Rational Minds Prevail

210
Tue, Aug 2, 2011 - 10:49am

 As hoped for, rational minds prevailed in the overnight trade and gold has been pushed to a new, all-time high near 1644. Apparently, guaranteeing a 20% increase in the U.S. national debt over the next two years is sufficient reason to buy more gold. Really? Ya think?

And don't think it's going to stop there. Predictably, all The Regime and The Republocrats did was buy time. The debt ceiling is unlikely to be reached again until after the 2012 elections and there will be no pesky, evil, mean scary spending cuts until after the election, too. (If ever!) As you continue to prepare yourself for the economic chaos that lies ahead, keep the metaphoric image of the "coin drop game" in your head. The process of moving toward the end of the great keynesian experiment quickens exponentially with the compounding of interest and declining tax revenues. The "coin" dropped further down into the funnel yesterday and is spinning faster today. Continue to prepare. I don't know when the end is coming, I just know that it is.

Alright. I want to give you a couple of charts but then I want to spend some time talking about silver. First up, here's a 12-hour POSX. Note that The Pig probed the low end of its current range last week. Having held, it's likely headed now back toward the middle of the range and will oscillate there for a while.

This gold chart is fascinating. Rarely do you see the blatant actions of The Cartel all on display within one, little 2-hour chart but here it is. Having done their job by keeping gold in check all last week, they'll soon fall back and find a new line to defend. Looking at the action this morning, it looks like they already are. I've said for weeks that I was looking for 1650 as a short-term goal and it looks like we might get there as soon as later today. We'll see. Either way, gold is cooking and should be bought and held. As you know, I have an intermediate target of 1800 by Halloween or so. Right now, even that looks conservative but I'm sticking with it.

paper_8-2amgold.jpg

Speaking of goals, for the past several weeks, I've been looking for silver to trade to 42-42.50. All of my charts tell me it's headed there. Fundamentally, however, it's having one hell of a time pulling it off. Why?

The criminal element of the CME/COMEX/CARTEL really did a number on silver back in early May and it is going to take quite a bit more time to recover. Several limiting factors are now in play:

1) Psychological Damage. The Master Plan of the Sunday Night Massacre followed by all the margin hikes sufficiently spooked a lot of speculators. Also, since it is patently obvious that the CFTC is utterly worthless and unable/unwilling to prevent the C/C/C from pulling the same stunt any time of their choosing, money is reluctant to get back into the game.

2) Financial Damage. The manipulation of the silver Comex is designed to scare off investors. The rational person (which I'm not) will choose not to play and invest in a market where the deck is so obviously stacked against you. The events of May have scared off a lot of rational investors.

3) Margin Damage. After five hikes in nine days, the amount of money it takes to buy silver on the Comex is now considerably higher than it was back in the spring. Why trade silver when you can get twice as much leverage in something else?

All of this is combining to restrain silver by keeping a lid on open interest. The total open interest is slowly creeping up but not fast enough to sustain rallies and push rapidly higher. Buyers come in and drive the price higher but, since there is rarely any follow-through buying, the EE simply steps in once things have quieted down. They begin selling their newly-minted paper silver and back down goes price.

paper_8-2amsilv3.jpg

So, what does this mean? HellifIknow! I still think silver is headed to a short-term top near 42. From there, I expect some consolidation for a week or two or three before taking a stab at 45. The key is the open interest and that is a two-sided deal. Right now, the open interest is only about 119,000 contracts. This is good because it has a lot of room to grow and it will be difficult for the EE to create a significant selloff with silver primarily in "strong hands". 119,000 is bad because it shows a continued lack of buying interest in silver. If you're wondering, the open interest in late April was between 145,000 and 150,000 contracts. That 20% difference is the primary reason silver is $40 and not $50. Let's watch the OI numbers this month. With a little more time and data, we should be able to make some end-of-year price predictions by about Labor Day.

