GOLD INVESTMENT REPORT
PRECIOUS METAL & ENERGY
CURRENCIES & STOCK INDEXES

* Golden Potpourri
* China Trade War Simmers & Boils
* Currencys in Disarray
* Gold Viewpoints for New Year
* Gold Developments Swirl
* Chavez & Destruction of Venezuela



HAT TRICK LETTER
Issue #70
Jim Willie CB, 
“the Golden Jackass”
24 January 2010

"Before long, when gold makes its move, a person's wedding ring will be worth more than his/her stock and mutual fund accounts." -- Anonymous HTLetter subscriber

"While the crooks have a party on the Titanic's A deck, control of all the lifeboats has been taken from them. Two large hedge funds have quietly bought up vast amounts of gold & silver contracts and will demand physical delivery from COMEX. This will be the end of COMEX, a mercy kill." -- a subscriber with ties to the London Bullion Market Assn

"The banks are f***ed, we're f***ed, the country's f***ed." -- British Cabinet Minister

GOLDEN POTPOURRI

◄ See the Hat Trick Letter Special Report entitled "Europe & Sovereign Debt Distress" for January. Europe stands at high risk for sovereign debt defaults. A grand orchestration is unfolding as risk abounds, posturing widespread, and an agenda being worked. Germany is in full control, but must give the appearance of trying to halt the defaults so eagerly desired. The F-PIGS nations are in ruin, soon to default in succession including France. Germany and the Netherlands are the powerhouse nations in Europe, with export surpluses. The Benelux nations are secure with debt. My personal belief is that Germany wants to carve off Portugal, Italy, Greece, and Spain from the EMU, and for them to quit relying upon German welfare program to sustain their undeservedly high standard of living at heavy German expense. Italy follows Greece next in debt default. The Germans will not rescue reckless Club Med nations like it did for East Germany. The prescription calls for IMF-style toxic medicine that will trigger a debt death spiral based on stupidity and ineptitude by economic doctors. Debt rollover will not happen, leading each nation to revert to former domestic currencies so deep devaluation can reduce debt burdens and truly stimulate the economies. The medicine does not permit currency devaluation, since Euro currency usage is shared like shackles. The European Union is preparing the legal basis to remove Greece, its weakest link, then other nations. The Greek failure and restructure will offer a model workbook written for other immediately application. Enormous differentiation exists among European nations that render impossible a common currency, seen vividly in non-homogeneous EuroBonds that differ in bond yield for each nation. The other nations differ greatly from Germany in trade surplus, federal deficits, interest rates, price inflation, productivity, tax structure, and cultural work ethic. Expect France to be saved from expulsion as deals are struck, since the Bundesbank owns 95% of the French Govt debt. Structural design flaws in the Euro Central Bank are exposed, since it was not designed to provide aid and stimulus or to promote growth, but rather to promote price stability. Milton Friedman correctly foresaw the doomed fate of the Euro currency in ten years time. Even heretics can be right once in a while.

◄$$$ THE BERNANKE REAPPOINTMENT APPEARS TO BE A VOTE OF THE PEOPLE VERSUS THE BANKERS. THIS IS CRUNCH TIME, A CRITICAL JUNCTURE IN AMERICAN POLITICS. IT WILL BE CLOSE. $$$

What is usually a slam dunk, the confirmation of US Federal Reserve Chairman Bernanke has become less is not a guaranteed lock. Defiance among some senators has grown, as opposition has galvanized. The Wall Street Journal and Dow Jones have compiled a tally of senators who have declared their intentions for the confirmation vote based on interviews with the senators or their offices. Under the threat of a floor filibuster, Bernanke needs the support of 60 senators for reappointment as Chairman. The Senate Banking Committee voted 16-7 last month to move the Bernanke confirmation to the full Senate. See the Wall Street Journal webpage tally kept up to date (CLICK HERE). The current tally as of Friday, January 22nd:

  • Voting Yes: 26  (18 Democrats, 8 Republicans)
  • Voting No: 15  (4 Democrats, 10 Republicans, 1 Independent)
  • Officially Undecided: 21  (13 Democrats, 7 Republicans, 1 Independent)
  • No Official Comment: 38

My expectation is that Bernanke will win reappointment, but he and the institution will be wounded badly. The vote will not be as close to rejection as many detractors would hope. Ugly secret backroom deals, like bribes and threats, will be effectively made by Wall Street firms, in particularly by Goldman Sachs, the ringleader of the deep finance ministry corruption. The prestige of the USFed has been and will continue to be seriously damaged. It has failed its mission, and the climax rescues include gigantic frauds. The Democratic chairman and a Republican on the Senate banking committee on Saturday showed their confidence that Chairman Ben Bernanke would win confirmation for a second term. "Based on our discussions with our colleagues, we are very confident that Chairman Bernanke will win confirmation by the Senate for a second term," Senators Chris Dodd and Judd Gregg said in a joint statement. Curiously, these are the two senators who attempt vigorously to block the formal initiative to audit the USFed balance sheet activity. The populist surge on Capitol Hill seems to have found extra gusto after the Massachusetts senator vote dealt a powerful political blow to Obama. The erosion of support crossed party lines. Two Democratic senators facing re-election in November, Barbara Boxer of California and Russ Feingold of Wisconsin, joined the opposition. President Obama said he has a great deal of confidence in what Chairman Bernanke did to bring our economy back from the brink. That is the standard P.R. message used by the syndicate that selected Obama. See the Reuters article (CLICK HERE) and the Wall Street Journal article (CLICK HERE).


The Hat Trick Letter dislikes political commentary. However,the Massachusetts senator election has resulted in a Quickening event in the USCongress that could result in a directional cha nge. The upset victory by Scott Brown certainly has brought about a powerful whirlwind attitude change with more open populist defiance against the current executive agenda. Some call the victory vote a continuation of the Tea Party movement, a fitting depiction since Boston was the site of the famous defiant display in the year 1773 that sparked the American Revolution. Irony is thick, since Brown replaces Ted Kennedy, an avowed supporter of the liberal socialist movement. The perceived setback to the Obama Admin on his Healthcare Bill has caused a typical scattering of legislators, who tend not to stand behind a weakened leader. Key senators have in the last week switched positions and oppose the reappointment of USFed Chairman Bernanke. Many astute political observers believe that the Senator from Wall Street (err, from New York) Charles Schumer holds a swing vote. If he backs Bernanke, expect approval by a comfortable margin, but not by the usual 95% lopside. If he opposed Bernanke, expect a possible shameful exit of the Inflation Secretary. A Bernanke denial might quickly result in Treasury Secy Tim Geithner not being unscathed either. Goldman Sachs CEO Blankfien as much as stuck a knife in Tim's back with his Congressional testimony. Geithner might soon return to the Goldman Sachs fortress if an impeachment process is launched.

The Senate debate will be interesting to observe, so as to monitor changes from the Geithner approval debate. Exactly one year ago, the theme of "ON THE JOB TRAINING" was thick. Outsiders would need training as to syndicate control and influence, and meetings to explain that bond fraud, narcotics money laundering, insider trading, Congressional extortion, and regulatory laxity (not laxative) pressures were standard practices for the US Federal Reserve. Next week could come the theme of "WHO ELSE IF NOT HIM?" and a desire to avoid a continuation of the Wall Street slush funds. The alternatives would be sound money types or henchmen from Wall Street, but more likely caretakers of the Volcker ilk. Equate experience with syndicate loyalty. The Bernanke vote carries deep implications on the attitudes toward USDollar risk, USTreasury management, and USGovt deficits. Lest people grow too excited, the American people have a long way to go before taking back control of the USGovt and its financial ministries. The movement has yet to make even ten steps toward the first mile or kilometer.

For a disturbing but accurate depiction of the US financial socio-political landscape, see the Kitco article entitled "America's Impending Master Class Dictatorship" by Stewart Dougherty (CLICK HERE). The only thread not stressed by the author is a criminal syndicate led by Wall Street, the Pentagon, the Defense Contractors, and the USDept Treasury, supported by a controlled Press Network and most recently by Big Pharma. Over the past 20 years, their latticework of frauds and collusion have been responsible for several $trillion in thefts and counterfeits that go totally unprosecuted. Perhaps half of the $9 trillion federal debt is from their high crimes. Dougherty does not make the conclusion coinciding with my forecast, a military dictatorship in a more real sense.

◄$$$ BERNANKE HAS BEEN CONSISTENTLY WRONG ABOUT EVENTS IN THE CREDIT CRISIS. PRE-OCCUPIED BY EXPECTATIONS AND LIQUIDITY FACILITIES, HE CANNOT DEFINE INFLATION. PRICE INFLATION WILL SURGE BEFORE LONG ASSURED BY HIS LATEST GUARANTEE THAT IT WILL NOT OCCUR. THE BANK OF ENGLAND IS A CARBON COPY SIDESHOW OF INFLATION $$$

An excellent highly reliable forecasting tool can be devised by planting a billboard message to do the opposite of major Bernanke pronouncements. He recently pounded the podium hard talking about higher job growth and no advances in price inflation. Neither will turn correct. Check his record, which has been laid out in Hat Trick Letter reports ever since the crisis hit high gear in 2007. He has been dead wrong, loud wrong, and embarrassingly shockingly wrong on every single major element to the credit and banking crisis. His list of errors will not be cited, since so well chronicled in HTL reports. Ben has a negative 95% correlation with event outcomes, a near perfect wrong record. At an economist conference on December 7th, he recently promised, "Will the Federal Reserve's actions to combat the crisis lead to higher inflation down the road? The answer is NO. The Federal Reserve is committed to keeping inflation low and will be able to do so. In the near term, elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here." Obviously, Bernanke is at the peak of his delusion, exposing the heart of erroneous disastrous heretical monetary thought. A loud rebuttal must be cited right off, that excess capacity (factory and labor) will not prevent higher prices that come from a falling USDollar and a slow vanishing act within the supply chain. They want to reduce the debt via monetary inflation, but doing so will gradually destroy the USDollar.

As Jeff Clark cleverly described, thought control of stability is baseless and absurd, but the center of the USFed policy to manage the thermometer. If the method worked, then giving a human fever victim an icy drink before temperature measurement would cure the fever. Ben should next be capable of growing new hair by simply thinking scalp follicle growth expectations! And a locomotive hurtling over the cliff should manage the descent by the engineer simply producing soft landing expectations! His audience was packed with professional economists and others. Forecasts for the economists in attendance share a strong negative correlation with event outcomes, but nowhere near as high as Bernanke. They are consistently off the mark too. But Big Ben has a near perfect record of being blatantly incorrect. This price inflation promise will be broken, and his words will be quoted in harsh criticism in the next couple years. The reality is that Bernanke was chosen to serve at their beck & call. He has done what Wall Street demanded: print money with abandon, bail out their failed banks, set up myriad liquidity facilities, and cooperate with syndicate functions such as bond fraud, counterfeit, and narcotics money laundering.

The Bank of England will perpetuate monetary expansion. Banking leader idealism might soon give way to urgent need steeped in desperation. The Monetary Policy Committee (MPC) of the Bank of England recently voted unanimously against extending the program to print money endlessly. The suits from marble offices like to call it Quantitative Easing, since it sounds sophisticated. Deep distress and verge of ruin could easily keep them on the present course for longer than anticipated, despite all protestations. The purchase program is essential for crippled assets announced in November, since their markets have vanished. The UKGovt is buying up assets of zero value. The British banking leaders are vastly under-estimating the impact of the Dubai debt default events, precisely my forecast. Pressure builds under the surface, not visible to these titans of shipwrecked vessels. UK housing prices continue to decline. The UK service sector cannot advance without a base industrial basis, while the London financial nexus is shrinking. The United Kingdom is widely understood to harbor almost no industry, just like the United States. Their industrial sector evacuation and removal lies as the cornerstone of financial failure, a soon recognized key part to systemic failure.

◄$$$ BRITONS ARE ADAPTING TO WAGE REDUCTIONS IN LIEU OF OUTRIGHT JOB LOSS. THE BRITISH GOVT IMPOSED A PUNITIVE BANKER BONUS TAX OF 50% AS A LOUD ANGRY STATEMENT. A HUGE DEFICIT EXPOSES IT AS THE LARGEST AMONG ALL G-20 NATIONS. PIMCO SEES UKGOVT BONDS AS VULNERABLE TO DOWNGRADE. BRITISH ECONOMISTS REALIZE THEIR OWN DEAD END LEADING TO SOVEREIGN DEBT DOWNGRADE. LATER COMES DEFAULT. $$$

Legions of Britons have accepted pay cuts or reduced hours to ward off outright job loss. Between April and October, the amount of income the UKTreasury received from taxes fell by 16%, amounting to over £17 billion, versus the same period in 2008. The Treasury calculates that 1.7 million people who might have faced job loss have been saved from the dole queue by accepting a pay cut or shorter hours. Wage restraint has resulted in lower unemployment and higher consumer borrowing, in keeping with true socialism (shared misery). Research has shown further that 7% of businesses are preparing to cut their worker pay in the next year. See the UK Telegraph article (CLICK HERE).

