Inflation & Gold-Silver Breakout by Jim Willie CB May 22, 2008 home: Golden Jackass website subscribe: Hat Trick Letter Jim Willie CB, editor of the “HAT TRICK LETTER” Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy. The gold and silver prices have broken out on the upside, not to register new highs but rather to emerge from a clear bullish wedge pattern in their daily charts. The stage is set for assaults on the 1000 gold high and the 21 silver high. Furthermore, and more boldly stated, the stage was set last January for tremendous moves in gold toward 2000 and silver toward 50 in the next 18 to 24 months, give or take. The crude oil price surged past 100. Next the gold price will surge through 1000, as in SURGE. The key commercial commodity is crude oil. The key financial commodity is gold (silver also). Unprecedented monetary inflation invites unprecedented reaction in the crude oil and precious metal prices, where justice still is enforced. This key cause and effect is sorely missed by slick Wall Street conmen and carnival barkers. They invest privately in secrecy, while they promote publicly with deception, fraud, and influence of public media networks. They invest in the energy futures markets, while talking about speculation as the blame factor. They have yet to read and absorb the Peak Oil phenomenon on billboards. Oil supply reliability and disruption is a key story behind crude oil prices right now, not speculation. Permit me a rant that rambles from one important topic to another, but does conclude with the gold & silver prices, charts, with breakouts evident, and targets claimed. Before the US Congress, the masterful Rick Masters testified that in the last three years, China was responsible for higher crude oil demand by 920 million barrels per day, more than the private speculative demand rise of 848 million bbl/day. In their unlimited shallowness, the US Congress is considering a new law to limit energy speculation. The new legislation would likely result in monumental shortages, since energy suppliers will be unable to properly and judiciously hedge their contracts spaced over a few months. In avoiding the risk, they would simply not supply. Major disruptions for the USEconomy are coming soon, from corruption, from stupidity, from legislation, from failed banks due to bond fraud, from designed addiction to oil in lieu of nuclear or alternatives, from consequences of three decades of monetary inflation, from honed horrendous heretic economic counsel, from abandoned factories, and from magnificent control of the network media sufficient to render an entire nation helplessly and hopelessly ignorant. The queer version of capitalism known and practiced within the Untied States is beginning to show signs of failure. Remedy involves either a depression from debt collapse on one route, or greater episodes of inflation and job loss, the other route to depression. The real risk of economic depression finally is being spoken about by intelligent people. The safety net for individuals is built with gold, silver, oil, gas, and other tangible things. Do not invest in Exchange Traded Funds. Why invest in something controlled by financial entities, most of which are corrupt with a track record of market control via fraudulent means? Take possession and avoid the lazy route of permitting a financial firm based in the US or UK to control your assets. ETFunds are part of their plan to control markets and to suppress key prices like gold. Price inflation is raging at almost 12% annually inside the Untied States. Monetary inflation is raging between 12% and 18% in the US and European Union. Rely on such sound statistics from the Shadow Govt Statistics folks. Higher food and energy prices are infiltrating the entire USEconomy, with higher costs being passed along everywhere. The only turkeys not noticing are USGovt statistical creative writers who clearly struggle to maintain their shell game and charade. Jobs are being destroyed on a mass scale. The financial propaganda has turned so absurd and bold that even former USFed Chairman Paul Volcker has commented on their split from reality, in his strong hint of a return to STAGFLATION. The criticism of the April Jobs Report was right out in the open, with goofy Birth-Death Model upward adjustments even to the construction and financial services ledger item. Wall Street traders, analysts, even financial network anchors had a hard time not laughing at that jobs report, pointing out with a straight face that they at least like the headline on the story. The actual USbased price inflation, when all is tallied, is several percent above the official corrupted gimmicked CPI. The facade of this myth is slowly being smashed in a public manner. This is precisely what will drive the public like a stampede into gold & silver investments. They have been conned to accept pitifully low interest yield on their bank certificates of deposit. A pullout of funds from bank deposits comes next, maybe not this year, but such an event lies in the future. The public will eventually embrace gold & silver. If wages do not keep pace with rising cost structures, businesses fold and consumers hold back. US banks are not yet prepared to lend money again to people and businesses with bad credit, bad balance sheets, and flimsy income. A return to halcyon moronic heretical days like in 2003 to 