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International Forecaster MidWeek Reading - Gold, Silver, Economy + More

By: Bob Chapman, The International Forecaster

-- Posted Thursday, 16 August 2007 | Digg This ArticleDigg It!

The following are some snippets from the most recent issue of the International Forecaster.  For the full 21 page MidWeek Reading, please see subscription information below.


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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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.

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The elitists have been using the stock market as a key instrument of national economic policy and that by actively managing its directions they can impact the wealth of the nation. Some 75% of stocks are owned by some 15% of Americans, so a policy of ever -higher stock prices has a major financial impact on the rich by further enriching them. At the same time it widens the gulf between the rich and the poor, and reduces the numbers in the middle-class.


The manipulation of economic markets, the control of monetary decisions and the suppression of gold began in a major way under Treasury’s guidance by Robert Rubin. That policy has been extended by the Bush neocons now under the control of Treasury Secretary Henry Paulson. Due to the spectacular performance under Paulson, until the current correction, the S&P didn’t decline by 2%, the second longest period without a correction since 1964.


The Executive Order signed in August 1988 by President Reagan was to help when markets were under severe pressure. They were not to be used 24/7 worldwide to satisfy the one world ambitions of the Illuminati. They are being used to control all markets worldwide with the assistance of other central banks. Make no mistake about it the work of the “Working Group on Financial Markets” is coordinated worldwide. In addition, the Fed has done its part by increasing money and credit by 10% for four years and over 13% for the last year. This was done to neutralize the impact of a 5-1/4% Fed overnight rate and keep the stock market climbing ever higher. The idea was to increase the value of the market to provide money and liquidity available for purchasing power, which had been lost in the fall of real estate values. Now that the stock market has fallen, credit has all but dried up, and the yen carry trade is not the power that it was just week’s ago – the elitists have a big problem.


We have seen the Treasury and the Fed in the markets day after day, sometimes in arrogant indifference as to whether anyone sees what they are doing. Since August 1st their participation has been a classic of indifference.


We do not know exactly how much money and credit the ECB spewed out the past week, but we do know 94 lenders had requested reserves increases. How much of the $130 billion was relent we do not know and we’ll have to wait a month or more to find out. In the US market we now know that the Fed injected $140 billion, but we do not know how much was relent. Again we won’t have those figures until later. What we do know is that the Fed bought, immediately monetizing, $38 billion in mortgage backed securities CDOs. On Friday, the GSE’s were refused permission to increase capital by $70 billion and to raise their guarantees on jumbo loans from $417,000. The GSE’s at least won’t be used to bail out the system.


The mammoth job is to restore confidence and that is going to be very difficult because the system came apart at the seams. We have seen a massive run against credit markets and we still have no idea how bad the damage really is.


Contagion, contrary to the protestations of charlatans Paulson and Bernanke, has engulfed the entire financial system. It has fully engulfed the heart of structured finance, the CDO market, asset-backed securities, the repo market, credit derivatives, structured products and even money market funds. The huge pressure on these markets and rates has put upward thrust to interest rates, as Wall Street demands lower rates to help bail them out. We could still face a collapse probably led by commercial paper. The central banks have to restore trust. Banks and other lenders have to be convinced that market pricing is real not just the result of central banks making $1.7 trillion available. Equally important is that the rating system is reliable. Even bankers are not convinced that central bankers know what they are doing. Can they really make the world a credit society? The perception that liquidity could be taken for granted under virtually all circumstances was false. That has just been proven. These structured products have totally distorted the marketplace in much the same way derivatives have. This crisis has been a long time coming.


Behind all these problems is “Greenspan’s Folly.” The unbelievably low interest rates, pressure on lenders to lend and the complete abdication of any sane guidelines. The GSE’s were made to function as Sir Alan and the politicians wanted them to function to keep them in office and to perpetuate prosperity. When this exercise in insanity began in 2004 we predicted exactly this outcome. Fannie Mae and Freddie Mac were the foundation for the Ponzi scheme initiated by the Fed and carried out by lenders, bankers and Wall Street. Bankers and Wall Street got richer as money flooded into these GSEs and eventually the public got left holding the bag. Funding GSEs allowed the bubble to form. It allowed housing consumption by those who never should have been able to buy homes.


