in other asset classes are copping a flogging too? 

With PAGE starting in Jun/Jul, (in gold at least initially), maybe the Morgue will lose "some" control in the gold arena, but still have a death grip on the silver side until PAGE moves to silver (somewhere later in 2012?)

My money is on this scenario. Just because they can, and they stand to make a lotta moolah, and it is their game plan of fleecing as much of the sheeple's wealth as possible.

I'd welcome other inputs or scenarios? 

2.) GSR 110

For a GSR of 110 to be achieved, suggests some very different propositions.

A very very high gold price, with silver in the dunny (toilet or WC for the Northern philistines)

Egs, $4500 gold, $40 silver. $2500 gold, $22 silver

What the hell could cause this? No physical silver would be available at this price by this stage late in 2013?

I don't know if a GSR will ever hit 100 plus after this time?

i) Crimex is toast or on the way out with no price discovery mechanism useful for physical acquisition, and paper silver price trending towards zero?

Possible.

ii) Gold monetised through IMF dodgy SDR instruments, with silver being marginalised by the Central Banks initially, until real world demand overcomes Central Bank manipulation?

On the demand side, industry still going apeshit for the stuff. Silver is the peon's metal, so Investment demand is  likely to continue escalating.

On the supply side, peak silver long gone, no major strategic reserves, with this element first to be depleted on periodic table (est 2020?) (By depleted, doesn't mean totally exhausted, but the easy stuff is gone, with massive new investment (only achievable through a high price) required to find new mining locations with a much higher EROEI )

Also possible.

iii) Ivar's charts support this, although I don't understand his methodology.

iv) I'm out. Trying to come up with bodgy scenarios to fit my bodgy predictions is tough! 

Any other thoughts out there for me to explore?

¤'s picture

Great stuff

Thanks for another great thread. 

With all the liquidity being created and driven into system how could the PM's not go up at some point? As much as we don't like high oil/gas prices I'll be totally  honest and say if it means higher PM prices going forward I'll take the higher PM's and drive less. It's not like we have a choice anyway.  Up with the PM's, drive less! 

Just imagine how all of the price structures will get really distorted once they openly have to announce another  round  of QE and/or the U.S. debt ceiling has to be raised again while a U.S. credit downgrade happens at around the same time.

I think TF referred to it as a new paradigm that's just begun and I would have to agree we've  entered a melt up since end of Dec. and it just accelerated with this Greece deal. Something significant has changed in the financial system and maybe the WOPR has digested the  raw data, so to speak, and saw it for the technical default it was despite all the denial to the contrary. I also think Fitch coming out and saying what they said about it 2 days ago was significant. Something has changed.

Pretty heavy stuff from Mike Krieger but easy to accept the fact how right he is.  I see the Judge Napolitano firing as a sign that FOX is going to become more centralized even though they are still obviously Repub/Conservative leaning. The MSM is slowly centralizing  just like both U.S. political parties. 

Could it be that Murdoch is feeling the heat and is lowering the flame on those who are now holding it to his own feet? 

eriklars407's picture

Waiting for the downward push.

First time poster. Long time creeper.

This is getting too good. Dumped my AGQ today a little early of the peak and still a little sad about that, but bought some ZSL at the lows anticipating a raid tonight. Anyone else? I am really excited to see what happens and hopefully we get a nice buying opportunity after it tests some support.

BTW, Turd, thank you for what you do.

Fr. Bill's picture

Religio-phobic readers move along to the next comment, plez ...

question wrote:
Thanks for that most enlightening translation [of Ezekiel's term for idol]; how real it could be I guess we'll never know. Is there not one "real" biblical scholar willing to share the truth?

I learned this in an advanced Hebrew class conducted by Bruce Waltke, a man whose name no one will know unless you're an extremely rare bird who can drop names like his.  He is most definately an expert in the field.

