50+ years of credit creation and living beyond our means year after year is finally coming to an end. Ben Bernanke spoke on Wednesday regarding “tapering” treasury and MBS purchases sometime next year, the market then immediately reacted. Stocks were sold, bonds were sold, commodities were sold and so were silver and gold (much more on this shortly.) Did the Fed actually do anything? Did they tighten at all? Has their balance sheet shrunk or even stagnated at all? The answer(s) are an emphatic NO! The bloodbath last week was merely “front running” on the fear that the Fed will back away and stop administering the crack credit doses that the financial community have become accustomed to. Basically free money and trillions of dollars of it. Can you imagine what will happen should the Fed ACTUALLY slow down or stop giving out free cash so that banks can cover up losses?
Last week was only a preview to what is coming. I personally do not believe that any “tapering” will ever come about last week’s financial action. This only supports my thesis. Last week happened only after the mention of “tapering,” Do you think the Fed may now know the end result of an ACTUAL exit strategy? One where the markets would have to fend for itself and be self-supporting along with the economy? They do know; the Fed knows that it will be forced again and again to not only continue QE but increase it exponentially. There is one minor “problem,” the more they monetize, the less “collateral” (there’s that word again) there is available to an economy and financial market that… runs on collateral. Can you imagine the immediate bloodbath of panic selling if the Fed not only stopped purchasing bonds but actually tried to sell some to reduce their own balance sheet? They are now purchasing more than half of the Treasury’s new issuance, if they turned into the seller, who is left as the buyer? What would happen should China’s current “cash crunch” cause them to turn seller?
As a result of the mere murmur of slowing QE the most shocking action last week was in the Treasury market. The 10 yr. ended Friday at 2.54%, this was a rise of .40 basis points or so and nearly equal to the rise in yield for all of May. May if you recall was the month where the Fed lost about $115 billion on their bond holdings (certainly far more if they had to mark the non-Treasuries to market). The volatility was staggering and without a doubt there are now some dead institutions out there because of how fast and violent the move was. There is $200 trillion outstanding in interest rate derivatives. This past week alone, these contracts on average probably moved more than 5% in value. This would indicate a movement of maybe $10 trillion (with a T) worth of net change from one side to the other in less than 5 days. Do you really believe that this type of “wins and losses” could have occurred without someone, probably “many one’s” becoming insolvent? The Fed only purports to have $65 billion of equity capital, in between May 1 and now their portfolio has dropped nearly $250 billion. Is this “insolvent?” Yes it is but they have the ability to run the presses so not to worry I guess?
Forget the stock market; the Fed has now lost control of the Treasury market. Interest rates on the 10 year have now gone from just under 1.6% to over 2.5% in a very short period of time. This is now a 60+% rise in rates. Was this truly because the economy was strengthening? It would be bad enough but the selling that has come about has nothing to do with the economy. The selling in reality started as “front running” by those smart enough to leave the party while the music was still playing. Now, it is evolving into one gigantic and global margin call. This will feed on itself, winners will not get paid, sovereigns will lose the ability to “fund” and ultimately the global real economy will suffer from the financial implosion.
Before getting to the gold and silver travesties I’d like to mention that the markets “don’t just crash” on their own. If you look back to every crash (with the exception of the metals “forced” crashes) of any asset throughout all of history, they all have one thing in common…debt. TOO MUCH debt to be exact. We have now passed the peak of the “debt bubble,” there is no question now. Debt got us into the 2008 calamity and the solution was …MORE debt. Even though the bubble burst back then they were able to reflate it one last time. “They” being central banks and sovereign treasuries. Now, there is no ability anywhere on the planet to reflate. Why? Because, there are no sovereign treasuries healthy enough or big enough to be able to issue enough new debt to reflate one more time. It’s over, plain and simple.
Gold. For those of you who can remember years back the “4 pillars” that Jim Sinclair always talked about, this, is what is happening now. The 4th pillar was the U.S. Treasury market and it has now been “pulled.” This was the last horse big enough and strong enough to “pull” (push) the economic cart. The only description of the Treasury market last week was “panic” selling and this coming week should be interesting to see how the margin calls are handled. We got a preview back in 2008 and ’09 of how firms treated each other which ended with Lehman (and many others) being devoured.
So gold got hit for another $80 and we are told it has no direction to go but down because interest rates are going up…because the economy is so strong. First off, yes I call BS on the strong economy story. Secondly, even if the Fed DID want interest rates to go up (they don’t) they would never want rates to move like they just did last week. They know that “fast” is a killer (remember the JPM London whale) and firms cannot “adjust” when market prices (yields) move quickly (think margin calls and delta hedging.) Firms blow up, when this happens and of course and then make the panic selling that much worse. As an interesting aside, “usually” money flows INTO Treasuries when there is fear but not this time, the “fear” IS the Treasury market!
