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Honest Money Gold and Silver Report: Market Wrap

Market Wrap

Week Ending 3/13/09


There is a lot to cover this week, so let's get to it. As with past market wraps we will begin with the latest economic news reports and from there move on to the various markets.

First up is the Flow of Funds Report from the Fed. The most important information in this report is total household net worth as a percent of GDP.

I included a chart of this ratio/trend at the end of the Fed's report. As they say: a picture is worth a 1000 words.

The following excerpt is from the full market wrap available at the website listed at the end of this report.

Board of Governors of the Federal Reserve
Flow of Funds Summary Statistics
Fourth Quarter 2008

Debt of the domestic nonfinancial sectors is estimated to have expanded at a seasonally adjusted annual rate of 6¼ percent in the fourth quarter of 2008, almost 2 percentage points less than in the previous quarter. The deceleration was evident in all sectors. For 2008 as a whole, domestic nonfinancial debt rose 5¾ percent, about 2¾ percentage points below the 2007 pace.

Household debt contracted at an annual rate of 2 percent in the fourth quarter, following two quarters of very weak growth. In the fourth quarter, home mortgage debt decreased at an annual rate of 1½ percent, while consumer credit decreased at an annual rate of 3¼ percent. In 2008, household debt increased ½ percent, 6¼ percentage points less than in the previous year.

Nonfinancial business debt rose at an annual rate of 1¾ percent in the fourth quarter, 2½ percentage points less than in the previous quarter. The slowdown was concentrated in commercial paper, loans, and commercial mortgage borrowing. The 4¾ percent increase in nonfinancial business debt in 2008 was over 8¼ percentage points less than in the previous year.

State and local government debt increased at an annual rate of 1¼ percent last quarter, and expanded 2¼ percent over all of 2008. Federal government debt surged at an annual rate of 37 percent in the fourth quarter, similar to the third-quarter pace. In 2008, federal government debt rose more than 24 percent, after a 5 percent increase in 2007.

At the end of the fourth quarter of 2008, the level of domestic nonfinancial debt outstanding was $33.5 trillion; household debt was $13.8 trillion, nonfinancial business debt was $11.1 trillion, and total government debt was $8.6 trillion.

Household net worth -- the difference between the value of assets and liabilities -- was an estimated $51.5 trillion at the end of the fourth quarter of 2008, $5.1 trillion dollars less than in the preceding quarter. For 2008 as a whole, household net worth fell $11.2 trillion.

Total Household Net Worth
As a % of GDP

The above is not a pretty picture, as it shows a loss of wealth of over 20%. Also, this is their interpretation of what's going on, which may or may not be correct. In my opinion things are a bit different.

The basic metric used to calculate these figures and ratios is the U.S. dollar bill or Federal Reserve Note, which has lost 96% of its purchasing power since the Fed was created in 1913.

I don't see that loss of purchasing power being calculated into any of the statistics. The most important aspect of money is its purchasing power.

The above was taken from the full report that can be read here: http://www.federalreserve.gov/releases/z1/Current/z1r-1.pdf.

Currency Devaluation

There is truly a global currency game of devaluation taking place. The debasement of purchasing power and destruction of wealth occurring on such unprecedented levels is a travesty in the making.

The ECB's decision to offer banks unlimited amounts of cash has done little good for the common man. Banks have not been lending. They have instead; opted to hoard money with the ECB, earning interest without taking on additional risk.

Let's consider the first place contestant in the race towards zero interest rates: Japan. For the past 20 years Japan has been mired in a virtual depression. Their stock market has fallen from 40,000 to 7,000.

Not long ago, Japan was touted as having an unfair advantage over the U.S. It was said to be on its way to dominating the world economy. Real estate prices soared through the roof.

The joke of the day was that unless one was wealthy, one couldn't afford the taxi ride from the airport to downtown Tokyo. As was presciently written many years ago - the times they are a'changin. Look what's blowin in the wind.

Japan is proof positive that central bank intervention does NOT work; no matter how low rates are hammered down. Excessively low (unnatural) interest rates simply cause lending to dry up. Western nations are about to learn the lesson the hard way - if they don't wise up.

They should know better, which if they do leads to an even worse case scenario - it's called intent. These guys are either real stupid; or... I'll leave it for the reader to fill in the blank.

And then there are the Swiss:

The Swiss National Bank (SNB) announced this past week that it would buy corporate bonds in the marketplace and reduce interest rates.

