A HAPPY, SAFE, AND PROSPEROUS NEW YEAR TO ALL
SATURDAY DECEMBER 30, 2006
THE INTERNATIONAL FORECASTER
DECEMBER 2006 (#4) Vol. 10 No. 12-4
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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International_forecaster@yahoo.com
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US MARKETS
Stupidity has become a mantra in America. Evidentially Americans like to be brainwashed. You explain how their government is lying to them and screwing them and they do not want to hear about it. Corporate CEO’s, Wall Street, government economists and analysts do not get it, or don’t want to get it. You tell these thinkers real inflation is over 10% and the answer you get is the Fed has tightened very aggressively and inflation is not going to be a problem. When you explain the issuance of money and credit that has been over 12% annualized for four years and has neutralized the beneficial affect of higher rates, they do not want to hear about it. Such truth might ruin their day or make them think there could be problems. The level of interest rates only tells half the story as we have just pointed out. The other half is the expansion or contraction of money and credit. Of course, the Fed, government, Wall Street, corporate America and its mouthpiece CNBC never want to talk about this. Every week a few others and we publish those statistics and we and two other publish estimated M3 figures. All the others are in a conspiracy of silence or they are too dumb to understand. Who cares if the total expansion of money and credit is running at 14%, not only in the US, but in the EU as well? ABS securities are only 7% below last year’s record and CDO issuance is running more than 65% above last year. International reserve assets are up almost 20% as central banks collect more and more fiat currencies, while they sell off their only real asset, gold. Foreigners are buying US Treasuries and Agencies, and have increased their participation at an annual rate of 15%. How can professionals conceivably believe money is tight or it is under control? They cannot tighten interest rates any further or stop creating more money and credit because the system will collapse. On the other hand if they do not raise rates the world will eventually flee from the dollar. If they lower them the dollar will collapse as will the world monetary system. Do not expect the Fed under Mr. Bernanke to do anything more or different than Sir Alan Greenspan did. The Fed doesn’t and can’t deal with the bubbles they have created. If they did they would have to raise interest rates to 14% or more and the economy would suffer a depression. The Fed is enmeshed in a trap of its own making.
What is happening now is the Fed is attempting to impose a bubble on a bubble, an exercise doomed to failure. At least that is what monetary history tells us. That means a continuing decline in the value of the dollar. If as we are now seeing other major currencies join in on the money and credit expansion that leaves gold and silver as the only safe harbors. That is why these other major currencies are doing what they are doing, and at the same time central banks are attempting to suppress gold. In the final analysis the Fed and other central banks simply cannot afford to tighten due to the current unserviceable debt. They have no choice but hyperinflation. This is why the upward moves in gold and silver are still after six years of a bull market only in their infancy.
Thus far easily available credit for mortgages and a ¾% drop in mortgage rates has temporarily slowed the decent of the real estate market. Stemming the tide doesn’t end the flood. We do not see real estate prices rising anytime soon no matter what the Fed does. The psychology has been broken and it won’t return for some time. Weak and weakening housing prices will weight heavily on the consumers ability to continue to spend even if energy prices remained at current levels. This set of circumstances will quickly affect corporate earnings and then be reflected in the stock and bond markets. That in turn will affect the use of credit and leverage, which will diminish. This is the very leverage that has boosted corporate earnings for more than four years and has assisted consumer spending. We have had bubbles in the stock market and in real estate. We have had major rallies in bonds and commodities. The only markets where overt suppression has taken place is in gold and silver. It is only a matter of time when there is a realization that they are the go to markets. Then the leveraged players will step in and ultimately create another bubble at much higher prices. Due mainly to massive US consumer and government debt and offshoring and outsourcing America and the dollar have been in decline for some time and will continue to decline unless offshoring and outsourcing are halted. In the meantime the balance of payments deficit worsens, as does the economy. That creates a relentless flight from the dollar. The elitists are forcing these changes, the result of which will be devastating for the US economy, as well as for the economies of Canada and Western Europe. The evolution of major growth for the past 25 years has been in the second and third world as the G7’s share of global GDP has been shrinking. That shrinkage is now accelerating. All this did not happen by chance, it was planned that way. There is to be a leveling of all countries down to a common controllable level to usher in world government. That is what free trade and globalization is all about. It’s about forced acceptance through diminishing economic and financial power. You had best discover what is being done to you and force your representatives to put a stop to it. If you do not you won’t like the future the elitists have in store for you.