Also, if you own the standard scholarly Hebrew lexicon by Brown, Driver, and Briggs (more names very few folks can drop!) and look up the root GLL, you will find under its discussion of the term g'llulim a reference to cognate vocabulary for the term "dung ball" or "dung beetle ball."

So much for the scholarly authorities, such as they are.  For me they're enough.

But, why not "dung ball" as a rendering instead of "little balls of shit?" The answer to that come from context -- in this case, the context being what one can discern by reading Ezekiel's prophecy about Ezekiel's attitude toward the idols that litter the landscape in Israel at this point in its history.  It's not hard to see that Ezekiel is intensely scornful, toxically abrasive in his attitude toward these idols.  To imagine him preaching against them, using the term "dung balls" ... well, it's not quite compatible with all the other clues he gives you about what he REALLY thinks about them!  

And, so, if a translator were permitted to render in English what Ezekiel is calling these things, then the translator would reach over to the Anglo-saxon section of the English lexicon and select the words "little balls of shit."  THAT would be, I am confident, a faithful rendering of Ezekiel's term for idols.

Vis-a-vis translations, a French proverb puts it this way: "Translations are like women: if they are faithful, they are not beautiful; if they are beautiful, they are not faithful."

In today's Bible market, a translator cannot be faithful to many ways in which the Hebrew Bible (in particular) speaks, for it is invariably too earthy, too vivid, too coarse, too pungent for today's ears which are correspondingly too ethereal, too monochromatic, too cultured, too blamd to hear what the Old Testament authors are telling us.

Alex's picture

SPROTT NEWSLETTER

Unintended Consequences

By Eric Sprott & David Baker:

2012 is proving to be the 'Year of the Central Bank'. It is an exciting celebration of all the wonderful maneuvers central banks can employ to keep the system from falling apart. Western central banks have gone into complete overdrive since last November, convening, colluding and printing their way out of the mess that is the Eurozone. The scale and frequency of their maneuvering seems to increase with every passing week, and speaks to the desperate fragility that continues to define much of the financial system today.

The first major maneuver took place on November 30, 2011, when the world's G6 central banks (the Federal Reserve, the Bank of England, the Bank of Japan, the European Central Bank [ECB], the Swiss National Bank, and the Bank of Canada) announced "coordinated actions to enhance their capacity to provide liquidity support to the global financial system".1 Long story short, in an effort to avert a total collapse in the European banking system, the US Fed agreed to offer unlimitedUS dollar swap agreements with the other central banks. These US dollar swaps allow the other central banks, most notably the ECB, to borrow US dollars from the Federal Reserve and lend them to their respective national banks to meet withdrawals and make debt payments. The best part about these swaps is that they are limitless in scope - meaning that until February 1, 2013, the Federal Reserve is, and will be, prepared to lend as many US dollars as it takes to keep the financial system from imploding. It sounds absolutely great, and the Europeans should be nothing but thankful, except for the tiny little fact that to supply these unlimited US dollars, the Federal Reserve will have to print them out of thin air.

Don't worry, it gets better. Since unlimited US swap lines weren't enough to solve the problem, roughly three weeks later, on December 21, 2011, the European Central Bank launched the first tranche of its lauded Long Term Refinancing Operation (LTRO). This is the program where the ECB flooded 523 separate European banks with 489 billion euros worth of 3-year loans to keep them going through Christmas. A second tranche of LTRO loans is planned to launch at the end of February, with expectations for size ranging from 300 billion to more than 1 trillion euros of uptake.2 The good news is that Italian, Portuguese and Spanish bond yields have dropped since the first LTRO went through, which suggests that at least some of the initial LTRO funds have been reinvested  back into sovereign debt auctions. The bad news is that the Eurozone banks may now be hooked on what is clearly a back-door quantitative easing (QE) program, and as the warning goes for addictive drugs - once you start, it can be very hard to stop.

