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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  520 Comments

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Haolezilverreiger
Sep 18, 2011 - 6:10pm

... and the tens of billions

... and the tens of billions of debt held by Euro banks and probably hundreds of billions in CDS against it held by U.S. banks.

zilverreiger
Sep 18, 2011 - 6:08pm

Greek is size wise only a

Greek is size wise only a dent for the eurozone, the problem lies more in the symbology, and the precedent.

¤
Sep 18, 2011 - 6:07pm

Greece default effect on banks

Guest Post: If Greece Default Would Wreak Havoc On European Banks Then CEO’s Should Be Fired

Submitted by Tyler Durden on 05/26/2011 18:13 -0400

https://www.zerohedge.com/article/guest-post-if-greece-default-would-wre...

¤
Sep 18, 2011 - 6:05pm

A Greece Default Would Wreak Havoc ...

Here Is What Happens After Greece Defaults

Submitted by Tyler Durden on 05/21/2011 19:49 -0400

https://www.zerohedge.com/article/here-what-happens-after-greece-default...

ReachWest
Sep 18, 2011 - 6:05pm

@Dr Jerome

This article from earlier today on ZH, may be a good place to start. It shows the exposure of various European and US Banks to the PIIGS.

https://www.zerohedge.com/news/interactive-infographic-doomed-european-f...

TechTradeHard Rain
Sep 18, 2011 - 6:04pm

Softs

Sugar is definitely on the downtrend, having failed to break 30 in the Oct contract several times, and then dropping 200 points on Friday. Cocoa's been in a beatdown for a while, from 3200 to under 2800, so it could be due for a pop, I have a few call options on. Cotton's hanging pretty tough actually, down from its highs, but way off its lows. Looks like a pullback into the 1.05-1.10 area, than perhaps a continuation of the rally.

¤
Sep 18, 2011 - 5:59pm

Gold, platinum ratio shifts, hints at wider change

Gold, platinum ratio shifts, hints at wider change

By mpicache[at]marketwatch[dot]com (Myra P. Saefong), MarketWatch

SAN FRANCISCO (MarketWatch) — Platinum prices have comfortably traded much higher than gold for the bulk of the last 20 years or so, but that relationship is starting to change and may signal a new order of value in the precious metals.

“A gold price higher than platinum is very unusual since the mid-1990s, when platinum’s use in catalytic converters really took off for diesel engines,” said Adrian Ash, head of research at BullionVault.com.

“Just like the under-performance of gold-mining equity in 2011, the low gold/platinum ratio points to economic weakness worldwide,” he said, adding that the ratio last broke below parity during the post-Lehman Brothers slump in 2008.

Prices for the two metals have been trading fairly close to each other over the last couple of months, with gold surpassing the price of...

https://www.marketwatch.com/story/gold-platinum-ratio-shifts-hints-at-wi...

Haole
Sep 18, 2011 - 5:56pm

That chart...

...gives me a boner.

Thanks for qualifying your comments too Vypuero, I thought it had something to do with trading. I just stepped on a few years ago and am riding it like a pony, volatility and all, much easier for a dummy like me. ;)

Congrats Shill, that is very cool!

Sep 18, 2011 - 5:55pm

European banking crisis?

Can anyone point me to an article that explains how Greece's default initiates the "domino effect" on the European banking system and how that string of dominos might cross the Atlantic to take down American banks?

thanks

¤
Sep 18, 2011 - 5:53pm

Haole

LMAO! Easy there, don't hurt yourself.

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