WEDNESDAY, MIDWEEK, MAY 9, 2007

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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International_forecaster@yahoo.com

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US MARKETS

US debt is at least $70 trillion, which is about six times GDP. That far exceeds debt levels seen in the Great Depression. This debt is the result of central bank policies that has triggered a deluge of money and credit over the past four years. This has made Americans dependent on foreigners to finance its standard of living, and has caused a credit bubble far bigger than the dotcom boom. As a result, it won’t be long before there is another large correction in the value of the dollar. That will be followed by an end of the dollar as a reserve currency. Were it not that the US has had the luxury of being a reserve currency, it would have collapsed long ago. The dollar has hung on due to political stability, its military might, its $12.5 trillion economy, which is 28% of GDP and liquid financial markets. In October of 2000 the euro was $0.83 and this week it was $1.37 versus the dollar. This year 50 currencies have risen against the dollar and only eight have fallen. We have a faltering American economy as the housing sector falls and unemployment rises. America has been in recession for over a year as GDP growth staggers toward 1%. Every time US GDP growth has dipped below 2% since 1960, a major recession has unfolded. We need $2.4 billion a day from foreigners to stay solvent and we waste $2 billion a day in Iraq and Afghanistan. This is why the USDX, the Dollar Index, is moving to test 80 on the downside. The components of the USDX are euros 57.6%, yen 13.6%, pounds 12%, Canadian dollars 9%, Swedish Kroners 4.2% and Swiss francs 2.6%. Part of the reason for dollar weakness is that foreign central banks have been supporting the US Treasury bond market. They now hold $1.93 trillion.

The dollar is very vulnerable and nowhere more so than in the Middle East. The Bush administration via sanctions forced Iran to sell oil in euros and other currencies. Even if a deal is cut with Iran over Iraq and their domestic nuclear program, we do not believe Iran will return to selling oil only in dollars. The reason this is so important to the US is that oil importers and central banks, which import oil, have to buy US dollars to pay. This dollar crude oil link is vital to maintain the dollar’s reserve currency status, allowing America to live beyond its means. Europe is Iran’s and the Middle East’s biggest trading partners, a major oil importer, and the eurozone over the past 12 months had a current account deficit of only $4.2 billion, a far cry from America’s current account deficit. If Iran continues to sell oil in other currencies and other producers follow, the dollar will be phased out as the world’s reserve currency and its value will collapse. As an example, Russia has cut its dollar reserves by 5% to 50% and increased euro holdings to 40%. The rest is in pounds, yen and gold. They now have the 3rd largest foreign exchange reserves in the world, approaching $400 billion. Thus, they are on their way to reducing dollar holdings. It should be noted that Russia’s M2 money supply grew by 52.7% yoy to April first. As you can see, the dollar and America are very vulnerable, but so is Russia if they continue doing what they are doing via M2.

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Total assets under management of hedge funds are about $1.5 trillion, and the funds contribute more than 50% of the volume in equity and bond markets. This is highly leveraged trading and extremely dangerous. The gross distortions emanating from global systemic liquidity excess is today’s critical issue. By the end of 2008 this out of control liquidity creation will begin to deteriorate and then it will take another year for hyperinflation to end, perhaps another 1-1/2 years. Thus, we are looking at 2-1/2 to 3 years until deflation sets in, which puts us to January to June of 2009. This is the classic Von Mises “crackup boom” on an international scale. Interconnectivity is great on the way up, but disastrous on the way down. There will be a devastating reversal of financial flows. The dollar will have collapsed by 2009. There will be no more leeway to create money and credit and extend liquidity. No re-flation will be possible. All those who believe somehow other economies are going to escape the fate of the dollar and US financial and economic structure are mistaken. There is an incredible $500 trillion in derivatives out there floating around that may not have a home, making the ramifications of risk incomprehensible.