The banker tax levied to all bonuses over £25,000 (=US$40,700) harkens back memories of the oil industry windfall profit tax. It should gather considerably less revenue than expected, as bankers boards play tactical elusive games. Chancellor Darling reported the current deficit would rise to £178 billion, up £3 billion from the previous forecast. The amount equals 12.6% of gross domestic product, the highest among the Group 20 nations. Further economic contraction comes this year. France is considering the same banker bonus tax. See the Market Watch article (CLICK HERE).

The Pacific Investment Mgmt Co (PIMCO) halted further purchases of USGovt sponsored debt. Now PIMCO anticipates a UKGovt debt downgrade, a loud slam! The United Kingdom is teetering toward eventual debt default, my forecast. The actual statement about UKGovt debt wreckage came from Scott Mather of PIMCO. He told Dow Jones his expectation for a rating downgrade of the island nation. He said, "It is just a question of when on the current trajectory, not if. Based on what we know today about the debt trajectory and about the inability to adjust it, I think it is greater than a 50% likelihood for sure. Call it more like 80%." What is more, Mather expects to see rates on UKGilts to jump up by a full 1.0%, but only when their own monetization program ends. See the Zero Hedge article (CLICK HERE). This pronouncement is important, since USGovt and UKGovt debt are both considered sacred and untouchable by the debt rating agencies.

A group of leading economists has attacked the UKGovt for its 'irresponsible' failure to lay out 'even the rudiments' of a convincing plan to reduce the British £178 billion budget deficit. The group warns of 'alarming complacency' in reaction to the fierce fiscal challenges the nation faces. An open letter was submitted to The Sunday Times by several economists including Tim Congdon, Patrick Minford, and Gordon Pepper. It warned of 'heightened risk' of a downgrade of the UKGovt sovereign debt. They warn loudly that the integrity of UK fiscal and monetary policy is at stake because of the huge budget deficit. Several signatories serve on the shadow monetary policy committee that critiques policy. See the Times Online articles (CLICK HERE). Even the financial leaders realize the lights are growing dim in London. Recall the quote by a British Cabinet minister, which went "The banks are f***ed, we're f***ed, the country's f***ed." That is some utter blatant honesty couched in frightening vulgar words, which the monk-like purist Jackass never utters.

◄$$$ DEMAND FOR US$-BASED BONDS MUST RISE OR ELSE MONETIZATION OF USTREASURY DEBT WILL BECOME A HIGHLY PUBLICIZED, EXTREMELY RISKY, AND VERY CONTROVERSIAL TOPIC IN 2010. REFER TO WEIMAR!! MY EXPECTATION IS THE USDOLLAR CRISIS BEGINS FULL BLOOM THIS YEAR, AS THE PHONY MONEY CREATION ASPECT IS PUSHED INTO THE OPEN FOR DEBATE AND DISPUTE. $$$

Zero Hedge presents the quandary facing the Obama Admin, which must finance the spiraling deficits. The ugly options for the USFed are threefold (taken directly):

1)      Announce a new iteration of Quantitative Easing. This will be met with major disapproval across all voting classes [except New York City and WashingtonDC], creating major headaches for Obama and the Democrats who are already struggling with collapsing polls.

2)      Prepare for a major increase in interest rates. While on the surface this would be very welcome for a Fed that keeps hinting that deflation is the biggest concern for the economy, Bernanke's complete lack of preparation from a monetary standpoint to a forced interest rate increase would likely result in runaway inflation almost overnight. The result would be a huge blow to a still deteriorating economy.

3)      Engineer a stock market collapse. Recently investors have, rightfully, realized there is no more risk in equities, not because the assets backing the stockholder equity are actually creating greater cash flow, but simply because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke's forced intervention in bond and equity markets. Yet the President's Working Group is fully aware that when the time comes to hitting the Reverse button, it will do so. Will the resultant rush into safe assets be sufficient to generate the needed endogenous demand for Treasurys is unknown. It will likely be correlated to the size of the equity market drop.

ZH is surprised the USFed's $200 million reverse repo operations have not made the late night comedy circuit yet. The monetization is that blatant and voluminous. Corporate cash flow is not rising, as USGovt welfare to stocks is in hyper-drive. The USEconomy has indeed become merely one huge Ponzi, whose expansion or reduction on the margin is by definition uncontrollable. The United States has long passed the point of no return. A USDollar crisis lies dead ahead. Clearly, Option #1 is the only realistic option, a path that the Powerz have already committed heavily to, marred by money printing and USTreasury purchase, disguised poorly to date, but recognized not at all by the press networks. Option #2 would kill JPMorgan and the other titans with over a $1 trillion loss in interest rate derivative losses. Option #3 would engineer a stock market collapse resulting in a national depression. See the Zero Hedge article (CLICK HERE).

◄$$$ THE CHINESE YUAN USAGE WILL SOON EXPAND ON TRANSACTION SETTLEMENT, AS FACILITIES ARE GIVEN BROADER USAGE. SOME FOREIGN INVITATIONS WILL COME, EVEN AS USAGE WILL SPREAD TO SOME CHINESE SERVICE FIRMS. $$$

China plans to broaden the usage of settlement facilities in the Yuan currency. Several nations across Europe already have the facility in place, Brazil too. The Peoples Bank of China will broaden a trial program that enables companies to use the Chinese Yuan to settle accounts involving cross border transactions. The expansion could make eligible to the system additional regions of China. And more foreign countries are to be invited to participate, according to the state run Shanghai Securities News. China plans to invite more companies and to broaden it to include the services sector. PBOC senior official Li Bo mentioned coordination efforts underway between various government bodies. The expansion will go beyond Shanghai, Guangzhou, Shenzhen, Dongguan, and Zhuhai to use the Yuan for transactions in centers such as Hong Kong. China imposes strict controls on its currency and only allows small amounts to be exported or transported across its border at any one time. See the Market Watch article (CLICK HERE). Beijing bankers are treading lightly, taking small steps, well aware that an overstep would invite lost control to foreign paper merchants armed with leverage.

◄$$$  THE CREDIT SUISSE FRAUD IS UNFOLDING. LAWSUITS IN PROGRESS SHOULD MAKE FOR GREAT NEWS HEADLINES. FURTHER BURDEN COMES FROM GOLD ACCOUNT THEFT AND RUINOUS EASTERN EUROPE MORTGAGES. $$$

After making some queries from a contact with Swiss ties, here is what was learned. The Union Bank of Switzerland conflict, a battle over tax haven accounts with the USGovt, exposes but the first flank to the Swiss bank woe. The Credit Suisse (CS) problem is the tip of the iceberg. Much additional fraud has taken place at CS. Once the fraud begins to come to light, the entire financial firm of Credit Suisse risks total fracture in failure, and possibly its sudden demise. The fraud extends to gold bullion accounts, a second flank of woe. Confirmed evidence has come that vast amounts of client bullion accounts are 'missing' from precious metal depots at two main CS depositories. The physical metal is gone. A newly set up Singapore based Global Wealth Management by CS is under tremendous pressure as wealthy investors are losing confidence in the Credit Suisse firm very fast. See the Business Week article for superficial information (CLICK HERE).

Swiss banks are in much deeper trouble regarding their mortgage loan portfolios in Eastern Europe than the financial press reports. This is the third flank of woe. Credit Suisse distress will result in bankruptcy by what is unfolding in three primary arenas. Watch Eastern Europe. With Austrian banks feeling the heat from Eastern European non-performing loans, the ripples are likely to be echoed in Switzerland. Beware a spotted black swan event. Not only is sovereign debt across Europe at great risk, but certain national banking systems. See the Heise article (CLICK HERE).

Eurozone banks may have to write down an additional ¬187 billion (=US$268 billion) in property related losses. Loans to big property companies and Eastern European nations threaten the recovery in financial markets, according to the Euro Central Bank. The ECB pushed upward its estimate for bank writedowns by 13% to ¬553 billion for the period of 2007 through 2010. In their published Financial Stability Review, the ECB directly cited the surge in government debt burden as having put a global risk to financial stability. The report stated, "An important reason behind the rise is the further deterioration in commercial property market conditions. This has contributed to an upward revision in to the estimate of potential writedowns on bank exposure to commercial property mortgages and commercial mortgage backed securities." While the United States buries its commercial loan disaster in elusive extensions and accounting gimmickry, Europe is more open. See the Bloomberg article (CLICK HERE).

◄$$$ VIETNAM INTENDS TO END GOLD TRADING FLOORS BY MARCH. MUCH UNCERTAINTY LIES AHEAD FOR THE VIETNAMESE GOLD MARKET. IT COULD JUST BE POSTURING. $$$

The Vietnamese Govt claims their gold market has been spinning out of control. Vietnam has ordered all gold trading floors to close by the end of March, putting an end to a business that turns over $1 billion a day. At issue, so they claim, is the fragile foundation that lacks legal, economic, and technical frameworks and knowledge. A ban will go into effect for usage of overseas accounts outside jewelry or retail gold sales. Leverage is an issue, as in some cases, investors had been required to put up only 7% of the value of their portfolio. The regulation will affect around 20 gold trading floors. The trade has become a lucrative source of income for many banks and trading houses working with the exchanges. Gold has a special place in Vietnamese investment portfolios. It often plays a key role in hedging property transactions, and historically has been used broadly to defend against political uncertainty. Vietnam is one of the world's largest gold consumers. The Vietnamese invest a similar amount of gold per capita as the Germans, who have a GDP per capita more than 40 times greater. However, gold competes directly with the domestic dong currency, which suffered over a 5% devaluation at the end of November. Last May 2008, the government tried to take some of the pressure off the dong currency by banning gold imports, but they backed off. Gold imports were a substantial contributor to an escalating trade deficit, which hit some $12.2 billion in 2009.

Two points of view should be considered. Perhaps the Vietnam Economy was at risk of lost business investment capital and at the same time price inflation from the deficit. The Vietnam Govt must integrate their banking functional structure with gold in order to weave in the benefit of solid money. This is a major challenge for the new decade. The other perspective came from a personal friend who does business in Vietnam, and makes two trips per year to inspect projects. He said simply that the authorities probably shut down the gold exchange, looking for bigger fees for aggressive officials, both personally and for the agencies. He mentioned bribery and trading levies, kickbacks and fees. He mentioned too much free enterprise that had attracted attention, a brisk flow that has been eyed by the government in a plain sight opportunity. Thanks to ScottM for his contributions.

◄$$$ AN OIL GLUT EXISTS AND IS REAL. DESPITE THE CURRENCY HEDGE AT WORK, PHYSICAL SUPPLY IS MONSTROUS IN STORAGES. SEE THE 26-MILE (42-KM) LINE OF SHIPS CARRY CRUDE OIL, HOPING TO EXPLOIT THE HIGHER FORWARD PRICE. THE IMPACT SHOULD BE LOWER CRUDE OIL PRICES AND LOWER SHIPPING RATES IN THE NEXT SEVERAL MONTHS. $$$

At end November, an incredible line of 168 tankers was storing crude oil or refined products, according to data from Simpson Spence & Young, the world's second largest shipbroker. Their combined carrying capacity of 23.8 million tonnes equaled 5.9% of the global tanker fleet. If placed end to end, they would form a 26-mile-long line of idled oil tankers. Oil tanker fees were supported by this demand. In offset, a 40% OPEC output cut in global supply represented the biggest annual cut since World War II. An astonishing decline in tanker rates has reversed. Daily returns from leasing supertankers on the industry's benchmark route from Saudi Arabia to Japan advanced to $40,212 on December 24th, compared with $1246 on September 11th, according to the London-based Baltic Exchange. The floating surplus could signal a 25% decline in freight rates in the next year in reversal, however. Rates for supertankers should drop to an average of $30,000 per day next year, according to the median estimate in a Bloomberg News survey of 15 analysts, traders, and shipbrokers. That figure is below the breakeven point for Frontline Ltd, the biggest operator of the ships. Martin Stopford is director at Clarkson PLC in London, the world's largest shipbroker. He said, "The tanker market has been defying gravity." He mentioned traders are storing enough crude at sea to supply the entire European Union with 27 nations for more than three days. Despite the current floating inventory, Royal Dutch Shell, British Petroleum, JPMorgan Chase, and Morgan Stanley are each seeking vessels for storage. More busts are coming in shipping. Big swings in price volatility are to come. Andreas Vergottis is research director at Tufton Oceanic in Hong Kong, the world's largest shipping hedge fund. He said, "If tanker rates go up, everybody will get rid of ships. It is going to be a market that is worse than 2009." Vergottis expects the global tanker fleet to expand about 12% in year 2010, of which 5% will come from ships returning from storage. See the Bloomberg article (CLICK HERE). The unspoken corrollary is that if tanker freight rates fall, so would crude oil prices. The backwardized price structure might normalize as current prices come down.

