Courtesy of JESSE’S CAFÉ AMÉRICAIN

If another author had said this I might not pay it so much attention. Lately some have been given over to a tabloid approach to overstatement and sensational headlines to attract attention. This is a strong temptation as the blogosphere expands, similar to the development and evolution of newspapers as a popular medium in Victorian London for example.

But as you know, I have a great deal of respect and admiration for Janet Tavakoli and her knowledge in this area. If she is seeing a new demand for Credit Default Swaps on the US payable in gold I would credit it since this is her area of expertise and industry connections, but would ask for some particulars, which I have done. This would match up with some other data I have seen from other sources, and desire to continue to put the puzzle pieces together without traveling false trails.

It does make sense, of course, to price a US default in something other than dollars. The question that comes to mind though, is not the suggested method of payment, but the nature and quality of the counter-party who could stand reliably behind such a claim without it being a fraudulent contract by its very nature.

If the US should default, what major financial institutions will be in a position to have written and then uphold the terms of these CDS, payable in anything at all? Surely only a sovereign bank like the US Fed, the Treasury, or the IMF, or some other central bank could be so capable. But what possible motivation could a non-profit-seeking official institution have in writing CDS on a US sovereign default? Perhaps more likely a private bank or GSE, with the buyers thinking it has some sovereign guarantees that would be upheld in extremis.

Truly, remember AIG? It was insolvent when payment was demanded, and acted improperly in paying collateral to Goldman ahead of its inevitable insolvency, and then receiving the support of the Treasury to pay obligations in full, above all others. It ought to have been placed in a receivership and its assets allocated with the previously disposed collateral clawed back. This kind of private arrangement between parties involving the sovereign wealth of nations may be indicative of things to come. The recent example of Iceland comes to mind.

I agree with her that credit default swaps should be curtailed. Indeed, I would tend to severely limit the trading of most if not all naked derivatives and stock sales by requiring capital requirements near 100 percent and secured by good collateral.

But I think the gold aspect of this may be overdone. The US has more gold than any other individual country, and still values it cheaply at a sub-fifty dollar historical price on its books. If a counterparty fails, it will fail, and a settlement will be arranged. The issue of course, is if some encumbrance of the gold in the US has already been accomplished through unfortunate leases to bullion banks who will not be able to return it.

Indeed this horse may already be ‘out of the barn’ as some evidence indicates that a few banks like JPM are already short more gold and silver than they can possibly deliver under the conditions of the contract without selective default to paper if demanded by their counter-parties.

If there is any sort of government guarantee, it will be payable in dollars, unless some private arrangement is made for the benefit of the recipient. For example, if a bullion bank is caught short of gold, and requires it to avoid a default and ’systemic risk.’ The rationale will be to pay the debt in full so as to avoid a collapse, even though there was no guarantee involved. If we did not have such a recent historical example of AIG I would say that such an abuse of the Treasury for the benefit of a few for placing the system at risk was not possible. And yet here we are.

There is another possibility, based only on speculation as far as I can determine, that a major purchaser of US debt is now demanding it be backstopped against ratings downgrades in gold payable CDS. Until now I have given this little credibility. How can such a thing be arranged in secrecy and maintained as such? How could a private bank, even a money center, write such a swap in good faith?

You see, to my knowledge no private corporation has the right to engage in contracts that encumber the US gold reserves, not the Fed nor the Banks, and not even the President or Treasury alone. Only the Congress, with the knowledge of the people, may allocate and distribute such a sovereign asset. If swaps and contracts and leases are being made on the US gold reserves, the people then are the subjects of a monumental theft and fraud. And if the US is writing or guaranteeing CDS in gold, then most likely it is doing so as a means of rescuing those who have already gone hopelessly short the gold market, and need to arrange a ‘back-door’ bailout.

So the rule at hand would be the epigram of the famous trader, Daniel Drew:

“He who sells what isn’t his’n
Must buy it back, or go to prison.”

Unless they have good friends at the Fed or the Treasury, or in positions of power in the exchanges perhaps. But does anyone believe that the American people would stand again for another bailout of the very same banks that it has bailed out previously? I would hope that there would not be a Reykjavík on the Potomac in my lifetime.