Inflation is already out of control and the lies of our government, the Fed, Wall Street, corporate America and our media are not fooling anyone. The only response is to create more money and credit and of course, the day will come when that is no longer possible. What enters our minds is that what makes these gamblers in financial assets believe they can financially survive what is coming? Ninety percent of them will lose everything they have. We are looking at a liquidity nightmare and the longer the price distortion, risk perception (or lack thereof) and economic and financial dislocation goes on, the worse the downside will be.

As we said two years ago, stagflation is already in place, and the public is slowly awakening to it. They are starting to realize that inflation is killing them. Wages are falling far behind income and inflation and we are starting to see a modern day Weimar in Zimbabwe. Zim is just the beginning. There are lots of Zimbabwe’s in our future.

Generally speaking Asia is no longer buying US Treasury debt. If this continues, and it may well do so, the result could be massive US liquidity problems. We believe diversification has already begun into energy, other commodities, and other currencies such as the euro and in gold. Were it not for Middle East oil producers and hedge funds the dollar would be much lower in value if not in a Zimbabwe like scenario, which we do not discount in the future. You can just imagine what would happen if oil prices fell to $40 a barrel. The Middle East is a war zone and dollar and Treasury support from this sector could falter.

We saw a geopolitical shift in power in the early 1990s. At that time we wrote that if remedial action had been taken then with a deep recession the US monetary problem could have been managed. The elitists had other ideas. We are now at the point where the US can only stay financially alive by having perpetual war, which we also predicted in 2000. The one ace in the hole is tariffs on goods and services. It won’t avoid a deep recession, but it could well stave off depression. Creditors know they have been cheating the US these many years by degrading their currencies or subsidizing their products. They realize, at least for the immediate future, they will have to suffer along with all other cheating exporters to the US. They will take 35% to 50% losses on dollar assets, but look at the market share and penetration they have made. The liquidity over the past six years has been supplied by the Fed, some other central banks; the yen and Swiss franc carry trades, derivative and hedge funds. Those exports keep on flowing because of this sea of liquidity. In addition, the world’s savings have been used to prop up the US economy and financial system. When we first were introduced to computers and software in the early 1960s the saying was garbage in and garbage out. We are being lied to about monetary inflation. The nonsense we hear and read, especially from CNBC, is ridiculous. Debt is manageable, but excessive debt is a killer. We are told free trade and globalization is good for us as more than five million Americans lose their jobs. How dumb is that? We can understand why the public doesn’t understand, they have never been trained in these matters, but business and Wall Street have no excuses. The Fed has turned the economy into a giant hedge fund. A home is not an investment vehicle. It is a place to live. That home should never been allowed to become an ATM card. That is totally the result of the actions of Alan Greenspan’s Fed. We are told manufacturing is not essential. They fail to include most of the great fortunes were made in manufacturing. We are being hoodwinked by Wall Street con men who only want to separate us from our wealth. Our economy is finally recognizably in recession with 1.5% GDP growth but neither government, Wall Street or media informs you of that. They lie by omission. Inflation has recently moved to 11% and unemployment is pressing 14%. Gasoline is over $3.00 a gallon and crude prices are headed for $70.00 again. Our government runs a military protection racket. Gulf oil producers need them to protect their interests.

There are no economic principals left. It is all about credit creation. It is a corporatist fascist state. Corporate America runs our government and we have little to say about it. We are no longer a nation of laws. Just look at what has transpired over the past six years in corporate America, in government and on Wall Street. Billions have been stolen and only a few of the non-connected go to jail. Our institutions flaunt the law and our court system is no longer reliable. Last but not least is the Working Group on Financial markets that legally rigs markets 24/7, all over the world to serve Illuminist ends. Tragically this is the world we live in and it is going to get worse before it gets better.

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GOLD, SILVER, PLATINUM, PALADIUM AND DIAMONDS

Over the next 29 months Central Bank Gold agreement members can sell 617.5 tons of gold or 2.4 tons a week on average. Sales have been very strong over the past two months, averaging some 10 tons a week. At that rate announced sales would cease in just over a year. Spain is almost finished, and Belgium and Germany probably won’t be sellers. France has 311.8 tons to go and they will probably sell it all. We could see pressure over the next year on prices and that should be it. These sales will easily be overcome by physical off-take as you saw these past two months. The days of control of gold by central banks is close to being over and once that happens we will see much higher prices.