CHINA TRADE WAR SIMMERS & BOILS

◄$$$ TRADE WAR WITH CHINA EXTENDS TO STEEL. THE TRADE WAR HAS VERY GRADUALLY RATCHETED UPWARD, NEVER ABATING. IT WILL IN THE NEXT COUPLE YEARS TURN HOT WITH MILITARY ASPECTS. $$$

At least 30 specific skirmishes have occurred in the last three or four years with trade to China, maybe more. The USGovt expects to sell debt securities to China, but to engage in warfare at the same time without consequences. To be sure, China commits plenty of violations, mostly of the copyright and trademark variety. The key source of trade friction is the markedly lower labor scale in the Chinese Economy. When their firms attempt to exploit that advantage, the US businesses pressure USGovt reaction. The USDept Commerce has decided to ratchet up the trade war. It will impose anti-dumping up to 145% on Chinese imports of steel grating products. The preliminary finding revealed the companies sold products at prices below fair value. (Before or after the labor component was factored in?) Imports of the steel grating to the US market were valued at $90.7 million in 2008. Chinese shipments continue to severely undercut the US competition, having ramped up in a huge growth spiral. Their steel grating exports to the US market rose over 500% by volume and more than 900% by value from years 2006 to 2008. Petitions by Alabama Metal Industries and Fisher & Ludlow (a subsidiary of Nucor) were answered. Other cases and rulings are on the docket. (What is their wage scale, benefit package, and pension contribution cost?) The US Intl Trade Commission is dealing with a separate case in which US companies are seeking duties on Chinese imports of steel oil drilling products valued at $2.8 billion in 2008. See the Bloomberg article (CLICK HERE). The USGovt needs very quickly to re-examine its heavy regulatory costs born by industry, its corporate tax structures, and more. The huge wage differential provides the basis for lost competitiveness by US factories, a problem never to go away.

 
◄$$$ THE CHINESE SKIRT THE IRAN SANCTIONS. NO DIRECT CRITICISM HAS COME FROM THE USGOVT, MOST LIKELY BECAUSE CHINA PROVIDES THE UNITED STATES WITH SIGNIFICANT SUPPLY OF CREDIT. $$$

Chinese companies banned from doing business in the United States for allegedly selling missile technology to Iran continue to do a brisk trade with American companies. For example, a subsidiary of state owned China Precision Machinery Import Export Corp has made nearly 300 illegal shipments to US firms since a ban was imposed on CPMIEC and its affiliates in mid-2006, according to an analysis of shipping records by the Wisconsin Project on Nuclear Arms Control, a non-profit proliferation watchdog. A Wall Street Journal review of the records and interviews with officials at some of the American companies indicate that the US firms possibly were unaware they were doing business with banned entities. The nest of subsidiary names caused plausible deniability for confusion, if not actual confusion. The multi-$million shipments from CPMIEC include a broad spectrum from anchors and drilling equipment to automobile parts and toys. In many cases, the export giant acted as a shipping intermediary, a role also banned under a 2006 presidential order. See the Wall Street Journal article (CLICK HERE). The rules will apply less and less to Chinese firms, as creditor status eclipses other concerns.

◄$$$ THE CHINA CLAMPDOWN ON RARE EARTH METALS BEGINS, FOREWARNED HERE. STRATEGIC SUPPLIES WILL BE DENIED TO WESTERN FIRMS. REPLACEMENT SUPPLY IS 5 TO 10 YEARS AWAY. A DOMINANT POSITION FOR RARE EARTH FINISHED PRODUCTS IS COMING TO CHINA. $$$

Concern swirls as China has clamped down on rare earth exports. This threat was discussed in a Hat Trick Letter special report entitled "China Declares Financial Trade War" in September 2009. Neodymium is one of 17 sparse metals crucial to green technology. The probem is that China produces 97% of the global neodymium supply, but they are not selling. During the past seven years, it has reduced by 40% the amount of rare earths exported. Britain and other Western countries risk depleted supplies of certain valued rare metals urgently needed for green technologies, as China has taken steps to curtail shipments. They have a monopoly on global production, and plans soon to choke off exports of valuable compounds. Failure to secure alternative reliable sources of rare earth elements (REE) would affect the manufacturing and development numerous niche industries such as wind turbines, hybrid car magnets and batteries, electric generators, fiber optics, and low energy lightbulbs. There are key military applications also, which could render the friction to a new level of trade war. Reactions to the restricted supply flow have begun.

Industry sources have told The UK Independent journal that China could halt shipments of at least two REE metals as early as next year, and that by 2012 might produce only enough REE ore to satisfy its own fast growing domestic demand. In October, an internal report by China's Ministry of Industry & Information Technology disclosed proposals to ban the export of five rare earths and to restrict supplies of the remaining metals. Beijing strenuously denied that the document was an accurate reflection of its strategy to control trade in rare earths. As a result, a potential crisis could result as Western countries rush to find alternative supplies. Suppliers are planning to open new mines in places like South Africa and Greenland to meet demand. British Dept of Business Industry & Skills said it was officially monitoring the supply of REEs to ensure China was observing international trade rules. Claims has cropped up that Beijing is using its rare earths monopoly as a foreign policy weapon. Jack Lifton is an independent consultant and a world expert on REEs. He said, "A real crunch is coming. In America, Britain, and elsewhere we have not yet woken up to the fact that there is an urgent need to secure the supply of rare earths from sources outside China. China has gone from exporting 75% of the raw ore it produces to shipping just 25%. It does not consider itself to be under any obligation to ensure supplies of rare earths to anyone but itself. There has been an effort in the West to set up new mines but these are five to 10 years away from significant production." Global demand in REE metals has tripled from 40,000 to 120,000 tonnes over the past 10 years, during which time China has reduced annual exports from 48,500 to 31,310 tonnes. Worldwide, the industries dependent upon REEs that produce a wide variety of sophisticated products are estimated to be worth $4.8 trillion, or 5% of global GDP. To conceive the magnitude of the supply stress, Beijing announced in December that it was setting exports at 35,000 tonnes for each of the next six years, enough perhaps to satisfy demand only in Japan.

After decades in which they were considered little more than geological oddities, rare earths have recently become a boom industry after the arrival of a raft of innovative devices. Refer to i-Phones, X-ray machines, fibre-optic cables, hybrid car batteries, magnets for efficent motors & generators, wind turbines, car catalytic converters, missile & laser guidance systems, and more. Fallout is tremendous. Toyota alone produce annually one million hybrid Prius cars, each of which contains 16kg of rare earths. By 2014, global demand for rare earths is predicted to reach 200,000 tonnes a year. The global demand in four years could be six times what China permits to be exported. European and North American companies are scrambling to open or re-open mines in Canada, South Africa, and Greenland amidst calls for USGovt-backed loans to secure supplies of some REEs used in guidance systems of missiles and laser guided weapons. After all the USEconomy has an important core for the war machine that is sacred and central to the corrupted soul of the nation. The Chinese must plan to counter with industry output for export that exploits the added rare earth metal monopolistic edge. They refuse to export the metals but do export the finished products.

Controversy abounds, even outside commerce and military shadows. Nearly all of China's supply of rare earth supply comess from a single mine near Baotou, in Inner Mongolia. The remainder comes from small and sometimes illegal mines in the south of the country, leading to devastating pollution from poisonous and even radioactive ore leakage. Environmentalists issued widespread criticism over the Chinese position on the environment during the Copenhagen climate summit. The consensus conclusion is fast forming, that a need exists for multiple sources for rare earth metals. One might wonder if both Military and Green Revolution premises might be used against China in a manner to escalate the current ongoing trade war.  However, China is not alone in restrictions of such trade or securing supplies. Last year, Australian regulators imposed restrictions on the Chinese acquisition of one of the Aussie's richest rare earth mines, snuffing out a $640 million deal. Expect more events like with Toyota, which effectively bought its own rare earth mine supply from Vietnam in an exclusive deal. See the UK Independent article (CLICK HERE).

◄$$$ GENERAL MOTORS EXPANDS FROM ITS NEW CHINESE CORE. USGOVT AID HAS FACILITATED EXPANSION IN CHINA & ASIA, NOT MAIN STREET AMERICA. POLITICAL BACKLASH WILL CONTINUE. $$$

GM, actually General Motors, aka Govt Motors, struggles to pay back its new USGovt debt. The revived General Motors has begun expansion, but in the East. Contracts with US workers are being rescinded and revised, but new contracts with the Chinese take their place. The USGovt is a servant to corporate interests, not the people. Earlier in December, General Motors and its new partner Shanghai Automotive Industry Corporation Group (SAIC) jointly announced that they had agreed to expand their long-time cooperation in the Asia region, outside China. GM and SAIC currently operate eight joint ventures in China. They have actually formed a new investment company, General Motors SAIC Investment Ltd, in Hong Kong to facilitate their expansion efforts. It is 50% owned by each partner. They also announced plans to support expansion in emerging markets, beginning with India. SAIC and GM began cooperation in 1997, when the two automakers formed Shanghai GM and also an engineering & design joint venture. Production began in 1999, after which Shanghai GM domestic sales grew by more than 22-fold nearly 3 million vehicles by end 2009. Since its creation in 2002, domestic sales by SAIC-GM-Wuling have grown to a level to establish it as the first Chinese automaker to sell one million vehicles in a single calendar year. See the China Daily article (CLICK HERE). One can be sure that the United Auto Workers are unhappy to be abandoned. The USGovt has facilitated this abandonment of US labor.

◄$$$ CHINA WILL BE FORCED TO REACT TO THE FOOD PRICE PHENOMENON AS IT UNFOLDS. USDOLLAR INSTABILITY WILL RESULT IN WIDER USAGE OF THE CHINESE YUAN CURRENCY. AT THE END OF THE ROAD IS POTENTIAL HYPER-INFLATION IN THE UNITED STATES. $$$

Eric deCarbonnel has been champion of the impending food crisis. The story reeks with USGovt deception, as well as Chinese impact in response. Eric deC expects the food crisis to carry a deep ripple effect with inadequate currency to fund the necessary cash flow for bilateral trade with China. The Yuan currency will be drawn into the breach to meet that demand, thus advancing it as a quasi-reserve currency. He wrote, "In order to prevent a collapse of international trade next year as the dollar collapse (see 2010 Food Crisis), China will be forced to allow the settlement of cross border trade in Yuan as well as allowing financial companies and importers to purchase Yuan more freely for investment and trade. In effect, the dollar's instability in 2010 will require the Chinese Yuan to assume the role of reserve currency. Needless to say, this will compound the dollar's troubles, accelerating the currency's freefall." See the Market Skeptics article (CLICK HERE). Each continent will be forced to create a quasi-reserve currency in the coming year or two.

◄$$$ GOOGLE IS AT WAR WITH CHINA, BUT ON A HIDDEN LEVEL. THE FLOW OF INFORMATION IS THE CRUX OF THE BATTLE. THE STATE CONTROL OVER INFORMATION IN CHINA AND ITS PURSUIT OF WEAPON DESIGNS COULD BE THE INITIAL CONDUIT TOWARD WIDER CONFLICT. $$

A battle continues to be waged with Google in China over the internet. The story remains more complicated than described in the press. Intellecutal copyright protection might be very secondary. Google has threatened to exit the entire Chinese market, perhaps in part over competitive concerns. They explain the risk of losing their source code in a land replete with copyright infringement. Search engine strategy is also a main issue of conflict. Business reasons and possibly espionage reasons are other explanations. Google has superior software and a solid business plan, one that threatens to dominate Baidu, its main Chinese rival. The Chinese Govt might have inflitrated the Google staff, enough to grab valuable software code. Their ulterior motive could be to monitor and eavesdrop on domestic groups that oppose the government in Beijing on numerous fronts such as human rights and Tibet. The Chinese Govt routinely kills tens of thousands of people to quell demonstrations, which the West rarely hears about. Google might be facilitating US intelligence gathering also. Chinese firms routinely raid USMilitary websites, with examples in the thousands for downloads. Google might be able to monitor such illicit downloads. Last week, the Chinese Govt issued a statement that Google charges of improper software grabs and of control of searches were baseless. Google executives have made a stand on search engine outcomes from unfiltered searches and protection of source code. The two parties are caught in a dance that only touches the surface exposing the real underlying conflict. My belief is that the Google incident and its resolution will be very telling about the blossoming trade war that could easily escalate into military action. One truism about war is that it starts with trade battles, and often follows cutoff of communication. See the Minyanville article (CLICK HERE) for business impacts.

