WEDNESDAY, FEBRUARY 28, 2007
MID WEEK ISSUE
THE INTERNATIONAL FORECASTER
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
Our privately owned Federal Reserve has one underlying purpose and that is to enrich its shareholders and its Illuminist friends. Their mission is to direct as much profit as possible into the pockets of this cabal.
What they are supposed to be doing is protecting us against inflation when they in fact, since their inception, have created inflation. Their creation was to end recession and after 17 years of existence America had its worst depression in its history. Inflation allows the Fed to fulfill the other part of its mandate – to promote full employment. The Fed is a perpetual balancing act. They are supposed to be prudent and that means keeping the system honest and in a conservative manner keep it functioning. What the Fed has never been able to master is a calm flowing economy that doesn’t plunge about in either direction. The reason for that is that when we have a volatile economy and markets, we have profit opportunities for the friends of the Fed. Thus, as long as the Fed is privately owned there will never be monetary, financial and economic tranquility. That is because the Fed’s agenda is not to protect our monetary system, but to assist a privileged sector of the world economy to obtaining more riches and power. The Fed is the ultimate 3-card Monte game. It is surprising that the system has withstood massive manipulation over these past 94 years. As you know it has been one bubble after another and one recession after another. We saw the result of irrational exuberance caused by the Fed in the market crash of 2000. Now we are seeing, as Sir Alan Greenspan described it as inflation, as a change in prices sufficient to cause people to adjust their behavior. His housing bubble is just that inflation, as a product of insanely low interest rates, and the wild creation of monetary aggregates, also known as money and credit. Lowering interest rates almost 6% is like hitting someone with a club because they won’t do what you want them to do. It is a shock and it is intended to be a shock. The Fed cannot make the system work without perpetually resorting to inflation, the silent thief in the night that by stealth steals your assets. Inflation is an arm of control. It keeps the system from failing albeit at a terrible price.
The Fed and the guardians of our nation, our politicians, have made a dreadful mess of our monetary and financial system. The dollar has been a fiat currency since 8/15/71 - an uncollateralized piece of paper being accepted on good faith. The country is highly leveraged due to the Fed’s increases in money and credit, and ridiculously low interest rates.
On Wall Street there is a childlike belief that the Fed has discovered the ultimate secrets of the universe - that they are infallible and can do nothing wrong. We will soon find out that is indeed untrue. They are mortal and they will prove that to us.
It was just four years ago that the Fed was terrified that they had lost control of the economy and financial markets to deflation. They were able to reverse that, but they always won’t be that fortunate. It also proves to us that the system cannot survive without at least 3% perpetual inflation. The answer was more money and credit and lower interest rates. In those days Sir Alan was attempting this magic while holding inflation at 2%. That wasn’t difficult seeing the BLS figures were whatever he wanted them to be. Inflation was in fact over 6% at that time. While this transpired the Fed became aggressively active in the repo pool. The Fed has authority to purchase Treasury securities of any maturity and indeed already purchases such securities as part of its procedures to keep the overnight interest rate at its desired level. This authority can be used to lower interest rates at longer maturities. One of the factors the Fed always fails to mention is that they have the ability to create money out of thin air, and through this operation they generate funds for banks, which in turn lend that money to their 21 agents, brokerage, commodities and investment banking firms, which in turn are instructed by the Fed how to use the money in the markets to manipulate them as the Fed sees fit. This is called the repo pool. This is the same Fed that tells us derivatives markets and hedge funds do not need to be regulated. They also tell us of productivity growth that is as bogus as a $3.00 bill and that free trade and globalization is a panacea.
Free trade and globalization were needed for a number of reasons. Cheap foreign goods kept a cap on inflation, especially during the 1990s. It brought fabulous profits to transnational conglomerates that control 73% of the trade from China and the US and it is a method of destroying America’s industrial infrastructure and in time part of its services industries. This formula got out of hand in the recession of 2000-2001, and that is why we had a deflation scare. Falling prices are good for consumers and to keep inflation at bay, but they are bad for debtors, and our government is the biggest debtor of all time. You cannot have it both ways.
Wall Street didn’t nor doesn’t care as long as the indexes are not plunging. Whatever keeps the money making machine afloat is fine with them.
In 2001, Sir Alan Greenspan’s so-called magic muscled 10-year Treasury note rates to 2-1/2% and correspondingly all mortgage rates plunged as Sir Alan began creating the real estate bubble. The Fed focuses on interest rates, not money and credit, and the move was a clear sign - anything to keep the economy afloat and to not fall into deflation. People who heretofore could have never even considered having a home were allowed to be given one. In fact, lenders hunted these people down to put them into a financial situation they were totally unqualified for. They were called exotic mortgages or affordability products. Just make your mark here and the home is yours. The motto was anything goes.
The result was a miraculous economic recovery with housing-related employment generating 43% of all private job creation from November 2001 to April 2005. We pegged the top of the real estate market in June 2005.