In short, if the existence of CDS on the default or downgrade of US sovereign debt payable in gold bullion be true, who would be in a position to stand behind these Credit Default Swaps with any reliability, and what buyer would be in a position to make such a demand of a credible source?

The US most likely will resist the banning of credit derivatives because it is in the hands of the Banks, and such derivatives are the source of enormous profits. Further, such a ban might cause the existing bulk of derivatives to fall in value, destabilizing the financial system. Nothing could be more obvious, at least for now. So this situation will continue most likely until it falters, and the entire system is once again placed at risk. But these markets are so opaque, and the intentions of government in them even less apparent, that one can only watch and wonder.

At some point the Banks may seek to make the people yet another offer they cannot refuse. And America will choose. But first I think, the UK will reach this point.

Huffington Post
Washington Must Ban U.S. Credit Derivatives as Traders Demand Gold
By Janet Tavakoli
March 8, 2010

…Remember AIG? When prices moved against AIG on its credit default swap contracts, AIG owed cash (collateral) to its trading partners. AIG paid billions of dollars and owed billions more when U.S. taxpayers bailed it out in September 2008.

U.S. credit default swaps currently trade in euros. After all, if the U.S. defaults, who will want payment in devalued U.S. dollars? The euro recently weakened relative to the dollar, and market participants are calling for contracts that require payment in gold. If they get their way, speculators on the winning side of a price move will demand collateral paid in gold.

The market can create an unlimited number of these contracts very rapidly. The U.S. wouldn’t have to ever default to trigger a major disruption in the gold market. Spreads (or prices) on the credit default swaps could simply move based on “news,” and demand for gold would soar.

If this speculation drives up the price of gold, and the available gold supply becomes limited, are you willing to post your children as collateral? I am pushing the point so that we put a stop to this before it is too late.”

Joe Weisenthal of Money Game

By Jeff Clark, Casey’s Gold & Resource Report

In a recent conversation with a fellow gold analyst, he was emphatic that the price one pays for physical gold should be ignored. “What’s far more important,” he insisted, “is how many ounces I own in relation to the total value of my assets.”

Building a core position in gold bullion is a smart goal, to be sure, and a strategy Casey Research has been advising for years. However, ignoring the price you pay for gold could be seen as foolhardy; sure, it’s insurance, but isn’t price part of the consideration when you shop for insurance?

So, who’s right?

The World Gold Council just released their 2009 annual report on gold trends. From the densely populated pages of interesting data, there’s one compelling tidbit I gleaned that may shed some light on the buying behavior of gold investors.

Overall investment in gold was 7% higher in 2009 than 2008. This is significant when you consider that demand in the fourth quarter of 2008 – during one of the worst financial meltdowns in history – was so great that shortages of physical metal abounded everywhere. And yet investors bought more gold in 2009 when investor fear about global financial uncertainty was subdued.

Further, 2009 total funds invested in all forms of gold exceeded 2008 by 20%, and the average price was 11.6% higher. In other words, investors were buying gold even though the price wasn’t necessarily “low.” To be sure, that’s a broad statement. But the fact remains that year-on-year, more gold was purchased at higher prices when the markets were less scary, than when the price was lower and Hank Paulson was on CNBC every 15 minutes pontificating on how to save America’s financial system.

This isn’t to suggest one shouldn’t pay attention to price. And the data doesn’t identify how many of those who purchased gold last year were first-time buyers, as certainly there were newcomers to the sector that contributed to higher demand. But it begs the question, who would continue to buy gold when the price is higher?

Whoever doesn’t own enough, that’s who. The gold I bought last month was certainly higher priced than what I paid in 2008. But I’m trying to position my assets for protection from eventual dollar debasement and rising inflation. So perhaps focusing more on acquiring sufficient ounces to withstand a storm rather than stubbornly buying none, waiting for “cheaper” prices, however you define that, is a better mindset. Not owning enough gold is equivalent to holding a million-dollar mortgage and having a $10,000 life insurance policy. It won’t help much when you really need it.

Of course we should pay attention to price. But the trick is not letting that distract you from buying what you need. You’re not buying gold bullion as a speculation (although we expect to make a bundle on our holdings), but as a sound form of cash in an environment where government has no respect for a balance sheet and sees inflation as the only way out of its black hole of debt. During periods of inflation, the government does fine; it’s the citizens that suffer from the lost purchasing power of their savings. It’s clear our currency is being debased. What’s your plan of defense?