◄$$$ THE WORLD TRADE ORGANIZATION CITES GROWING TRADE FRICTION BETWEEN CHINA & THE UNITED STATES. IT WILL ONLY GROW WORSE, AS GOVT INITIATIVES SHIFT TO JOB CREATION THIS YEAR. $$$

Trade friction between the United States and China over everything from cars to steel to chemicals will increase in the coming years, so claims general director Pascal Lamy of the World Trade Organization. He is a former European Union trade commissioner. The WTO charter is to resolve international commercial disputes and negotiate new rules for export of farm produce, manufactured goods, and services. It is tasked with averting an all-out trade war that would render harm to the global economy. Lamy predicted great challenges over the next two years as unemployment remains stubborn and the free trade credentials of world leaders are tested. He is a bit clueless in his claim "There is no risk of slipping into a trade war," since the US-China ongoing brawl already qualifies. He reasons that rising trade volume removes any label of trade war. Such a shallow viewpoint would coincide with trade sanctions eliminating all trade, another falsehood. He calls mere trade spats what scatter the trade journals. He implies the trade friction is properly handled, but it obviously is not since skirmishes are more frequent and other more diverse products. Lamy has one foot in reality though, as he strives to oppose trade rule violations that shield domestic jobs from foreign competition. He said, "We are certainly not out of the woods on protectionism. The fundamental reason there is a protectionist impulse has to do with the job market. We know that unemployment will remain high this year, maybe even next year." Some trade observers believe the danger will be even greater in 2010 as fiscal emphasis shifts focus to job creation from last year's stimulus packages and financial bailouts. See the Huffington Post article (CLICK HERE).

◄$$$ THE WORLD TILTED EAST IN THE 2000 DECADE, A TREND CERTAIN TO CONTINUE IN THE NEW DECADE. CHINA FACES CHALLENGES TO BECOMING A RESPECTED GLOBAL POWER. $$$

China is in the midst of an economic revolution! It comes with challenges well laid out. Compare a tenfold growth of gross domestic product between 1978 and 2004 under Beijing rule with a four-fold increase between 1830 and 1900 under British guidance. Goldman Sachs chief economist Jim O'Neill has made projections that China will overtake America in economic size as soon as 2027, in less than two decades. He described what gave the West a strong advantage over the past 500 years. O'Neill believes they are six factors: 1) the capitalist enterprise, 2) the scientific method, 3) a legal & political system based on private property rights & individual freedom, 4) traditional imperialism, 5) the consumer society, and 6) a work ethic combined with capital accumulation. China has successfully replicated the first two factors, adopting them into a national strategy of newfound capitalism with product development. Other factors he claims will be adopted with a Confucius-type modifications with regard to imperialism, consumption, and the work ethic. The only problem area remains as factor #3, political structure, individual liberties, and property protection such as patents. This area shows little sign of emerging in the current regime. See the Financial Times article (CLICK HERE). My belief is that item #3 is critical for China to become a recognized world power in a broad sense. Without it, they can become a world power in a narrow sense with a dark shadow cast.

CURRENCYS IN DISARRAY

◄$$$ JAMES GRANT FORESEES THE DEATH OF THE USDOLLAR, BUT HE DOES NOT ANTICIPATE A GRAND FLIGHT UP IN THE GOLD PRICE. THE DECLINE IN MONEY SUPPLY TRIPS HIM ON ANY GOLD ASCENDANCY. HE OVERLOOKS THE 0% POLICY THAT FUELS THE GOLD BULL, AND LOST PRICE CONTROL. HIS OPINION HAS ADDED VALUE SINCE HE IS SO RESPECTED, EVEN WHEN CONTRARY TO THE BOND MARKET SYSTEM (CONVENTIONAL CRITIC). $$$

James Grant of The Grant Interest Rate Observer is usually an excellent analyst. He correctly observes the billboards and their herald of the USDollar death spiral. However, he focuses too much on the money supply, and even accepts the official USFed statement on the monetary aggregate as accurate. It is not, and not remotely so. It ignores all derivative contracts, which bank analysts admit kept the entire US banking industry afloat last decade. It does not factor in off-balance sheet bank assets. Grant curiously believes the USDollar can experience a collapse without mention of another instrument taking its place, not even a crisis where the world seeks desperately an anchor in the financial storm. He clearly refused to endorse the gold train, fearful of being labeled a gold bug and suffering ostracism. He misses the entire factor of zero cost money fueling a grand gold bull, a policy clearly not near its end. He misses the entire factor of lost monetary control, as unspeakable growth on the central bank balance sheet cannot be contained like in past cycles. He misses that a monetary crisis centered upon the USDollar will send Gold upward in a powerful manner. He misses the direct corollary of the USTreasurys having lost prestige, sure to lift its arch-enemy Gold. Something must pick up the mantle, and Gold is the default to fall back upon. My belief is that Grant is an analytic coward, cut from the same cloth as Nouriel Roubini. Grant might be such a veteran that he is incapable of learning that the world is in the process of rejecting fiat money entirely as it seeks a gold covered currency. He might be bought out by Wall Street to leave gigantic holes in his treatise. One must wonder if he is aware that $2.2 trillion more USTreasury Bonds have been sold than issued, which is called counterfeit. Gold usually enters the room when fraud reeks. Grant drops the ball by missing the obvious conclusion of a powerful gold rise. He wrote the following in "Requiem for the Dollar."

"There is no greater success story in the long history of money than the common greenback [USDollar]. Of no intrinsic value, collateralized by nothing, it passes from hand to trusting hand the world over. More than half of the $923 billion worth of currency in circulation is in the possession of foreigners... The dollar is faith-based. There is nothing behind it but Congress. But now the world is losing faith, as well it might... The problem lies with its management. The greenback is a glorious old brand that is looking more and more like General Motors. You get the strong impression that Bernanke fails to appreciate the tenuousness of the situation, fails to understand that the pure paper dollar is a contrivance only 38 years old, brand new, really, and that the experiment may yet come to naught. Indeed, history and mathematics agree that it will certainly come to naught. Paper currencies are wasting assets. In time, they lose all their value. Persistent inflation at even seemingly trifling amounts adds up over the course of half a century. Before you know it, that bill in your wallet will not buy a pack of gum... Not that the architects of the post-1971 game set out to lower the nets. They believed they would put up new ones. In place of such gold discipline as remained under Bretton Woods, in truth, there was not much. Markets would be the monetary judges and juries. The late Walter Wriston, onetime chairman of Citicorp, said that the world had traded up. In place of a gold standard, it now had an 'Information Standard.' Buyers and sellers of the Treasury notes and bonds, on the one hand, or of dollars, yen, DeutscheMarks, Swiss francs, on the other, would ride herd on the Fed. You would know when the central bank went too far because bond yields would climb or the dollar exchange rate would fall. Gold would trade like any other commodity, but nobody would pay attention to it...

Many contended for the hubris prize in the years leading up to the sorrows of 2008, but the Fed beat all comers. Under Ben Bernanke, as under his predecessor, Alan Greenspan, our central bank preached the doctrine of stability. The Fed would iron out the business cycle, promote full employment, pour oil on the waters of any and every major financial crisis, and assure stable prices. In particular, under the intellectual leadership of Bernanke, the Fed would tolerate no sagging of the price level. It would insist on a decent minimum of inflation... And it would perform these feats of macroeconomic management by pushing a single interest rate up or down. It was implausible enough in the telling and has turned out no better in the doing. Nor is there any mystery why. The Fed's M.O. is price control. It fixes the basic money market interest rate, known as the federal funds rate. To arrive at the proper rate, the monetary mandarins conduct their research, prepare their forecast, and take a wild guess, just like the rest of us. Since December 2008, the Fed has imposed a funds rate of 0% to 0.25%. Since March of 2009, it has bought just over $1 trillion of mortgage backed securities and $300 billion of Treasurys. It has acquired these assets in the customary central bank manner, i.e., by conjuring into existence the money to pay for them. Yet, a measure of the nation's lingering problems, the broadly defined money supply is not growing but dwindling. The Fed's miniature interest rates find favor with debtors, disfavor with savers (that doughty band). All may agree, however, that the bond market has lost such credibility it once had as a monetary policy voting machine. Whether or not the Fed is cranking too hard on the dollar printing press is, for professional dealers and investors, a moot point. With the cost of borrowing close to zero, they are happy as clams. That is, they can finance their inventories of Treasurys and mortgage backed securities at virtually no cost. The US government securities market has been conscripted into the economic stimulus program."

◄$$$ A USDOLLAR RALLY SEEMS POSSIBLE. A USDOLLAR DECLINE ALSO SEEMS POSSIBLE. THE CHAOS IN THE EURO CURRENCY COMBINES WITH THREATS TO SIDETRACK THE EXTREME USGOVT WASTEFUL SPENDING COURSE, TO OFFER CAUSE FOR A HIGHER USDOLLAR. THE WRECKED USGOVT, USBANK, USHOUSING, AND USECONOMY INDICATE A CONTINUED DECLINE IS JUSTIFIED. WITHOUT A LOWER USDOLLAR AND LOWER USHOUSING PRICES, NO ECONOMIC RECOVERY IS REMOTELY POSSIBLE. A BRIGHT POPULIST LIGHT EXPOSES A BANKRUPT AND GUTTED USDOLLAR. $$$

Many are the drivers (important factors) behind a potential USDollar continued rally. A move to 80 could easily happen. Support at 77 includes the moving average merger, but an overbought condition has come. The tumult in Europe over expulsion of Greece spreading to Italy and Spain has eroded confidence in the Euro currency tremendously. The Massachusetts senate vote was a powerful vivid statement against President Obama that could spread to a movement against the entrenched Wall Street syndicate in control of the USFed and USDept Treasury. The win by Senator-elect Scott Brown against the Obama Healthcare Bill has galvanized populist opposition in a manner not seen by the Jackass since the Eisenhower Admin. A strange market reaction has come, that USGovt fiscal responsibility might be restored, wild wasteful spending might be curtailed, the criminal drain from big banker welfare might be brought to an end. It has no basis in reality! The populist wave carries with it an irrational construct that the USDollar can take higher value, when more likely the wave could reveal its total collapse as a new dawn would require a fresh start after an important USTreasury default event. The sentiment has changed, but the financial condition is still so far wrecked as to be irretrievable. The mild euphoria has caused poor judgment in rational matters and irrational markets. Within one month, reason will prevail unless a rejection of Bernanke as USFed Chairman results in wild euphoria and incredibly bizarre perceptions of quick revival, even further dismissals like Treasury Secy Geithner, and maybe a Wall Street firm failure.

The USEconomy absolutely cannot recover unless and until the housing sector stabilizes at considerably lower prices, enough to clear the hidden inventory. The USEconomy absolutely cannot recover unless and until the USDollar is brought to a justified level considerably lower, enough to match the reality of its debt burden ruin, bank system ruin, industrial absence, and crippled economy. Without both a housing and US$ lower price structure, no economic recovery is possible, as rebuttals are laughable. New USGovt debt cannot attract foreign credit supply unless and until the USDollar is 30% lower, but a decline to that lower level would spark a global monetary crisis from outsized grotesque foreign USTreasury Bond investments losses. My firm belief is that the world is on the verge of watching the second Dollar Death Dance, a rally founded upon its death. The first came in autumn 2008 after the Wall Street collapse. To claim the US$ has no alternatives is nonsense, since alternatives are being constructed out of view. To claim a rising US$ is due to a flight to safety is nonsense, since the USDollar is a toxic pit of insolvency, waste, fraud, counterfeit, sacred military, and syndicate devotion.

