In either June or August the FED will raise interest rates, but it is a mute point. The ten-year US Treasury closed at 4.77% last Friday, a clear breakout. The next stop is 5-1/4% to 5-1/2%. That means all but 20% of the mortgage holders will not find it prudent to refinance. If their homes fall in value and they have to pay more monthly for their mortgage payment they lose their homes. Then there are the derivatives. JP Morgan Chase may be the LTCM of the future. They have $36.8 trillion in notional value of derivative contracts and 1.5 million separate distinct securities positions with 240,000 different pricing series. There are about $200 trillion in derivatives out there and 85% are interest rate oriented. The rates just spiked from 4.50% to 4.77% and there could be a fall out. It may not happen immediately, but next year will be terrible.

            For the week ended 5/7/04, 30-year fixed mortgage rates rose again from 6.01% the previous week to 6.12%. We see 6.30% or higher next week and 7% shortly. That is up from 5.38% on 3/18/04. If we are right, just as we predicted, a rise of 1-5/8% in three to four months. Fifteen-year fixed were 5.47% up from 5.35%. The one-year ARM, adjustable rate mortgage was 3.76% up from 3.75%, which we find preposterous. There is no question the FED is telling Fannie and Freddie to suppress the ARMS rate.

As we mentioned before gold and silver and the shares are taking a short breather. Just remember gold is only selling at half the price it rose to in 1980. Even though base metals have doubled, there is a good chance they will double again. Copper is $1.25 lb. versus $2.00 lb. in 1988. Nickel is $5.05 lb. versus $10.07 lb. in 1988. The same is true for aluminum, zinc, lead and tin. Of course silver has a long way to go from $6.00 oz. to the 1980 high of $44.00 an ounce. China has been a major purchaser of commodities and we do not see any slow-down in their economy for at least nine months to a year. That means commodity prices should rise over the next one to two years. Besides other countries in Asia are doing well and India and Russia have semi-booms going.

            OPEC is currently producing 1.5 million barrels of oil a day, more than its official output limit, yet oil prices are over $40.00 a barrel.

            Strong oil imports from Mexico and Nigeria have pushed up US crude oil supplies, up from last year’s levels by 9.1 million barrels, or more than 3%. In just the last year the Strategic Petroleum Reserve has moved up from 58 million barrels to 658.3 million barrels. This puts all imports at 60% of usage and another 19 million barrels is slated to enter the SPR by October.

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GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS

            As yields climb, the stock market remains stalled and these are indications that the end of the real estate bubble may have occurred. The FED is under continual pressure to raise interest rates. Even if they do raise rates in August you can bet they will create $1 to $2 trillion in aggregates before November and their repo numbers will go sky high. In spite of the continual negative media reporting and outright lies by people like Jeffrey Christian, the fundamentals underlying the primary bullish trends for gold and silver and the primary bearish trend for the dollar has not changed one bit. Nothing has changed. The enemy has just gotten away with another major manipulation. All of the negatives that make these metals so attractive are still in place. That is particularly true if the South African miners go on strike or there are mine closures there. That will just add to the supply deficit in gold. The panic we witnessed in the market for gold and silver in April just gives us another great buying opportunity. You buy when the blood is in the streets. You buy them when nobody wants them. In both metals the ultimate prices are determined by supply and demand. Silver has little or no inventory left and central banks are probably looking at 5,000 tons with which to suppress markets. Production is falling and new sources of production are at least three to five years downstream. As copper, lead and zinc production ease so will the supply of silver because that is where 70 to 75% of silver comes from. Central bank selling cannot destroy the primary trend in gold all it can do is destroy the underpinnings of each society that sells their most precious asset. If you look back over the last 3-1/2 years you can plainly see gold has persevered and has moved into a bull market in spite of massive gold selling by governments. What governments have done has been a total failure. The bull market still lives. They delayed it and for that delay we will be rewarded with much higher prices than we would have had. This is nothing new, the Fed, Treasury, IMF and other governments did the same thing and we were rewarded with $840 gold. Nothing has changed. It’s just this time we are looking at $3,000 gold.

            Gold is the natural antithesis of the dollar the world’s reserve currency. The dollar now near 92 will test 85, 82 and 80. Once 80 is broken the last stop should be at 70 to 72. This will not happen over night and there will be major bear market rallies along the way. Seventy to seventy-two would be a reflection of a normal correction, but today these markets are not normal. They are supercharged and the systemic damage done to the world financial structure is massive, so a fall to 60 is not out of the question. If social disorder were to accompany depression it could get far worse. Mind you, we are looking at several years and that is why the gold and silver bull markets have several more years to run. Mind you, we are not even out of stage one yet. Nobody wants to believe the precious metals are in a bull market. Wait until stage two when investment demand by professionals surges and some of the public gets involved. As stocks, bonds and real estate fall people will be looking for a safe home for their money where they can get a return on investment. Then, of course, there is inflation, war and political instability. This is the 1970s all over again but this time you will witness the death of the dollar and American society as we have known it. Remember in order to compete and survive you must reinvent yourself every day. The older you are the more important it is. As we said last week, privately Sir Alan Greenspan admits inflation is 8%. It will not take long for the markets in gold and silver to project and reflect this in prices. The stock market is priced to perfection; real estate has peaked, as have bonds. Where else do you go but to gold and silver? Three and one-half years ago we predicted perpetual war for perpetual peace to cover-up economic and financial failure and we have it in spades. Whether the elitists like it or not all these problems will lead to investment demand. Those who believe higher interest rates are negative for gold are wrong. As rates have risen in the past gold has had its biggest, strongest rallies. Higher interest rates are a cause of a charging bull market. Rates rise due to negative return caused by inflation. As a result, we recommend numismatic coins and silver bags.

India has witnessed heavy retail purchasing of gold in the past two weeks. In fact, it’s been fabulous. The word is that in just 15 days dealers have done two months business, just as we predicted. Gold demand in Bombay is up 800 to 900 kg a day up from 300 kg a month ago.  In Madras demand is up from 125 kg to 350 kg. Pakistani demand is up 70%. In spite of these facts, Reuters and other commentators are saying Indian gold demand is falling, which is the opposite of what is really happening.

            The Istanbul Gold Exchange reports that volume was up 24% in April the highest this year and 82% above 4/03. The fifth highest ever volume in nine years.

            Most every one we read and hear from believes it will take a long time to repair the damage done to the silver and gold markets. We totally disagree. Those technicians are wrong. Both markets will quickly come back with a vengeance and this time the shares will follow. Nothing has changed – and you can all throw your charts out the window. This is a rigged market fighting fundamentals and we are going to win.

On Tuesday February 3^rd we received photos of a fuel tanker filled with $45 million in gold bricks. Why hasn’t the government told us what they did with the gold?

There are now rumors that our government wants to upgrade the monetary status of gold bullion coins in order to confiscate them so that Mr. Bush and his neocons can finance their perpetual wars for perpetual peace, which are a cover for economic and financial calamity. If they do attempt to do this we believe they’ll get about 40% of the coins. Those of you who want to play it safe either move your coins out of the country or bury them or switch to numismatic coins. The government is capable of anything.  We’d make moves to protect ourselves.

Last week Diario el Mundo said 16,624,488 ounces of gold is missing from the Central Bank of Spain. Our guess is it was leased. The Spanish Royal Family is part of the black nobility so it figures.  

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