For those diligently accumulating gold, how do you know when you have enough? Check your anxiety quotient. If Ben continues printing money or Obama promises more goodies than he has the money to pay for, and you remain calm, then you likely have adequate gold. These are the investors who can afford to be stubborn about price as they build their holdings. In my opinion, this is where we all want to be.

What form of gold should you buy? It depends on why you’re buying it. If you understand gold’s role in history, owning a physical form will come naturally to you. If you see the threat of inflation on the horizon, or you worry about what is being done to the dollar, you’ll own both coins and an ETF. If you’re worried about possible exchange controls someday, you’ll consider a Perth Mint Certificate. And the more gloomy your outlook about the global economy, the greater the percentage of all forms of gold you’ll buy.

That said, we maintain a bias toward physical ownership. GLD and other gold ETFs are fine and do offer protection. But the custodian isn’t going to airmail gold to you when you cash in your shares; having the “hard money” in your hand gives you the freedom an ETF cannot. In our book, owning physical gold, in the form of one-ounce coins, is where your first dollar should go.

I remember when my wife and I decided it was time to get life insurance. We just had our kids, and it was time to play grown-up. Given what 5,000 years of history has taught us about the value of gold, and given what’s happening at this moment in history to our currency, are you playing grown-up with your investments?

Is the current price of gold a good time to buy? Check out our four “clues” in the new issue of Casey’s Gold & Resource Report, risk-free here…

When the tech bubble burst in 2000, Greenspan tried to “fix” the problem by cutting rates and printing money. Fix the problem he did … well sort of! What Greenspan did was create two new bubbles in the credit and real estate markets to replace the tech bubble that had burst. Millions of jobs were created in these two industries. Much needed jobs to replace the ones lost as the tech boom came to an end.
I think we will all admit it was one heck of a party, but like all good parties there’s a price to pay. The Hangover!
The truth is the economic boom of the mid 2000’s was built on a lie. Instead of a foundation of productivity the last bull market was founded on an ocean of liquidity. That ocean of liquidity fostered risky investments and massive speculation. It was only a matter of time before the house of cards came crashing down. And crash it did. The world suffered through the second worst bear market in history almost taking down the global financial system in the process.
Apparently the powers that be have learned nothing from this near death experience because they are back at it again, printing, printing, printing in another vain effort to create prosperity with the printing press. I dare say the average 6th grader can understand that the act of putting ink on paper does not create wealth. It’s too bad our elected officials can’t understand this.
So here we are, we’ve survived the credit crisis and all appears to be well in the world. I’m here to say that all is not well. We now have a cancer growing under the surface of the economy many times bigger than the one Greenspan created. This cancer isn’t going to show up in real estate or credit markets, that bubble has already burst, never to be inflated again. No, this time I expect the cancer is going to flare up as inflation in the commodity markets.
Witness the strange resilience of oil at $80 despite a very strong dollar the past 3 months. Gold has been holding over $1100. Sugar is at multi-year highs. Copper is less than 15% from all-time highs.
The commodity markets are now poised to unleash a massive inflationary storm. I think there’s a very good chance that storm will strike this spring.