Britain is definitely hooked. On February 9, 2012, the Bank of England announced another QE extension for 50 billion pounds, raising their total QE print to £325 billion since March 2009.3 Japan's hooked as well. On February 14, 2012, the Bank of Japan announced a ¥10 trillion ($129 billion) expansion to its own QE program, raising its total QE program to ¥65 trillion ($825 billion).4 Not to be outdone, in the most recent Fed news conference, US Fed Chairman Bernanke signaled that the Fed will keep interest rates near zero until late 2014, which is 18 months later than he had promised in Fed meetings last year. If Bernanke keeps his word, by the end of 2014 the US government will have enjoyed near zero interest rates for six years in a row. Granted, extended zero percent interest rates is not nearly as satisfying as a proper QE program, but who needs traditional QE when the Fed already buys 91 percent of all 20-30 year maturity US Treasury bonds?5 Perhaps they're saving traditional QE for the upcoming election.

All of this pervasive intervention most likely explains more than 90 percent of the market's positive performance this past January. Had the G6 NOT convened on swaps, had the ECB NOT launched the LTRO programs, and had Bernanke NOT expressed a continuation of zero interest rates, one wonders where the equity indices would trade today. One also wonders if the European banking system would have made it through December. Thank goodness for "coordinated action". It does work in the short-term.

But what about the long-term? What are the unintended consequences of repeatedly juicing the system? What are the repercussions of all this money printing? We can think of a few.

First and foremost, without continued central bank support, interbank liquidity may cease to function entirely in the coming year. Consider the implications of the ECB's LTRO program: when you create a loan program to save the EU banks and make its participation voluntary, every one of those 523 banks that participates is essentially admitting that they have a problem. How will they ever lend money to each other again? If you're a bank that participated in the LTRO program because you were on the verge of bankruptcy, how can you possibly trust other banks that took advantage of the same program? The ECB's LTRO program has the potential to be very dangerous, because if the EU banks start to rely on the loans too heavily, the ECB may find itself inadvertently attached to the broken EU banking system forever.

The second unintended consequence is the impact that interventions have had on the non-G6 countries' perception of western solvency. If you're a foreign lender to the United States, Britain, Europe or Japan today, how comfortable can you possibly be in lending them money? How do you lend to countries whose sole basis as a going concern rests in their ability to wrangle cash injections printed by their respective central banks? Going further, what happens when the rest of the world, the non-G6 world, starts to question the G6 Central Banks themselves? What entity exists to bailout the financial system if the market moves against the Fed or the ECB?

The fact remains that there are few rungs left in the financial confidence chain in 2012, and central banks may end up pushing their printing schemes too far. In 2008-2009, it was the banks that lost credibility and required massive bailouts by their respective sovereign states. In 2010-2011, it was the sovereigns, most notably those in Europe, that lost credibility and required massive bailouts by their respective central banks. But there is no lender of last resort for the central banks themselves. That the IMF is now trying to raise another $600 billion as a security buffer doesn't go unnoticed, but do they honestly think that's going to make any difference?6

When reviewing today's macro environment, we keep coming back to the same conclusion. The non-G6 world isn't blind to the efforts of the Fed and the ECB. When the Fed openly targets a 2 percent inflation rate, foreign lenders know that means they will lose, at a minimum, at least 2 percent of purchasing power on their US loans in 2012. It therefore shouldn't surprise anyone to see those lenders piling into alternative assets that have a better chance at protecting their wealth, long-term.

This is likely why China reduced its US Treasury exposure by $32 billion in the month of December (See Figure 1).7 This is also why China, which produced 360 tonnes of gold internally last year, also imported an additional 428 tonnes in 2011, up from 119 tonnes in 2010.8 This may also be why China's copper imports hit a record high of 508,942 tonnes in December 2011, up 47.7 percent from the previous year, despite the fact that their GDP declined at year-end.9 Same goes for their crude oil imports, which hit a record high of 23.41 million metric tons this past January, up 7.4 percent year-over-year.10 The so-called experts have a habit of downplaying these numbers, but it seems pretty clear to us: China isn't waiting around for next QE program. They are accelerating their move away from paper currencies and into hard assets.