The housing, Fed, GSE, banker, CDO fiasco was massive abuse of financial power. Never in financial history were so many AAA and AA securities created that in actuality were junk. We do hope thousands sue all three rating agencies. The result of all this chicanery is that the system now is in the reversal process of dehedging. We see less liquidity and the highly disruptive reversal of speculative flows from mortgage-related instruments, along with the very real risk of mortgage and credit collapse. That means higher real interest rates, lower bonds and stocks, and higher gold and silver prices. Risk is being re-priced at a much higher cost level. We are told from their lofty heights by Wall Street and the Fed that this is a liquidity issue not a solvency issue. Well, we have news for the elitists and that is what you have done this time is take the financial system to the edge via mortgage-related instruments and derivatives, and we risk a credit collapse, because of your greed. There are trillions in top-rated securities that are simply junk. They are impaired and when all is said and done 50% of those instruments are going to go bad. What the operating parties have done is create the greatest abuse of leverage ever. Wall Street lied and the rating agencies swore to it, as the Fed and the Treasury nodded their heads in approval. These investment vehicles were risky and inappropriate for most investment vehicles, such as pensions, and for leveraging. Wait until the credit-derivative market collapses, you will then see more thunder and lightening. Who’ll clean up that unregulated mess?


The central banks will slow the process of de-leveraging and the exit from credit instruments that will incur grievous financial losses. They’ll be lots of bankruptcies. It is very important to note that market misperceptions with respect to risk and liquidity have been exposed. We will see the unmasking of serious flaws in assumptions by black box models in leveraged strategies across various securities markets. We have spoken of this often. We saw it with LTCM and few lessons were learned. Probability is a hoax. Go to any roulette wheel and you will fast find out. Confidence is gone, just as the yen carry trade is about to end. You will now see a tidal wave of hedge fund withdrawals; probably 50% will go out of business over the next few years.


The funds that made this all possible came from central banks. They made it happen, they made it possible. Not only did they fund it – they encouraged it. They have created a mess that could take down the financial system.


As we have state over and over, it is not suitable or prudent for pension plans to venture into hedge funds, which we believe is a dark high-stakes corner of the investment world. Going to non-traditional investments to generate the annual returns necessary to meet obligations to retirees is wrong.


We expect a lower stock market and if we are correct, the 8% or more returns expected for pension funds won’t be there to meet the requirements of the flood of baby boomers on the way to retirement. In addition, a number of funds have failed and we expect more will as cheap high risk funds dry up.


The underlying concept behind hedge funds is high risk, high return, and the concept behind pension funds is little risk and guaranteed return. The two concepts are incompatible. The approach can be deadly.


How can an investment manager invest in hedge funds when they are virtually unregulated? Often the contents of a hedge fund are arcane and difficult if not impossible to value. We refer you to the events of the past three weeks and the inability to value or sell CDOs of which hedge funds are loaded with due to high return and for their use as collateral. This is borne out by the recent collapse and bankruptcy of Bear Stearns’ two CDO hedge funds. One fund borrowed 5 times its capital and the other 15 times and this is typical. This is not the place for pension funds.


Regulators have been concerned, but Wall Street’s power is such that nothing has been done to reign in these funds. We could now as a result of that inaction be witnessing some very nasty losses. Just 20 years ago we would have never imagined that pension funds would be allowed to take such risks.


The average hedge fund has returned 7.7% this year, lower than the 9% on the S&P 500 index, and now that we’ve had a large correction in markets, the average return could easily be in the minus column. These pension fund managers are buying into these funds that are unpredictable, very risky and lack transparency. Would our sane pension manager buy into something where assets values were the result of a computer model? The answer unfortunately is yes. Is it really prudent to pay fund management 20% plus fees? We don’t think so.






What we have just witnessed over the past four trading days (Thursday, Friday, Monday and Tuesday), is a crystal clear demonstration of the cartel's priorities.  Gold suppression is JOB ONE!  All other markets take a back seat to the gold markets even though by value the amount of gold bullion and gold futures that trade in the various gold markets are almost insignificant compared to the bond, stock and currency markets.  If the entire system of financial markets were, metaphorically-speaking, a coal mine, then the gold market would be the canary in that coal mine.  When gold starts a long, inexorable, upward climb, that means that trouble is brewing, and whenever trouble is brewing, you can bet that there is smart money flowing to gold as a safe haven.  The cartel just discovered this as they sacrificed the Dow and other stock markets to cause a flow of money from the liquidation of various types of more speculative investments into cash and treasury bonds in order to push the quickly-descending dollar up.  By doing so, they had hoped to hit gold really hard, only to find to their horror that gold barely budged.  To add insult to injury, the cartel, through their central banks, have had to bail out the financial markets, which are now hair-triggered to explode and go down in flames, by a very costly and highly inflationary injection of credit and liquidity to the tune of hundreds of billions of dollars.  All they managed to do with all this new credit and liquidity was to prevent a free-fall into financial oblivion.  Confidence in the stock and bond markets is quickly bleeding out, while interest in gold as a safe haven is quickly gaining steam.