For today, silver is holding above $40 as I have a last of 40.15. Closing above $40 would be a good thing to root for today. Closing above 40.60 would be our next target as we wait for silver to finally generate enough momentum to go tackle the highs of last week and, eventually, the 42-42.50 we've been waiting for.

paper_8-2amsilv.jpg

That's all for now. Have a fun and happy Tuesday! TF

p.s. I posted this note and then proceeded to check my inbox. Look what I found! A new Sprott Update!

The Real Banking Crisis

By Eric Sprott & David Baker

Although the adjacent questionnaire is facetious, it does ask the right questions. If you’re a wealthy European depositor today, what do you do with your money? Do you really continue to keep cash in a Greek or Italian bank account?

European bank depositors all face a tough decision today – to withdraw their deposits, or not withdraw and take their chances. Their response to that decision may determine the financial future of the Eurozone. Since 2008, EU Government bailouts have transformed a traditional banking crisis into a full-blown sovereign crisis. The European Central Bank (ECB) has managed to keep the Eurozone banking system going for now, but the constant threat of depositor bank runs makes its future extremely uncertain. A bank run on deposits forces banks to liquidate assets to raise cash. Governments and central banks will go to extreme lengths to avert such a scenario, because a liquidation reveals what an asset is really worth – and they are likely worth far less than what the banks are claiming they’re worth on their balance sheets today.

Bank runs have wreaked havoc in Europe over the past three years. In Iceland, it was a UK-led bank run on its second largest bank, Landsbanki, in early October 2008 that led Landsbanki to block over 300,000 UK depositors from accessing their accounts in its online bank called Icesave. Fear of widespread deposit losses compelled the British government to promptly freeze the assets of Landsbanki in retaliation, inciting an effective lock-down of foreign capital in and out of the country.1 You certainly didn’t want to have an Icelandic chequing account when that happened – especially considering that the Icelandic Krona proceeded to lose 58% of its value by the end of November 2008.2

In Ireland, it was the withdrawal of almost €4 billion in deposits in less than three weeks that compelled the Irish government to nationalize Anglo Irish Bank in January 2009.3 Large depositors lost faith in the Irish government’s bank account guarantee and began to pull their cash out of Irish banks in droves. As a Trinity College Dublin professor was quoted at the time, "This is a nightmare scenario for the [Irish] government… they can’t stop further withdrawals from the bank unless we close the borders and turn into Cuba."4

Ireland experienced a second bank run in late 2010, when more than €67 billion was withdrawn from Ireland-based institutions in October alone.5 Ireland’s top six domestic banks, two of which are currently in the process of being shut down, have now lost more than €90 billion in corporate deposits since the crisis began in 2008.6 And the withdrawals continue – in May 2011 it was reported that Irish resident private-sector deposits had declined by 8.7% over the past 12 months.7 Private sector deposits from non-Irish Eurozone residents declined by 9.7% over the same period, while deposits from non-Eurozone residents were reportedly down 28.2%.8Ireland’s experience makes it fairly clear: when depositors sense danger, and they are free to move their money elsewhere – they typically do.

The Irish deposit withdrawals have left Ireland’s banks in the hands of the ECB, which graciously bailed the country out back in November 2010, and has now lent Irish banks more than €103 billion as of the end of June 2011.9 This, in addition to the €55.7 billion the Irish banks have received from their own central bank, is amazingly still not enough to recapitalize the Irish banking system, which at the time of writing still requires an additional €24 billion of capital to remain solvent.10

In Greece, bank withdrawals have proven equally as damaging. Greek banks have seen deposit outflows of around 8% thus far in 2011, with an acceleration of outflows in May and June. Moody’s recently warned that such flows could cause a "severe cash shortage if they rapidly increased beyond 35% of deposits".11 Last week’s €109 billion bail-out suggests that may have already happened.

Just as with Ireland, the ECB has kept the Greek banks afloat, funding them almost €100 billion in 2010 and an additional €103 billion thus far in 2011.12,13 The recent bail-out will buy Greece time, but deposit outflows could still derail the ECB’s efforts to save the Greek banking system if they continue unchecked.

