Gold and silver withstand paper attack

Harvey Organ, Tuesday, June 7, 2011

Gold and silver withstand paper attack

Jim Sinclair – Gold to Exceed $12,500 to Balance US Debt

June 7, 2011, at 2:10 pm
by Jim Sinclair 

Dear CIGAs,

My interview with Erik King of King World News is I believe the most important this year.
Please listen to it as it examines the improbably end of QE.


Jim Sinclair – Gold to Exceed $12,500 to Balance US Debt
With continued volatility in gold and silver, today King World News interviewed the legendary Jim Sinclair to get his take on the markets.  Sinclair surprised KWN by discussing a price target for gold that to some would seem unimaginable.  When asked about trading for gold this summer Sinclair stated, “I think most of your analysis of secular trends will look and say no, no, summer time doldrums nothing happens.  Well we could have something very significant happen and for a very clear reason.  It’s becoming obvious even to our talking heads that this great recovery which we’ve questioned for a considerable period of time is in fact more in people’s minds than in reality.  The economy is turning down again and turning down hard, there’s no question about that.”
Sinclair continues:
“Quantitive easing is the only tool that the Fed has had available to them.  The Fed has pumped in trillions of dollars and the result of that pump-priming in the monetary sense has been only at best a modest recovery, and certainly making trillionaires out of some bankers, billionaires out of many of them.
We’ve come to a point now where if QE were to be stopped, you would see an implosion in the general equity markets…And yes gold would go down, the market would go down hard.  The dollar would go up slightly to begin, but then fall back down again as the management of the economy was seen to have been ineffective and inefficient.
Gold would then start moving back up again and I think if QE was to cease, the recovery on gold from a modest reaction would be multiples upon multiples of that reaction and would lead the way to Harry’s $2,400, to Alf’s $3,000 to $6,000.
You can’t stop quantitive easing.  If you stop quantitive easing the stock market will return to its recent low or lower.  That alone by its impact on decision making will cause an economic implosion.  We’re tied into this monetary stimulation, there is no way out of monetary stimulation.  If there was any attempt to get out of monetary stimulation it would cause an economic accident which would require central banks to go right back where they were.  That would be again, loss of control…
More…

Jim’s Mailbox

June 7, 2011, at 1:28 pm
by Jim Sinclair 

Dear Jim,
The following is an analysis of your Mathematics of Gold. The analysis was conducted by our summer intern and we thought it may be of interest to your readers.
Kind Regards
Isaac Matzner



Research Coordinator
Auerbach Grayson & Company 25 West 45th Street
New York, NY 10036 USA
Tel. 1-212-453-3549
Fax. 1-212-557-9066
www.agco.com

Case: The Mathematics of Gold
International US dollar debt: $4.4792 trillion (approximately 32% of total US debt of $14.32 trillion)
Portion of international US dollar debt held by China: $1.1449 trillion
90% of total US international debt less portion held by China = 0.90 * ($4.4792 trillion – $1.1449 trillion) = $3.00087 trillion (A)
50% of international US dollar debt held by China = 0.50 * $1.1449 trillion = $0.57245 trillion (B)
Total foreign currency reserves held by People’s Bank of China (Central Bank): $3.045 trillion
Therefore, A + B = $3.57332 trillion (C)
Total US holdings of gold = 8,133.5 tonnes = 8,133.5 * 35,273.9619 = 286.900770 million ounces (D)
Therefore, C/D = $12,454.8986 per ounce ~ $12,455 per ounce
Balance of Payments is an account of financial flows between a country and the rest of the world. It consists of the Current account and the Capital account. Current account consists of the trading account (exports minus imports of good and services), income account (factor payments from abroad minus factor payments to abroad) and the transfer payments account (foreign aid received minus foreign aid disbursed). Capital account, which is in surplus on account of increasing foreign investments in US treasury securities and in deficit for increased US investments in foreign securities and reserves. A surplus in the current account should always be balanced by a deficit in the capital account and vice-versa. That is, the balance of payments must always balance.
Suppose the balance of payments account does not balance. Then there are two options to balance BOP, first, the Central Bank of the country (in this case US Federal Reserve) should increase/reduce its reserves, that is the Central Bank’s holdings of foreign currencies and gold to bring BOP to balance. Second, if the Central Bank cannot increase/decrease its reserves or has decided against changing its existing reserve holdings, then the exchange rate of the country’s currency will be decided by the market and the government will not have any control over its currency.
Now, US has a current account deficit and the BOP is balanced by capital account surplus. If the BOP was not in balance and if US wanted to keep the existing exchange rates fixed, assuming it had a BOP deficit (international debt we calculated above), then it would either have to sell foreign exchange reserves or appropriate amount of gold to the tune of $12,455 per ounce. Thus, to balance the US government balance sheet, its holdings of gold should be valued at $12,455 per ounce.
Present market value of gold = $1,528.80 per troy ounce = $1,528.80 / 1.09714286 per ounce = $1,393.44 per ounce. This means that gold is heavily undervalued at it existing market price. Thus the price of gold has to be raised 8.94 times ($12,455/$1,393.44) ~ 9 times to the present price of gold for US balance sheet to balance.
References:
1. Link: http://en.wikipedia.org/wiki/United_States_public_debt
2. Link: http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
3. Link: http://en.wikipedia.org/wiki/Foreign_exchange_reserves
4. Link: http://en.wikipedia.org/wiki/Gold_reserve
5. Link: http://finance.yahoo.com/

