Core & Headline Inflation Up...Gold & Silver Down...

Jim

All this means more instability. I think it's better to hold a hard asset like gold that will always retain value, Rather than trying to figure out which way the inflation-deflation debate will go. If they're playing with paper money while not producing value, BAD things are going to happen. I'd rather have a tangible asset in my hand in that case.

Interesting that, when gold peaked last March, Gary North felt like it had reached its peak - he actually wrote an article a day or two after its $1000+ peak - and it's gone down ever since. Other than going to war, he doesn't think we'll see $1000+oz again for at least a couple of years.

See this for the full commentary: http://www.lewrockwell.com/north/north646.html

This might be at least part of the explanation.

The liquidation of a big hedge fund or investment-bank trading portfolio is wreaking havoc in some parts of the hedge-fund business, managers and investors said Thursday. Black Mesa Capital, a hedge-fund firm that uses computer models to track down investment ideas, said that at least one large hedge fund or investment bank is liquidating "massive" trading portfolios, according to a letter the Santa Fe, N.M.-based firm sent to investors Wednesday.

The warning is causing disruptions and triggering big losses among other so-called market-neutral hedge funds, Black Mesa said in its letter, a copy of which was obtained Thursday by MarketWatch.

"Clearly, something is amiss in the markets that few in our strategy, if anyone, have experienced before," Black Mesa's managers, Dave DeMers and Jonathan Spring, wrote. DeMers declined to comment Thursday.

Wondering what caused the mysterious melt-up in stocks and meltdown in commodities? This article could provide the explanation. If the large hedge fund in question that is supposedly liquidating “massive positions”, and they happened to be long-commodities and short-stocks, then this could explain what we’ve seen lately.

It is also possible that this could have been triggered by the sudden counter-trend movement (rise) in the dollar. At any rate, hedge funds have several trillion dollars in direct deposits to work with but they are leveraged anywhere between 10 times and 40 times (or more) depending on the outfit. So they are controlling a pool of investments/assets that are at least as large as the entire US yearly economic output and possible the entire world.

It wouldn’t take much to create some serious ripples in the water if one (or more) of them ‘blew-up’. At any rate, this is a pretty good article and worth a read.

http://www.marketwatch.com/news/story/portfolio-liquidation-triggers-turmoil-among/story.aspx?guid={9562090F-2CC0-4EE2-ACBF-2688F60061DA}

It seems like our monetary system has at least 2 potential problems: 1. the currency has no asset(s) backing it; 2. the currency requires interest payments after it is loaned into existence. Although I think both problems are probably fatal to a monetary system, problem #2 may be a particularly nasty flaw in the system, because the interest cannot be repaid since the interest is never created (not to mention the potentially "wasted" productivity that goes into servicing the interest payments).

Based on my statements above, I have a couple questions:
1. Would a fiat monetary system that did not require interest payments be less bad than one in which interest payments were required?
2. Could an asset backed monetary system fail if the currency required interest payments?

Thanks for any info. If any of my statements are incorrect, please let me know (thanks).

RH

“I’m in show business, why come to me?”
“War is show business, that’s why we’re here.”
– “Wag the Dog” (1997 film)

Last week, Fannie Mae and Freddie Mac had just announced record losses, and so had most reporting corporations. Unemployment was mounting, the foreclosure crisis was deepening, state budgets were in shambles, and massive bailouts were everywhere. Investors had every reason to expect the dollar and the stock market to plummet, and gold and oil to shoot up. Strangely, the Dow Jones Industrial Average gained 300 points, the dollar strengthened, and gold and oil were crushed. What happened?

It hardly took psychic powers to see that the Plunge Protection Team had come to the rescue. Formally known as the President’s Working Group on Financial Markets, the PPT was once concealed and its very existence denied as if it were a matter of strict national security. But the PPT has now come out of the closet. What was once a legally questionable “manipulator” of markets has become a sanctioned stabilizer and protector of markets. The new tone was set in January 2008, when global markets took their worst tumble since September 11, 2001. Senator Hillary Clinton said in a statement reported by the State News Service:

“I think it’s imperative that the following step be taken. The President should have already and should do so very quickly, convene the President’s Working Group on Financial Markets. That’s something that he can ask the Secretary of the Treasury to do. . . . This has to be coordinated across markets with the regulators here and obviously with regulators and central banks around the world.”1

The mystery over what was going on with the dollar the first week in August was solved by James Turk, founder of GoldMoney, who wrote on August 7:

“[T]he banking problems in the United States continue to mount, while the federal government’s deficit continues to soar out of control. . . . So what happened to cause the dollar to rally over the past three weeks? In a word, intervention. Central banks have propped up the dollar, and here’s the proof.