Although we don’t have the data for Spain or Italy, it does not escape us that those countries’ governments are likely highly aware of the effect a bank run could potentially have on their fiscal stability. Italy is a much bigger fish than Ireland or Greece. Its €1.8 trillion of borrowing in nominal terms is more than the debt of Greece, Spain, Portugal and Ireland, combined.14 Italy and Spain are too big to fail and too big to bail-out, so the future of the Eurozone will be seriously compromised if Italian and Spanish depositors take flight with their euros. To that effect, we found it very instructive to read about new provisions that the Eurozone’s rescue fund, the EFSF, recently incorporated into the latest Greek bail-out. Included among them is the ability for the EFSF to buy sovereign bonds in the secondary market, give EU states "precautionary credit lines" before they are shut out of credit market, and "lend governments money to recapitalize their banks".15 The sovereign crisis, at its root, is still a banking crisis. The banks hold loads of Eurozone sovereign debt. If depositors withdraw capital, those banks must sell some of those sovereign bonds to stay solvent. The EFSF provisions are there to provide the banks with the liquidity they need to survive deposit withdrawals. The question now is what will happen if the EFSF runs out of the funds to do so.

In our view, the depositors that chose to transfer their money out of their local Eurozone banks deserve some recognition, because they ‘get it’. The EU banks are still the root of this problem, and depositors are right to question the security of their deposits held with them. We have always postulated that the real problem in our financial system is too much leverage in the banking system. We are continually reminded of this fact every Friday when US bank failures are released. When you compare the failed banks’ assets to the cost the FDIC pays to make their depositors whole, it reveals how many times the banks have lost their equity capital. The key to remember here is that banks lend out our money and keep very little in reserve. If we assume they keep 5 cents of capital for every 95 cents they loan out – a 25% ‘implied write-down’ in Chart A would mean that the bank has effectively lost its capital six times over.

The banking situation in Europe is no different from that above – EU banks are also highly levered, but their situation is further complicated by the fact that what was once the most liquid and secure loan on European banks’ balance sheets – sovereign debt – is no longer liquid and secure. This makes EU banks extremely vulnerable to deposit withdrawals as it forces them to approach the ECB for help to maintain liquidity. There is only so much the ECB can do – if a true ‘liquidity event’ takes place, we can all rest assured that there will be no buyers of distressed assets in the sizes that European banks hold today, sovereign bonds, or not.

We discuss the EU banking crisis this month to remind everyone that we have very recently lived through two instances where the entire financial system almost collapsed. The first took place during the height of the 2008 crash. The second transpired in May 2010 when the ECB stepped in with its $1 trillion bailout package to avert disaster. All financial bailouts up to this point have been instigated with a desire to avert the first domino from falling. They have been instituted to avert contagion – a total financial meltdown that would effectively turn the global banking system into an Icelandic money trap – where no money can get in, or out.

We still don’t know if a financial collapse can be averted in Europe because investors and depositors are not all naïve to reality. The financial malfunction is ongoing and will not be prevented through these continual perverse financial machinations. If Eurozone depositors move their capital – more bailouts will be required, thereby increasing the sovereign debt levels and exacerbating the seemingly hopeless situation that much more.

As the questionnaire above suggests, we believe a growing number of European depositors are transferring their money out of EU banks, and many of them are reinvesting their capital into gold and silver for safety. It does not surprise us to see gold hitting all-time highs in euros and dollars. It’s worthwhile to acknowledge that those investors in Iceland and Ireland who had the foresight to convert their cash to gold before their countries’ respective bank runs have all fared extremely well in both nominal and real terms. We believe that gold and silver are the ultimate alternative for a chequing account in a vulnerable banking jurisdiction, and whether the ECB prints more euros or eventually defaults, both outcomes will continue to support a robust demand for precious metals as an alternative currency.

For more information about Sprott Asset Management’s investment insights and 
award-winning investment capabilities, please visit www.sprott.com.