China, the second largest holder of US debt, reduced purchases of US bonds 1.7% in the first 10-months of the year. Central bankers in Venezuela, Indonesia and the UAE have said they will invest less of their reserves in dollar assets. South Korea and Romania say they prefer the higher yielding Fannie Mae and Freddy Mac paper.
US Treasury Secretary Henry Paulson, who represents the Goldman Sachs elitist program for China, is headed for a confrontation on China with the new-Democratic-controlled Congress after his fiasco in Beijing and word that he has softened on criticism of China. He said China was not a currency manipulator and, of course, they are, and everyone with any sense knows they are. The Democrats are going to call Paulson to Capital Hill to question him on the decision.
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The depreciation of the US dollar, the world’s reserve currency, did not happen due to malfeasance – it’s the result of a calculated plan to tax dollar users. The fall in the dollar is an indirect tax on all nations that trade with our country. The supply of dollars in modern times began in the 1960s with the birth of GATT in 1962, and later as WTO in 1986, and with the Vietnam War and the guns and butter economy. That was followed by the decompiling of the dollar from gold on 8/15/71, which officially made the dollar a fiat currency with no further gold backing. The foreign increase in dollar holdings as a result of LBJ’s Great Society and persistent US trade deficits set the stage for today’s financial and economic quagmire, which has been exacerbated by free trade and globalization. Trade deficits are in essence a tax on those who trade with us. In 1971, the dumping of the gold standard was in reality a declaration of bankruptcy. What is very interesting is that it took only ten years for our system to collapse. Thus, America has extracted an enormous amount of economic goods from foreigners with no intention of paying for them. Being the dominant military power in the world no nation was prepared to challenge this indirect taxation or tribute. As of today the world continues to accept this taxation stoically.
In 1972 a deal was cut with Saudi Arabia. The US would support and protect this monarchical dictatorial government if the Saudi’s would only accept dollars for oil and in turn invest part of their income in US federal and agency debt and into America’s markets. Dollars became exchangeable for oil instead of gold. The world needed dollars because they had to buy oil. Once this changed the dollar would become totally fiat. That is what happened when the US crossed Saddam Hussein and he began selling oil in dollars. The US could not allow that. The power of the empire would be broken, the dollar, oil link would have been destroyed, thus invasion and occupation. The invasion was to stop oil sales in dollars and to steal the oil in the process. The war had nothing to do with human rights, WMD or spreading democracy. It was about keeping the dollar as the world’s imperial currency. The invasion was meant to show that the US would destroy anyone or any country that dared to not use the dollar in commerce. The US was defending its money monopoly.
Money and credit continue to expand aggressively. Total bank credit and M3 are expanding around 10%, y-o-y. Since the Fed enacted it's cost-cutting move in March 2006, presumably for the benefit of their private shareholders (And, yes the Fed is private entity), M3 has expanded from 8.5% to over 10%. Total bank credit has also expanded from 8.5 to over 10% over the same period. These numbers draw an erry comparison to the 2000 to 2001 credit and money growth rates, except this time M3 must be estimated. A real world analog for estimation is guess. This means the growth rates could be significantly higher.
We haven’t decided yet if Iran’s switch to euros from dollars was something the US wanted Iran to do. In all probability the answer is probably yes. This is the ultimate excuse to attack Iran. The elitists were very upset that Israel was beaten by Hezbollah in Lebanon, but even more upset that Israel was incapable of invading Syria and occupying that nation. If Israel had done so it would have severely weakened the insurgents in Iraq and brought an end to the conflict and occupation.
Iran’s switch to euros is the greatest threat yet to dollar supremacy. The case for an Iranian oil bourse in euros has essentially been bypassed. The usage of the euro is now universal in Iran and it will spread to other countries as well, thus we change our position. Iran has to be attacked by elitist US interests. They have no choice now. Just as an example, major oil producers such as Japan, India and China will be able to reduce dollar reserves as well as of Europe. This is a devastating blow to elitist dollar interests. A portion of dollar holdings by those who buy Iranian oil and gas can be converted to euros, other currencies and gold. The dollar would then drop 50% or more. Russia of course is a natural to dump dollars for euros because the majority of their trade is with Europe. The Gulf States are in the same boat.