“When central banks intervene in the currency markets, they exchange their currency for dollars. Central banks then use the dollars they acquire to buy US government debt instruments so that they can earn interest on their money. The debt instruments central banks acquire are held in custody for them at the Federal Reserve, which reports this amount weekly.

“On July 16, 2008 . . . , the Federal Reserve reported holding $2,349 billion of US government paper in custody for central banks. In its report released today, this amount had grown over the past three weeks to $2,401 billion, a 38.4% annual rate of growth. . . . So central banks were accumulating dollars over the past three weeks at a rate far above what one would expect as a result of the US trade deficit. The logical conclusion is that they were intervening in currency markets. They were buying dollars for the purpose of propping it up, to keep the dollar from falling off the edge of the cliff and doing so ignited a short covering rally, which is not too difficult to do given the leverage employed in the markets these days by hedge funds and others.”2

Just as central banks manipulate currencies in concert, so gold can be manipulated by massive selling of central bank reserves. Oil and any other market can be manipulated as well. But markets can be manipulated by only so much and for only so long without fixing the underlying problem. There is more bad news coming down the pike, news of such magnitude that no amount of ordinary manipulation is liable to conceal it.

For one thing, roughly $400 billion in ARMs (adjustable rate mortgages) have or will reset between March and October of this year. Assuming 3 to 6 months for strapped debtors to actually hit the wall with their payments, a huge wave of defaults is about to strike, continuing through March 2009 – just in time for the next huge wave of resets, in option ARMs.3 Option ARMs are loans with the option to pay even less than just the interest on the loan monthly, increasing the loan balance until the loan reaches a certain amount (typically 110% to 125% of the original loan balance), when it resets. The $800 billion credit line recently opened to Fannie Mae and Freddie Mac may be not only tapped but tapped out, at taxpayer expense. The underlying problem is little discussed but impossible to repair – a one quadrillion dollar derivatives scheme that is now imploding. Banks everywhere are facing massive writeoffs, putting the whole banking system on the brink of collapse. Only public bailouts will save it, but they could bankrupt the nation.

What to do? War and threats of war have been used historically to distract the population and deflect public scrutiny from economic calamity. As the scheme was summed up in the trailer to the 1997 movie “Wag the Dog” --

“There’s a crisis in the White House, and to save the election, they’d have to fake a war.”

Perhaps that explains the sudden breakout of war in the Eurasian country of Georgia on August 8, just 3 months before the November elections. August 8 was the day the Olympic Games began in Beijing, a distraction that may have been timed to keep China from intervening on Russia’s behalf. The mainstream media version of events is that Russia, the bully on the block, invaded its tiny neighbor Georgia; but not all commentators agree. Mikhail Gorbachev, writing in The Washington Post on August 12, observed:

“What happened on the night of Aug. 7 is beyond comprehension. The Georgian military attacked the South Ossetian capital of Tskhinvali with multiple rocket launchers designed to devastate large areas. Russia had to respond. To accuse it of aggression against ‘small, defenseless Georgia’ is not just hypocritical but shows a lack of humanity. . . . The Georgian leadership could do this only with the perceived support and encouragement of a much more powerful force.”4

Bruce Gagnon, coordinator of the Global Network against Weapons and Nuclear Power, commented in OpEdNews on August 11:

“The U.S. has long been involved in supporting ‘freedom movements’ throughout this region that have been attempting to replace Russian influence with U.S. corporate control. The CIA, National Endowment for Democracy . . . , and Freedom House (includes Zbigniew Brzezinski, former CIA director James Woolsey, and Obama foreign policy adviser Anthony Lake) have been key funders and supporters of placing politicians in power throughout Central Asia that would play ball with ‘our side’. . . . None of this is about the good guys versus the bad guys. It is power bloc politics . . . . Big money is at stake . . . . [B]oth parties (Republican and Democrat) share a bi-partisan history and agenda of advancing corporate interests in this part of the world. Obama’s advisers, just like McCain’s (one of his top advisers was recently a lobbyist for the current government in Georgia) are thick in this stew.”5