But something just does not add up here. First, we know that physical demand was huge going into this week and now we hear that physical off take has again increased with this latest price takedown. Secondly, if the COMEX numbers are to be believed, the open interest numbers actually went up on Thursday a whopping 10,000+ contracts in gold and in silver over 2,000 contracts…but how can this be? If everyone was selling to get out then the open interest would have dropped by these amounts or more, they did not which means that more and more “shorts” piled on. Again, if the CME numbers are to be trusted and are correct then we also have a clue as to “whom” the shorts are…the specs (hedge funds) and the commercials look now to finally be on the long side after 15 years on the short side.
Here are a couple of speculations on my part. Is this a trap being set for the shorts? A trap for the commercials (banks) to clean out the hedge funds? Follow this through, in the past the CME would raise margins to pressure the prices of gold and silver. I believe that 100% of the time after the CME has raised margin rates, gold and silver would get hammered, why didn’t they get hammered on Friday? If history was any guide at all they should have but they did not. Why? Surely there were margin calls issued Thursday night to be met on Friday and a margin hike on top of that. What the heck happened? Why the difference? …Maybe because the longs are a different group now than in the past? Maybe because in the past the longs were the hedge funds that would receive margin calls and then cut and run. Now maybe the longs have deeper pockets?
And speaking of “deeper pockets,” the open interest in silver continues to stay very high…and even after a 50% drop in price. The longs have now effectively PAID for more than half of the silver if they met each and every margin call and now stand for delivery. Will July be the month that Silver defaults on the COMEX? There are still 50,000 July contracts outstanding with 1st notice day next Friday. This represents 250 million ounces…the dealers only hold about 40 million for delivery. Who, other than a sovereign government (China?) or a collective of sovereigns could have met the margin calls over the last 6-8 months? Have they allowed the short specs to build up and get bolder in their sales? On the gold side it is interesting to note that JP Morgan has not reported 1 single ounce of gold entering their dealer depository so far this year…they have 1 week to go before June deliveries must be made and they have a negative 80,000+ ounce deficit to cover. Where will this gold come from? Could we be set up for the Chinese to stand for delivery from under stocked vaults…and at the same time sell some of their Treasury holdings?
This upcoming week could be a doozy. So many potential train wrecks from so many different directions to keep your eyes on all of them. Just remember that “credit” is what runs everything and it looks like “credit” is now at the center stage of problems. Should rates continue to rise this week in U.S. Treasuries you should expect to see some very major firms run into trouble. This time around it will be real as there are no solvent white knights left with the ability to leverage up and save the day. The U.S. Treasury and Fed are now in the crosshairs, they need to catch a bid this week or they will be at the center of the biggest one time margin call ever!
Bill,
Excellent article as always.
We all know the ponzi scheme is coming to an end. It may well be this week or sometime soon.
I feel sorry for the 97%+ that are still in the system as they will all suffer greatly.
We are all going to suffer, but some will suffer greater than others.
Couple this with foreign governments losing and citizens of the US losing faith in the US government (NSA/Prism scandal) and the train wreck turns into the entire US government
Bill,
I’m afraid what most people who believe metals are the place to be for the fallout are forgetting that a weak economy combined with collapsing credit and rising yields is a very deflationary environment. As you yourself said, there is no method left with which to reflate.
In a deflationary environment all commodities are going down.
Just like in 2008 when a collapse of the financial system threatened a deflationary depression, commodities got hammered. Oil went to 24$ a barrel. Gold was at 300$ an ounce.
Unless you actually think Bernanke wins or tries to pull a Japan and ups purchases to 200 billion a month. This is a deflationary environment going forward and commodity prices will reflect that.
Ah yes, another deflationist! So Dollars will be worth more? Dollars which are issued by a bankrupt entity? That are backed by the “full faith and credit” of that bankrupt entity? First off, Gold only traded down to $696, not $300 in 2008. It did not fall as much as any other “commodity” because Gold is not a commodity…it IS money. JP Morgan himself said “Gold is money, nothing else is”. In a true deflation, Gold does better than anything else and deflation is THE best environment to own Gold…even better than hyperinflation which is where the fiasco will ultimately end up. “Dollars” only did well in the Depression because they were still backed by Gold, a “surrogate” for Gold so to speak. Were they not backed by Gold they would have crashed and burned. We now live in VERY different times than the Great Depression.
I mispoke about 2008… the great re-flation experiement began w/ Greenspan following the tech bust. Causing both the housing and then bond bubbles. Gold was 200$ an ounce prior to the central bank embarking on the grand keyesian nuclear bomb.
You are right that at some point the validity of the dollar itself will be questioned as tax revenue falls along with GDP and the public debt burden gets heavier.