2006 among lenders is just not going to happen this time around. US banks have taken advantage of generous US Federal Reserve offers to trade their USTreasury Bonds for private and heavily damaged mortgage bonds at grossly inflated prices. Meanwhile, Wall Street has resorted to admitting that perhaps the worst in bank and bond distress might still be ahead of us. The lied again. Meanwhile, Wall Street has switched stories to deceive, moving to the crude oil price surge. They are blaming speculators, but the charge does not stick. Today Nigeria announced that in the next three years they expect production declines from depletion to be in the range of 30% less for supply. So add Nigeria to Mexico, Russia, the North Sea, Indonesia, Kuwait, and Saudi Arabia on depletion of their major oil fields. Yet Wall Street continues to talk about a mean reversion and removal of speculators. Such reversion arguments depend heavily upon the landscape not changing. Nothing has remained the same! Nothing like reality acts like cold water to introduce reality. In my May Hat Trick Letter report, six key events occurred in the banking and financial realm, described for their negative content, all dismissive of the claim of recovery and return to sound status for banks, housing, or mortgage bonds. UBS announced a huge mortgage bond loss and will raise cash for capital. Citigroup announced a huge mortgage bond loss, will dump $400 billion of supposedly non-core assets, and will raise cash for capital. They emitted the distinct stench of a Chapter 13 restructuring bankruptcy. Of course, that is not how the story is told. Fannie Mae announced a huge mortgage portfolio loss and will raise cash for capital. This august semi-pristine cesspool will serve as the foundation for the new mortgage relief platform??? AIG announced a huge loss from credit default swap insurance related to mortgage bonds, along with distress in the insurance business. Bank of America announced that their raised estimate of 2.5% on loan portfolio defaults is low, that more losses are to come. Lastly, MBIA announced a huge loss from covered mortgage bond insurance and the need to raise more cash for capital. They relinquished in shameful fashion their Standard & Poor AAA debt rating. If Moodys or Fitch downgrade the MBIA bond rating, then woe to the US banks that hold insured bonds, like a few hundred billion$ worth. To claim the US bank debacle is over is laughable. To claim future losses will easily eclipse past losses is obvious to anyone using his or her brain. Sadly, that excludes over 90% of Wall Street, and probably the majority of the US public. Wall Street does a poor job of recognizing that price is determined by an attempt to reach equilibrium between Supply Versus Demand. Anytime, anyplace, by anyone, an argument can be made for lower price by looking at only one side. Supply problems are cropping up all over the globe, not just in crude oil production. In the Andes region of South America, cutbacks have been suffered in delivered copper supply. Other more challenging supply problems are revealing themselves. Electricity shortages seem also to be spreading beyond South Africa. A hidden threat lurks in contractual supply of a more dire nature. China might soon refuse all payments in US$ or refuse to set up new commercial contracts in US$, in outright dismemberment of the US$ basis for international contract settlements. Some believe China might slowly make a transition into a different commercial system altogether. The one key item that neither Wall Street nor USGovt agents of corrupt information and data seem to overcome is gasoline and diesel. The extra cost to the USEconomy in higher energy prices just since February is roughly $300 billion. Match that to the mickey mouse $130 billion in handouts to households by the kindergarten players in the White House and Congress from the stimulus package. THESE GUYS DON’T GET IT!!! The USEconomy and US banking system are both on track for widespread seizure, then collapse. Cost explosion does not represent broad systemic price inflation. If the US Federal Reserve and other major central banks react to sharply higher cost inflation with official interest rate hikes, the last cost element will enter the explosion picture, namely borrowing costs. The task of the USFed is to continue to monetize the insolvency and bankruptcy of the major pillars of the United States system, not even to consider any remedy. Collapse is the risk now, and those words are no longer alarmist or poppycock. A major seizure is on the horizon, as prices have interfered with viability of commerce, especially internationally. Households face much higher costs just to arrive to work sites. Employers face much higher costs just to maintain profitability. Suppliers face much higher costs just to keep production lines flowing. Schools, hospitals, and other public facilities face higher costs in order to maintain function. The first failures and seizures will likely occur in California, where the greatest home loan abuses took place, where the biggest nastiest and most painful home price declines have taken place, where the biggest state government budget cuts have been ordered. The Chinese face more disruption from short-term price changes under contract than any other nation. They are voicing their anger and disgust at the US for instability of