The dollar wants to break down and test 80 on the USDX, the Dollar Index. It soon will and we will see the battle between the little people worldwide and the Illuminists break into open financial warfare. Needless to say, over the past two months, the elitists have used all their tools to restrain gold prices and to allow Barrick and Lihir to buy futures contracts to cover their hedge shorts. Now as we look back the collusion is obvious. We also believe that out of 617.5 tons of gold for sale probably less than 500 tons will be sold and that will be gone in less than a year. The stupidity for hedging and its consequences are not over as they scramble to cover and take their horrendous losses. Do not forget too that as this and other factors come together physical gold purchases are rising and production continues to fall. Higher gold prices will not lead to higher production. It takes 5 to 8 years to bring a new mine on stream. The majors still are not doing the exploration they should be. If they want increased production they have to buy another company to get it and that doesn’t increase overall production. In addition, the gold suppression of the last 19 years has not only hampered exploration, but the industry in North America faces a skills and labor shortage. Two-thirds of mining professionals come from Canadian schools, so if Canada has a shortage of geologists the world production areas have mega shortages. In just 10 years 60% of geoscientists will be over 65 years old. Mining’s problems lead to decreased production and on a fundamental basis higher prices. Gold and silver are a lock; you just have to be patient.

Early on Monday the Dow was off 3, the S&P off 5 and Nasdaq off 8 Dow points. The Nikkei was closed. The FTSE was up 106 Dow points; the CAC was +1 and the DAX +9. The yen was up .22, the euro up .0034 and the pound up .0034. Oil was -$0.03, gas -$0.04 and natural gas off $0.14. The Canadian dollar was about to break out to a new high at 90.65, plus .36. It’s been on a tear since it traded in the 84 to 85 zone. The 2-year Treasury yield was 4.69% and the 10’s were 4.65%. Gold was up $3.30, silver up $0.13 and copper was off $0.01.

Gold swung down to $667 last week, then abruptly turned around and went to $690.90 and then ended up at $688. That was a turnaround week as we had predicted. We will either consolidate here or move higher and we believe it is time to move higher. The gold cartel suffered a serious setback and they will have a tough time recovering. Oddly the upward moves in gold and silver producer stocks was flaccid and there was negative flows into the gold ETF’s. We suggest the turn was so fast and unexpected that the move into more positive territory was muted.

The May 1 Commitment of Traders Report showed net shorts declining only 5,620 contracts or 3% from 171,773 to 166,153 contracts. This occurred as gold fell $11.40 or 1.7% from $684.40 to $673.00. We believe there was little short covering during the past week as well. The long side was fund futures buying and mostly physical off take. The commercials saw much more downside coming last week and they were dead wrong. They were caught flat-footed. The big question now is will they increase their shorts or cover? We still believe the shorts could and probably will add 13,000 more short contracts this week. We believe that will do little good and they may be covering later this week or early next week, giving gold a boost through $700.00.

The gold ETF-GLD fund fell 7.55 tons to 485.78 tons. The UK version increased 1.5 tons to 90.85 tons. Barclay’s IAU added 0.45 to 45.16 tons.

Barclay’s silver trust SLV rose 29.17 tons from 4,195.36 to 4,224.53 tons last week. That offset the previous week’s fall.

The suppression of producer gold and silver shares becomes more noticeable with each passing trading day. At this juncture, like charts, waves and cycles, the XAU and HUI cannot be used as guidelines. They are easily manipulated by small amounts of capital. For now we will quote them and watch.

We had a nice gain of $3.30 overnight into Monday on gold, but as usual on Monday as soon as Comex opened the cartel attacked and took gold down to even by two hours into the session. Both gold and silver are in well-defined bull markets so these short-term movements mean little.

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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