Brzezinski, who is now Obama’s adviser, was Jimmy Carter’s foreign policy adviser in the 1970s. He also served in the 1970s as director of the Trilateral Commission, which he co-founded with David Rockefeller Sr., considered by some to be the “master spider” of the Wall Street banking network.6 Brzezinski, who wrote a book called The Grand Chessboard, later boasted of drawing Russia into war with Afghanistan in 1979, “giving to the Soviet Union its Vietnam War.”7 Is the Georgia affair an attempted repeat of that coup? Mike Whitney, a popular Internet commentator, observed on August 11:

“Washington’s bloody fingerprints are all over the invasion of South Ossetia. Georgia President Mikhail Saakashvili would never dream of launching a massive military attack unless he got explicit orders from his bosses at 1600 Pennsylvania Ave. After all, Saakashvili owes his entire political career to American power-brokers and US intelligence agencies. If he disobeyed them, he’d be gone in a fortnight. Besides an operation like this takes months of planning and logistical support; especially if it’s perfectly timed to coincide with the beginning of the Olympic games. (another petty neocon touch) That means Pentagon planners must have been working hand in hand with Georgian generals for months in advance. Nothing was left to chance.”8

Part of that careful planning may have been the unprecedented propping up of the dollar and bombing of gold and oil the week before the curtain opened on the scene. Gold and oil had to be pushed down hard to give them room to rise before anyone shouted “hyperinflation!” As we watch the curtain rise on war in Eurasia, it is well to remember that things are not always as they seem. Markets are manipulated and wars are staged by Grand Chessmen behind the scenes.

Translation:Screw whatever deflation explanation you may have....

I have to chuckle at the on going argument over deflation vs inflation. The fact is there are both. Yes the real state market is deflating has been since the bubble burst however prices are climbing in food groceries gas etc.

things are at a lull at the moment as banks write down and lower the money supply, however just a soon as they think they can get away with it and they think they have lulled the consumer in thinking all is well and the bump in the road is behind us we will see massive inflation again in real state and other areas.

Think about It what happens with a glut of property on the marketl? Same thing as currency it is devalued.

In the meantime prices will not have gone down for everyday stuff. Of course there are always exceptions but it is laughable to say that gold will not go up because it's going down now. Gold will never be 300 an ounce again I doubt it will see 600 again. But I would love it it if did and silver went to 5 because then I could buy more for less paper ;-). Sure panic buying over prices commodities and they drop some eventually but it is just a dip in the upward trend.

This is why Ron Paul calls where we’re heading an inflationary depression, the money is still created from nothing and they have inflated it to the max and then they deflate a bit and then re-inflate. The real state market has been doing that since the 80’s they will play around in the upper ten percent of the balloon deflating and inflating until finally it looses it elasticity and burst like it just did.

Some traders don’t live in the real world when it come to this, there is an underlying market that exists and has always existed even if the big exchanges go away and that is everyday consumers buying/trading for what they need from where ever they can get it. If all the trading markets went away tomorrow this market will still exist and this is real world and this is where people are experiencing the results of inflation via high prices. Inflation creating high prices then dropping a few cents is not deflation it is still inflation since prices are much higher then they where originally.

Wait till we start seeing the real shortages hit then you will see some drastic inflation. The silver and gold gurus know this and it is why they are predicting gold and silver spiking through the roof. It will happen it’s just a matter of time. The currency is still devaluing despite all the parlor tricks and hand slights don’t be fooled and prepare accordingly especially during these times of false optimism that things have turned around. Don’t get upset about it make the best of it try to enjoy life as much as possible but be prepared.

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Hedge fund momentum-blackboxes, and not brains, rule markets today.

****

It's important to remember that historically, gold jewelry represents over 60% of the total global demand and industry and dental account for another 20%. Yes, that leaves only around 20% for investment demand.