But that is a long way away from happening. And gold will likely see 200$ again before we get there.
There’s a big difference between a inflationary collapse of currency and a deflationary collapse of currency cause by too much debt and debt default.
In a deflationary collapse, the currency itself is likley to rise for quite a long period of time, even resulting in hoarding of the currency, until all confidence is lost and then collapse occurs in a relatively very short period of time.
And you are right, this is very different times, this is not like the great depression. This is a coming deflationary collapse caused by too much debt. For a extended period of time, all assets will fall, credit and leverage will be wiped out and velocity of money will plummet. Only well after all these things when the funding of the government itself is questioned will fiat potentially collapse.
But why buy tons of gold at 1000$ when you may get it at 100$.
Dream on and on! Gold by the way was never lower than $252 so you’ve misspoken again. $200? $100? Totally laughable! Gold is money, it is not just another “asset” as you say. You sound like Ben Bernocchio under oath. Gold is THE only money that is not someone else’s “liability” and will rise in value versus other assets because it is the only asset that cannot default. By the way, the “funding of the government itself” is already in question.
Gold is not money any more than a barrel of oil or a collectible piece of art is. They can be exchanged or traded for money but you cannot use it as currency. You may be able to walk into a store and talk the owner into trading you goods for your gold coin, but so could you do the same w/ a piece of artwork or antique car.
Gold and precious metals are an asset class and they are an asset that will decline in value relative to a US dollar as the US dollar rises in value.
But.. good luck to you. I believe in 5-10 years, the average US home price will fall from 170 to 85k. Gold will fall from 1250 to 200, oil will fall from 95 to 20 and the S&P will see 450. The dollar will at one point (before collapse) be very valuable relative to hard assets.
“Gold is not money”………….says it all doesn’t it. Good luck
Hmm… Funny how lately when I post in contradiction to what you guys are saying here it doesn’t seem to stick, are you guys moderating the comments here?
My point was/is anything can be money , paper, shells , gold etc. all it takes is the opposite parties willingness to accept it. Yes, yes, gold has stood the test of time but there have been times when gold has not been accepted and when it has declined in inflationary times, see Martin Armstrongs work on this. Cory above is right, gold can, and probably will decline.infact my previous post, which seems to have been deleted, said exactly that and here we are on another leg down while you guys are calling the bottom yet once again while the market is proving you wrong once again. In a world wide interconnected economy it is not as simple as fed prints therefore gold rises. It’s about capital flows. At the moment it’s flowing to the $US, look at Armstrongs blog yesterday where he says the $A and commodities are falling, that’s what is happening, Cory above was right. Only the gold bugs insist gold can ONLY go up even though the markets prove them wrong time and again and anyone who says anything different is set upon. Jim Rogers sees the gold price going lower as do a few others.
Armstrong was right when he said you guys do a disservice to people wanting to buy gold because you have urged to buy even at the top and all the way down scaring off potential buyers because they’ve been burned so badly by bad advice. I don’t believe, as Armstrong does, that you have conflict of interest, but you are just too zealous to be really taken seriously.
I own gold and silver from 7 years ago and are still holding and buying from now on when I can.
Gold has always been accepted as money, oil, wheat etc. can be traded but not used as money for obvious reasons. Sorry, yes ALL markets can be manipulated to paint a picture, the picture we are seeing now. I have never said that Gold can only go up, only that it is worth a hell of a lot more Dollars than the peak number of $1,900. Can there be corrections? Of course there can and there should be. Can 100% of the world’s production be sold on one exchange in less than 12 trading hours…uh yeah I guess but it isn’t really Gold is it? In any case, I stand by what I write and believe what I write, you are not forced to read anything of mine and are free to read Armstrong or whoever, “it’s a free country”. I try to deal in logic and heard this same stuff back in 1999 and early 2000 regarding the internet stocks and equities in general…I was a fool and didn’t know what I was talking about. Of course they pointed to the market and said “see” …as you are now. Gold at or below the cost of production is a no brainer, Gold, when the financial panic goes full blown will also be a no brainer. …and I suppose you or someone that you read knows the date when this goes full blown? It can be any time of any day which is why you cannot pick tops and must buy weakness which is what I have advocated loudly since we probed the $1,600’s. I also responded to Cory’s posts, as I said, I think he is way wrong but that’s what makes horse races.
It’s is my second attempt to post here, are you guys sensor ing me? If you are what are you afraid of?
So here we go again….
Money can, and has been, anything, yes I know, gold has stood the test of time but there have been times when gold has declined in an inflationary environment and there have been times when it has not been accepted as money , see Armstrongs blog.
