Silver Leads Gold as Dollar Teeters

May 7, 2009

In a bizarre exercise intended to defend legitimacy, the bankers are engaged in a complex game of propaganda. They pressured the USCongress to relieve Wall Street from the chains of FASB Rule #157, and the senators & representatives obeyed their paying masters. The result has been a baseless stock rally led by insolvent banks that have lied desperately about their capital and earnings. The announced audited Citigroup profit of $1.6 billion in the first quarter was actually a deep $2.5 billion loss, provided the $4.1 billion in gimmickry was removed. The gimmicks pertained to toxic assets valued at fictitious model, shell games on loss reserves management, and illicit debt markdowns on the balance sheet. Thanks to Martin Weiss for the autopsy of Citigroup, the biggest zombie strutting in the global financial sector. Actually, that ignominy is a close race with Bank of America. The end result is the global financial markets are losing faith in the US$-based system, since the US is regressing in backward steps rather than working toward remedy. In my view, attempts at remedy would reveal a failed system that cannot be revived, broken irreparably since last autumn. The contradiction between the exposed US bankers and the Intl Monetary Fund projections of additional bank losses is another big billboard message, again ignored. Maybe somebody should reveal to US bankers and their investors what is happening in the mortgage market, with losses to come on a broad basis. Future bank losses will continue in a torrent!!!

The President has uttered a total absurdity, that the USGovt will pay as you go, despite the fact that the PayGo has been violated if not trampled in the last few years, and foreign creditors have stepped back from USTreasury Bond sales. It should be called PrintGo, since the monetization card has already been put on the table. A very dangerous precedent has been initiated. Obama has led the charge against senior bondholders of corporate debt. Their right to be first in line during any bankruptcy process has been discarded carelessly, a legal contract violation, with certain unintended consequences in the corporate bond market issuance arena. See the General Motors and Chrysler dictated conversion to stock, which favors the Wall Street firms in possession of vast amounts of unsecured debt. That puts the screws to hedge funds that hold vast amounts of secured debt (deserving senior positions). This war against hedge funds is more a defense of a syndicate in charge, and a gross betrayal of securities rules. Once again, the financial bosses in the USDept Treasury write the policies that favor themselves. Foreigners are watching; confidence in the US$-based credit markets will suffer blows. The impact on the USDollar and gold, if not the USTreasurys, will be vivid.

The bank sector Stress Tests clearly are a sham designed to restore confidence after accounting rules were eliminated. USFed Chairman Bernanke continues to make inept comments about the problems centering upon bank liquidity, when solvency remains their plague issue, and will continue to be the main flaw. He claims the Stress Tests were extraordinarily detailed, yet they relied on ridiculously soft economic stress factors from months ago. My stance is clear, that the Stress Tests will eventually be used as weapons to force stronger regional banks to merge with dead ones lodged on Wall Street, with the FDIC holding the legal hammer. The cancer of Lower Manhattan most assuredly will force its metastasis across the nation and into its banks.

Financial market anchors and analysts debate whether the 30% stock rally qualifies as the new bull market, as nutty green shoots are identified. The supposed green shoots are nothing more than elaborate moss on exposed decaying roots of dead standing trees. These are sprawling sequoias with hollow trunks and decayed roots. Those sell-side optimists ignore that a 30% stock market rise after a 50% decline since October 2007 is a typical bear market correction. The green shoots cannot possibly be new attempts at legitimate growth when jobs are being destroyed on a massive scale, home foreclosures continue to rage, home values continue to decline closer to 20% than 10%, corporations are guiding lower on profits and investments, and the states are cratering financially. Besides, the S&P500 Price Earnings Ratios are at historic highs, not lows. Worse, the earnings are mostly fictions. Votes are being registered in the gold & silver markets, and in the USDollar and USTreasury Bond markets.


Silver has made an initial move over the 14 level, to challenge the March highs. The gold price has rebounded, but not enough to cause as much enthusiasm. The reliable respected Adrian Douglas has spread the word that both Goldman Sachs and JPMorgan Chase have been building option call positions on both gold & silver futures contracts.Normally, options are the contrary indicator of naïve money piling on, after a segment of the game has concluded. Not so with option futures, which is the province of insider trading. Both GSax and JPMorgan have been accused for years of suspicious trading history, the sure benefit of carrying out USGovt policy. The other inside story comes from overseas. The Germans have demanded the return of all their gold bullion held by US bankers in custodial accounts. The Arabs are accumulating gold, platinum, and silver. The Chinese admitted their gold accumulation. The Russians have not permitted any gold mining output to enter the markets in three years. Precious metals are being looked upon very favorably as the US$-based financial structures continue to dissolve.

