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

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turd [at] tfmetalsreport [dot] com ()

  520 Comments

terri5125
Sep 16, 2011 - 12:20pm

Chart question

I see the 5 minute charts you are putting out with gold but question- Turd said he would not be buying until 1720-1740. Does the further out chart show a drop? I am looking to buy more physical so just wanted to know what you guys are seeing. Thanks!

ewc58
Sep 16, 2011 - 12:21pm
exiledbear
Sep 16, 2011 - 12:24pm

Yeah, looking at the old '70s charts

Gold went from $200 to about $100 in the span of a year - 1975 to 1976. That would be like gold going from 2000 to 1000 today.

I'm not saying that's in the cards this time around, and certainly not right now. But it wouldn't surprise me if gold did a swandive from say 5000 to 2500 at some point, before going to that 12k target that Sinclair put forward a while ago.

Haole
Sep 16, 2011 - 12:25pm

Caption Contest on ZH

Just had a great laugh reading the comments, thought you all would enjoy it if not seen already.

https://www.zerohedge.com/news/caption-contest-0

pforth
Sep 16, 2011 - 12:25pm

JP Morgan on holiday?

Is JP Morgan on holiday or something? It feels like they've taken the foot off the brake today. What a nice change.

Sep 16, 2011 - 12:27pm

Be sure to read the new

Be sure to read the new sticky!!!

ericplatham terri5125
Sep 16, 2011 - 12:31pm

RE: Chart Question

Terri,

First off... let me say I am not a chart expert by any means... I just like to see trends form. Could we see a drop? Yes. Can we go up? Yes. Here is a two hour chart which leads me to believe that we are going to be around this range until the FOMC next week. From there, it will be crazy times.

ggnewmex
Sep 16, 2011 - 12:33pm

interesting story

So, I was talking to my parents last night. They had a "financial advisor" come over to discuss what to do with some money..

get this, you, fellow turdites will appreciate this...

He told them, (and they believe him, NOT their son, LOL)

Quote, -- you do not want to be in gold, did you know it went to 2000 per ounce, got nowhere to go but down.."

I laughed at that, they got perturbed with me....

This is an example that we are NOT IN A BUBBLE as long as the financial guru's think gold is stupid.

It just seems to be so logical, yet most cannot see the trees in the forest. too bad

Shill
Sep 16, 2011 - 12:34pm
¤
Sep 16, 2011 - 12:37pm

Sure does feel good..

...to see the PM's react in a rational way as far as our interests are concerned. I left the house to drop off daughter #1 to a college class and Au had just nudged over $1800 at the time.

I see we are steadily going higher. I've been watching the price creep and grind up in the last 10 minutes or so before posting.

Whew...what a relief to see it going up finally... love it!

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