The Biggest Risk is The One That Was Not Perceived to Exist

The Gold Futures Bear Raid leads to ‘extraordinary’ demand for Bullion contrary to the perpetrators’ expectations.

There is a GIANT EXPANDING bubble waiting to implode brought to us by a seemingly never ending supply of a monthly $85 billion flood of Fiat money from the Federal Reserve. Once the bubble actually bursts, the US economy will be left in ruins. When it bursts, there will be no new round of bailouts like the ones that the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.

The world’s politicians can’t seem to get it through their thick heads that liquidity cannot solve an insolvency problemsince each injection of liquidity increases the insolvency by the exact same amount. After reading Stockman’s recent article, I can’t help but wonder if he is one of the one and a half a million people who read UNCOMMON COMMON SENSE on a regular basis. As all my regular readers know, even though I expected an explosive DJII push to the 15,500 to 16,000, I’ve not fully endorsed playing the rally except for professional traders. Why? Chart wise, the rally looked like a slam dunk, but fundamentally it would be playing a fool’s game as I could not count on further massive printing of Fiat money since I have been very skeptical about quantitative easing from its very beginning. It may have been needed back in 2009, but history teaches that it ends up causing much more harm than good and only succeeds in prolonging and increasing the eventual agony.

The financial system may have been on the verge of collapse, but pouring gas on the fire certainly does not solve the problem and neither does its ongoing $85 billion a month QE 3 and 4 which only served to inflate both the bond and stock markets to unsustainable levels: It also ballooned the deficit by another $7 trillion for a total of over $17.5 trillion, which again only serves to exacerbate the problems, not solve them.  They have also devalued the Dollar to such an extent that they have completely distorted GDP, corporate earnings, P/E ratios, etc. creating the biggest stock market bubble in history.

By keeping interest rates artificially low and insuring multiple rounds of quantitative easing in order to continuously suppress bond yields, the Federal Reserve has killed fixed-income returns for investors especially Seniors, 401K’s and pension funds and completely destroyed the CD marketplace. Those who are taking part in the junk bond and T bond market in a desperate search of higher yields are now taking more risk than ever; now that the sure capital gains generated by falling yields are no longer available. Once we are at 0% yields, they only have capital and inflation losses, with zero income to look forward to. What kind of save haven is that? And who in their right mind wants to buy T BONDS?

WORST OF ALL: They have severely damaged the workings of the “Free Price Operating System” upon which Capitalism is based.

DEJA VU ALL OVER AGAIN

Can you believe it?  Congress is once again pushing for the banks to make the same kind of low interest loans to people without a good credit history so that they can get “no down payment” mortgages that they still can’t afford to pay for. Which at the first sign of trouble they will let slide since they will have no skin in the game.

WILL THEY NEVER LEARN?

In 2008, there were only $43 billion worth of high-yield corporate bonds (“junk bonds”) issued. Fast-forward to 2012, and this number increases by 665% to $329.2 billion.

The FED’S easy monetary policy objectives were designed to encourage the American consumer and businesses to spend, thus moving the US economy toward economic prosperity (Keynesian Socialist philosophy that has been proven time and again, never to have worked). Keynesian Socialist Economists are persistent if nothing else. Meanwhile, the Congress managed to “demonize” Apple, the single largest income tax payer ($3 billion) in the world because they are holding some $3 trillion offshore, in the countries in which the money was earned and subsequent taxes paid. (That will certainly encourage Apple to repatriate its funds, so that a thieving Congress can get its grubby hands on it.) 

Meanwhile, digital Gold provider, The Bullion Vault, has reported their “strongest period for new customers ever.” They reported that they saw record volumes of Gold and Silver transactions “beating the previous peak of September 2011.” In terms of transactions, Gold buyers outnumbered sellers by a ratio of nearly five to one for the past few weeks and in terms of volume, gold buyers outnumbered sellers by a ratio of nearly nine to one as buyers were placing larger orders than those selling and this trend has been continuing.

Premiums are also rising both in Europe and the US and especially in Asia: There are delays of up to a few weeks on some smaller coins and bars highlighting the ever increasing demand.

JAPAN’S ECONOMIC LESSONS (Is anybody watching and learning)?