Times have changed and we see a fed overnight interest rate of 5-1/4%. In June 2006, we said the Fed was through raising rates for now and wouldn’t increase them until June 2007 or later and that looks to be the case. The market, the economy and Wall Street want lower rates, but that won’t happen unless the FOMC is truly suicidal. Lower rates would crash the dollar. The best the Fed can hope for is unchanged rates, which will deteriorate the economy, housing and the dollar. As the dollar approaches 80 on the dollar index, interest rates will rise. Unfortunately, it will be too late and the dollar will plunge along with the economy. The Fed and the market could care less about inflation. The pros know it is over 10%, but as long as the market and bonds are not falling they do not care they can make money. Once they head down there will be a stampede into gold and silver related assets. Wall street doesn’t want to understand that the economy is in deep trouble and that we entered recession a year ago. There answer is do not bother me with the facts. They do not realize that the fall in real estate and disaster ahead in mortgage-backed securities will infect the whole economy and our financial structure. The liquidity is available from various central banks and from the carry trade and this sea of money, this prolonged period of policy accommodation is contributing to massive risk taking in all sectors of finance. It is not only in the subprime mortgage market that trouble lurks, but almost everywhere. All world markets are overpriced – investors are chasing yields. Banks, Wall Street and speculative-grade corporations are borrowing heavily at relatively low interest rates with as little documentation and qualification as those making $30,000 a year buying $300,000 homes. Then there is the almost $400 trillion derivatives market, just two steps away from catastrophe and hedge funds leveraged to the eyeballs, all totally unregulated. Everyone expects low interest rates to last forever and that isn’t going to happen.
The Fed and Wall Street and government refuse to honestly lay out the risks they are facing. The media refuses to tell the truth and the public doesn’t understand. We are fast losing stability and instability will increase.
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GOLD, SILVER, PLATINUM, PALADIUM AND DIAMONDS
UTI Mutual Fund has launched its gold exchange traded fund (GETF) in Mumbai, India, becoming the second fund house in the country after Benchmark AMC to offer this asset-class investment. It will be listed on the National Stock Exchange.
The gold ETF will be a passively managed open-end fund, through which investors can buy or sell gold units on the exchange. Each unit will be backed by physical gold held by the custodian. The GETF will deal in 99.5% pure gold, which is higher than the most commonly found quality (above 91.5% purity level) in the country.
Over half the gold short positions on Comex are concentrated among eight or fewer traders known as commercials. The February 13, 2007 CFTC report on all 46 traders was 288,984 contracts. That means each trader on average was short 6,282 contracts, or 628,226 ounces or 19.54 tons worth $421 million at $670 gold. The February 20th COT shows the large commercials increased short was 2,686 contracts, up to 168,150 contracts to 165,464 net short, which is what we expected. The new release at the end of the week will be more revealing. Total Comex gold open interest rose 12,946 to 393,115 contracts after being up 22,233 the prior week. Since January 9, 2007, the commercials increased their shorts by 86,476 and since then gold has risen $60.00. In contracts that is an increase of 106%. As gold rose shorts increased collective exposure by 269 tons of gold to a total of 523 tons worth $11.5 billion. This means the shorts have lost billions of dollars on paper. We suspect they increased their shorts and in the process were not able to hold down the advancing gold price.
The gold ETF StreetTracks gold shares increased their purchases by 11.87 tons to 487.47 tons. The February increase has been 37.17 tons to 8.2%. This is the fastest accumulation since November 2006.
The silver ETF Barclay’s iShares Silver Trust SLV added 30.98 tons taking the total to 3,919.88 tons or 126,026,951 ounces worth $1.8 billion.
The HUI is challenging 350-360, which it challenged when gold was $30 to $50 lower. We see an eminent breakout and it will be explosive because of such a long-term consolidation. The force is now with us.
State Street Global Markets announced that streetTracks Gold Trust GLD, has surpassed $10 billion to $10.2 billion, making it the seventh largest ETF by assets in the US.
Monday in the early morning hours gold was up $1.90, silver was off $0.01 and copper was up $0.02. After completing the first two hours in NY, gold was up $2.80, silver was up $0.06 and copper was up $0.01. At mid-session, gold was up $2.30, silver $0.04 and copper $0.02. After the fourth hour gold was up $1.10, silver down $0.06 and copper off $0.04. The market remained strong into the close as gold rose $2.90 to $685.90 and silver gained $0.14 to $14.65. The April contract closed at $689.80 +$3.10, silver rose $0.10 to $14.83 and copper rose $0.02 to $2.87. We expect somewhere between $688 and $730 – then government, central banks and the commercials along with the CFTC and the investment banks will attack gold again trying to shake out buyers on the long side. Thus far they have abysmally failed. The gold-silver story hasn’t been this strong in a long time. The Europeans are selling 60% less gold than they can under their agreement. That means they either do not have the gold or do not want to sell what they have left. Big sellers of gold have done their best to injure the gold price as much as possible and that is not normal. The buyers say nothing – they just keep on buying. This could be why UBS, Europe’s biggest bank expects gold to reach $750 in the next three months as they announced on Monday. During the Friday Tocom session the big shorts reduced their gold position by 14,583 contracts to 121,592. Goldman covered a very large 4,111 contracts to 31,552, taking some stiff losses. The big dealers reduced their net silver shorts by 39 to 4,408. It should be noted that silver one-month lease rates are at zero with no takers. The XAU gained 1.93 to 147.75 and the HUI rose 4.53 to 361.82.