Last Wednesday, August 8, gold had set a new short-term high in excess of 676, and was threatening to go higher.  So the cartel did probably the only thing they could do, which was to cause a carry trade unwinding by strengthening the yen in order to cause a liquidation of gold positions to cover margin calls.  They did not dare run up their gold shorts in the futures market with the fall rally in the offing, a rally that could annihilate them if they got caught with their pants down overextended in shorts.  They have also been forced to save up their gold bullion for the fall rally, where they know physical off-take is going to eat them alive, so that was not an option either.  But there is a big problem with strengthening the yen to cause a liquidity drain in order to suppress gold in light of the fact that the subprime/CDO/credit crunch debacles are claiming new victims every day.  The fear generated by these casualties has weakened the various markets to the point where they are not strong enough to absorb a substantial yen blow, which is why they had to bail them out.  And then the bailouts backfired because the markets viewed the bailouts as an admission of a systemic problem, which was likely to cause a complete meltdown of virtually all financial markets.  This in turn triggered the need for more bailouts.  The hapless cartel has now run up quite a tab on the credit and liquidity fronts which will cost them dearly somewhere down the line when the inflationary chickens come home to roost.  We expect that their tab will be run up to precipitous heights in the near future, so much so that professional traders will at some point decide that the tab is too high and pull their credit, at which time all hell will break loose.


Now let's look at the mechanics of the manipulation.  On August 8, the yen closed at about 119.76 yen per dollar and 165.365 yen per euro.  On Tuesday, August 14, at about 7:50 pm, the yen stood at 117.498 yen per dollar and 158.974 yen per euro.  So if you were wondering why the markets are tanking to such crazy extremes despite the bailouts, consider your mystery solved.  The yen strengthened by about 2 and a quarter yen per dollar and by a mind-blowing six and a half yen per euro over the period under discussion.  Talk about taking the carry traders to the wood shed!  Note that when we refer to the large specs in the gold market, these are mostly hedge funds that are heavily into the carry trade, so when they get the business end of a hickory stick in the form of margin calls due to a carry trade unwinding, they usually go running to their gold and other commodity positions for their own private bailout.  The market crashes that occurred on February 27 to 28 of this year are an excellent past example of this type of yen hit on gold.  We simply cannot believe the chances the cartel is taking with these yen manipulations, which are bound at some point to detonate the Yen Death-Star as the panic-stricken Japanese public bails out of their short positions on the CME and send the yen to the moon.  As the cartel continues to play Russian roulette with the world's financial markets, it is only a matter of time before the pin hits the primer in the lethal chamber.


          Next, let's look at the results of these manipulations.  The USDX went from 80.343 on August 8 to 81.489 on August 14.  How horrifying is it that with all the fearful flight into dollars and treasuries the USDX has only gained a measly point?  That shows you just how much trouble the dollar is in.  Open interest on USDX futures dropped from 42,621 to 36,324 over the same period, so it's almost as if they have given up trying to convince traders to buy dollars using the influence of the USDX futures market.  Now let's consider the decline in the Dow versus the decline in the spot price of gold.  On August 8, the Dow closed at 13,657.86 while spot gold closed at 674.80.  On August 14, the Dow closed at 13,028.92 while spot gold closed at 668.80. The Dow lost about 4.6%, despite the hundreds of billions of bailout credit injections, while gold lost a "stunning" .89%.  We think we would be straining all credulity if we were to suggest that the loss of 4.6% on the Dow was in any way a good tradeoff for the cartel's .89% suppression of gold.  We believe that gold's stubbornness is due to a number of factors, including the flight to safety, the cartel's limited options for manipulative strategies due to the nearness of the fall rally, impending seasonal factors and the use of yen calls and stock index puts by large specs as a hedge against these types of manipulations.  We might add that the XAU and HUI lost only 5.8% and 4.8%, respectively, over the same period, so you are no worse off in these types of stocks than you are with investing in Dow components.  This too will change over time, as a huge flight into PM stocks, as a more leveraged safe haven alternative to gold and silver bullion, is bound to occur as moronic traders finally get a clue.  So take a long position in PM's and their related stocks, stay long, and wait for the fireworks!      




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.

-- Posted Thursday, 16 August 2007 | Digg This Article

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