Japan is still struggling after multiple rounds of quantitative easing and a multiyear extended period of low interest rates. (Japan’s debt-to-GDP ratio has surpassed 200 %.)  And all it got them was 20 years of Recession, so their solution now, like that of the US, is to double up? Maybe Depression will work better than Recession? Do they not realize that all their solutions carry with them a double edged sword?

Depression is the other edge of that inflation sword.

EVERY PROFESSIONAL GAMBLER KNOWS THAT DOUBLING DOWN IS A LOOSING PROPOSITION.

The US economy has fundamental problems that can’t be fixed by throwing money at them. Quantitative easing and low interest rates are both speculative (non-proven)   short-term fixes with long-term evil tails as they are more likely to create bubbles and take us down the path of Depression rather than the path towards economic growth.

ELEMENTARY ECONOMICS, MY DEAR WATSON

Currency wars and the threats posed to the US Dollar as the only global reserve currency of the world, make owning physical Gold essential to all who wish to preserve their wealth in the coming years.

Increasing global demand for physical Gold and Silver is very clearly seen in rising premiums especially internationally. The drop in prices ignited a flood of buying in Gold coins and bars, sending premiums to multi-year highs throughout Asia as demand intensified. Exactly the opposite of what you would have expected to happen. The slowing global economy will take a heavy toll on an already struggling US economy. Why? Because a significant number of US companies operate globally: If there is an economic slowdown in the global economy, then these global companies will see their profitability shrink. And yet analysts are completely ignoring the rapidly slowing world economy and are not even considering that fact in their earnings and growth projections, which are now slowly hitting these blind dummies between their eyes! What’s happening in the rest of the world leaves the US economy vulnerable. We haven’t seen any real economic growth since the financial crisis began. Now, with threats from the global economy emerging, the growth outlook appears even more dismal.

Today’s rising stock markets are being justified by manufactured profits (i.e. stock buybacks and reduced investment and delayed replacements along with government falsified economic statistics.

8 reasons why I believe the stock market is close to a Blow off top:

1.         Corporate insiders are dumping stock in historically record amounts.

2.         Bullishness amongst Wall Street & Media stock advisors is at all time highs.

3.         Companies are propping up earnings with record stock buyback while cutting back on new investment programs (does not bode well for future growth).

4.         Corporate earnings growth will probably be negative again in the first quarter.

5.         The global economy is slowing. Certain countries in the Eurozone (Spain, Portugal, Ireland, Greece, Cyprus and probably France and Italy) as well are all in Recession come Depression. The US economy is definitely contracting.

6.         The percentage of assets that mutual funds have invested in the stock market is at record all time highs (little buying power left).

7.         The underemployment rate (which is the unemployment rate taking into consideration people who have stopped looking for work and people who have part-time jobs but want full-time jobs) is over 15% - 18%—it really hasn’t changed much in almost 2 years.

8.         The American consumer is in trouble. Real disposable income is lower today than it was in 2008. The personal savings rate has fallen more than 70% since 1980. Average hourly earnings of production and non-supervisory employees have crashed 50% since 2008. (Source for all data is from the Federal Reserve Bank of St. Louis.)

What do we really have? We have a stock market bubble created by the “easy” money policies of the Federal Reserve—policies of multiyear, artificially low interest rates and $2.5 trillion in newly created (printed) money. Europe now has a current account surplus, which is supposedly a positive until you realize that the economy is contracting. Europe is now in Recession and heading VERY QUICKLY towards Depression. This will have a severe impact on the corporate profits of U.S. corporations as well because 40% of S&P earnings come from abroad, the bulk of which comes from Europe and not the emerging countries.

Our debt will continue to be added to until it implodes. This debt has done nothing but build a false alternative reality. We’ve borrowed monies from the future to live a better life now; only it has not been better and the bills will shortly be coming due.

GOLD: HAS THE LOW BEEN REACHED?

One of the ways to look for a Bear Market to signal that a bottom has been reached is to look for an extended downtrend followed by panic selling, culminating in a capitulation day immediately followed by a huge bounce. $50 in 2 days could be just the signal we were all waiting and looking for.