◄$$$ THE EURO CURRENCY DECLINE WILL CONTINUE UNTIL CLARITY COMES TO THE EXPELLED MEMBER NATIONS AND TO THE NEW STRUCTURE IN THE AFTERMATH. THE CURRENT EURO IS NEAR ITS BOTTOM. THE EUROPEAN CORE WITH GERMANY AND BENELUX AT ITS NUCLEUS HAS FIRM FUNDAMENTALS, A FACT TO EMERGE SOON. EUROPEAN LEADERS BENEFIT FROM A LOWER EURO VALUATION. $$$

The debt default and expulsion of key Southern European nations changed everything. Dubai started the process of debt intolerance. The Euro has embarked on a death-birth process, the end of the broad Euro and the beginning of the Core Euro. The European leaders have no problem with a lower Euro valuation, since it acts as an economic stimulus, except its conclusion means a required new birth. The new Core Euro currency will resemble the old Deutsche Mark, whose return will coincide with other nations reverting to their former domestic currency. Except the new DMark will be strong and the reversion currencies will be trashed 30% to 40% lower. Unless and until Germany emerges with a solid plan with a new Super-Trim Euro currency, the US$ will benefit at the Euro's direct expense. The reversal of much Euro usage as a secondary global reserve has caused suffering. It was not designed for that purpose. The call for new gold-backed currencies is loud, soon to turn to a global scream. Watch Germany, Russia, China, and the Persian Gulf lead the movement to form new currencies in a revoluation that knocks the USDollar off its pedestal. Great changes come as Germany leads the exercise to carve off Club Med fat and gristle. When the US$ is rising, the gold rally will be led by the Euro in disarray. The newly formed Core Euro will dominate and proceed to 200 per US$ in value, forcing a climax event in the global monetary crisis.

◄$$$ GOLD IS HOSTAGE TO THE EUROPEAN RECONSTRUCTION AND THE USCONGRESSIONAL REVOLT. AT THE SAME TIME, THE PAPER GOLD MARKET AND THE PHYSICAL GOLD BULLION MARKET HAVE FINALLY SEPARATED. DIVERGENCE AND HAVOC COME NEXT. THE PAPER GOLD PRICE MIGHT FALL TO 1080 BEFORE A STRONG RECOVERY. BUT THIS CORRUPTED PAPERWEIGHT ARENA MIGHT NOT MATTER MUCH LONGER. $$$

During the trend decline or the counter rally for the USDollar, a constant event persists. The London metal inventory is being totally depleted of gold bullion. Fast approaching is the event of GAME OVER for London, a condition that has already reached critical level according to a key reliable source of information with London connections and direct experience there. The paper gold market and the physical gold bullion market have finally separated in a practical manner, meaning actual gold has almost no role anymore in London paper contract settlement. The absence of gold in London requires extraordinary tactics to settle contracts and to obtain gold bullion. Intimidation and bribes accompany gold delivery demands. They have almost zero gold, its supply having been drained in high volumes since early December, a process currently in acceleration. The opportunity to convert fiat money into precious metal weight is closing, at least at prices considered reasonable. The London gold banker said, "There is going on a lot more than meets the eye. The physical system is actually consolidating bigtime and is organizing itself with lightning speed, totally hidden from pretty much anyone, even the so-called insiders. The paper precious metal market and the physical precious metal market have defacto disconnected. The paper and physical gold markets currently operate in parallel universes. The outflow of physical metal from bank vaults is happening at a mind bending pace." The true gold price might very soon become unknown, an extremely positive development. Gold market disruption leads to chaos, followed by much greater clarity. Like a bankruptcy process, the event is sudden but the cleanup takes weeks as dust settles. Right now, we see strong attempts using naked gold short contracts at the London metals exchange (LBMA) and the COMEX in the United States to drive down the gold price. It is all illegal and permitted. Margin calls have hit, forcing further selling of paper contracts. Before long, no gold metal will be available until clarity and prosecutions begin.

The world is approaching a climax event. Sure, many analysts have made such a claim for months. But with Europe in flux, the USCongress in flux, the Persian Gulf in flux, the US-China trade battles escalating, and USTreasury debt finance recognized more and more as monetized printing press activity, we are truly approaching a climax event as gold metal has exited the London market. The trigger event is unknown. It will likely not be directly related to the above event fronts. It will probably be a typical garden variety event pertaining to the far from ordinary stresses tied to the ongoing crisis in the credit market, gold market, and currency market. When the combined magnus financial crisis blossoms, it will go ballistic and the sovereign debt default will comes full circle to kill the USDollar and USTreasury Bond. The warning signal will be default of the UKGilt (British debt security).

GOLD VIEWPOINTS FOR NEW YEAR

◄$$$ IN THE WAKE OF THE GOLD CORRECTION IN DECEMBER, JOHN EMBRY PROVIDES A PEPTALK OF SUBSTANCE. HE COVERS MANY IMPORTANT FACTORS AND DESCRIBES A HORRIBLE IMBALANCE IN THE SUPPLY-DEMAND EQUATION THAT FAVORS MUCH HIGHER PRICE. INVESTMENT DEMAND IS FAST RISING, WHILE MINE SUPPLY AND CENTRAL BANK SUPPLY IS DWINDLING, EVEN AS PARTICIPATION IS MINIMAL AMONG INVESTORS. THE GOLD BULL HAS A LONG WAY TO GO BEFORE IT IS EVEN CLOSE TO PEAK. $$$

Talk of a gold bubble is nonsensical propaganda, since a small minority of institutions own it. Instead, the rising gold price is a sign of global rebellion against the USDollar, perception of a ruined currency system, uncontrollable government budgets, and insolvent banks. That is my quick preface to a review of a fine essay. John Embry of Sprott Asset Mgmt provides a strong peptalk intended to remind people that the selloff in December is nothing but a mid-course correction. Find the essay entitled "Gold Bull Has Many Years, Thousands of Dollars To Go" from 24 December 2009 on the Sprott research website (CLICK HERE). He cites no gold price target, just multiples of its current price.

Here are astute major points made by Embry. Western central banks have been leasing their gold bullion not for diversification, as claimed, but instead for to depress the gold price. The grander strategy is to protect the USDollar and defend low interest rates, if not the entire fiat currency system. The past 1990 decade sowed the seeds of the 2000 decade gold bull, which will surely continue. Chaos in the credit and property markets came in the wake of past interventions to suppress gold, lack of regulatory controls, and easy money. Central banks (CB) are discovering that their tactics ultimately fail, their amplified efforts notwithstanding. Events from the 1960 strongarm tactics are being revisited, but without much actual central bank learning. The CB geniuses simply increased the interventions and retreated to more hidden basements for astounding liquidity flows. Embry makes the clear point that since the illicit activity has been greater in volume and longer in duration, the rising price impact will also be much greater, especially since the backdrop has been a much more fragile financial structure. The CB gold dump has totaled 15 thousand tonnes, whereas in the 1960 decade it was only 3 thousand tonnes. Gold mine supply has been in steady decline for ten years. Embry expects supply to continue down despite rising price for many reasons, a concept called supply inelasticity (covered by Hat Trick Letter frequently). The only peak to identify in the gold market lies in mine production, confirmed even by Barrick Gold's Chairman Aaron Regent. Gold mine output is set to experience a disaster in the flagship nation of South Africa, from both depletion and electricity shortages. Gold shortages will persist at a time of huge expansion in gold investment demand and rapidly diminishing central bank supply. Embry does not expect a rampant deflationary outcome to arrive, given the highly active and extremely motivated central bankers, who operate side by side with government leaders at the fiat currency controls.

Embry finds it nauseating to hear claims of a gold bubble, and instead calls it a stealth gold bull market in its tenth year. Little public attention has come to gold, and only recently have some sophisticated financial players taken an interest. Thus the gold bull is still in a middle chapter. Tiny public participation and minimal profession participation mean no bubble, very simply. The only lines seen for public queues at emporeums have been to sell gold, not buy, as the naive set up profits for the savvy professional buying firms who pitch their lines like carnival barkers. Mining firms also are struggling to earn money, amidst a subdued sentiment, another contradiction to the absurd bubble argument. Skepticism is widespread. Press attention has been greater, but it too is skeptical, as the stories are presented with bearish guests in the lead. The press cares little that guests have been consistently dead wrong. If the 1980 peak price of $850 for gold were adjusted conservatively using official price inflation statistics, the equivalent price would be $2300 today. If one must identify a bubble, look to the USTreasurys. He concluded, "In fact, I believe that we are many years and several thousands of dollars in price away from the end of this powerful bull market... I suspect that gold is going to stage a parabolic rise from current levels shortly, a development that will come as a true shock to the many detractors of the world's only real money. This remains one of the best supply-demand imbalance stories I have ever encountered in my caree. It will only be enhanced by the existence of massive short positions that will be nearly impossible to cover, and myriad paper claims on gold that dwarf the available physical supply."

◄$$$ GOLD BANKERS AND GOLD MINING EXECUTIVES OFFER FORECASTS FOR THE GOLD PRICE. BEWARE OF A POTENTIAL PAPER CURRENCY CRISIS. A STAGGERING CONDITIONAL GOLD PRICE IS OFFERED BY AN AUSTRIAN ECONOMIST, IN A CALCULATION THAT ASSUMES THE EURO CURRENCY WERE COMPLETELY BACKED BY GOLD. JUST A THEORETICAL EXERCISE, BUT WITH MEANING. $$$

Egon von Greyerz, the founder of GoldSwitzerland, is an influential person with an opinion worth listening to. During a brief interview for the show "Wake up to Money" on BBC, he extolled the virtues, prospects, and elevated future value of gold. The host of the interview intorduced the guest by saying, "According to Egon von Greyerz a leading gold commentator, gold could reach $10,000 per oz due to the state of the world paper currencies. He has released a hard hitting analysis of the effects of toxic loans and printing of money to prop up the economies. Egon von Greyerz, a former Deputy Chairman of Dixons and now Managing Partner of GoldSwitzerland, also states that we could see hyper-inflation and the collapse of the dollar." See the radio interview (CLICK HERE).

Gregor Hochreiter is Austrian economist and co-founder of the Institut für Wertewirtschaft. He arrived at at theoretical price of more than ¬25,000 per troy ounce of gold. His premise is the full backing of the Euro currency by gold. He examined the correlation between Eurozone gold holdings and money supply figures for his calculation. His is not a forecast, but a theoretical level under sound money conditions. See the Seeking Alpha article (CLICK HERE).

Rob McEwen forecasts a $5000 gold price in the next two to three years. He is one of the sharpest executives in the gold industry, and should not be dismissed. McEwen is chairman and CEO of US GoldCorp. In a conversation with  Erik Schatzker and Deirdre Bolton from Bloomberg, he discussed the outlook for gold prices. He claims that the gold price could reach $5000 per ounce by 2012. He is one of the sharpest CEO's in the entire gold mining industry. Bear in mind that he accurately predicted the timeline for the rise in gold price from $350 to $800 per oz in the last few years. In the interview he actually says gold will hit $5000 or higher in the 2012 to 2014 timeframe.

A savvy contact with two decades of gold trade experience made his own comment about the interview and revealed perceptions. He said, "The interview should be regarded as a typical example of popular media's absolute faith in paper money and misunderstanding of real money i.e. gold. But the public's perception of gold will change dramatically in the next 12 to 18 months. With the likely major decline of currencies like the Dollar and the Pound and the resurgence of problems in the financial system, the coming rapid appreciation of gold will make major headlines. At that point the media will totally change their attitude and treat gold with the respect that it requires, since it remains the only surviving currency of the last 6000 years."

◄$$$ A FORECAST OF $1500 GOLD AND $25 SILVER FOR YEAR 2010. NICHOLS FORESEES A CONFLUENCE OF POSITIVE FORCES FOR GOLD, MANY OF WHICH ARE OVERLOOKED BY DETRACTORS. $$$

Jeffrey Nichols is senior economic advisor to Rosland Capital. He started off with mention that on the first trading day of 2010, many managed funds and speculators established once again their long positions in gold. Despite their bullish held view for gold, they sold the metal in December to realize substantial profits earned. Perhaps they balanced losses. He sees several factors pushing up gold considerably in price, a confluence of positive forces. Nichols described his highly bullish forecast in the following. See the Commodity Online article (CLICK HERE).