The Dow barely hung on again on Monday, which is usually a good market day. It fell 18 points to 12,632, S&P fell 17 Dow points and Nasdaq fell 62 Dow points. Oil finished up $0.39 to $61.53, gas rose $0.02 to $1.78 and natural gas fell $0.21 to $7.55. The euro rose .0020 to $1.3185, the pound was up .0008 to $1.9639 and the Canadian dollar fell .12 to 86.21. The 2-year Treasury bill fell 10 bps to 4.76% and the 10’s fell 10 bps to 4.63%.
Gold started off Tuesday three hours prior to the NY opening off $5.20, with silver off $0.20 and copper off $0.06. A half hour before the opening gold was off $7.20, silver $0.17, copper $0.06, oil $1.01 and London’s FTSE was off 113.00 points or 190 Dow points. The price of gold was off $13.00 just before the close and finished off $2.20 at $683.60 and silver fell $0.16 to $14.49. The April gold contract fell $2.60 to $687.20, silver was off $0.14 to $14.69 and copper fell $0.05 to $2.83. What is significant is that the Working Group on Financial Markets could not keep the Dow from falling 500 points. The big Tocom shorts increased their shorts by 4,771 contracts to 126,363. Goldman added 1,719 shorts for a total of 33,271 contracts. The same group increased silver shorts by 27 contracts to 4,435. The XAU fell 10.29 and the HUI fell 27.10 to 334.72.
Tuesday’s market was one to remember. The Dow fell 416 to 12,217, S&P fell 454 Dow points and Nasdaq fell 582 Dow points. Oil rose $0.07 to $61.46, gas rose $0.04 to $1.82 and gas fell $0.02 to $7.53. The euro rose .0043 to $1.3236 and the pound fell .0029 to $1,9606. The Canadian dollar fell .43 to 85.73 and the dollar index fell .46 to 83.38. The 2-year Treasury yield fell again to 4.60% and the 10’s were 4.50%.
The elitist, Working Group on Financial Markets pounded gold and silver all day and came away with very little, but they were successful in raising havoc among quality stocks and that spread to juniors and exploration company shares. The dollar is cracking as the yen carry trade starts to unravel. There now is more talk about lowering interest rates. They must want the dollar to crash. The yen is finally strengthening. Money has already been moving from the stock market into bonds. Gold and silver related assets are next. It defies reason that durable goods orders plunge - Mr. Cheney is almost blown up in Afghanistan, home prices fell 3.1%, bonds are rising, earnings are falling and gold and silver fall. It is out of the question. Just more short-term manipulation.
One ECB central bank sold gold and another bought some for coin purchases. The 2.38 tons was sold versus 5.8 tons last week and the weekly sale needs to be 9.6 tons to reach the 500 tons quota for the year.
Silver production at Penoles fell 10.2% to 42.56 million ounces and previously BHP Billiton told us their silver production fell 34.6% to 35.163 million ounces in 2006.
Over night in the access market gold traded off $26.20. This aftermarket is very thin, so light volume can cause big swings and that is why we discontinued quoting it. On Wednesday, three hours before the Comex and CBOT openings, gold was off $9.40, silver was off $0.23 and copper was $0.03 lower. There has been and still is a major buyer in the gold market and we suspect it is the Chinese getting rid of some of their dollar reserves. We suspect they are purchasing via hedge funds to cover up what they are doing. We believe the cartel is either out of gold or do not want to sell anymore and that vulnerability is being taken advantage of by the buyer. The gold buying could also be used to blackmail the Congress and administration into not passing protectionist laws, such as tariff barriers, that would affect trade with China. If gold continues upward people and investors would finally get the message that we have financial and economic problems. One thing we do know is that China and Russia are gold buyers. Every time the elitists push oil prices down Russia buys gold forcing the conspiracy’s hand to ease off on oil or we’ll send gold higher. These two very strong buyers we believe have gone head to head with the cartel and what a great way to dump dollars. In addition to that Barrick has been forced to throw in the towel and is liquidating its hedges or better covering its shorts and taking terrible losses in the process. Big things are happening and you have to be in the game if you want to win.
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SUBSCRIPTION and RENEWAL INFORMATION: 1-YEAR $129.95 U.S. Funds.
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