Figure 1: China Hong Kong Gold Imports vs. US Treasury Holdings

Source: US Treasury, UBS

China is not alone in this trend either. Russia has reportedly cut its US Treasury exposure by half since October 2010 (See Figure 2). Not surprisingly, Russia was also a big buyer of gold in 2011, adding approximately 95 tonnes to its gold reserves, with 33 tonnes added in the fourth quarter alone.11 It's not hard to envision higher gold prices if the rest of the non-G6 countries follow-suit.

Figure 2: Russia US Treasury Holdings ($BN)

Source: Zerohedge.com

The problem with central bank intervention is that it never works out as planned. The unintended consequences end up cancelling out the short-term benefits. Back in 2008, when the Fed introduced zero percent interest rates, everyone thought it was a great policy. Four years later, however, and we're finally beginning to appreciate the complete destruction it has wreaked on savers. Just look at the horror show that is the pension industry today: According to Credit Suisse, of the 341 companies in the S&P 500 index with defined benefit pension plans, 97 percent are underfunded today.12 According to a recent pension study by Seattle-based Milliman Inc., the combined deficit of the 100 largest defined-benefit plans in the US increased by $236.4 billion in 2011 alone.13  The main culprit for the increase? Depressed interest rates on government bonds.14

Let's also not forget the public sector pension shortfalls, which are outright frightening. In Europe, unfunded state pension obligations are estimated to total

$39 trillion dollars, which is approximately five times higher than Europe's combined gross debt.15 In the United States, unfunded pension obligations increased by $2.9 trillion in 2011. If the US actually acknowledged these costs in their deficit calculations, their official 2011 fiscal deficit would have risen from the reported $1.3 trillion to $4.2 trillion.16 Written the long way, that's a deficit of $4,200,000,000,000,… in one year.

There is unfortunately no economic textbook to guide us through these strange times, but common sense suggests we should be extremely wary of the continued maneuvering by central banks. The more central banks print to save the system, the more the system will rely on their printing to stay solvent - and you cannot solve a debt problem with more debt, and you cannot print money without serious repercussions. The central banks are fueling a growing distrust among the creditor nations that is forcing them to take pre-emptive actions with their currency reserves. Individual investors should take note and follow-suit, because it will be a lot easier to enjoy the "Year of the Central Bank" if you own things that can actually benefit from all their printing, as opposed to things that can only be destroyed by it. 