Cory Is right when he says gold and silver can decline, it’s declining now against the $ US , it’s not as simple as fed prints therefore gold goes up, in an interconnected global economy it is capital flows that are important and at the moment flows from the euro, yen etc. are pushing the $ up. You and the gurus have been insisting you’re right for 2 years now while the market has been proving you wrong, anyone, like Armstrong or Edelson, that says gold or silver may go down are ridiculed even though they are proven right! What does that tell you about yourself? Just because you have a large position in gold and silver doesn’t mean it’s bullish!
As Armstrong noted, the permabulls who have no idea of history or markets, have done more harm to the gold price than good. Encouraging many to buy all the way up and all the way down saying ” We’ll never see these prices again and The bottom is in! ” have made many loath to buy in precisely when they should be. Imagine you as a real estate broker during the bubble always telling people to buy, how do you think they feel now?
Armstrong expected the $US to get stronger, it has as we speak, not manipulation, not a surprise, just the markets working. Yes I know there are manipulations but no one can manipulate every commodity across every country at the same time. Gold and silver may well have their time, I hope so, I’m heavily invested in them for many years, but they aren’t the percieved safe haven YET, the euro and yen moves have to finish first and the gold and silver markets are WAY to small to absorb the kind of money we are talking about. Yes, yes I know, at THESE prices but lets be realistic how many entities are Going to buy gold at $10,000 an ounce or more when much more liquid options are available?
Cory above is right, as is Armstrong, $US is strengthening as we speak. It is not as simple as fed prints therefore golds value increases, it’s all about capital flows worldwide. Until the yen/euro move is finished the $US will strengthen. You have done more harm than good encouraging. People to buy all the way up and all the way down, imagine it was the housing bubble, do you think people will ever buy back in after losing so much? Gold and silver are Not money YET. You permabulls are insisting you’re right when the market is proving you wrong. Take an honest look in the mirror.
sorry Jason, I disagree. I write my honest opinion to which you can disagree…or not read what I write. I believe Gold and in particular Silver are better buys now than any time since 2001. I cannot prevent or forecast the entire annual global production of Gold hitting the paper markets in 2 days, I can deduce that it was done deliberately to effect price which it has. I have said all along not to trade, just to stack. If I am wrong then so be it, I write what I believe in and have been correct in much of what I’ve written since 2007 and of what I spoke and advised since 1997. I was a broker for 23 years and branch manager for 12, not myself nor any one of my brokers ever got sued because we told the truth. Maybe not always 100% correct as no one can be…but, sincere in our recommendations. We at Miles Franklin operate in the same manner, otherwise I would not write for them. We all have skin in the game and have acted 100% in accordance with what we write. I still have past clients who bought THE low ticks in both physical and the shares, I told people to hang in throughout 2008-09 and am doing so again… let’s see if I’m correct again . I’ll bet I won’t hear from you then will I?
You guys are censoring content, what are you afraid of? If you can’t stand honest debate you obviously must have ulterior motives. That’s the problem with you permabulls , always insisting you’re right when the market is proving you wrong and attacking anyone who disagrees with your opinion. Shame on you!
for seeming to be so informed you guys are not very smart. gold is to be used as money according to the constitution. receipts for such are still the same thing,however those receipts are not as trustworthy as the real thing,but such either in written form or digitalized can be traded with computer technology and would be constitutional. we do NOT follow what we were directed to do according to the documents we agreed to as citizens and especially leaders of this country. all leaders take a solemn oath to follow protect and respect the constitution. they do not seem to keep their oath.
especially the jackass oconman
here is a nicer version
for seeming to be so informed you guys are not very smart. gold is to be used as money according to the constitution. receipts for such are still the same thing,however those receipts are not as trustworthy as the real thing,but such either in written form or digitalized can be traded with computer technology and would be constitutional. we do NOT follow what we were directed to do according to the documents we agreed to as citizens and especially leaders of this country. all leaders take a solemn oath to follow protect and respect the constitution. they do not seem to keep their oath.
especially o-conman
Allow me one more attempt to explain my position on this.
I believe that buying gold is in effect betting that Bernanke wins. You are not only betting that he likely will have to massively increase debt monetization from current rates but much more importantly that he actually is successful and manages to reflate the economy and increase rates of core inflation.
My position is that Bernanke’s theory/experiment is mathmatically, theoretically and fundamentally flawed. That he cannot and will not be successful in causing inflation within the economy outside of blowing focused bubbles.
Therefore, every dollar he prints will only function to make the resulting deflationary fallout worse. Whether that occurs because he stops printing on his own or because the market finally calls BS on his reflationary attempts does not matter. What matters is that he will fail and deflation will be the result.
maybe so, as I said, Gold will in this instance be the last man standing. If it is a deflationary outcome it means the banking system is gone, Gold will underwrite the next system. Owning Gold will then make you a charter member of the next banking system.