"I expect the yellow metal will hit $1500 an ounce or higher during the year, a gain of more than 35% from its December 31st close. Looking further ahead, gold's bull market will likely continue for another few years, carrying the metal to a cyclical peak of at least $2000 or more. At the same time, silver could very well outperform gold, rising from $17 an ounce at the end of last year to an annual high of at least $25 sometime during 2010, a gain of more than 45% from last year's close. While silver's advance will mostly reflect strong cyclical growth in both industrial and investment demand, gold will also benefit from rising secular expansion of investor participation, central bank reserve diversification (which is only just beginning), and an irreversible erosion of the US dollar as the single dominant reserve asset and denominator of much world trade. As a result of these secular developments, over the next decade and beyond, the long run average price of gold (stripping away the major cyclical bull and bear market swings) will be considerably higher than past experience would suggest, and considerably higher than many analysts and investors would dare imagine. Key fundamentals, some of which have been ignored by gold's detractors, remain intact:

  • US monetary & fiscal policies remain extremely expansionary and ultimately inflationary
  • Strong continuing central bank demand for gold as more countries try to limit their exposure to a depreciating dollar and diversify their official reserve holdings
  • Investment demand is growing, with more individuals and institutions viewing gold as a legitimate asset class, portfolio diversifier, and insurance policy
  • World gold mine production will continue to decline for at least another five years
  • Expanding wealth in other geographic markets with a cultural interest in gold, including China and India, will be buying more gold jewelry and physical gold investments than ever before."

◄$$$ JAMES TURK PITCHS IN WITH FORECASTS FOR GOLD & SILVER IN YEAR 2010. HE EXPECTS A $2000/OZ GOLD PRICE THIS YEAR, A LOW OF $1080/OZ, AND EVENTUALLY A SILVER PRICE WORKING TOWARD $50/OZ. THE KEY IS EXTREME MONETARY INFLATION TO COVER USTREASURY DEBT, AND A POSSIBLE USDOLLAR MONETARY CRISIS. $$$

Bear in mind that Turk is one of the world's premier gold accounting experts. He operates the GoldMoney business with gold, silver, and platinum from the independent jurisdiction of the Jersey Isle. His analysis is not quite as superb as his accountancy analysis of the gold funds and metals exchanges. He forecasts the following. See the Free Gold Money Report (CLICK HERE).

1)      The US dollar is on the edge of hyperinflation. Reckless spending by the United States led to extreme increases in borrowing, which in aggregate is more than the market is willing to lend to it. (He explains the USGovt is far ahead in borrowing more than what global savings can or is willing to provide. It will print money with abandon and purchase USTreasurys, thus causing the USDollar to begin hyper-inflating. The USGovt essentially is refusing to pay its debts, preferring instead to cover them with a counterfeit process.)

2)      Gold will reach $2000 per ounce ($64.30 per goldgram) some time during 2010. Gold will not fall back below $1000. In fact, it is likely that a floor has been put under the market around $1050, the price at which India made its recent gold purchase from the IMF, though I do not expect gold to fall below $1080. Like 2009, the low point for gold will probably occur early in this year's first quarter. (He explains two forces propel gold higher, the first is monetization of USTreasury debt gone wild, the second a trend toward physical gold away from corrupted paper gold. The Greenlight fund decision to convert its large position in the big NYSE-listed gold ETFund GLD into physical metal was a seminal event, a wake-up call to avoid risky gold derivatives. An imbalance exists with too low a price for gold to eliminate the physical shortage. A short squeeze is coming in gold.)

3)      The gold/silver ratio will drop to 45, and perhaps make a new multi-year low around 40. If gold hits $2000 and the ratio reaches 45, then silver will be $44.44 per ounce. A ratio at 40 would put silver at $50 with gold at $2000. I mention this $50 target on purpose. Silver will eventually exceed its $50 per ounce all-time record achieved in January 1980. Will it happen in 2010? It is I think only a 20% probability, but that is high enough for me to mention it. We need to start thinking about silver hurdling above $50. Unimaginable to many, if it does not happen in 2010, I expect happen in 2011. (He explains that demand for physical metal is the driving force in the silver price. The probability of a short squeeze in silver sometime in 2010 is higher than it is for gold. His guess of a silver short squeeze is at least 33%.)

4)      The XAU Index in 2010 will break above its record high of 206.37. Also, the mining stocks will outperform gold, so that the XAU Index returns to more reasonable levels of valuation above 6 goldgrams. My upside target for the XAU Index for 2010 is 300, which would be about an 80% increase from its 168.25 price for year-end 2009. (He explains how cheap the mining stocks are compared to gold, the underlying product. He expects the XAU Index will outperform gold in 2010.)

GOLD DEVELOPMENTS SWIRL

◄$$$ FUTURES CONTRACT IN GOLD ARE BROKEN, AND FAILURES TO DELIVERY WILL BECOME COMMON. ANTICIPATE COUNTER-PARTIES TO GO BANKRUPT AND INVESTORS TO BE STUCK WITH WORTHLESS PAPER GOLD DERIVATIVES. PHYSICAL GOLD IS THE BEST PROTECTION. $$$

John Burbank of Passport Capital believes the gold futures contracts are broken, as he prepares to buy physical gold in volume. Passport is poised to make large scale purchases for investors in its $1.2 billion Global Strategy hedge fund. Like several other hedge fund managers, Burbank sees rampant monetary inflation from trillion$ pumped by the US Federal Reserve and other central banks in response to the global financial crisis. He said, "A year and a few months after the crisis, there is no recognition that we have to change. Instead, the United States is borrowing and spending again, like a rogue trader doubling down. We are liable for another collapse of some sort. Physical gold could go to very high levels [in such a scenario]." Passport is not a recent gold convert, and even profited from a big past bet against subprime mortgage securities. Burbank anticipates widespread dishonor and breaking of gold futures contracts, which he sees at great risk. This could happen to contracts between counterparties on either side of investments, or between heavily indebted sovereign nations with gross unfunded future liabilities standing opposite to individuals or investors in those countries. Physical gold could be a great investment if the financial system runs into trouble again, Burbank reckons. He advocates owning physical gold as an insurance policy against such financial catastrophe because no contracts are involved.

Burbank calls gold futures and Exchange Traded Funds merely paper contracts that would be easily broken in a crisis. He makes an astute observation. Burbank anticipates that physical gold prices could rise more than gold futures and ETFunds as more investors demand physical delivery when futures contracts expire. Indeed, the firm argued in a research note earlier this year that the price of gold futures has little connection to the actual metal since 99% of contracts are settled in cash. He argues against the ETFunds for another basic reason, cost. Passport favors physical gold because it is cheaper than investing in the metal through an ETF. Owning physical gold through a bullion bank costs 5 to 30 basis points a year, while gold backed ETFs charge roughly 40 basis points. Passport noted these many points in its research report. He overlooks the massive fraud in most leading ETFunds like Street Tracks gold (GLD) and Barclays silver (SLV). They sell bullion to the metals exchanges when not leasing it out.

Burbank said, "If someone cannot pay, an exchange closes or a counter-party goes bankrupt. You do not actually own gold in those situations. And that is when you want to own it most. There could effectively be a global run to physical gold as people simultaneously converge on gold markets and demand delivery. For investors to profit from a short squeeze in gold, they must be in a position to deliver physical metal. Having a paper substitute for gold may not necessarily provide the same results."

◄$$$ THE I.M.F. SOLD 10 TONNES OF GOLD TO SRI LANKA. THEY WILL SOON SELL GOLD TO THE PUBLIC WHEN LARGE TRANSACTIONS ARE FINISHED. $$$

The official IMF gold sale to Sri Lanka, formerly known as Ceylon, as part of a restructuring of IMF financial resources. The sale was conducted at prevailing market prices. It was the third sale of gold in a month by the institution as it seeks to bolster its finances amid the global economic crisis. Member nations are sick & tired of giving them money. In early November, the IMF sold 200 tonnes of gold to the Indian central bank for $6.7 billion. Later in November it sold two tonnes to Mauritius for $71.7 million. The IMF executive board approved the sale of 403.3 tonnes of gold, a process almost complete. The fund claims to hold nearly 3000 tonnes of gold, which if true would make it the third largest official holder of the precious metal after the US and Germany. What a fiction. The IMF in reality holds zero gold, as all its claimed holdings are pledges from member nations. The United States is in a class all by itself. The nation in distinction as the global fraud center holds zero gold, only deep storage gold (mine ore yet processes) on its balance sheet, a gigantic fraud. The IMF reports gold sales will go directly to central banks and other official holders for an initial period, with an eventual transition to sell the remaining amount on the open markets phased over time.. See the Yahoo Finance article (CLICK HERE).

◄$$$ SOVEREIGN GOLD RESERVE LEVELS HAVE BEEN UPDATED. THESE ARE LOWBALL FIGURES THAT EXCLUDE HOLDINGS OUTSIDE CENTRAL BANKS, LIKE IN CERTAIN SOVEREIGN WEALTH FUNDS. THE I.M.F. & U.S. LEVELS ARE PURE FICTION. $$$

The World Gold Council has released the latest sovereign gold reserve holdings data. In December, total gold holdings climbed by 132.7 tonnes to 30,117 tonnes. This is the equivalent of 965 million troy ounces, worth $1095 billion. Tyler Durden makes a great point, when after a bloody fistfight he said "In the grand scheme of things, it seems like a relatively insignificant insurance amount in case the great fractional reserve banking experiment comes to a premature end." The IMF was a seller, while India was a buyer. Russia added from domestic output. The council continues to promote the laughable fiction. It claims the top 5 holders of gold continue to be the United States, Germany, the IMF, Italy, and France. China did not adjust its gold holdings in the last three months of 2009, but surely gold in its possession was increased. Beijing does not offer much information about its big sovereign wealth fund details. Italy lost all theirs from the LongTerm Capital Mgmt fiasco in 1998. The USGovt holds exactly zero, well, perhaps a negative amount considering leased sales owed in bullion. Deep storage gold (unmined ore) cited by the USGovt does not count. See the Zero Hedge article (CLICK HERE).

◄$$$ THE RUSSIAN CENTRAL BANK IS RAMPING UP ITS GOLD HOLDINGS. PRIVATE SOURCES TELL OF PUTIN STORING MUCH MORE GOLD IN NON-GOVT LOCATIONS IN ADDITION, THAT AVOIDS PUBLIC ACCOUNTING. CHINA ALSO HAS HIDDEN GOLD HOLDINGS. AT A MERE 1.5% OF STATED RESERVES HELD IN GOLD, CHINA HAS MUCH CATCHING UP TO DO. MOST NATIONS COMMAND 15X AS MUCH GOLD AS CHINA IN RATIOS. DEMAND BY CHINA WILL SURELY BE CONSTANT, POWERFUL, AND SIGNIFICANT FOR YEARS. $$$

The Central Bank of the Russian Federation updated the data for their foreign reserves. It indicates that the total amount of gold held by the RussianCB is 20.5 million ounces for the year 2009, an increase of 800k ounces from the November snapshot. The increased amount of gold came from purchases by the Russian agency Gokhram. The December increase was the biggest single month increase in its public record. Speculation has been steady that the Kremlin is preparing to participate in a new gold-backed currency, along with the Persian Gulf nations. Talk has circulated also that a new Core Euro and even the Chinese Yuan could contain gold components, like gold cover clauses.

China has a pressing need to buy gold, to diversify out of the USDollar, in order to avoid grotesque systemic stumbles. It must contend with a steady stream of disruptive events, since it wedded its future to the American paperhangers. They trusted guidance by Goldman Sachs and Citigroup at critical junctures, and events backfired on the Middle Kingdom. Beijing leaders ten years ago entered into a rocky marriage with the US$ for reserves management and even banking system foundation, as it expanding its industrial base. In doing so, China hitched its future to a wagon that is hurtling over the cliff. China has a mere 1.5% in gold bullion as part of its now $2.4 trillion in total national reserves. The great majority of its reserves are US$ denominated, and thus at grave risk. Be sure to know its actual gold holdings are significantly more, but even at four times the stated level, a 6.0% gold ratio is miniscule. Most industrial nations command a 60% to 70% gold ratio in total reserves. That assumes they do not lie, but they do lie, even tell great lies as policy. Debate aside, if China were to strive toward 65% in gold ratio of reserves, it would need to accumulate 44,619 tonnes of gold bullion. Their deficit represents 27% of the total existing gold hoard held above ground. The path toward prudent reserves management will push the gold price skyward. See a survey article on the topic on Gold-Eagle entitled "China's Pressing Need to Buy Gold" by its website editor I.M.Vronsky (CLICK HERE).

◄$$$ ADAM HAMILTON DESCRIBES THE THREE STAGES OF GOLD. THE THIRD STAGE CANNOT HAVE BEGUN SINCE THE SECOND STAGE IS NOWHERE NEAR COMPLETE. ASIAN CENTRAL BANKS HAVE EXTREMELY SMALL GOLD RATIOS IN THEIR TOTAL RESERVES. THEY ARE DUE TO BUY MUCH MORE. $$$ See the article entitled "Gold Going Parabolic" by Adam Hamilton of Zeal Intelligence (CLICK HERE).