1 Board of Governors of the Federal Reserve System (November 30, 2011) "Coordinated central bank action to address pressures in global money markets".
http://www.federalreserve.gov. Retrieved February 15, 2012 from: http://www.federalreserve.gov/newsevents/press/monetary/20111130a.htm
2 Jenkins, Patrick and Oakley, David (January 30, 2012) "Banks set to double crisis loans from ECB". Financial Times. Retrieved February 15, 2012 from:
http://www.ft.com/intl/cms/s/0/09ab9542-4b6d-11e1-b980-00144feabdc0.html
3 Telegraph Staff (February 9, 2012) "Bank of England restarts QE with £50bn stimulus". The Telegraph. Retrieved February 16, 2012 from:
http://www.telegraph.co.uk/finance/economics/9071622/Bank-of-England-restarts-QE-with-50bn-stimulus.html
4 Fujikawa, Megumi and Ito, Tatsuo (February 14, 2012) "Bank of Japan Surprises by Easing, Setting Price Goal". Wall Street Journal. Retrieved February 17, 2012 from:
http://online.wsj.com/article/SB10001424052970204883304577222063451464968.html?_nocache=1329249611524&user=welcome&mg=id-wsj
5 Zeng, Min (February 10, 2012) "Fed's 'Operation Twist' Tangles Treasury Trade". Wall Street Journal. Retrieved February 15, 2012 from:
http://online.wsj.com/article/SB10001424052970203315804577211303042416034.html
6 Wroughton, Lesley and Hughes, Krista (January 18, 2012) "IMF seeks more funds". Reuters. Retrieved February 14, 2012 from:
http://www.reuters.com/article/2012/01/18/us-imf-resources-idUSTRE80H0VU20120118 
7 Mackenzie, Michael (February 15, 2012) "China anticipates Fed quantitative easing". Financial Times. Retrieved February 16, 2012 from:
http://www.ft.com/intl/cms/s/0/27a221be-57e4-11e1-b089-00144feabdc0.html#axzz1mSKyDrxw
8 Hook, Leslie (February 7, 2012) "China gold imports from HK surged in 2011". Financial Times. Retrieved February 14, 2012 from:
http://www.ft.com/intl/cms/s/0/d26cd2d6-518d-11e1-a99d-00144feabdc0.html#axzz1mH8V3yyg
9 Hook, Leslie (January 10, 2012) "China's copper imports hit record". Financial Times. Retrieved February 15, 2012 from:
http://www.ft.com/intl/cms/s/0/e8e76eda-3b68-11e1-a09a-00144feabdc0.html#axzz1mSKyDrxw
10 Bloomberg News (February 20, 2012) "China January Oil Imports Rise to Record 23.41 Million Tons". Bloomberg. Retrieved February 20, 2012 from:
http://www.businessweek.com/news/2012-02-13/china-january-oil-imports-rise-to-record-23-41-million-tons.html
11 World Gold Council (February 16, 2012) "Gold Investment Trends". World Gold Council. Retrieved February 17, 2012 from:
http://www.gold.org/investment/research/regular_reports/gold_demand_trends/
12 Scheyder, Ernest and Mincer, Jilian (January 26, 2012) "Analysis: Pension shortfalls a stark corporate challenge". Reuters. Retrieved February 15, 2012 from:
http://www.reuters.com/article/2012/01/26/us-corporate-pensions-idUSTRE80P03720120126
13 Milliman, Inc. (January 6, 2012) "Milliman analysis: Bad year for pensions ends badly". Milliman, Inc. Retrieved February 15, 2012 from:
http://www.milliman.com/news-events/press/pdfs/pfi-december-2011.pdf
14 Philips, Matthew and Campbell, Dakin (February 2, 2012) "Banks, Pensions are Squeezed as Fed's Low Rates Erode Profits". Bloomberg. Retrieved February 16, 2012 from: http://www.bloomberg.com/news/2012-02-02/banks-pensions-are-squeezed-as-fed-s-low-rates-erode-profits.html
15 Christie, Rebecca and Woodifield, Peter (January 11, 2012) "Europe's $39 Trillion Pension Risk Grows as Economy Falters". Bloomberg. Retrieved February 16, 2012 from: http://www.bloomberg.com/news/2012-01-11/europe-s-39-trillion-pension-threat-grows-as-regional-economies-sputter.html
16 Lawrence, Bryan R. (December 28, 2011) "The dirty secret in Uncle Sam's Friday trash dump". Washington Post. Retrieved February 14, 2012 from:
http://www.washingtonpost.com/opinions/the-dirty-secret-in-uncle-sams-friday-trash-dump/2011/12/28/gIQArtWMNP_story.html

atomic47's picture

We're all living in America

Moderator Jane's picture

Remind About End Times Forum Thread

MODERATOR

Now the third time I've posted this link...please...to keep the peace on the main blog...share your thoughts on "Are We in the End Times?" in the handy forum topic set up for your convenience:

http://www.tfmetalsreport.com/forum/3434/are-we-end-times

It just delves too much into religion for any continual thread on Main Street to go well in the long run. PLEASE continue the discussion in the forums, where people are welcome to get into heated religious arguments to their heart's content!

Xeno's picture

This has got to be Turd's

This has got to be Turd's greatest post! If not definately a top top tenner.

They stole our country, we're takin' it back.

"when you get to the bottom you go back to the top of the slide and you stop and you turn and you go for a ride then you get to the bottom then you still ain't done"

This is going to be an epic battle of the ages!

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