What an incredible few weeks with global uprisings! It is not all too surprising that social eruptions over food prices come from the Arab world, since they spend up to 75% to 80% of income on food for basic needs. What proof that the global economy is not a closed system! The QE and QE2 initiatives have spread like a powerful virus, leading to global commodity prices heading upward and quickly. Even cotton is up 170% in price. The USFed has suffered even more credibility blows, calling the global food price inflation unrelated to its QE2 policy. It is obviously connected. What we have is the Western Big Banks protected from fraud prosecution, redeemed for their broken toxic balance sheets at government expense, leading to a global price tag in the form of foodstuffs and commodities.
Worse, the USGovt and USFed continue to be run by fraud kings, who continue to maintain a tight strangehold on the purse of the state and the Printing Pre$$ itself that produce deficit spending and fresh phony money. Ironically, the punishment for the US banking system is chronic unending insolvency. Despite the largesse to prop them up, fund their channels, redeem their toxic debt, enrich their executive packages, they remain the same Zombie banks from late 2008. Tragically, the USGovt will continue to fund their black holes instead of restructuring like Iceland, which is back on its feet. The battle cry of Too Big To Fail for the Big US Banks is a call to sustain the corruption and to ensure no recovery ever!!
In the meantime, fast rising gasoline prices and higher crude oil price, along with a host of industrial metals like copper, have lifted the entire cost structure of the USEconomy, and the global economy since all are priced in US$ terms. The banking officials act like keeping US wages down it a noble objective with a national purpose. It is indeed a noble purpose, as the nobility remain with money, but the masses will not be capable of effectively dealing with the cost squeeze. Businesses not well placed within the Fascist Business Model will also fare poorly. The list of US companies is long that have complained of an important cost squeeze. Expect many businesses to suffer a vanished profit margin in the next few months. The process has already begun, in fact well along. Across the oceans, the untold story on the geopolitical front is not the billboard message given by the obedient US press. The Arab world does not simply demonstrate on the city streets as a result of higher cost for hummus, bread, and cooking oil. The Arab people sense the demise of the Anglo Empire. They sense the end of the US & UK support for their tyrants and royals, who have enriched themselves and their families. The Arab people sense a weakening of their leaders and their system of government, often harsh and repressive. The food prices only serve as a lightning rod to gather the people together. What is happening is the defacto Petro-Dollar Standard is crumbing ever so slowly. Many eyes are fixed on Saudi Arabia, where the royals are increasingly fearful. All hell breaks loose if the Saudis lose their grip of the Petro-Dollar device, by which the OPEC crude oil is sold in USDollar terms. THE PETRO-DOLLAR IS THE LACE ON THE CORSET THAT SUPPORTS THE ANGLO-AMERICAN FRONTISPIECE. Remove the Petro-Dollar practice in global crude oil sales, and the United States becomes isolated, its currency rejected, since it cannot stand on its own. Observe the US trade gap and escalating federal deficit.
Put aside the fundamentals of Silver. It continues to see huge industrial demand, no replacement opportunities, and totally depleted stockpiles. It continues to see skyrocketing investment demand growth, massive shortages for national coin mints, and reports of extreme machinations to relieve the inventory shortages at exchanges. Focus instead on the silver market. The everpresent Big US Banks continue to ply their trade, selling silver contracts without benefit of posting collateral, otherwise known as naked shorting. However, since the autumn months, their game, their modus operandi, has backfired badly in their faces. By means of lowering the paper contract silver price, they enable a cheaper physical silver price. Imagine being a big buyer of silver bullion metal. If the strongarm syndicate forces choose to offer a discount from the corrupted price discovery system, then the outcome is hardly favorable. The physical buyers ramp up their purchases, enjoy the price discount, and thank the absurd connection between the paper silver and physical silver markets. In fact, evidence is growing fast that the two markets are gradually diverging. The Jackass forecast from months ago was for the eventual divergence between the paper silver market, where increasingly contract settlement takes place in cash (with a 25% bribe to keep quiet and walk away) and the physical market, where acute shortages have not stopped the aggressive purchases of those seeking to diversify out of the USDollar.
Aw heck!! Don’t put the shortage aside. Observe it instead and take personal action with the remaining wealth not destroyed. Understand the incredible shortage. Thanks to Nick Laird of Sharelynx for the fine chart. By the way, shortages result in massive price increases to achieve balance between Supply & Demand, a concept totally missed by the clueless cast of economists that litter the USGovt and Wall Street landscape. They believe price is something achieved by JPMorgan market intervention, for the national good. They wrecked the system and markets, yet remain in control of the USGovt and its finance ministry. They should be in prison. They should watch over their shoulders.
In the last week, two significant factors must be mentioned, each important in its own right. Last week, both factors were overrun by the silver market as new highs were established in the silver price. Options expiration for silver futures contracts usually brings about a huge ambush by the usual suspects, the Big US Banks, who sell vast additional futures contracts without posting any collateral. Mere mortals are prohibited from such naked shorts! Usually the imminent options expiration date results in a significant sudden swoon in the silver price, at least in the futures market, the so-called but increasingly absurd price discovery arena. This past week, the silver price zoomed toward $34/oz despite the threat of ambush, in total defiance to the options expiration deadline. Also, the COMEX in their height of wisdom and market rig efforts decided to raise the margin requirements for silver, for the umpteenth time since last summer. Usually such a margin hike results in a significant price drop like a wind sheer to an commercial jet aircraft. This past week, the silver price zoomed toward $34/oz despite the threat of margin ambush, in total defiance to the greater hardship to maintain margin. It is unusual to see a silver price advance in the face of one such factor. But it rose with gusto in the face of two important obstacles. My forecast in the last few months has been steady, that silver would lead the precious metals. That has been confirmed. While silver raced past $30 and $31 with ease, Gold has yet to confirm the breakout beyond the January highs. All in time.