"Stage One stealthily emerges out of a secular bear low when everyone loathes gold. In response to a devaluation in the dominant currency, this metal starts quietly creeping higher. Stage One in today's bull began in April 2001 and ran for over 4 years. It was marked by modest yet consistent gains in gold. Stage Two can run for many years. It is the longest phase of a gold bull's lifespan by far. It persists for so long due to the way bull markets affect investor psychology. Early on in a bull, few investors believe it is real, so little capital chases it. But as a price powers higher, more and more investors start to believe which gradually yet relentlessly increases capital inflows. This drives prices even higher, forming a virtuous circle that attracts in even more investors. All this takes a long time. Some bulls end at Stage Two, but the truly great ones ultimately transition into Stage Three. Lasting less than a year, this is the terminal phase of a secular bull. After professional investors are already fully deployed in gold, the general public soon grows enamored with it and wants in at any price. The resulting massive influx of capital drives a popular speculative mania and its resulting parabolic blowoff...

The top 5 Asian CBs in terms of gold holdings now have an average of just 3.5% of their foreign exchange reserves in gold. Is this fully-invested? Certainly not. For comparison the top 5 Western CBs have an average of 64.8% of their forex reserves in gold bullion today! Given the Eastern CB undiversified heavy exposure to the ailing US dollar, which has been in a brutal secular bear since July 2001, it is impossible to imagine them not wanting to sell more dollars and buy more gold. Like American stock investors, Asia has barely even started investing in gold. How can Stage Two transition into Stage Three when the only investors with heavy gold exposure today remain a relatively small fraction of contrarians? It cannot. Stage Two will not reach maturity until large professional investors all over the world have great enough allocations in gold to consider themselves fully invested. I suspect it will be many years yet before professionals reach this milestone."

◄$$$ GOLD VIEWPOINT BY A VERY SHARP VETERAN. HIS LONG-TERM VIEW IS VERY OPTIMISTIC. HE ANTICIPATES A TREMENDOUS RISE IN GOLD, BUT MORE SO IN SILVER, WITH A RETURN TO A NORMAL AU/AG RATIO. HE EXPECTS A FLASH POINT TO OCCUR WITH CERTAIN MISJUDGED TRIGGERS, FOLLOWED BY A BREATH-TAKING SEQUENCE OF EVENTS TO UNFOLD IN PURE GLOBAL MONETARY CRISIS. $$$

My best gold & banker contact made the following brief observations. He provided lead notice to the Wall Street collapse in September 2008, one month in advance with details. That earned my deep respect and steady desire for contact. He said, "China is buying Au and Ag in off-market transaction in a grand concealed accumulation. China is in possession of 5 times as much gold as the gold councils report, maybe more. They will keep doing so for a long time to come. It will all unfold quite differently from what people might expect. A one ounce gold coin could have the purchasing power over US$10 thousand in today's USDollar paper purchasing power. The Au/Ag ratio will return 15:1 when that happens. Timing will be much faster than you can imagine. A single event will lead to an incredible firestorm, as its effects will be misunderstood and miscalculated. The Boyz will be caught flat-flooted after celebrating an unsinkable USDollar. Right now they have been forced to relinquish almost all London gold in inventory. We are soon to experience a flash point, a tipping event, which leads to the current system breaking down in accelerated fashion. The event referred to will not be taken seriously, but will cause incredible damage to the surprise of the Powerz as the New Paradigm unfolds in full glory." He did not mention Russia and its purchases. In past notes, he has mentioned that Russia probably has 3 to 5 times as much gold in reserves as cited publicly. The Russians and the Chinese do not hold all their gold reserves in government ministries, but rather hold significant portions in quasi-govt agencies that include the well known sovereign wealth funds. So their national gold reserves are much more than any official statement. The Russians and Chinese enjoy under-stating to the Westerners their gold position, all a strategic element of disinformation.

My expectation is for events to proceed in the breakdown at a snail's pace, as seen in the last several months, but in fits & starts that threaten a broader breakdown. The debt default in Dubai was once such event, whose containment is still to this day not assured. A calm returned, but a false calm. The fracture of the European Monetary Union is not being factored into mainstream scenarios and viewpoints. As the Euro currency slides further from the disunity momentum, the USDollar will find continued occasional lifts. In time the Gold price will rise versus all currencies. Next though, Gold in Euros might easily rise when the first EU nation suffers sovereign debt default, like Greece. That event might occur very soon, and provide another cold water splash on such optimism in the short-term for the Gold/US$ price. The USDollar will fall and Gold will rise only after the Germans discard the Southern toxic debt, and institute the New Core Euro. It will resemble the Deutsche Mark in my opinion, but most likely with key provisions for future stability. The new DMark must survive the next anticipated onslaughts, that prepare for new currencies in part backed by gold. The breakdown of Dubai exposed the deep vulnerability to the entire financial structure in Europe and London. Next the broken European Monetary Union that shares Euro currency usage will fracture, but only at the periphery where the Club Med nations lie. Europe will consolidate and its Union will survive. As the distressed PIGS nations are released on their own to float in Southern Europe along the Mediterranean Sea, free to devalue their restored old currencies, the gold price will resume a powerful rise. As the months pass, the dreadful financial state for the United States will return to focus. The Competing Currency War has a perverse side, a contest to declare the other more ugly when both are butt ugly.

◄$$$ WHEN THE CRISIS AMPLIFIES, RIPPLE EFFECTS WILL SPREAD THROUGHOUT THE ENTIRE FINANCIAL SYSTEM. SPECULATION IS RIPE IN ELITE GOLD CIRCLES AS TO WHAT THE MUSHROOM CLOUD WILL LIKE. $$$

When, not if, the financial crisis and ripples are thrust across the financial system, the Twilight Zone will be here. Pure speculation follows, but the Jackass imagination is not lacking in a description of growing disorder replete with contagious breakdown. Discontinuity will come to the gold price, with a move perhaps to 1480 followed by an overnight jump to 1720, never touching 1500 on a retreat, then a move to 1880 following by an overnight jump to 2120, that does touch 2000 on a correction. Ditto for silver. The London metals exchange and COMEX will shut down all gold & silver contract trades, will come up with a cockamamey reason why no delivery takes place, as price discovery and reporting go blank. Lawsuits, arrests, prosecution, data seizure, office shutdowns, fritzy price reports, irregular transaction settlements, they all come to London and then to New York City. Key mid-level figures will turn state evidence, thus assisting bigger investigations involving central banks and the collusive giant private banks. Magnificent schemes will be revealed, of which Madoff is a relatively smaller part.

The world will be left with five trading centers offering gold prices from volume sales, with average recent prices posted on the internet amidst much debate and mockery by the official corners of the discredited syndicate. Suppliers of gold (clearing houses) will be sued for breach of contract to the metals exchanges. Allocated account holders will vanish, even file their own fraud charges for illegal lease & sale. Lawsuits will spring up against the Street Tracks gold exchange traded fund (GLD) for sale of investor bullion to the LBMA, as confirmation comes on the practice. Discovery phase in court proceedings will reveal fraudulent management of the GLD gold bar list, fraud for vault fees without gold held, and more. Immediately, false stories circulate about a wide variety of topics, even phony reports about market health and normal trading activity. Confusion in certain markets abounds. The internet will experience gaps with lost patterns of regular reporting of news stories. Rumors will fly that something strange is going on, resignations are due, certain executives are either arrested or in hiding or committed suicide. Some sensational versions will be true.

Many mining firms will by then bypass all metals exchanges, and sell their refined gold bars directly to large investors and honestly run funds, in addition to Asian central banks. They will prefer the simplicity and avoided involvement from fraud allegations. Government debt auctions will go badly, for smaller but still important nations in Europe. The USTreasury Bond default will approach, especially after the likelihood of a UKGovt Gilt default appears inevitable and preparations are made for the shameful event. Credit derivative costs skyrocket through AIG and Fannie Mae, as well as other institutions like JPMorgan, Goldman Sachs, and Bank of America, while USGovt coverage of those costs hits the news wires and goes public, sparking tremendous controversy. Effect to the USDollar is directly felt. Linkage of several financial markets is mentioned by certain experts as having totally broken down, and instability enters all markets. Bank holidays are rumored on a daily basis, but none are ordered, and people wonder why not. New currencies are announced in succession, all gold-backed, such as the Gulf Dinar, the Core Euro (dubbed the New DMark), and the Russian Ruble, maybe even the Chinese Yuan. Only portions of the currencies will be reinforced by gold pledges. By this time, both the USTreasury Bond and the USDollar will be the object of powerful debate, criticism, and controversy. The topic of monetization will turn to world court challenges for its illegal nature, committed by the USGovt and Wall Street, which will still be in firm control of all things federal in finance ministry function. That is, until the USMilitary bloodless coup happens so as to restore order and to regain control of the money machines. Incredibly complex discussions ensue between US authorities and foreign creditors.

Certain key people go missing, or unavailable, as rumors fly of avoided prosecution and subpoenas. Legal prosecutions will be at times secretive, so as to protect the sovereign debt and currencies linked to the nations involved. Interpol will take on the role of world cop against bank fraud, making arrests and seizing documents on US soil. The other really seedy aspect that does come to the surface will be the skein of murders, suicides, and missing bankers, even some in exile with extradition demanded. Tracks will be covered, as middlemen will be eliminated who know too much. The syndicate in the United States will finally be on the run, as they escape in numbers with ill-gotten fortunes to several locations that will not be named or conjectured here. Neither will war events, complete with false flags be conjectured. Neither will virus outbreaks and accusations be conjectured. Not here!

◄$$$ GOLD INSPECTORS ARRIVE AT LONDON, BARBARIANS AT THE GATE. THE PRELIMINARY STAGE WAS SET BY DRAINAGE OF GOLD BULLION AT THE EXCHANGES. NEXT COME REVELATIONS OF CONTRACT FRAUD AND DELIVERY FAILURES. $$$

Some analysts have dished out criticism of an article written by the Jackass last May 2009 about hitmen coming to bust the COMEX. Eric deCarbonnel of Market Skeptics seemed to require the signed contracts with dates and ordered hits, even weapons used, methods detailed, in an incredibly foolish rebuttal. Ironically, Eric deC has provided corroborating evidence to fortify my arguments, with details on irregularities in well done articles to cover events from London. My comments were general in the article entitled "Hitmen Contracts to Bust Comex" (CLICK HERE). They were certainly not intended in literal fashion, like men with uzis and machine guns spraying exchange officials with bullets, laying waste to the corrupt halls leaving bloody trails. My comments were figurative. The process has begun, as hitmen have indeed arrived. The location is London, not New York, but no difference since a strong umbilical cord of fraud connects the two primary locations. The hitmen came in two types. The first were contract holders who drained the London Bullion Market Assn of its gold in late autumn, especially December. Many were wealthy Chinese billionaires, demanding return of their gold bullion. Others more recently are Swiss wealthy individuals, whose demands confirm suspicion of illegal and illicit practices, like leasing from gold accounts for sales. Now have come the inspectors, hired by individual billionaire account holders who are quite sure much of their gold has been improperly leased, no longer there. The inspectors are the HITMEN!! They actually began arriving in early December but have widened their scope of work.

Here is a quoted message from a man with direct dealings with the London LBMA. He has colleagues involved in the London gold trade. He responded to my article to confirm the hitmen on the scene, a newer contact. He wrote, "There will be the usual tap dancing, the yoyo waltz up and down, but it will be up and up with Gold or better down down with the US$. Gold is not going up one iota. Rather, the US$ is crashing. The purchasing power of Gold remains pretty much the same. You need to look at this from the proper perspective. Consider all the banksters who charge their clients for gold storage fees where there is no gold in the cages. They now are sweating blood and shitting bricks since they have third party inspectors at their gates and vaults." Yes, the hitmen have arrived. If anyone has the email for Eric deC, send them this passage above from my cross examination to his pithy rebuttal, with quizzical gratitude.