The dollar is now deep into a counter trend rally and in jeopardy of putting in an intermediate term top at any time. When it does the flood gates could break and we will have to deal with the unintended consequences of Bernanke’s actions.
Unfortunately, there are no painless cures for spiking inflation, especially in an ongoing recession. The cure is to let the market clean out the excesses. The cure is to raise rates and drain liquidity, to induce a recession. That course leads to 20%+ unemployment and a deflationary depression. Does anyone really believe our elected officials will choose the that course of action?
On the other hand, doing nothing leads to higher and higher inflation and running the presses faster and faster to stay ahead of rising prices, eventually culminating in a hyperinflationary event if government debt is allowed to spiral beyond the point of no return.
Unfortunately, I think it’s probably too late to stop the storm. Let’s face it, you don’t start turning the Titanic when it’s 100 yards from the iceberg. By then it’s too late and the ship is doomed.
The same principle applies with our economy. If the Fed waits until inflation starts to pop up it is too late. The damage is already done and there’s no going back. If the inflation Genie gets out of the bottle there’s no easy way to get him back in. I would argue that the commodity markets are already trying to tell us there’s trouble coming.
History has been crystal clear - every time oil spikes 100% or more within a year’s time, it has pushed the our economy into a recession. We already have a spike from $32 to over $80 and this is against a backdrop of high unemployment. The last thing we need in an economic environment that’s already under stress is surging energy prices again.
The question investors have to ask themselves is whether it’s more likely the powers that be will do the right thing, raise rates, drain liquidity and force the world into a deeper recession before inflation gets out of control or will they continue to kick the can down the road making the problem bigger and bigger?
Knowing human nature, my bet is that our elected officials will do whatever they have to do to avoid short term pain - even if it means compromising our future.
The storm is brewing. It’s time to batten down the hatches.
That means gold and silver!

John Townsend

The Smart Money Tracker

Since March of 2001, the stock market has been and continues to be in a secular bear market. Beginning in March 2009, stocks have been in a cyclical bull market. This means our current stock market is in a relatively short term bull rally within a much longer term secular bear market decline.
The current rally will serve to separate the second phase of the secular bear from the third and potentially most damaging leg down in the ongoing bear market.

Now that doesn’t mean the rally since March 2009 is finished. I doubt it is.
What it does mean is that one can’t make a timing mistake and expect to be rescued by the secular trend.

At some point this bull is going to expire and we are going to head back down and break the SP500 lows at 666, either nominally or on an inflation-adjusted basis. I suspect it will be both.

The reason it’s going to do that is simply because we don’t have a fundamental driver to power a long term bull market in place. For instance, from 1982 to 2000, the stock market was in a secular bull market. The fundamental driver for that bull was the personal computer and the internet. Those were world changing new technologies. Millions and millions of jobs were created during this period.

There were certainly nasty corrections during the secular bull, for which 1987 is an example. But the secular trend was up. So as long as one was willing to hold onto positions, any entry no matter how poorly timed, would eventually end up being a winning trade. (It’s the strategy Buffet used to become a billionaire, by the way).

Simply said, only traders can lose money in a secular bull market. The only way to lose money in this type of market is to buy high and sell low. And, a buy and hold strategy is the only sure fire money maker in a long term bull.

The problem with the stock market since 2000 is that there is no longer a fundamental driver to produce a secular bull. We haven’t discovered the next “big thing” yet. The new technology that will change the world again, drive massive economic growth and create the millions and millions of new jobs the world needs so desperately.

Now all we are getting are phony cyclical bull markets built on money printing. Those are not the kind of fundamentals that can support a sustainable long term bull market.

So what happens? Well, eventually the false fundamentals fail and the market collapses.

The Fed is now at it again trying to build another bull market on a fundamental base of nothing more than trillions of dollars of liquidity (printing money out of thin air). It didn’t succeed when Greenspan tried it earlier in the last decade, and it’s not going to succeed for Bernanke in this decade.

Until we get the next fundamental driver (i.e. personal computers & internet 1982-2000, electronics 1945-66, automobile and mass production 1920-29, trains in the late 1800’s) we are not going to have another secular bull market for stocks.

There is a sector however that does flourish on a fundamental base of money printing. That sector is the commodity sector, in general, and the precious metals, specifically.

Gold is in a secular long term bull market. This means several things. First off, we can expect this bull to continue until the fundamental driver is taken away. That means the money printing presses have to be turned off. Second, any entry will ultimately turn out to be a winning position as long as one is willing to hold on.
Investors would do well to remember that the bull will eventually correct any timing mistakes.

That being said it is possible to maximize gains and minimize draw downs if one can recognize where gold is in its wave cycle at present. As all of the gains occur during a C-wave advance one wants to be fully invested during this period.

Probably more importantly one needs to recognize when the C-wave is coming to an end and exit positions before gold enters the inevitable D-wave correction.

At the moment gold appears to be entering a second leg up in the ongoing C-wave. The trick will be to sell at the top when things look the brightest and then re-invest at the bottom of the D-wave… when things look the bleakest.
I will be monitoring the advance closely over the next couple of months so as to get subscribers out prior to the onset of the next D-wave.