The silver price is moving up the most rapidly, in lead fashion. The reasons are many, but they include the fact that the shortage in silver is far more acute. Both industrial demand results in depletion, and investment demand is growing quickly. The six billion ounce stockpile in silver once established by the USGovt has been long gone for at least five years. The next stop for silver is 15, which should occur easily, and then 18 in another easy leg up. The cyclicals are both nicely aligned in a positive direction. Enrico Orlandini demonstrates that the Point & Figure chart method indicates a $26 price target for silver, although the method has a timeless element in its elegance. Those investors who averaged their unleveraged silver positions since last autumn will be greatly rewarded. Silver has always sauntered in the shadow of gold, but it will sachet soon with a smirk and a wag.

One can pore over a gold chart, compare it to a silver chart, resolve some confusion, and unassuredly attempt to make some conclusions. The easier analytic step is simply to observe the gold versus silver ratio chart. One strange price factor is the lease rate. The one-month silver lease rate is under 0.5%, but the one-month lease rate for gold is stable and negative. So the custodians of gold held in US bullion banks are paying insiders to borrow it, which can then be easily dumped on the market. They simply do NOT have the silver to give away. The ratio of gold to silver has finally favored silver again after three months of consolidating.Notice the 200-day moving average that supported the ratio. Some give little credence to technical chart support and resistance theories. They matter less during times of serious dislocations, to be sure, but they are evident even in the most obscure of ratios like this. Hedge funds and Wall Street firms both employ complex trading strategies. Their monitor and usage of the gold/silver ratio is definitely a tool. Notice the absence of support in this ratio, down to the 52-53 level again. The snap conclusion is that silver is bound to recover quickly toward the 18-20 level, while gold makes its smaller move back to the 1000 level.


The threat of a triple top breakdown has highlighted last week. Clearly the 84 defensive line has failed. Next the 83 support line will be challenged. It is buttressed by the 200-day moving average. Some analysts claim that the DX index can once more mount a rally, just like off the December low, just like off the March low. Yet the more powerful argument is that the triple top exhibits a profoundly clear ROUNDED TOP pattern that could be jammed into a bearish Head & Shoulder pattern. A breakdown in the neckline of such an H&S pattern would indicate a move to 80 or below is assured. Gold will ride that burst of wind with ease over the 1000 mark. Silver will double the gain that gold enjoys.

A better look at the USDollar breakdown in progress can be seen in the five-day chart. The defense of the 83.7 support level is the primary location of the battleground. It is trading at 83.75 at the moment of this written sentence. The battle is on. The USDollar is delivering a strong vote against the faulty green shoots claims by the desperately motivated. The USDollar is voting NO confidence to the sham bank sector claims of viability, when they are cupboards with false contents. The USDollar is saying hard times are coming to the USEconomy, led by the manufacturing (cars in particular). Industry is ALWAYS the most important part of any economy, its fundamental value added sector, a chapter lost in the US economic history teachings in compromised universities across America.


Last week, the USTreasury Note (UST) principal value was charted. It was noted that the 3.0% level of resistance was giving way. It broke, and it did so suddenly to the upside. The TNX measures the 10-year USTreasury yield. It zoomed to 3.25% and has stabilized in the last few days. The USTreasurys can act as a gigantic feeder system into gold. Obviously, the bond loss and often the gain for stocks, but the gold market is much smaller in magnitude. Many reasons can be offered for why long-term rates are rising. Leave the litany of reasons for the May Hat Trick Letter out next week. The overriding message is that the entire gain from the mid-March announcement of USFed monetization of $300 billion in USTreasury Bonds and $750 billion in USAgency Mortgage Bonds has been lost. The rally seen in mid-March immediately afterwards was based on the notion that the USFed and USGovt together would provide a powerful bid on the USTreasurys. That is now gone, as something bigger can be sniffed in the ill winds.

The triangle pattern has been broken. The indicated target for long-term USTNote yield is 3.5% at least. However, the larger triangle has even more potential lift in long-term yields. The larger triangle indicates a powerful damaging move in long-term yields up to the 4.0% level, where they were last autumn. That is a strong feeder channel for gold & silver. The process is global, as the European Central Bank just today announced a 25 basis point cut down to 1.0% in the official interest rate. Cheap money, negative real rates, are a primary impetus for gold, as currencies are almost uniformly damaged, debauched, and this time probably destroyed.


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Jim Willie CB, financial & economic analyst has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth. His website is at

Peru became the world’s largest producer of silver in 2012.