I am still waiting for a new buy signal for precious metals and mining stocks. The HUI PPI did generate a buy on April 25th, but the stochastic indicator has not. Gold, Silver and Mining Stocks are putting the finishing touches on a long term correction that has been underway for almost two years. They are setting up for a mega rally. That rally should start by mid-2013. The Weekly Full Stochastics are at levels that in the past have identified major bottoms – PATIENCE. Accumulate into SELLOFFS.

We see what’s going on in Cyprus, what’s going on in Europe: When it comes here to the US, and we’ve already seen cracks in the debt bubble, it’s going to make all that look like a garden party. The US is going to be devastated. The middle class is being systematically destroyed by the Federal Reserve and the Obama Administration.

A pan global collapse is inevitable (including China as they too must succumb to the same Natural Laws of Economics). It’s coming and there’s no way out of it.  Whether it happens next week, next month, or next year, it is coming. And governments are going to become more and more desperate. This is going to sweep the Eurozone and Cyprus is just a precursor of what will spread to the rest of the world and especially to here in the GOOD OLE USA. We borrowed monies to get elected and to live a better life now…but “The Piper” must always eventually be paid.

Have you ever wondered how the big banks make such enormous mountains of money?  Well, the truth is that much of it is made by gambling recklessly.  If they win on their bets, they become fabulously wealthy.  If they lose on their bets (putting up no collateral), they know that the government will come in and arrange for the banks to be bailed out because they are “too big to fail”.  Either they will be bailed out by the government using our tax dollars, or as we just witnessed in Cyprus, they will be allowed to “recapitalize” themselves by stealing money directly from our bank accounts.  Its already happened twice this year alone. So if they win, they win big.  If they lose, someone else will come in and clean up the mess.  This creates a tremendous incentive for the bankers to “take enormous risk”, because there is simply not enough pain in this equation for those that are doing the gambling. If the big Wall Street banks had been allowed to collapse back in 2008 that would have caused a massive change of behavior on Wall Street.  But instead, the big banks are still recklessly gambling with our money as if the last financial crisis never happened.  In the end, the reckless behavior of these big banks is going to cause the entire global financial system to Implode.

WATCH OUT FOR THOSE DEADLY DERIVITIVES!

I have been warning about them since 2005. But all my warnings have fallen on DEAF EARS. Now that they total in the quadrillions; a failure of one (i.e. Lehman Bros.) could be that BLACK SWAN that brings the whole system crashing down.

Have you noticed how most news reports about Cyprus don’t even get into the reasons why the big banks in Cyprus were about to collapse? Well, the truth is that they were making incredibly risky bets with the money that had been entrusted to them.  In a recent article, Ron Paul explained how the situation played out once the bets started to go bad…The dramatic events in Cyprus have highlighted the fundamental weakness in the European banking system and the extreme fragility of fractional reserve banking. Cypriot banks invested heavily in Greek sovereign debt at the urging of Draghi, and last summer’s Greek debt restructuring resulted in losses equivalent to more than 25% of Cyprus’ GDP. These banks then took their bad investments to the government, demanding a bailout from an already beleaguered Cypriot Treasury. The government of Cyprus then turned to the European Union (EU) for a bailout.

If those bets had turned out to be profitable, the bankers would have kept all of the profits.  But those bets turned out to be big losers, and private bank accounts in Cyprus are now being raided to pay the bill.

The elites in the EU and IMF failed to learn their lesson from the popular backlash to these tax proposals, and have openly talked about using Cyprus as a template for future bank bailouts. This raises the prospect of raids on bank accounts, pension funds, and any investments the government can get its hands on. In other words, no one’s money is safe in any financial institution in Europe. Bank runs are now a certainty in future crises, as the people realize that they do not really own the money in their accounts. A run on all European Banks is eminent. How long before bureaucrats and bankers try that same crap here?

Unfortunately, all of this is the predictable result of a Fiat paper money system combined with fractional reserve banking. When governments and banks collude to monopolize the monetary system so that they can create money out of thin air, the result is a business cycle that wreaks havoc on the economy. Pyramiding more and more loans on top of a tiny base of hard assets creates an economic house of cards just waiting to collapse. The situation in Cyprus should be both a lesson and a warning to the USA. This is an example of what can happen when the dominoes start to fall.  The banks of Cyprus failed because Greek debt defaulted.  And the Greeks were using derivatives to try to cover up the true scope of their debt problems.