About the Author

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

  210 Comments

Larry · Aug 2, 2011 - 4:11pm

Salute to Jim Sinclair!

You saw it, you said it, you taught it, you preached it, you fought for it, you stuck with it, you pulled us along and you were correct through all of it. Thank you! So very glad I met you in 2007. 

At long last... gold at $1650!!! WOW. I suspect there is no fear of heights in Turd Town when the next numbers fall.

https://www.youtube.com/watch?v=98W9QuMq-2k

bullwhip29 · Aug 2, 2011 - 4:12pm

$1764 gold

Many of the charts were busted today. I think major damage is coming for holders of equities if things are not turned around asap. For now, I'll at least consider the idea that the sell off today (right into the closing bell) could be attributed to many capitulating (which pushed the S&P below the 200d MA) and that a violent snap back could be possible in the coming days. If, however, this is only the tip of the iceberg, then we could see gold at $1764+ much sooner than anticipated. We are close to a critical fork in the road...

Rui · Aug 2, 2011 - 4:17pm
FriedEggs · Aug 2, 2011 - 4:20pm

Four:Twenty

To the Fellow 4:20 Turdidians...on this glorious day...

Spark one up...Lets do it!

Its Tuesday Tokes...

Fried(e)

Blue Sky · Aug 2, 2011 - 4:21pm

I can't believe

the EE let it run like this. Playing the devil's advocate with the DOW down and gold up and bonds down I can hear the cries of the people lamenting that there is no interest rate for savings and our retirement stocks are plunging and who can afford gold at 1660.00 so bring in the PPT to save us before it's too late. Bring gold down like you did oil and we'll love you again and oh yeah vote for you in the next election.

duckwomanloulou bullwhip29 · Aug 2, 2011 - 4:26pm

Movin' on Up (my 5 year old son's favourite on the turntable)

Video unavailable

Having to pinch myself - each time the chart refreshes it's still 'movin' on up'!! :)

Lou

Jasper Puddlemaker · Aug 2, 2011 - 4:28pm

Ya baby...

Six months off isn't a "miss" Jim. Metallica and Eastwood sum up my thoughts this afternoon.

Metallica - The Ecstasy of Gold & The Good The Bad and The Ugly
R man J · Aug 2, 2011 - 4:29pm

Should have listened sooner

After I have been talking to him for a year about PMs, a friend of mine this morning finally decided to sell $20K mutual fund and buy gold. He could not execute the buy today due to the lag time in transfer of funds...and now what???? Talk about a day late.

Running_to_stand_still · Aug 2, 2011 - 4:30pm

UK is to blame for Gold Bubble.....i see

https://seekingalpha.com/article/283766-former-u-k-prime-minister-gordon...

this is incredibly stupid, but it's what we are dealing with. i guess the answer is to pour into 10 year treasuries, because we surely are smart enough to stay away from 30 year paper (wink, well it is what happened today). can't wait until central banks pour into gold with what's left in the coffers......who's fault will it be then? my guess is Putin

TheGoodDoctor · Aug 2, 2011 - 4:31pm

@Rui Nice chart bud!

@Rui Nice chart bud! laugh

aurum argentum · Aug 2, 2011 - 4:31pm

real time

Fellow turdites. Where do you go to find real time commodity prices for gold and silver.

Also, anyone know if and where there is a free otcbb pink sheets real time market depth site? I can't find one.

Many thanks...

jackinrichmond After the Storm · Aug 2, 2011 - 4:32pm

someone wanting their gold

good point.. maybe the p.a.g.e. ? my understanding is that the pan asian gold exchange will deal directly in physical.. does anyone know when this new exchange is due to open ?

TheGoodDoctor · Aug 2, 2011 - 4:34pm

Harvey's post should be

Harvey's post should be interesting tonight!