Gary Savage authors the Smart Money Tracker and daily financial newsletter tracking the stock & commodity markets with special emphasis on the precious metals market.

The Mess That Greenspan Made

It wasn’t much, but yesterday’s addition of 4.6 tonnes of gold to the “tonnes in the trust” at the world’s most popular gold ETF - SPDR Gold Shares (NYSE:GLD) - was the largest one-day addition since the middle of December.
As compared to last year at this time, there’s not much happening with the GLD inventory these days. Recall that during the first few months of 2009 they were adding gold bars like never before - a whopping 350 tonnes during just the first three months of the year.

The inventory is still about 20 tonnes below the all-time high reached last June, however, given what’s happened with the gold price in recent days, that could soon change.

The question now remains whether gold is stuck in a D-wave decline or whether the action since December has just been a very tricky midpoint consolidation before the C-wave finishes its run.

I will say the recent strength despite a strong dollar is very encouraging.

There are four important requirements that have to be met before we can say with a high degree of confidence that the C-wave is still in play.

First, the single most important is the dollar. We simply must see the intermediate dollar cycle top. No C-wave has been able to fight a rising dollar. What I’ll be looking for is a weekly swing high on the dollar chart as a sign the intermediate cycle has topped.
I will note the dollar is getting late enough in the cycle that it could put in a top at any time. Not to mention we are starting to see a large momentum divergence forming.

Second, the next requirement is for gold to put in a right translated daily cycle. If this remains a D-wave decline then all daily cycles should be left translated. If gold can eclipse $1131 this week then we will have a right translated cycle and the second requirement will have been successfully met. With today’s close above $1133, this key requirement is satisfied.

Third, the next hurdle for gold is the $1161 level which has to be surpassed. Gold has to break the pattern of lower highs and lower lows. It will do that if gold can top $1161.
The $1161 price level will also eliminate the December trough as the intermediate cycle low. Instead, the most recent intermediate cycle low would become February.
This is very important as it would mean gold is on week 4 of the intermediate cycle (which typically runs about 20 weeks) instead of week 10. In effect, this puts 6 more weeks on the shot-clock for the second leg of the C-wave to progress.

Fourth and finally, we need the miners to start participating. If the HUI can cut through the 420 resistance level that will be a big step in the right direction. With the HUI close today above 420, this key requirement as also been met.
If miners can break out to new highs later this month all resistance in the gold market will be out of the way and the path will be clear for the second leg of the C-wave to rack up another monster move.

Gary Savage, The Smart Money Tracker

Gary Savage is currently retired and lives in Las Vegas. He is the author of the Smart Money Tracker, a financial blog with special emphasis on the gold secular bull market.

From the 2001 beginning of the great secular bull market in gold, price has followed a predictable ABCD wave pattern.

This pattern has since played out five times. And on each occasion the C-wave has provided a spectacular performance. Gold’s C-waves of 2002, 2005 and 2007 yielded brisk gains of 18, 61 and 41%, respectively.

Fast forward to our current C-wave (April 2009 - present) and we find ourselves in either a C-wave that has surprisingly underperformed expectations (topping in early December with a modest 19% gain), or one that has yet to show its awesome might.

The question now is whether gold is still consolidating within a C-wave advance or whether a D-wave has managed to take hold.

On one hand the C-wave never really generated the kind of excessive speculation we normally see at C-wave tops. The silver gold ratio never spiked, miners never even got to normal valuations much less expensive, which is what would be expected as gold fever hits hard at C-wave tops.

The massive year and a half consolidation only spawned a meager 190 point new high? That doesn’t sound like a C-wave top to me. We had the most powerful A-wave, along with the weakest B-wave of the entire bull market so far and all it could gain was 190 points above the old highs? Hard to believe.

Trillions and trillions of dollar printed and thrown at the market and all we got was 190 points? Again hard to believe.

We even have a broken trend line.

Which ever way gold breaks out of the box should tell us were we stand. I will say that if this is a D-wave we should be getting close to the bottom. I would expect a test of the 65 week moving average and the $1000 mark will probably be about it before the next A-wave gets underway.