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GOLD, SILVER, PLATINUM, PALADIUM AND DIAMONDS
On Tuesday gold was up $4.60 coming out of Europe and after the Comex opening went up $9.60. It wasn’t long before the gold suppression cartel snapped into action and we had to settle for a $4.20 gain to close at $623.80. Silver had been up $0.40 and closed up $0.078 to $12.50. The February gold contract rose $4.60 to $626.90, silver rose $0.09 to $12.73 and copper rose $0.02 to $2.88. Gold open interest rose 795 contracts to 341,890 with silver OI falling 880 contracts to 101,747, which is only 5,000 contracts off its multi-year low. On Friday Tocom the big gold shorts added only 114 contracts to be net short 118,532. On Monday they increased their shorts by 6 contracts to 118,548. Goldman covered 81 shorts on Friday and Monday for a net contraction to 31,790. They increased 114 contracts on Friday and on Monday they covered 61 contracts in silver to bring the total silver short to 3,646 contracts. It is interesting that Russia’s gold position on 12/31/05 was 369 tons and on 11/20/06 it was 400 tons. Gold reserves increased by 31 tons over 11 months, or about 2.8 tons per year. The HUI gained 1.87 to 329.89 and the XAU rose .86 to 138.45 on Tuesday. Tuesday saw holidays in Canada, the UK and parts of Europe.
It should interest you to know the silver production in Mexico dropped 41.5% in October YOY. Mexico is the world’s largest silver producer. October production fell to 4.5 M/oz. If the trend were to continue that would mean 54 million ounces annually down from more than 90 million ounces. We’d say that is very bullish for silver.
On Tuesday the Dow opened down and then spent the whole day to the upside finishing up 64 points to 12,408. The S&P rose 54 Dow points and Nasdaq rose 72 Dow points. Oil fell $1.31 to $61.10, gas fell $0.06 to $1.57 and natural gas fell $0.52 to $6.11. The euro fell .0037 to $1.2090, the pound fell .0054 to $1.95, the Canadian dollar fell .28 to 86.20 and the dollar index rose .12 to 83.79. Two year Treasury notes yielded 4.72% and the 10’s yielded 4.60%.
The 24-karat American Buffalo gold coins have not proven that popular. After sales of 99,500 in June and 117,500 in July, sales have fallen dramatically. August saw 22,000 sold, September 33,500, October 21,500, November 10,000 and December 15,000. The sales this year of American Gold Eagles have been poor as well.
Russia’s gold production fell 1.6% YOY in January-November to 155.097 tons. Mine output fell 2.3% YOY to 139.92 tons.
Thirteen of 34 traders, investors and analysts surveyed from Sydney to Chicago on 12/22 advised buying gold, which rose 0.5% last week.
Investment in Street Tracks Gold Trust, the $9 billion exchange-traded fund linked to the price of gold, has more than doubled in value this year and the number of shares outstanding jumped 78%. Meanwhile the dollar has fallen 8% on the dollar index against a basket of six major currencies. The fund attracted $4.7 billion this year, up from $3 billion in 2005.
Gold should do very well in the first quarter of 2007, because the dollar should decline further. The market should top out and the economic and financial situation should worsen. Remember, all you hear about is the Dow being up 16% this year, but you do not hear that gold is up 22%. Contrarians should rejoice because the short-term gold timing newsletter index shows gold sentiment at 25 and that is where it was a year ago before gold rose 22%. We will likely get a repeat in 2007 and then some. That would put gold at $780 minimum.
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Make check payable to ROBERT CHAPMAN (NOT International Forecaster), and mail to P.O. Box 510518, Punta Gorda, FL 33951-0518. Please include name, address, telephone number and e-mail address. We accept Visa and MasterCard charges. Provide us with your card number and expiration date. We will charge your card US$129.95 for a one-year subscription.
Foreigners please use foreign U.S. dollar denominated checks or Money Orders.
Note: We publish twice a month by surface mail or twice a week by E-mail. international_forecaster@yahoo.com