Dr G R man J · Aug 2, 2011 - 4:36pm

@R man J

Stinks, but your buddy will still be fine. $20k will work out to about 11oz of gold with premiums. 11 x the gains from today isn't that much. $500 or so. Would have been nice to save it, but at least he is getting on board the train!

Watcher · Aug 2, 2011 - 4:36pm

EE letting the price

EE letting the price run?

That's what they did to slam the silver market. Will they raise margins like they did in silver? Are they planning to trap the speculators and take the price down in an overnight raid?

And can they really manipulate prices of an asset that is global?

It feels like something 'broke' today....

Patrancus · Aug 2, 2011 - 4:41pm

I seem to recall reading

I seem to recall reading somewhere from one of the heads, that after the dirty debt deal was done we could expect the gold and silver dump of the year. I decided in the alternative and picked up a few more kerns instead. moooo!

aurum argentum · Aug 2, 2011 - 4:43pm

Thanks

Thanks folks. i just found another for commodities:

https://www.sgxniftydowfutureslive.com/index_files/DOWFUTURES.htm

Still can't find one for free otcbb pink sheets level 2 market depth. if anyone knows of one, i'd certainly appreciate it....

TheGoodDoctor · Aug 2, 2011 - 4:51pm

Stephen Leeb - Expect Silver

Stephen Leeb - Expect Silver to Trade in the Three Digits

If you do a search for his name on this site I have recommended a couple of his books. Don't know if there have been any takers yet but he is a great read on understanding the coming commodity/energy shortages, investing in the BRICs, and the law of diminishing returns for alternative energy (IE the water, energy, and commodities put into an alternative energy will not be recovered in energy output as prices increase).

He also states that there will be no one "silver bullet" alternative energy and that many will be used along with nuclear and fossil fuels. The argument is that all energy supplies are limited.

https://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/8/1_St...

Vypuero · Aug 2, 2011 - 4:53pm

I am pretty sure

If I short the market now, it will bounce back. So I can't do that. Let it burn!

Goofy · Aug 2, 2011 - 4:53pm

Remember its just bad paper

Remember its just bad paper like the US dollar showing weakness against Gold. Take a look at Gold in Swiss Franc!

Mickey · Aug 2, 2011 - 4:54pm

Just a Wish

our President-who campaigned on how he would bring this country together, and the democratic leaders in Congress, could make an occasional speech without saying millionaires, billionaires, corporate jets and being fair. Not to mention oil companies not paying fair share -when other companies like GE pay nothing in tax.

we probably have 15 months of this coming. Tylenol will come in handy.

s1lentslayer · Aug 2, 2011 - 4:55pm

This is insane. Surely there

This is insane. Surely there will be a course correction in gold. Gold has gone straight up for a month straight.

OC15 · Aug 2, 2011 - 4:56pm

This

was an ass whoopin today.

Dr G · Aug 2, 2011 - 4:57pm

@s1lentslayer

Yes, if by course correction you mean a consolidation of gains. If you mean a $100 drop, I would highly doubt that. The fundamentals are pushing it higher, not some magical force. Change the fundos and the price changes (minus blatant manipulation).

Larry · Aug 2, 2011 - 5:01pm

oops

tried to edit a chart jpg but no worky. hmmm...

Watcher · Aug 2, 2011 - 5:02pm

Eighth day down for the

Eighth day down for the market. It may bounce up tomorrow. Be careful out there. Only the insiders decide when to short and when to go long so they can keep the banks afloat. They'll decide when to go long so they can make another boatload of cash.

silver foil hat · Aug 2, 2011 - 5:02pm

sorry if duplicate.... latest from "wynter" 1 hour ago...

Word from The Leader to Blythe and The Morgue 56 minutes ago

Blythe,

The Leader wishes to inform you and the Morgue that if the paper price of silver is ever below $36 again, we will bust the Comex.

You are hereby given due notice.


You're going home in a body bag, do da, do da....... https://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stoc... I guess 36 is "THE" floor. and quoth the raven, NEVERMORE!!!! smiley

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12/11 8:30 ET Producer Price Index
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