Gold Consolidation Nears End

The battle for survival continues, as banks resorted to basic revisionist accounting (aka fraud) in order to claim improved health. Their reward was a financial sector stock rally of the most queer kind. The rally depended on all manner of contrived demand from the most sordid of chambers opposed to free markets, using tactics that are typically abhorrent. Next this beleaguered sector must withstand valuation checks and fair value scrutiny. The sector should fall in value soon. The new facade of Stress Tests has filled the void left by Financial Accounting Standards Board (FASB) concessions that led to phony balance sheets. These Stress Tests are neither a test nor a reflection of stress. They are rigged excuses for continued funds, and worse, might be used to coerce healthier regional banks into merging with dead Wall Street banks laced with insolvency and fraud. These hollow institutions continue to engage in sales of USTreasurys with rampant failures to deliver funds in order to maintain cash flow, not mentioned in quarterly earnings reports. See a related article entitled "Wall Street Selling Imaginary Treasuries" on Market Skeptics (CLICK HERE). This is called naked shorting, counterfeit, and not even complicated fraud. Regulators remain quiet on the subject, business as usual. The US financial sector is reminiscent of a band of zombies that usurp the vitality of the system they reside in.

One should be aware, certainly not a broadcasted fact, that the special inspector general for TARP funds Neil Barofsky working on behalf of the USCongress has already recommended 40 criminal investigations for fraud from the total over $1000 billion in its funds disbursement during his ongoing audit. The primary focus is AIG payouts, for which Goldman Sachs has steered some very suspicious redemptions at 100% parity. Wall Street would call the program a success. Administrators would call it a great thrust of desperately needed liquidity into banks. The public should know that the program is run by the same Wall Street firms that produced the original bank crisis. The absence of broad disclosure remains the cloak to conceal the massive abuse of public funds.

The US Federal Reserve is trapped. Not only does the 0% monetary policy put them in a corner without options, but ownership of a couple trillion$ worth of heavily impaired bonds has given the august overseer of failure and fraud and money laundering a bad case of constipation on a dead end street. Any change in either situation pushes USTreasury interest rates up, pushes up USAgency Mortgage rates, and renders great harm to the credit markets. The dirty secret is that the USFed is stuck in mud with a bad diet of offal on a road to a dead end.

GOLD STRUGGLES HIGHER

The gold consolidation has been like a crock pot slowly cooking a beef stew over a long stretch, as hungry observers whet their appetite with hors d'oeuvres with the promise of bountiful meals. The gold chart presented in the last articles took a more long-term view, as it described the formation of the Right Side Handle in a clear bullish reversal pattern. That consolidation continues. Since February when gold touched the 1000 mark, the selloff and profitaking have taken place amidst a sequence of extraordinary USGovt and US Federal Reserve policy decisions. Gold actually fell following the announcement of $1050 billion in monetized USTBonds and USAgency Bonds, if you can believe that! The reason was an avalanche of (probably illegal) short COMEX futures contracts timed simultaneously. The popular byline was that investors were worried about continued deflation, without benefit of knowing what deflation is. Monetary inflation has been historically off the chart, which should include credit derivatives and futures contract commitments.

The incident at the end of March involving Deutsche Bank and the COMEX pointed out serious exchange violations in all likelihood, as D-Bank surely did not hold 90% of its short gold positions in collateral. The German flagship bank almost defaulted. None of the big four banks hold proper gold collateral, routinely, and regulators look the other way. That is just another form of naked shorting, without prosecution. D-Bank in a panicky fashion came up with 850 thousand ounces of gold so as to satisfy a delivery, precisely at a time when the Euro Central Bank just happened to sell 1.141 million ounces of gold. The EuroCB event was anything but ordinary, but was treated as an asterisked event, with no explanation.

Regardless of market interference, despite all that the Powerz throw at gold, the weekly chart looks promising with a possible stochastix crossover in the making and a MACD momentum ready to turn up. The cyclicals look promising. A big battle is being waged. The bulls need a run above the trendline set from February joining three local tops. A move to 925 would establish the bullish rise out of the current pattern. The bear case would have a breakdown below the 860 mark toward 850 again. However, the moving averages show support, especially the 50-week MA. In the last week, some solid support has been seen with the less stable 20-week MA. Other extremely important factors are at work behind the scenes, which weaken the position of the gold cartel significantly this spring and into the summer. Whatever risk was present at the end of March will be more acute at the end of June. These factors are discussed at length in the April Hat Trick Letter.

USDOLLAR BREAKING DOWN

The USDollar has enjoyed an extremely strange paradoxical rally since last August, when the US financial system exhibited clear signs of insolvency, destruction, and failure. Many observers wonder expect the USDollar will weaken again without additional large scale financial firms going under in failure. Financial failures are most opportune to lift the US$ exchange rates. Must the USDollar be sustained by a steady stream of failing firms, emergency measures, and floods globally of USTreasury Bonds? Perhaps! Since the autumn, a double top failure is plainly evident in the dollar DX index. In April, yet another rollover occurred, but this third turn is not definitive enough to declare a triple failure. A break to 84 would give such a claim credence. The 200-day moving average (in green) has twice provided last ditch support necessary to rekindle another run after each breakdown. Notice the rounded top nature of the series of breakdowns, sufficient to be on the lookout for a retest of the 200dMA at 83, and a clear fall below that level. Such an event would serve as a confirmation of the end to this queer counter-trend USDollar rally.