A final comment on price estimates for goals and targets. As preface, consider that despite a powerful USEconomic recession in progress, and despite earnings declines for the major US companies, and despite the profit margin compression to lower levels from rising costs, the S&P500 companies have a collective Price/Earnings Ratio that stands as ridiculously high. The absurdity lies in forward P/E Ratios, since the supposed expert equity analysts do not factor in the rising costs and falling profit margins. Estimates on future earnings are ridiculously low and totally fallacious. The P/E Ratios might be subject to division by zero soon, as profit margins vanish from fast rising costs. Numerous companies from Whirlpool to Kraft have tipped the market off, but the market has so far ignored the warning call about costs. These costs are obvious consequences to the Quantitative Easing initiatives done by the US Federal Reserve. Next consider the estimated price target for Gold if the monetary aggregate is based in gold held by the USGovt in reserves. My argument, and the argument of many informed analysts, is that the USGovt has no possession of gold whatsoever, having leased and sold the entirety of Fort Knox, then sold European gold, then sold Chinese gold. So the recent estimates of $7000/oz gold or $8000/oz gold make little sense if the monetary aggregate is divided by a gold reserves quantity likely to be ZERO, bound by lies at worst and myth at best. Therefore, the potential Gold price is infinite, since division by zero cannot be done. This utterly basic point escapes many conventional analysts, who have yet to benefit from any independent audit of the gold reserves. The claim of national security is given, but the reality is more like national insecurity!
It should always be noted that silver has gained much greater acceptance as a monetary asset. The Chinese Govt in February announced a new objective to put into action, for diversifying their reserve assets to include silver and platinum. This is huge news. Never before has the silver metal been included in national sovereign reserves management, an unprecedented event. Gold awaits confirmation of the silver breakout. The momentum swing move was so quick, so sudden, so breaktaking, so powerful, that it could not be sustained. Just like in the last four months of year 2010, expect the corrections to be brief and not too painful. After three or four such mini-corrections, only later can the silver market expect another consolidation that endures like what was seen in January. Maybe by June the timing will produce a month of consolidation.
THREAT OF USDOLLAR CRISIS
The Bernanke USFed is on the road to triggering a USDollar panic, a run on the buck. The USEconomy can become more competitive if the USDollar declines hard and worker pay scales fall hard. In the view of many, QE2 then QE3 will present two alternatives, rabid price inflation or USTreasury debt default. A QE3 program is guaranteed by the chronic federal deficit in excess of $1.5 trillion. Even the usually compliant Wall Street Journal has been opposing USFed policy, with dire warnings of deep USDollar devaluation, debt downgrade, and hefty labor wage cuts. Higher USTreasury Bond yields are the currently ignored flashing signal, hardly what Bernanke promised over a year ago when QE1 was launched, and hardly what he promised when QE2 was launched. But then again, he has been wrong about the housing market, the mortgage market, the economic recovery, nascent price inflation, bank stability, a housing recovery, and just about everything. Serving as Secretary of Inflation, he manages the money creation diligently and liquidity facilities with such aplomb and dexterity. Thus he is revered. Unlike the Great Depression, for which he is a revisionist history expert, massive price inflation has begun to accompany the hyper-inflation on the monetary side. Bernanke was selected as the dumb professor in residence, the bag holder, the obedient lackey, and idiot savant. My forecast is for both rabid price inflation and USTreasury debt default, the former in spades at this moment and the latter in due time.
If the USDollar declines significantly more than what it did in the 2000 decade, and worker wages fall to more competitive levels, then to be sure the US labor market would find itself more in line with foreign worker wage levels. A stimulus would be felt, but at a great cost. The price inflation effects would be powerful, while the lower income purchase power would aggravate the price effects in a profound double whammy. US households would feel an introduction to the Third World of poverty. USTreasury Bond yields have risen markedly in the last several months since the USFed announced the reckless QE2 bond purchase program born of cancer. Focus on the opposite ends of the USTreasury yield curve. The 30-year USTBond yield has shot up noticeably, the opposite of what the oafish clownish Bernanke expected. During that time, the 2-year USTBill yield has been stuck under 0.5% for over a year. The Treasury Yield Curve has grown steeper, which normally happens at the beginning of a recovery, due to investors moving out of risk free bonds into riskier assets like stocks. This time around, the steeper yield curve signals the advent of unwanted price inflation without any trace of recovery prospects. In a typical credit cycle, the yield on the long-term bond would start to fall due to investor expections that the USFed intention to raise short-term rates to curb potential inflation. The yield curve is signaling one of two things: inflation or default. My forecast is for BOTH. In fact, NO signal can be seen of a robust recovery. Fast rising costs are spreading like a powerful virus across the USEconomy. The latest crude oil threat out of Libya highlights the viral aspect. Businesses will suffer vanishing profit margins. Household will suffer vanishing extra income, the discretionary spending source.