A Potential Signal For Further Monetary Stimulus, Aka, Quantitative Easing

June 7, 2011, at 3:41 pm
by Jim Sinclair 

Dear CIGAs,

Ever since talk began surfacing of the ending of QE2 this month, the stock market has rolled over on the technical price charts. The more convinced that the markets have become that the Fed was going to take away the fun and games, the further the equity markets have dropped. It has now reached a point where the stock market is threatening to take out a critical support level. Should it do so, consumer confidence, already reeling from high foreclosure rates, falling property values, soaring gasoline, food and other energy prices, and a lackluster jobs situation, would immediately plummet.
The one thing that has helped to keep some of the population from becoming completely depressed has been the fact that they could look at their 401K programs and still see that those were in the plus column for the year. In other words, while the rest of the world was seemingly going to economic hell, at least they were making a bit of money on their retirement accounts.
Take away this last refuge of happiness, and the mood of the public will grow foul and fester, not to mention that of Wall Street and the many brokerage houses which do not generally make money during bear markets in equities.
Look at the weekly chart of the S&P (note – I use the emini S&P for charting purposes) and you will see the rising 50 week moving average along with a critical horizontal support level that comes in near the 1250 level. That is also the level near which the S&P began the new year of 2011. If it falls below that level, all gains from the year are gone and losses begin to then mount. That is when the general public will lose its last refuge of consolation.
I mentioned last week that if 1300 were to give way on the weekly chart, it would bode ill for the broad equity markets going forward. That level is still a key level but as of now the S&P is trading below it and cannot seem to recapture its footing above it. The momentum is growing to the downside on the charts and if we continue to get economic data that disappoints and reinforces the growing perception that the economy is in serious danger of rolling over, a very strong possibility exists for a move lower in the S&P to the 1250 level.
If this level gives way allowing the market to fall down towards the 50 week moving average which currently comes in near the 1225 level, expect a chorus of voices clamoring, nay, demanding further stimulus from the Fed. Those voices will firstly come from the Democrats whose election fortunes next year are directly linked to the welfare (or lack thereof) of the US economy. It will also come from the doves on the FOMC. Lastly it will come from many in the financial community who are more willing to take their chances on a falling Dollar than a falling stock market.
If the Fed hearkens to those voices, and I have no reason to doubt at this time that they will not, expect the US Dollar to not only take out critical chart support near 73 – 72.50, but to continue sinking lower. The result will be to push gold sharply higher and into new all time highs.


Click chart to enlarge in PDF format with commentary from Trader Dan Norcini
For further market analysis and commentary, please see Trader Dan’s website at www.traderdan.net

The Big Banks Have Sold Us Out. Democrats And Republicans Have Sold Us Out. No One Is Defending Our Interests. Our Future Is Going Up In Flames. It’s Time For Us To Stand Up And Defend Ourselves












Get your money out while you still can...if this is true...

Is France's Banque Postale Cutting Its ATM Withdrawal Limit By Up To 50%

Submitted by Tyler Durden on 06/07/2011 14:14 -0400

There is a curious email floating around (allegedly sourced here), which is supposed to represent a communication from France's La Banque Postale to its clients, notifying that beginning August 1, 2011, the bank will lower the weekly ATM withdrawal limit by anywhere between 33% and 50%. In brief, according to the terms of the of the bank's statement, the top tier of credit card holders, the Visa Premier, will see their weekly withdrawal limit reduced from €3000 to €1,500, while the next two tiers, MasterCard and Bleue Visa, will see their weekly withdrawal allowance lowered from €1,500 to €1,000. Lastly, the lowest tier will see its cash withdrawal drop from €1,000 to €800. Naturally if confirmed, this would not be a good sign as pertains to the bank's current liquidity situation: traditionally cutting the withdrawal cap is an indication of a substantial cash on hand scarcity. We hope some of our French readers can confirm or deny this peculiar development out of a country that has so far rarely made the "financial woes" headlines.