At the end of the second quarter, gold jewelry sales were down over 20% globally and the industrial demand was down around 8%. The small gold investment sector is relatively flat, with ETFs doubling in the first quarter, but alas, the ETFs may actually hurt gold as they take a big bite out of direct gold investments. So, over-all, demand is down significantly.

On the supply side, I'm sure you're familiar with the collapse of the juniors (exploration companies that explore for new deposits, or they may be a small mining companies with only one or two mines in operation), but this sector is responding to demand.

Another key is with the often over-looked scrap gold market. In the past, this huge market accounted for between 20-25% of supply. YTD, the gold scrap market is up a whopping 30%. This is huge.

What we are seeing is the gold market correcting to reduced jewelery demand and the growing scrap supply.

I'm not sure how far the correction will drop the price but I would not be too anxious to increase your gold holdings. After the correction, I think we will once again enjoy a sustained and growing demand for gold. It may be that investment gold will have to grow exponentially to fill the gold jewelry gap.

of foreclosures are certainly well known and understood. In the normal course of things, this would in practice drive inflation into the dirt. The problem is that we are no longer living in "normalcy". Instead of the fed/government allowing the corrections, they are instead manipulating the market with massive bailouts, a state of affairs which only promises to increase.

Money was created for the building of these assets. The assets still exist with value attached as does much of the money created, albeit somewhat lesser in scope. Add to this that the shortfalls are being "guaranteed" by the bail-outs and you have a situation that negates the deflationary affect to a great degree. Now add the ever increasing deficit spending in a falling economy and you have the makings for further monetary inflation/dollar devaluation.

Much of what has occurred over the last year or two has yet to fully impact or "bake" into full economy as the rise in prices has not begun to slow, wages have yet to catch up and inflation has yet to respond...and certainly not due to a few-week dip in oil. It is the forward-looking nature of the metals that I question as certain long-held assumptions associated with the business cycle are being altered by monetary policy.

**“The man who does not read good books has no advantage over the man who cannot read them.” ~ Mark Twain **

I think it's pretty obvious at this point. They are working hard to keep this bird flying at least until the Conventions are over... a crash could catipult their worst nightmare into contention... Ron Paul!

Mike
"Fire Team for Freedom" and "Revolutionary Business"
visit www.mikeandjake.com

Participate at your own great financial risk. Markets are like nature. Attempts at manipulation result in unexpected consequences, virtually all of which are negative.

Inflation reports reflect the past - what has already happened.

The gold & silver markets are discounting the future - what is going to happen. It appears that right now, these markets are looking forward and seeing deflation.

Forclosures are deflationary.

Read more into it when a bank talks of "write downs". It's very telling.

In basic terms, when a bank says it has written down assets...what it really has done is virtually destroyed currency. They're saying this 2 billion dollars that used to exist no longer does.

Monetary inflation/deflation occurs when there's a change in the amount of dollars or the amount of goods they're chasing.

You have fewer dollars in the economy due to these write downs, with the same amount of goods. Fewer dollars=more value in existing dollars.

What the banks have done in 2008 is basically have a huge bonfire and throw about 500 billion dollars into the pile.

Commodities have been overvalued because of fear of inflation (this isn't hindsight, I said this at $1000/oz). The dollar rises due to this deflationary pressure in housing and the premium put on commodities brought on by fear is gone, so they drop in value.

This occured in the mid 1980's when inflation cooled the commodities tanked.

the CPI is a reflection of the past. Investors, speculators, buy with the expectation of FUTURE inflation. After all, if you buy because you have seen past inflation (such as the CPI reading that is what has already happened) you are not protecting against inflation unless FURTHER inflation is seen.

The metals have been PREDICTING DEFLATION for several months now, just as they began predicting INFLATION in 2002. How accurate were the metals at predicting Inflation?

Since then we have seen evidence of deflation.

All I can say is that it probably was already priced in.

Having said that, if you made the play on Monday, you would have gotten some rewards. I posted about this on Monday and confirmed it late Monday, early Tuesday.

The time to have made these plays was Monday and Tuesday, making sure you sold as it peeked.

Remember this is a bear market, you must trade to make money. If you invest, you will lose money.

The same goes for oil, however I am somewhat surprised by the pull back in oil today. This is the play today. Oil will go up over the next 5 trading days.

WAHOR!!
http://www.dailypaul.com/node/48994