Macro

520
Fri, Sep 16, 2011 - 9:46am

Gold is recovering today and is actually green on my screen. Wow! How unusual! Let's see if we can rally today and crawl back above 1800 before we call it a week. There's been some very interesting "news" rolling around for the last 24 hours and I wanted to take a minute to give you my non-educated opinion.

The crux of the matter is summarized quite well below:

https://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100011987/china-to-liquidate-us-treasuries-not-dollars/

Between these comments and the wikileaks cables, one can quickly conclude that the Chinese are considering (if not already actively engaging in) further "diversification" of their vast U.S. treasury holdings. In the article above, Mr. Pritchard makes this sound as if there will be some happy and pleasant side effects of these moves. "Don't worry", he seems to say, "those dollars will flow into hard assets like stocks, land and gold". As if it's a zero-sum, no-big-deal event. On this point, he is dreadfully wrong.

As you know, I have long maintained that the real purpose of Quantitative Easing is not to promote economic growth. It is to promote low interest rates. Remember how rates on U.S. treausries are set...through auctions. Simply stated, if you need to borrow $50B and there are no takers at 2%, then you have to try 3%. If no one wants your bonds at 3%, then maybe they'll take them at 4%. Low or no demand means higher interest rates. Period.

With U.S. borrowing needs at all-time high levels, the rest of the world must be induced to buy treasuries. But, rates cannot be allowed to rise. As Mark Steyn points out in his new book, if long-term rates were to return to 5.7% (the average for the period 1990-2010), debt service projections for 2015 would increase from $290B to $850B! Additionally, the only "way out" of our current fiscal disaster is to magically increase tax revenues through economic growth. A return to higher rates would stifle and crush any potential "recovery".

So, what's a Boy Wonder to do? The answer: MORE QE MORE QE MORE QE.

The U.S. has managed to cover its necessary funding needs since June by managing the headlines. Have you noticed that nearly every time a treasury auction arises or the POSX moves down toward critical support, some type of intervention takes place. Whether it's a foreign central bank devaluing their currency or a rash of suddenly scary headlines out of Europe, events seem perfectly timed to keep money flowing into treasuries. This can work in the short-term and it obviously has. The yield on the 10-year note has actually declined since the end of QE2 in June. This won't and can't continue. A recent study from the University of Wisconsin showed that, by 2020, U.S. funding needs will soak up nearly 20% of the total annual global GDP! Do you really think that that is possible? There can be no world GDP when world economic growth is crushed under that type of debt burden.

But, that's in the future. What about the near term? Eventually, rates will rise when buyers (like China) disappear. Faced with an immediate funding crisis, QE will resume with vigor. Left with no other government funding option, the Federal Reserve will be forced into creating trillions of new greenback, simply to keep the social security checks flowing, the doctors paid and the military shooting. The dollar will resume its long-term decline into obscurity.

In the end, all of the central bank intervention in the world will not be able to suppress the global demand for true safe haven financial protection. Gold will rise to heights that even you, my dear reader, may currently think are unattainable. Silver will most certainly come along for the ride. Therefore, do not be fearful. If you use the time left to prepare...mentally, financially and spiritually...you will survive, and even prosper, in the days ahead.

Here are your updated charts. Unfortunately, both have taken on the appearance of range-bound markets. This can be managed as it affords us the clear opportunity to buy at the bottom of the range and sell at the top but it certainly isn't as much fun as runaway efforts to the upside. For today, don't get too excited until/unless either metal is able to firmly trade through the blue trendlines I've drawn inside the ranges.

I'm going to be away and unavailable for most of the day today so, just as John said to Yoko, "looks like you're on your Ono". I will be monitoring things from afar, however, and will attempt to update if conditions warrant. Have a great day and a relaxing weekend! TF

p.s. Another preparatory move for the opening of PAGE:

https://www.reuters.com/article/2011/09/16/cjina-gold-idUSL3E7KG1IG20110916

About the Author

Founder
turd [at] tfmetalsreport [dot] com ()

  520 Comments

Tom L
Sep 16, 2011 - 12:01pm

@EWC

I still own the 30 $14 DEC SVM's I bought weeks ago for $0.35. So, It's all good.

If that comes to pass, I'll be the first one to say "Yippee!" in my most annoying 9-year-old Anakin Skywalker voice

Ta,

Nick Elway
Sep 16, 2011 - 12:04pm

CEF outperforming GLD+SLV

CEF (roughly 50 per cent gold and 50 per cent silver) is up over last 30 days with GLD flat and SLV down. The premium (for this "physical" ETF that Harvey follows) is climbing. The premium usually falls when silver drops. Something has changed.

Tom L
Sep 16, 2011 - 12:05pm
Haole
Sep 16, 2011 - 12:08pm

The FKN Newz

Sorry about the intro/addvert.

SUCK MY VETO PALESTINE
beardeus
Sep 16, 2011 - 12:09pm

INSANITY!

It is absolutely INSANE that PMs would be down on Swiss Franc Euro peg and yesterdays news!

snoochieboochies ¤
Sep 16, 2011 - 12:09pm

I like that picture! where'd

I like that picture! where'd you get it from Darkpurplehaze?

ericplatham
Sep 16, 2011 - 12:12pm
Tesla
Sep 16, 2011 - 12:15pm

ZH Guest Post -

https://www.zerohedge.com/news/guest-post-china-ready-pull-plug

I'm guessing this is the one Turd was talking about yesterday gang...

Guest Post: Is China Ready To Pull The Plug?

ewc58
Sep 16, 2011 - 12:15pm

Beardus!

It's today though :-)

exiledbear
Sep 16, 2011 - 12:19pm

It probably won't be obvious

Until a week or two has passed that this correction is over. Of course 4 months from now, you'll look at the chart and it'll be obvious when it was really over.

I'm not saying it's over yet, just saying that unless you're being really prescient or psychic, you're just not gonna know.

Besides, do you really want it to get to 2500 right this minute? If it did, you know it would have to correct even harder than it has already. What's 62% of 2500?

Another thing. About halfway thru the '70s bull in gold there was a nasty 50% haircut. The fireworks, the part where everyone went nuts and formed lines to the coinshop, that all happened in the last year or two of the bull.

It's the sitting that makes you the money. The part that Livermore left out was "it's the sitting on thumbtacks that makes you the money".

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