◄$$$ THE SAME OLD GAMES HIT SILVER. PAPER SILVER PUSHED DOWN THE SILVER PRICE, AS THE POWERZ STRUGGLE TO KEEP THE CORRUPT GAME GOING. FOR EVERY 13 OUNCES OF SILVER SOLD SHORT BY THE SYNDICATE, THEY ONLY HAVE 1 OUNCE IN POSSESSION. THAT IS CALLED NAKED SHORTING. $$$

On Wednesday January 20th, the price of silver fell by nearly 4.7% on a single day (89 cents). In less than 11 days the available stock of silver to cover paper shorts fell by nearly 15%. Silver shortage is all the rage, as a race to own silver is on. Yet the paper driven silver price fell hard. Silver inventory is on a sharp decline. The USGovt has announced shortages to fabricate silver eagle coins. Mine output is down, as working capital is in shortage also. The stocks of registered silver at the COMEX fell to 47.4 million oz while the eligible stocks (as in eligible to meet delivery demands) rose to 65 moz. As of the January 15th, over 128k silver futures contracts were in Open Interest. That amounted to contracts covering over 640 moz with just 47 moz available to meet delivery demands. That is correct, physical silver in inventory can only cover 7.3% of the open silver contracts on the COMEX. The other side of the equation is that almost 93% of the COMEX silver contracts can only be satisfied if the short side can locate silver outside the exchange, or the long contract holder is willing to settle in paper money, usually with a bribe (vig). The conclusion is simple: a staggering amount of Naked Short Selling occurs on a regular ongoing basis. This is criminal fraud by the exchange officials, not to require the big banks to hold collateral on their massive short sales. The Commodity Futures Trading Commission head is a Goldman Sachs stooge, who sees nothing wrong with the picture even after letters of protest have been nailed to his office door.

The only ways the Big Criminal Shorts can satisfiy the counter-parties can be listed. 1) Buy silver on the open market to settle the demand for delivery, or 2) force silver relinquishment as part of margin calls upon price declines, or 4) drum some silver from hidden stores, or 4) force a settlement in cash, which is the same thing as a default. Technical defaults are occurring on a routine basis these days, ever since early December, without proper attention or mention of the criminality in the contract fraud. My Hat Trick Letter forecast of staged sequences for default, both for gold & silver contracts and for the USTreasurys, is slowly coming to pass. Coercion is also used to deter demands for delivery. The COMEX desperately needs to acquire silver, either from total idiots willing to part with their metal at low prices, or from hidden stores like wealthy individuals or the Vatican. The most sinister method is the one most commonly used, margin calls after price declines, which remove bullion from leveraged contract holders. The public has not awakened to the silver shortage story, surely not the stodgy distracted Joe Sixpack, even if angry. However, it would appear that savvy traders have laid definitive claim on 7 million ounces in just 11 days. Before too many more weeks or months, the COMEX and LBMA will not contain any gold or silver, just paper and billy clubs. My firm belief is eventually orange jumpsuits from prison garb will be common. See the Seeking Alpha article (CLICK HERE).

CHAVEZ & DESTRUCTION OF VENEZUELA

◄$$$ STRONGMAN LEADER CHAVEZ DROPPED A BOMBSHELL FROM VENEZUELA WITH A 50% CURRENCY DEVALUATION. CONSEQUENCES SHOULD RIPPLE FOR MONTHS ON POLITICAL BACKLASH, FOREIGN FLIGHT, CORPORATE REACTION, MASSIVE SHORTAGES, CIVIL STRIFE, AND MORE. $$$

In the first currency action since March 2005, Venezuela under President (dictator?) Hugo Chavez devalued its currency. Chavez order a 50% discount on the bolivar currency in reaction to economic recession and falling oil revenue, with a second tier as well. The bolivar will be devalued to 4.3 per dollar from 2.15 per dollar. The move is certain to have a great impact on imports, made more costly. Venezuela relies on crude oil for 93% of export revenue. Exports will thus fetch double the foreign revenue in US$ terms. A confusing two-tier currency regime comes, since a subsidized peg of 2.60 bolivars per dollar will be imposed for importing food, medicine, and machinery. Talk about micro-management! intended to boost the economy's competitiveness. The Venezuelan Central Bank will provide significant government welfare, having agreed recently to transfer $7 billion in reserves to the government, to be used directly in currency market intervention to prop up the bolivar in the unregulated parallel market. A crisis in both socio-political and economic arenas is being averted, at least the plan. Popularity for Chavez is rock bottom, and domestic price inflation is the highest among 78 economies tracked by Bloomberg. Their small investment community had hunkered down into bonds before the announcement, pushing them to their highest value in two months, on speculation a devaluation was imminent.

The new dual exchange rate system is intended to take the pressure off the preferential exchange rate in a bid to protect $35 billion in international currency reserves, which has been the steady target of raids. Phony exchange rates lead to savvy investors to take all the idiotic government agencies donate to maintain the false official rate. Jose Guerra, a former central bank director, anticipates that the government has sufficient reserves to withstand the devaluation. More deficit spending will come, sure to cause more inflation. He said, "This gives them bolivars to keep spending, but inflation will continue to accelerate and another devaluation will be inevitable." Julio Borges has opposed Chavez after a decade of ruination of the private economy, from poor management, overbearing socialism, and cronyism to the hilt in their primary oil industry. He defiantly said, "Do not try to say that this devaluation is to stimulate national production after 11 years of kicking the private sector, Mr. President. This devaluation is to get more bolivars per dollar from oil exports." See the Bloomberg article (CLICK HERE).

Behind the stage is a grand battle between Chavez and the Black Market for currency trading. The govt currency rate is artificial, while the underground market is true, as always. The previous 2.15 rate of bolivar/dollar was by force, by dictum, imposed by clowns and crooks. The Black Market rate had been 6.25 bolivar/dollar for some time. So the Chavez action seeks to strike a compromise and remove underground influence by a 4.3 exchange rate. Virtually no one in private business will exchange at the rate of 4.3 bolivar per dollar. Banks do not honor any official exchange rate either, thus the need for a black market. Some argue that Chavez effectively announced a government takeover of all private enterprise, sure to result in massive shortages. Wrongly priced money does that. The government has already taken over the oil and telecommunications industry, the latter by fiat ruling two years ago. To make domestic matters worse, a pervasive drought has caused electrical power shortages from the country's largest hydroelectric dam. Chavez has responded with orders to reduce imports and to ration electricity. He also has ordered the partial shutdown of state steel and aluminum plants. Good luck with that. Price controls compound the problem by orders of magnitude typically, cause shortages and major dislocations, as well as disruptions to business investment. Chavez has vowed to fight the Black Market, but will instead trigger amplified problems common to economical meddlers. My guess is the Chavez henchmen have run a profitable arbitrage currency game, exploiting their own phony exchange rate for private profit. They might have changed the rate only after they were cut off, or else they see greater oil revenues that they plan to steal and skim from state coffers. See the Wall Street Journal articles (CLICK HERE and HERE).

◄$$$ CHAVEZ HAS 3-TIER PRICE CONTROLS, A FINE EXAMPLE OF GROTESQUE FAILURE. ANTICIPATED PRICE INFLATION HAS LED TO SUPPLY RUNS RIGHT AWAY. HIGH INFLATION WILL LIKELY DOUBLE. GREAT DISRUPTION TO THE SUPPLY CHAIN COMES. $$$

So Venezuela must deal with three exchange rates, the standard official rate, the urgent product rate, and the Black Market rate (probably the most fitting and accurate). Chavez is returning to lap up economic vomit. The three tiered rate system mirrors the failed implemented regime during a devaluation in 1983 that Venezuelans call Black Friday. Chavez has been critical of the Black Market, probably the only legitimate market in the nation. He said, "They put the value of the dollar at more than 6 in an arbitrary and illegal manner. We have to organize to reduce and attack of the speculative illegal dollar that hurts the Venezuelan economy so much." Chavez, in clueless ignorant fashion, claims the weaker currency will stimulate economic growth. But his stupid policy runs the risk of creating an inflation surge, leading to foreign flight, and inviting grander corruption. Ricardo Hausmann from the Harvard Center for Intl Development served as planning minister in the 1990 decade under Carlos Andres Perez, the president who dismantled the previous failed multi-tiered rate system. He said, "Latin America learned in the 1980s that policies like this do not work. It is too easy a game to steal money through a multi-tiered exchange rate. You make a bundle just on the exchange differential." Hausmann does not mention that a big Black Market differential invites the same corruption.

Criticism of such policy came from the Chavez staff over a year ago. On the 25th anniversary of Black Friday in 2008, his Information Ministry called the 1980s currency system 'famously corrupt' and said it was the cause of 'countless irregularities' in grand disturbances. The system helped spark $60 billion of capital outflows from the country, a process extremely likely to be repeated. The Venezuelan Govt sets retail prices on hundreds of products and determines maximum interest rates in basic blanched communism. An official spokesman actually said comparisons between the new currency policy and the 1980s system were unfounded. This is a return to lapping up vomit on the floor, calling it enriched soup.

Venezuela's 27% price inflation rate is already high. Strange indirect dissent came from the Finance Minister Ali Rodriguez. He has been forecasting 2010 inflation of between 20% and 22%, and now expects the devaluation to add as much as 5% to that price inflation rate. Try 10% to 15% more at least! The moron clown strongman Chavez threatened to seize any stores that raise prices, and has begun to do so quickly. We are in the middle of a classic trade-off. The devaluation will cut the budget deficit in half by giving the government more bolivars for each dollar of export tax revenue. The deficit will equal 3.2% of gross domestic product this year, rather than the 7.4% of GDP it would have equaled without a devaluation, according to RBS forecasts. That assumes no changes from new rate structures, a wrong assumption often made by hack economists. Look for the deficit to be trimmed much less, due to disruptions, shortages, riots, and strikes, none factored into such forecasts. The trade-off will be more bolivars in the federal till, more funds to spend recklessly and to steal, but at the cost of a big jump in price inflation. Venezuela imported $11 billion in food last year, equal to about 25% of all imports. Food prices will double, causing certain riots, possibly enough to topple Chavez from power. Popular revolts often center upon food prices and supply shortages.

Failure is the signature of Chavez and his entire economic management. In the years 2004 and 2005, the national oil industry under his control suffered 20% to 25% reduced output from both crude oil and refined products. Corruption was rampant, as were cronies placed in key management posts without engineering experience. The Venezuelan current account surplus, the trade gap combined with investment gap, fell to $12.4 billion in 2009 from $37.4 billion in 2008, a testament to his failed policies and shifts in the oil price. While the devaluation will immediately ease their federal financing needs, stagflation will worsen, claims Boris Segura, a senior economist at RBS Securities. He raised his price inflation forecast for this year to 40% from 28% previously. He predicts the economy will suffer 6% recession in 1Q2010 after contracting an estimated 2.9% decline last year. He expects a repeat of failed policies. He concluded, "We have tried this in the past and it failed everywhere. [The risk] is corruption and bureaucracy. You are going to have exporters under-invoicing exports, importers over-invoicing imports. I am thinking about Latin America in the 1980s and it was a mess." See the Bloomberg article (CLICK HERE).

◄$$$ CHAVEZ PLANS TO SEIZE COMPANIES THAT RAISE PRICES. SEIZURE OF A LARGE DEPARTMENT STORE HAS OCCURRED, OWNED BY COLOMBIAN AND FRENCH INVESTORS. FOREIGN REACTION WILL BE CAPITAL FLIGHT, EXACERBATING SHORTAGES. $$$

Venezuelan President Hugo Chavez is a clown in residence at the palace. He claimed that businesses have no reason to raise prices following the devaluation of the bolivar, and the government will seize any entity that boosts its prices. Chavez will enforce the policy with an anti-speculation committee set up to monitor prices. The private businesses warned that prices would double in reaction to the currency dictums. They must, in direct reaction to import cost increases. The rush by consumers to buy household appliances and televisions was just the start in what will eliminate inventory on shelves rapidly. The first action of seizure has taken place. Chavez ordered the expropriation of stores from Almacenes Exito SA after it allegedly raised prices and hoarded inventory. It is the largest publicly traded retailer in Colombia. Friction already exists with its neighbor nation bordering to the west. Chavez even boldly stated that Venezuela will change its laws if necessary to take over stores belonging to the Colombia-based company. The fool said, "I order that we develop a dossier and prepare a new law to take over the Exito chain. Repricing and hoarding, what is this?" Repercussion will spread to Europe. The seized Almacenes Exito is owned 46% by French retail conglomerate Rallye SA, according to Bloomberg records. The plan is for stores currently occupied by Exito will become socialist markets selling goods at controlled prices. Look for suppliers to exit the Venezuelan economy. The track record is clear. Chavez has previously nationalized oil field service companies, the cement and steel industries, farms, and communications. The nation is a wreck. See the Bloomberg article (CLICK HERE). Watch a tipping point in South American next, as nations either follow the stupidity and destruction by Chavez, or else institute free market reforms with more business formation. Some nations might exploit the capital fleeing Venezuela, attracting it directly and openly.

Thanks to the following for charts StockCharts,  Financial Times,  Wall Street Journal,  Northern Trust,  Business Week,  CIBC Bank,  Merrill Lynch,  Shadow Govt Statistics.