USTREASURYS, THE LAST PAPER BUBBLE

The long-term USTreasurys remain the arch-enemy of gold. Since the historic failure of the US financial sector last autumn, and is inability to be revived, the USTreasurys have benefited mightily. The flow has hardly been a Flight to Quality, since foreigners are almost uniformly shunning the US$-based bonds. Anyone who bothers to examine the Treasury Investment Capital (TIC) reports can see this plainly. Yet the US financial networks continue to trumpet their falsehoods. See the excellent article entitled "The Big Lie" by Rob Kirby on the topic (CLICK HERE). He describes the key facades corruptly managed and maintained to sell the phony story. Forced hedge fund liquidation by Wall Street perpetrators in an engineered credit contraction, the resulting decline in commodity prices, the compensating USFed actions to monetize the debt securities sold by foreigners, all worked to create the impression of a USTBond rally accompanied by a perverse USDollar rise. Now time seems to be running out, as the tide might be turning.

The 10-year USTreasury Note principal value is exiting the pennant pattern that has bounded its price since January. It is early to declare, but this might be the beginning of a meaningful breakdown in long-term USTreasurys. They have been kept aloft almost by pure monetization, a policy finally admitted in mid-March, long after the policy was put into effect. The 50-day and the 100-day moving averages have each been breached (in blue and red), and next is a challenge of the 200-day MA (in green). The corresponding bond yield battle is being waged at the 3.0% level. The message is being painted on the Treasury Billboard, that the main bidder for long-term USTreasurys is the USGovt via the USFed. They are isolated, which puts risk to both the USTBond and the USDollar from lack of integrity and confidence. Something has to give and it will. My guess is the USDollar will take a bad tumble and fall, rather than long-term rates to rise. The mountain of credit derivatives stand like a lattice work of financial nuclear bombs, with fuses hidden and crisscrossed in the dark. Defense of this mountain of mass destruction potential will be to the end, even if the entire US banking system and USEconomy enter a downward spiral.

THE BEST PART OF ANY USTREASURY SELLOFF WOULD BE THE BENEFICIAL EFFECT ON GOLD, DUE TO THE POWERFUL FEEDER SYSTEM. If the USDollar is sacrificed instead of USTBonds, in order to preserve the USTreasurys, then gold will also benefit, but not as strongly.

RAMPANT USTREASURY FRAUD

Outright counterfeit of USTBonds has been traced in the last two decades to certain Wall Street firms, with full impunity. Naked shorting is more crafty and devious, but no less counterfeit. The details of naked shorting of USTreasury Bonds are very ugly, and surprisingly broad based. This is supposedly the most liquid and transparent market in the world. NOT SO!!! Market Skeptics (cited with links above) provides some excellent insight on the totally illegal practice and its clear consequences. They wrote,

"Following the collapse of Lehman Brothers in September, fails to deliver among the 17 primary dealers in the US treasury market have rocketed to more than $2 trillion over a period of weeks and still lie above $1.3 trillion. Broker/dealers have stopped delivering bonds. Holders of US treasuries are now scared to lend into the repo market in case their bonds are not returned, and potential buyers sit on the sidelines fearful of handing over their money to a counterparty that at best might not deliver a bond on time, and at worst might go under… If investors turn their back on treasuries, the US government will find it increasingly difficult and expensive to raise money and roll over its maturing debts. Upward pressure on interest rates will occur at a time when the government needs to be loosening monetary policy in order to jump-start a domestic economy that is heading towards a depression. As a result of fails to deliver, the most transparently priced instrument available now has investors scratching their heads.The natural balance of supply and demand has been altered and the true price of treasuries has become obscured… Fails to deliver in the treasury markets are not a new phenomenon. There is data for fails for treasuries, agencies and mortgage backed securities as far back as 1990, says Susanne Trimbath, an economist, and former employee of the Depository Trust Co, a subsidiary of Depository Trust and Clearing Corp. Back then, though, there would be $50 billion of fails in a whole year, she says. That figure has grown enormously. Failures in US treasuries were 8.6% of all treasuries outstanding in the first five months of this year, compared with 1.2% in the first five months of 2007. That has ballooned further over the past three months, hitting more than $2 trillion for almost the entire month of October, more than 20% of the daily treasuries trading volume."

Corruption has crept into the USTreasury market, which is the great alternative to real money in gold. Far too many important markets have turned corrupt. GOLD REPRESENTS AN ALTERNATIVE, BUT AVOID ALL EXCHANGE TRADED FUNDS. Their practices are highly suspect, as they might not hold as much gold as they claim. It will be physical gold that upsets the paper chase charade, where price discovery has become a mockery.

FINAL VIRUS NOTE

See the May Hat Trick Letter for a series of arguments regarding the Swine Flu outbreak, which reads like a spy novel. The press & media networks do not tell the full story. Details for arguments are far too controversial and dangerous to provide in any forum such as this. This is a deadly serious issue. However, one theory that carries little weight is that the Swine Flu is being spread by the most unsuspected of sources, animal lovers of a tender age. Sorry, but too cute, and we need to break the tension!

CREDIT CRISIS AUTOPSY

Here is fine piece of analytic work from a friend named Trace Mayer. He comes to the gold community with a different slant and background. He has a law scholar with emphasis on the Constitution, especially how it applies to the gold and currency topics. In his e-book entitled "The Great Credit Contraction" one can read about the historical significance of a crisis that will surely reshape the world. The global economy is built on an illusion currency that is evaporating before our very eyes. This book is an autopsy of the current worldwide systems and begins with financial history, discusses the current great deflationary credit contraction, projects the future environment, and concludes with suggestions on how to generate and preserve wealth in this challenging time. An appendix analyzes important topics. (CLICK HERE TO ORDER)

THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com . For personal questions about subscriptions, contact him at [email protected]