the dollar, for hidden repudiation of debt via inflation, and for corrupt leadership in monetary management. They are also hoarding ocean shipping containers, most of which they built. In the next few months, expect weekly explosions and surprises within the United States heading toward climax. The latest has been the gradual collapse of the US airline industry, yet another insolvency. My reaction was actually a chuckle at the story that owners of Sport Utility Vehicles in the US have been increasingly refused trade-ins on their vehicles for new sales. Dealers have seen declines of 30% in one year on the pigmobiles and their values. They lose value while on the lot, as dealers hope for sale. The pig car owners will take a bath! In August 2003, on the veranda sipping lemonade with the venerable respected Kurt Richebacher at his spacious apartment in Cannes France, we talked about his forecast of a collapse to the USEconomy before 2005. My response was not to underestimate the ability of Americans to pump up another bubble and keep the national economy levitated for a while longer. My argument was to point to the US housing market, its $20 trillion size at the time, and how a few $trillion could keep things afloat for a long while. We agreed on the ultimate destination for both the USEconomy and US bank system though, a combination of a dustbin, charred ruins, and a pile for vultures to feed upon carrion. He was an interesting man, with great insight in economic dislocations, but he could not properly assess some innovations like mortgage bonds, carry trades, and extreme speculation that had been endemic to US financial engineering foundations but now are epidemic in their destruction. He would now point to the four insolvent pillars to the USEconomy: federal budget, current account (trade) deficit, bank capital, and homeowner equity. These four insolvent pillars point to imminent desperation in policy, all directed toward mammoth unprecedented monetary inflation. Gold & silver prices will respond. Crude oil already has begun to do so. Sadly, he is not able to see the grotesque pathogenesis on display for the collapse of the USEconomy and US banking system that he forecasted. It would be nice to hear his interpretation of the kill job of Bear Stearns, the illegal funding access by JPMorgan, the next kill job of a Wall Street bank by its own murderous crows, the flight into crude oil, the crackup boom in gasoline prices, supply chain disruptions, the next gold surge past 1000, the various new USFed lending facilities, the distortions of US and LIBOR interest rates, the contrast of negative M1 growth versus fast rising M3 money supply, and the elevation of the competing currency wars with central banks working together and at each other’s throats at the same time. In the last couple months, a profound change has been seen in the USTreasury Bond market. Long-term yields have been rising, but so have short-term yields. The financial network spin, originating from Wall Street, has been that the USEconomy has begun to recover, and US banks have also recovered from threats to insolvency. Of course, both claims are incorrect. What happened is that the USFed gave away its more valuable USTBonds to troubled Wall Street and other money center banks, took their damaged private mortgage bonds, and did so at seriously inflated prices. AAA-rated mortgage bonds were typically unloaded to the now vulnerable USFed at 70 and 80 and 90 cents per dollar par value, when their actual value is half that, maybe nothing at all within a year. The USFed was forced to balance its bond portfolio by selling USTreasurys in the open credit market, thus lifting USTreasury yields in a broad manner. They are desperately trying not to use blatant monetization methods to rebalance their portfolio. In doing so, they are actually draining the private sector banking sector of liquidity. To say that the big money center banks, central bank, Treasury Dept, and USGovt Administration are subsidizing the nucleus of the US financial elite is a gross understatement. In the next phase, occurring over the next few months, the USFed and their partners in collusion will be monetizing the insolvency if not bankruptcy in a bigger way, but accomplishing the deed without balancing the bond portfolio of the USFed itself. The bankster syndicate will resort to much more direct and blatant monetary inflation. This is a key reason why the crude oil price has been gushing upward. Next is a vault upward in the gold & silver prices. GOLD & SILVER BREAK OUT OF PAUSE PATTERNS The gold price was first to break out of the bullish wedge pattern, last week. Silver followed within a couple days. Now the breakouts seem more clear. Gold has vaulted north of the bull wedge upside barrier, and vaulted past the 50-day moving average (in red). Some consolidation should occur here at the congestion level at 925 before a move up toward 950 soon. Then comes 975 and swift establishment of new highs. One must ask the question “Has anything been fixed on the federal budget, the trade gap, insolvent banks, or increasingly underwater homeowners, and most importantly the falling home prices?” The answer is a resounding loud NO. Progress has been seen with banks, whose core assets have gone from minus $100 billion to minus $90 billion. This has been claimed as recovery? No, all responses with official