QE 3 "Protection"?

Submitted by Tyler Durden on 06/07/2011 14:29 -0400

With less than an hour and a half left until the release of Bernanke's 3:45 pm prepared remarks out of embargo, one wonders if someone may have just purely by accident, and totally inadvertently broken the embargo, in advance of a speech that some see just as important as the Jackson Hole QE 2 announcement. And while the earlier announcement out Fed 8K distributor Jon Hilsenrath made it seem that there would be nothing QE 3-related at all out of Bernanke's Atlanta remarks, perhaps the Fed has finally remembered that the best monetary policy works when it actually surprising. Which incidentally may explain why there is a rather substantial amount of XLF July $16 call buying going on, to the tune of $1.4 million: the option-based bet for a run up versus down in financial stocks (which would be the primary beneficiary in any even remote QE 3 announcement) is substantially tilted to the upside, with a 4 to 1 bias in favor of the calls. Will these calls pay off massively, or will they all expire worthless very shortly: find out at 3:45 pm Eastern.

The Animated Weiner

Submitted by Tyler Durden on 06/07/2011 14:50 -0400

With an hour of boredom to kill until the Bernanke announcement, and nobody trading anything until then, here is some afternoon amusement courtesy of the NMA which has taken Weiner's career suicide and made a, what else, cartoon out of it.

Guest Post: How Goldman Dissembled In The Wall Street Journal

Submitted by Tyler Durden on 06/07/2011 15:42 -0400

You have read Dealbook's superficial (and practically dictated) defense of Goldman's subprime bet. Below we present David Fiderer's a vastly different perspective than the one shared by straight-to-HBO expert A.R.S., which provides a far more realistic perspective of what really happened with Goldman and its "big short."

Market Reaction To Bernanke Speech: Disappointment

Alas, the market still refuses to acknowledge that the S&P will need to drop below 1000 (and whatever the appropriate level for the RUT is) for Bernanke to greenlight QE 3 which will in turn send everything to the moon (better have those collocated algos ready and steady). Judging by the post-speech reaction, markets may finally be getting it, just as Bernanke is also getting that he is dealing with a heroin addict who will not settle with methadone (aka "extraordinary" and "extended").

Our Economic Future - From Best to Worst Case

There is a great deal of uncertainty among investors about what the future of the U.S. economy may look like – so I decided to take a stab at what’s likely to happen over the next 20 years. That's enough time for a child to grow up and mature, and it's long enough for major trends to develop and make themselves felt. I’ll confine myself to areas that are, as the benighted Rumsfeld might have observed, “known unknowns.” I don’t want to deal with possibilities of the deus ex machina sort. So we’ll rule out natural events like a super-volcano eruption, an asteroid strike, a new ice age, global warming, and the like. Although all these things absolutely will occur sometime in the future, the timing is very uncertain – at least from the perspective of one human lifespan. It’s pointless dealing with geological time and astronomical probability here. And, more important, there’s absolutely nothing we can do about such things. So let’s limit ourselves to the possibilities presented by human action. They're plenty weird and scary, and unpredictable enough.

Goldman: "QE 3 Optimism Is Excessive"

Submitted by Tyler Durden on 06/07/2011 17:15 -0400

As has been repeated on Zero Hedge many times, with the stock market just 15% off its post-Jackson Hole surge highs, the market continues to be irrationally exuberant that QE3 will come come hell or high water. No. That will not happen until all the mutual funds who have been holding for 2+ years realize that in order to get another heroin hit, some will have to be wiped out (thank near-record margin debt and record low cash holdings) before QE3 does arrive. The latest to confirm this is Goldman Sachs, which via a note just released by Dominic Wilson confirms our speculation that "QE3 optimism is excessive." Ironically, the only thing that will guarantee QE3 is a fresh round of significant pains which retraces the entire QE2 move higher. Nobody in the long-only community wants to hear it. Alas, it is the truth. As usual: he who sells first, will have a job tomorrow...

And More Cold Water From Goldman: "Bernanke Speech Suggests Fed Squarely In Zone Of Inaction"

Submitted by Tyler Durden on 06/07/2011 17:32 -0400

Following the earlier note on the "irrational exuberance of QE3" at current conditions, Goldman does a one-two to the face of the long-only slow money crowd which are about to realize that what goes up the escalator, will go down the elevator, repeating that the next round of monetary easing "would require a notable further deterioration in the outlook to be considered seriously." As a reminder the only "outlook" the Fed keeps an eye out on is the 50 DMA of the Russell 2000.

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