The following is what Jim Sinclair recently told King World News…

“When people say that the Cypriot banks lost because of being in Greek debt, what was one of the Greeks’ greatest sins? They used over-the-counter derivatives in order to hide the real condition of their balance sheet.”

Depositor money, brokerage money, and clearing house money have been tangled up in the mountain of derivatives as the banks have used this cash to speculate in an attempt to make huge bonuses for bank executives.  As I have written about so many times, the global quadrillion dollar derivatives bubble is one of the greatest threats that the global financial system has ever faced.  As Sinclair explained to King World News, when this derivatives bubble bursts and the losses start soaring, the big banks are going to want to raid private bank accounts just like the banks in Cyprus were able to. What is even worse is when the government can no longer pay its debts, what happens then?

PROTECT YOURSELF WHILE YOU STILL CAN

What do you think happens when Buffett (the world’s biggest crony Capitalist) reports that he made $10 billion in derivatives? Somebody else lost $10 billion and it was most likely one financial institution. There is no question that what we are seeing right now is not isolated to Cyprus. It has happened everywhere, but it has been camouflaged by making the depositors and the banks whole. What Cyprus will reveal is that losses do not stop with the bank’s capital. Losses roar right through bank’s capital and take depositors’ money and other financial institutions money as well (i.e. AIG).

Essentially, if there was a cleansing run on the wholesale funding market in the canyons of Wall Street. It would have worked its will, just like JP Morgan allowed it to happen in 1907 when we did not have the Fed getting in the way. Because they stopped it in its tracks after the AIG bailout and then all the alphabet soup of different lines that the Fed threw out, and then the enactment of TARP, the last two investment banks standing were rescued, Goldman and Morgan [Stanley], and they should not have been.

As a result of being rescued and having the cleansing liquidation of rotten balance sheets stopped, within a few weeks and certainly months they were back to the same old games, such that Goldman Sachs got $10 billion for the fiscal year that started three months later after that check went out, which was October 2008. For the fiscal 2009 year, Goldman Sachs (NYSE:GS) generated what I call a $29 billion surplus – $13 billion of net income after tax, and on top of that $16 billion of salaries and bonuses, 95% of which was bonuses (15% income tax).

Therefore, the idea that they were on death’s door does not stack up. Even if they had been, it would not make any difference to the health of the financial system. These firms are supposed to come and go, and if people make really bad bets, then they ought to get their just reward, because it would create lessons, it would create discipline. All the new firms that would have been formed out of the remnants of Goldman Sachs where everybody lost their stock values –– when they formed a new firm, I doubt whether they would have gone back to the same old game. What happened was the Fed stopped everything in its tracks, kept, the reckless Goldman Sachs and the reckless Morgan Stanley intact - everyone quickly recovered their stock value and the game continued. This is one of the evils that comes from this kind of deep government intervention in the capital and money markets. It destroys the Free Market pricing system and encourages Crony Capitalism.

The lessons that we were supposed to learn from the crisis of 2008 have not been learned.  Instead, the lure of huge returns and big bonuses has caused a return to the exact same behavior that caused the crisis of 2008 in the first place.  The following is one example of this phenomenon from a recent article by Wolf Richter…

“The craziness on Wall Street, the reckless for-the-moment-only behavior that led to the Financial Crisis, is back.”

This time it’s Citigroup (NYSE:C) that is once again concocting “synthetic” securities, like those that has wreaked havoc five years ago. And once again, it’s using them to sluff off risks through the filters of Wall Street to people who might never know. What bubbled to the surface is that Citigroup is selling synthetic securities that yield 13% to 15% annually—synthetic because they’re based on credit derivatives. Apparently, Citi has a bunch of shipping loans on its books, and it’s trying to protect itself against default. In return for succulent interest payments, investors will take on the majority of the risks of these loans.

Yes, the Industrial Average hit another new all-time high.  But the derivatives bubble that hangs over the global economy like a sword of Damocles could burst at literally any moment.  When it does, the damage is going to be incalculable.