policy will involve monetary inflation, the extension of credit, the printing of money, handouts of money, hidden replenishment of major connected banks, and the debasement of the USDollar. What comes down the road is the creation of the New Resolution Trust Corp for the full platform of mortgage relief, rescue, and bailouts. That will serve as the biggest risk to the USDollar of all. In fact, the USFed is waiting for this second horse in the New RTC to join the paired team of Clydesdales for the powerful fire truck. When the USGovt is fully involved, not just with a flimsy $600 check to each taxpayer, the US$ money supply will expand in a monumental fashion, and gold will set its sights on 1500 and then 2000. These targets will be pursued at the same time we see ruin of federal budget, totally, to the point that only the printing press can close the budget deficit gap. Foreigners will just say NO, as they have begun to do. They are shedding non-Treasury US$-based bonds in vast numbers. They are not showing up with bids at Treasury auctions. The tide has turned. THE GLOBAL ENERGY WAR THAT STARTED IN 2003 IN IRAQ HAS NOW EXPANDED INTO A GLOBAL WAR OF CAPITAL. The silver price break out of the bullish wedge pattern two days after gold. Now the matching breakouts seem more clear. Silver has vaulted north of the bull wedge upside barrier, and vaulted past the 50-day moving average (in red). Some consolidation should occur here at the congestion level at 18.20 before a move up toward 20 soon. Then comes 21.5 and swift establishment of new highs. My May Hat Trick Letter points out some anecdotal evidence of coin shortages. Heck, even the US Mint has quietly cut back severely on making silver eagles. Their officers have told a subscriber that they are on orders not to publicize the reason, a silver metal shortage. Try to order delivery of a silver contract at the COMEX, just try. You will hear of demands for an economic need, which translates into default. Desperate measures are being initiated, shuttling silver bullion from bank to bank across Europe and London. They must avert a public default. The publicity would lift the silver price radically, like with platinum. LONG-TERM VIEW OF GOLD & SILVER Nothing is fixed in the four damaged pillars of the entire US financial and economic system. All solutions involve a radical rise in monetary inflation. The USDollar is being defended. Soon, in desperation, it will be sacrificed if not trashed. The policy makers must prevent a broad spread of seizures, dislocations, and failures. This is not baseless doomsday claims, but rather reality. We are witnessing the climax to a failed fiat USDollar currency experiment, abandonment of the bulk of the US manufacturing base, longstanding sacred privilege to the US Military budget (no longer defense), reckless reliance upon a housing bubble to serve as foundation to the USEconomic (consumption & loan finance), and the wicked backlash of Mother Nature as it swings its lethal pendulum back in the other direction, called correction. Debt and bankruptcy will not be permitted to go unabated without reaction. That reaction will be heavy liquidity influx, in every area of attempted pillar restoration. That constitutes monetary inflation, which invites a gold & silver response. Late in 2007, the gold price was not satisfied with a jump to 850. After catching its breath for a month, it vaulted past 1000 in an easy stroke. The fundamentals, technicals (chart), and psychologicals are all aligned together. They foretell of a paradigm shift in finance, centered upon an upcoming near fatal situation with the USEconomy. The USDollar will also be under siege after the full blown rescues, bailouts and stimulus packages. A new era has dawned. Gold will rise to 2000 in the next two to three years. The swing momentum move that started at 1000 corrected down to 850. It will next pursue 150 points above the old breakout, toward 1200 on follow through. A bullish stochastix crossover in the weekly chart overrides any claim of an overbought condition visible in the daily chart. The gold price is next to start from a relatively low 850-900 range as its base in the assault of price to new highs. The difference between daily and weekly charts is quite clear, as they tell a different story, each positive. A similarly bullish chart forecast is seen with silver. True to form, the signals seem to occur a little after gold, which fights the big financial battles, wages war with central banks, and deals with strong headwinds of resistance. Silver is also vulnerable to the common stroke of paper weights in the form of futures contracts in blatant suppression. Late in 2007, the silver price was not satisfied with a jump to 16.50. After catching its breath for a month, it vaulted past 20 in an easy stroke. The fundamentals, technicals (chart), and psychologicals all are aligned together. They foretell of a paradigm shift in finance, centered upon an upcoming near fatal situation with the USEconomy. The USDollar will also be under siege after the full blown rescues, bailouts and stimulus packages. A new era has dawned. Silver will rise to 50 in the next two to three years. The swing momentum move that started at 21 corrected down to 16.50. It will next pursue 4.5 points above the old breakout, past 25 and higher. 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