Gary Savage is currently retired and lives in Las Vegas. He is the author of the Smart Money Tracker, a financial blog with special emphasis on the gold secular bull market.

Three weeks ago on February 5th, we saw an extremely high level of fear in the market with selling vs. buying volume at a 9:1 ratio. We note that in 2009 this extreme level of fear occurred at the bottom of each significant pullback.

Since this panic selling low in February 2010 we have seen stocks and commodities work their way higher, which we expected. Overall the broad market looks as though it’s trying to make a move higher.

Below are some ETF charts of gold, silver, oil and the indexes.

Gold lead the market higher in 2009 and also lead the market lower in December of 2009. It looks as though gold could be starting a new trend higher.

You can see the clean breakout of the down channel and then a test of the channel at support. This type of price action also forms an inverse head and shoulders pattern for those who like trading patterns.  This is very bullish price action.

SLV Silver ETF – Daily Trading Chart
Silver has much of the same chart features as gold, but is slightly skewed. This is not particularly surprising though, as silver virtually always behaves with less defined chart patterns due to its characteristically funky price action.

USO Oil Fund – Daily Trading Chart
As with gold and silver, oil’s trading chart has formed a pivot low also, but the trend line is much steeper than what I am looking for. I prefer a flatter trend line as price growth is more sustainable.

As you can see in on the USO chart, back in December price rallied at almost the same angle as is currently the case, and then notice what happened. Once the momentum died out the price dropped straight back down. I call steep trends like this a Parabolic Rally.

Scroll up and look at the first chart (GLD) and observe the parabolic rally going into December. It too suffered a sharp drop straight back down when momentum died out.

Stock Indexes – SP500, Dow Jones, Russell 2000
Last week the market sold down the first half of the week, then bounced back up forming a possible pivot low. The daily chart for these indexes look virtually the same as the GLD, SLV and USO charts above for the past 5 trading sessions.

But, one little thing has me concerned….
When looking at the 5 minute intraday charts (posted below) you can see at the very last minute before the market closed HUGE selling volume flooded the ETFs. The market ended up losing all of its gain for the day.

With any luck this was just end-of-the-month hedge, mutual fund, etc. portfolio rebalancing. But I am somewhat concerned that more of this selling could step back into the market Monday or Tuesday.

Weekend Trading Conclusion:
Overall, last week started on a negative note but ended strong after forming a reversal pattern.

It looks as though stocks and commodities have formed an ABC retrace pattern and are now ready to move higher.

How much higher you ask?

Well, I believe 2010 is going to be a traders market. I envision an 8-12 month sideways consolidation (large bull flag) forming. If this materializes then buying on over sold dips, as we did on Feb 5th, and scaling out on strength at resistance levels will be our goal in the coming months.

A bunch of 4-8% trades is what I’m figuring, but with leveraged etfs we can double and triple those type of returns. Now that is something to anticipate with delighted optimism!

If you would like to receive my free weekly trading reports please visit TheGoldAndOilGuy at: www.TheTechnicalTraders.com

Chris Vermeulen

The Mess That Greenspan Made

Some of yesterday’s surge in the price of gold bullion was apparently driven by this report from Pravda that his since been de-bunked by the more mainstream financial press:

China has confirmed the intention to purchase 191.3 tons of gold from the International Monetary Fund at an open auction, Finmarket news agency said.
…
“Chinese officials have confirmed previous announcements from IMF experts and said that the purchasing of 191 tons of gold would not exert negative influence on the world market. China is interested in the development of the domestic consumer market,” the agency reports.

Well, maybe not - Reuters followed up and filed this report

:

Contacted by Reuters, the author of the Rough and Polished story, Nadezhda Shagrova, who works as a tour guide and journalist in Shanghai, said she did not have any official information to back up her story.

“The source for the story? Well, that’s been written about in lots of places. I mean, Xinhua news agency wrote about that and other official Chinese sources, lots of them. Why are you asking?”

Told that gold prices were moving on her story, she said: “No, no, there’s just no way that could be because of my article.”

As reported in China Economic Review this morning, an official at the China Gold Association said China would not buy any IMF gold, a view that has been widely held for many months since they are now the world’s number one producer of gold and, when combined with overseas acquisitions have a natural source of supply to add to their holdings.