$212,525,587,000,000 - According to the US Government, this is the notional value of the derivatives that are being held by the top 25 banks in the US.  But those banks only have total assets of about $8.9 trillion combined.  In other words, the exposure of our largest banks to derivatives outweighs their total assets by a ratio of about 24 to 1. When the derivatives bubble finally bursts, where are we going to get the trillions upon trillions of dollars that will be needed to “fix” things this time? And sadly, the reality is that we are quickly running out of time.

It is important to keep watching Europe.  The European banking system as a whole is leveraged at estimated 26 to 1 at this point.  When Lehman Brothers finally collapsed, it was leveraged about 30 to 1. And the economic crisis over in Europe just continues to get worse.  It was announced on Tuesday that the unemployment rate in the Eurozone is at an all-time record high of 12% and the latest manufacturing numbers show that manufacturing activity over in Europe is in the process of collapsing. So don’t be fooled by the fact that the Dow keeps setting new all-time record highs.  It is nothing NEW - it has happened in the early 1970’s, which quickly led to the 1972-74 crash. It was believed that investing in hard assets (corporate stock) was a protection against inflation. This modern day bubble of false hope will be very short-lived.

There is strictly nothing happening now on the Gold and Silver markets that would be related to fundamentals. This crash, just like the markets breakout to all time highs, is orchestrated, and it doesn’t reflect the extremely tense situation on the physical Gold and Silver markets or of the economy.

Here is how some of the significant elements are to be taken into account. I have put them in three different categories:

1)    The Global Context

2)    The Situation in the Paper Gold Market

3)    The Situation on the Real Physical Gold Market

1) The Global Context : Price manipulation has but one goal: Protecting the value of the Dollar in order to keep the Fed in control of interest rates and, thus, in control of US Treasury Bonds and derivatives, largely held by the big banks and the government pension funds. If the Fed loses control of the Dollar, which is bound to happen inevitably, since it’s printing billions of dollars every month, interest rates are going to go up radically, the value of US bonds will crash, the credit derivatives bubble will explode, taking with it the whole banking system.  Manipulating the price of Gold serves the purpose of destroying the signal that would reflect the upcoming crash of the Dollar and, by way of contagion, of the whole financial system.

Below is an excellent article by Paul Craig Roberts that explains in detail how this recent manipulation took place and to whom it profits:

1) The Global Context

- The Fed continues to print $85 billion each month. Japan announced the most ambitious quantitative easing plan of its history with an injection of $1.4 trillion within two years: All this with no signs of any limitations on QE-type inflationary monetary policies.

- Holland’s Prime Minister has confirmed, as has a report from the FDIC, that deposits confiscations in Europe will be applied in future bailout plans, like in Cyprus. Trust in the European banking system is now at its lowest ever.

- Since 2007, the S&P has progressed by a mere 1% and, even after the current correction, Gold has still out performed being up over 100% since 2007.

- This year, the Gold spot price tumbled less than Apple shares, which lost 39% since its peak.

2) The Situation on the Paper Gold Market

- Between Friday, April 12 and Monday, April 15, 1 million short contracts have been sold on the COMEX (i.e. 12% more than the world’s annual Gold production).

- 150 tons of paper Gold were sold within an hour on that last Friday. This sale was realized on the COMEX by a single entity and it triggered a cascade of forced liquidation by investors totaling 500 tons of Gold. One could ask the following question: Who has the financial power to realize such an operation? No trader ever sells such a position in one block at once.

Paul Craig Roberts: Who has the capacity to sell the equivalent of 500 tons of gold on the markets for an amount of $24.8 Billion (or 16,000,000 ounces of gold, about 15% of world global production)? Who would own so much gold, enough to cover eventual delivery requests on those naked shorts without putting up any COLLATERAL? Also, nobody sells this much gold all at once; such a sale is done progressively so as not to crash the price and, thus, limit the losses. As a matter of fact, this massive sale entailed a $1.168 trillion in losses. Who can afford to lose such an amount? Only a government who can print as much as it wants. They can do it but they cannot afford it. Watch what the near term results will be.

