THE INTERNATIONAL FORECASTER
MAY 2006 (#4) Vol. 10 No. 5-4
P. O. Box 510518, Punta Gorda, FL 33951-0518
An international financial, economic, political and social commentary.
Published and Edited by: Bob Chapman
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US MARKETS
If you thought 1929-1941 was bad, our coming financial problems will be much worse. Today’s speculation and leverage is 100 times more powerful. The trigger this time could be the yen carry trade and other carry trades and the derivatives involved.
Due to the giant sea of liquidity created by the Fed and more recently by other central banks, today’s leveraged speculations are financing gross and unsustainable distortions, such as over consumption and global asset inflation. The underlying credit fundamentals are simply dreadful. This was not an issue in years of crisis in the immediate past. There is a huge risk associated with financing serial current account deficits and asset inflation with market-based leveraged speculations. This is not only a problem in the US, but also a global problem.
The vulnerability of the US dollar and the fact that elitist forces have decided it must be devalued significantly, curtail Fed Chairman Bernanke’s options and flexibility. The credit system or machine as you can see from the weekly figures we publish, is already in overdrive and is gaining upward momentum in an effort to counter financial disruption. The issuance of money and credit to stave off the inevitable crash will only exacerbate the flight out of dollar securities, which has already begun. In time this will happen to all unsound currencies as the move into gold, the only real money expands. It is in motion now and has been for almost a year by professionals, 98% of pros haven’t made that move as yet, and 95% of the public never will. What the mainstream media doesn’t tell you is that a lower dollar means higher US inflation, which will be exported throughout the world by anyone who handles dollars. This and the yield protection factor is why interest rates will not go to lower levels again for years to come. This will freeze the Fed in its tracks. Seeing this, Bernanke will have to raise interest rates to protect the dollar as best he can. That will stifle the economy and add to inflation. If he doesn’t do that they’ll be a further run on the dollar. Accompanying this is the consequence of current leveraged speculation far, far worse than in 1999. This leveraged speculation is rife throughout the entire world, so everyone will be affected. That is followed by debt instrument volatility and instability throughout the entire financial system.
Any bubble we have today is not really a bubble of the recognizable source, but a dollar liquidity bubble. Real estate isn’t the problem. The problem is the easy dollar liquidity that allowed a real estate bubble to happen. Low interest rates are pounced upon when offered – that is only normal. Yes, we are headed toward crisis and have been since 1989. The recession opportunity to purge the system was lost due to the greed of the elitists in the early 1990s and now we have a problem to deal with of monstrous proportions. Another question is, can we deal with it without going into chaos? All we know after 47 years in the markets is that you should get out of debt ASAP. Cut up and pay off your credit cards, revolving charges and pay off your vehicles. Excess funds should be used to purchase gold and silver related assets. They are the only things that will retain value...
Gold and silver have risen for a number of reasons, but one that is little talked about is that historically, and especially in times of war, governments have escaped from fiscal over-commitments by letting their currencies depreciate. Ambitious spending initiatives, threats of international conflict and even Washington’s political unpopularity, all contribute to the fear that this is happening again now. Once the dollar slides it takes at least a couple of years to rebuild confidence in it and in the meantime gold rises as the only real currency that people have faith in. This time it probably will take a lot longer due to the immensity of the problem. Gold is a harbinger of economic troubles as well. Interest rates climb as inflation climbs and gold hops on for the ride. As stocks, bonds and real estate fall it sometimes is the only game in town. You cannot have fiscal profligacy, monetization gone mad and capitalism that is nothing less than corporatist fascism...
GOLD, SILVER, PLATINUM, PALADIUM AND DIAMONDS
Benchmark Mutual has filed papers for India’s first gold exchange traded fund with the SEC of India. At least 90% of the corpus will be held in physical gold, while the rest can be deployed in bonds and money market securities. It will have a 4% entry load and a 3% exit load.
Last Friday, Macquarie Research lifted its price expectation for gold by 19% to $833 next year. In the third quarter of 2007 they say it will exceed $900 an ounce. National Australia Bank is looking for $873. Commonwealth Bank of Australia sees $800 and possibly $873.
Macquarie Research expects investments in commodity index funds to rise to $120 billion this year from $80 billion last year.
Canada has done extremely well out of soaring commodities prices. Commodities account for 35% of Canadian exports and about 10% of its $990 billion economy. The country is sitting on large reserves of gold, uranium and nickel, to name just a few of its resources. This has helped lift the Canadian dollar to its highest level against the US dollar in nearly 30 years...
What do you do when gold declines 9%? You buy more of course. Gold sentiment fell from 51.8% to 8.93%. From a contrarian viewpoint it is certainly time to buy. The Market Vane Service’s Bullish Consensus, which tracks futures traders, behaved even more dramatically over last week, dropping 22 points to 71%, which is the lowest reading in four years. The recent peak was 92% on 5/5.
We believe support lies between $640 and $655. Next gold will rally and then consolidate between $640 and $700. That will be accompanied by a re-launch of an attempt to break above the $715 to $735 area. That will be accomplished and $850 will be the next stop. The short position figures will dictate the time element. The filling on the long side will continue to come from the physical market.
The China Securities Journal, an official newspaper, says China should buy more gold. Gold only accounts for 1.3% of China’s foreign currency reserves, which are $875.1 billion. They said in rich countries of contrast, gold makes up 50% to 60% of reserves.
They worry about the momentum by the US economy – fear a long term depreciating dollar, doubt that the euro can replace the dollar as a major currency, and they are concerned that overseas demand for US Treasuries is drying up.
They referred to the recent recommendation by an expert at the Beijing Gold Economy Development Research Centre that China should quadruple its gold reserves to 2,500 tons from 600 tons ASAP.
China should raise its gold reserves so those reserves can account for 3% to 5% of foreign exchange reserves, instead of 1.3%.
The Russian Trading System, Russia’s premier stock market, says it will start trading gold, oil and oil products on June 8, 2006. It will trade futures and options in oil and oil derivatives, diesel fuel, jet fuel and fuel oil. The settlement period for a contract is one month and the minimum-security guarantee on a contract is of its overall value. It will be interesting to see if oil will trade in euros.
The correction in gold and silver and shares is over. Consolidation should not take long due to the unusually large short positions. You do not get buying opportunities like this very often. It’s what is called a setup or a laydown. In a bull market these opportunities don’t often occur, so take advantage and be a buyer. You can’t win unless you are in the game.