The CFTC, supposedly in charge of regulating derivatives, including those on gold and silver, was not doing their job. They authorized enormous concentrated short positions (far above legal position limits) destroying the normal free price determination mechanism. There could not be any manipulation of Gold or Silver if the CFTC were doing its job of regulating markets and the FED was doing their job of regulation the derivatives.

The COMEX and the LBMA must have been close to defaulting. The COMEX functions on a fractional basis. There is not enough physical Gold and Silver in the COMEX inventories to guarantee the convertibility of all contracts.Kyle Bass, one of the most important hedge fund managers in the US, who had correctly anticipated the bursting of the subprime bubble, confirms that the COMEX does operate on a fractional basis. He decided, a few years ago, to ask for delivery of his Gold held via his fund because he didn’t have faith in the COMEX capacity to make good on future delivery requests. It would only take about 5% of contract holders asking for delivery to cause the COMEX to default.

WILL THERE BE A RE-SURGENCE IN GOLD?

I mentioned in previous letters over the last few months that is was likely too soon to give up on Gold.  The articles were written after the price of Gold had fallen off a cliff.  I felt that Gold was too important of a safe-haven investment to stay depressed for any great length of time. And, it looks like I was right on. Gold has already gained back half of what it had lost during the recent slaughter.  The price of SPDR Gold Shares (GLD) is currently just under $141.  That’s well under the 52-week high of $174.07, but a solid 8% off the 52-week low from earlier this month of $130.51.So what’s behind the revival in the yellow metal?

First off, central banks hold a huge amount of Gold.  In fact, these banks are hanging on to 19% of all precious metal.  And, they have no intention to sell anytime soon. As such, there’s going to be a limit to how much Gold can drop. Plus, several key investors, including billionaire John Paulson, and George Soros, are still bullish on Gold.  Paulson is the largest investor in GLD. What’s more, many Gold bulls including banks and more importantly central banks (like China, Russia Brazil South Korea) used this recent price pullback as a reason to go out and load up on bullion and coins.  Mints across the globe are reporting a shortage of Gold coins as demand has soared. Despite the (supposed) lack of inflation and the overall improvement in the global economy, we’re not out of the woods yet.  The world still has a ways to go to get back to full growth, especially in Europe.  Gold is going to persist as the single most important safe-haven for investors. Who is today willing to trust all their money to either domestic or international banks and/or Fiat currency? Are you?

WHERE TO NOW?  

Since we can’t trust the Fundamentals, let’s examine the Technical’s: Gold, Silver and Mining Stocks are putting the finishing touches on a three wave correction that has been underway for almost two years. They are setting up for a mega rally. That rally should start by mid-2013 or as early as tomorrow.  Looking at the long term chart, Gold has completed a perfect 10 year Elliott 3 wave Bull Market and a subsequent 38% 2 year correction and is now set to start this Bull Market’s 5^th and most explosive wave up. The Weekly Full Stochastics are at levels that in the past, almost universally, have identified major bottoms. Start SCALING into Gold, Silver and their securities into any further selloffs. I am still standing by my long term projection for Gold being $6,250 in 2017.

HOW NOW DOW

The world’s stock and bond markets are living in a FOOL’S PARADISE. I am not smart enough to pick the highs, especially in a manipulated market with unlimited money (at least for the time being). While Wall Street could still possibly push the DJII another 500 to 700 points higher but maybe not since all eyes are now upon them: So start scaling into DBT TZA, FAZ, BGZ (check out their charts).  If you think 2008/09 was bad, you ain’t seen nothin’ yet.

GOOD LUCK AND GOD BLESS

We are into the most trying times in our nation's history. We can either succumb to our Government’s folly and go down with the ship or take actions to personally prosper. As always, the choice is yours.

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UNCOMMON COMMON SENSE                                      

Aubie Baltin CFA, CTA, CFP, PhD.

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Please Note:This article is for education purposes only and is designed to help you make up your own mind, not for me to make it up for you. Only you know your own personal circumstances so only you can decide the best places to invest your money and the degree of risk that you are prepared to take. The Information and data included here has been gleaned from sources deemed to be reliable, but is not guaranteed by me. Nothing stated in here should be taken as a recommendation for you to buy or sell securities. I am not a registered investment advisor.