The economic situation has deteriorated sharply since last December, and there is a risk of negative inflation over the next three years. Decisive action is thus called for, to forcefully relax monetary conditions.

This is known as "monetizing" debt: creating paper fiat debt-money (credit) to purchase (buy) bonds with.

Non-interest paying debt is exchanged for interest paying debt. The U.S. does the same thing when Federal Reserve Notes (non-interest paying debt) are exchanged for Treasury bonds (interesting paying debt). It's like when Peter and Paul rob one another to pay god - if that makes any cents.

The SNB also intervened in the currency markets, selling the Franc in an attempt to slow its recent 7.6% rise in the past half year, which is a huge advance for a currency, especially in such a short time.

Over the past year the Swiss franc has advanced 6% versus the dollar and 11% compared to the euro.

The Swiss franc reacted to the bond monetization and currency intervention by falling 4.7% for the week. A weakening currency is believed to provide a helping hand to a nation's export trade.

Remember the little foray above regarding Japan: the land of the sinking sun? The last time a major industrialized nation intervened in the currency markets to try to weaken its currency was back in 2004 when the Bank of Japan (BOE) sold 35.20 TRILLION yen.

The yen reacted by gaining almost 6% against the dollar within the following year. Government intervention in foreign currency markets does not have the best track record of working: short term perhaps; long term almost never. But then again, this could be due to the fact that paper money just doesn't work, no matter what. God damn the pusher man.

Central bankers are in a race towards zero rate interest rates. A global devaluation of currencies is occurring. Purchasing power (wealth) is being destroyed. Some CB's are overtly monetizing debt. Look for more monetization to come - from an ever-growing number of central banks.

Such an increase in debt issuance is going to further debase already weakened currencies and cause inflation and perhaps the specter of hyperinflation to rear its ugly head.

There are those raising concerns that sovereign debt may be defaulted on - among them is China's Premier Wen Jiabao, who said:

"We have lent a huge amount of money to the United States.

I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China's assets.

Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried."

If China or any other significant buyer of U.S. debt (Japan) announces that they will no longer buy U.S. debt that is not denominated in a non-U.S. dollar currency, gold will skyrocket to heights unknown.

Of course, Washington felt compelled to answer, as White House Press Secretary Robert Gibbs stated:

"There's no safer investment in the world than in the United States."

Let's hope he is right. On the other hand, remember Franz Pic's words:

"Government bonds are notes of confiscation."

This is a secular bear market - not a cyclical bear market; and in my own opinion it is going to be the mother of all bear markets.

Why? - Because the death of paper money is occurring: the age of debt as money is coming to a close. This is why gold is rising, as it is the only sound money known to man - with a history of millenniums, not decades.

Notice on the chart below the long term secular trend line from 1982 to 2002 and has been broken below. A gigantic double top from 2000 and 2007 is staring us in the face, saying: watch out below.

In mountain climbing we call it: "falling". The break below the 2002 is ominous at best, but a warning nonetheless. Get out of the way - or else.

The next chart shows the 61.8% retracement of the secular bull market from 1982 to 2007, which resides at 669.98.

It is quite possible that this will mark a low - but what low: a short term low; an intermediate term low; or a long term low?

Will the low hold and for how long? How high might prices rise above the low before retreating - if they do retreat? How far below the low might prices fall if the low is broken below?

No one knows the answers to these questions. But that doesn't mean the questions shouldn't be asked and possible scenarios contemplated.

To do otherwise is to proceed ahead without a roadmap or guide, on what may end up being a most arduous journey, much like negotiating a minefield on crutches. Earlier in the week I wrote a paper on the most probable scenarios that can be accessed here: Bear Market Rally.pdf.

How many times have the experts called a low in the Nikkei Index, only to be proven wrong, as the index continues to fall relentlessly for 20 +years; and is testing its 1982 low?

Past bear market bottoms occurred when a 6% dividend yield or higher existed: 1932, 1938, 1942, 1949, 1953, 1974, and 1982. This time will be no different.

History need not repeat - a rhyme does the trick. Of note in this regard is the long term support line from the lows of the past bear markets mentioned above - it resides at 560.

To get a 6% dividend yield the S&P would need to fall to 408. If capitulation has occurred, it is only of a short to intermediate term duration, at best. I wonder what the final bottom will be called when it arrives. It will arrive when no one wants anything to do with it - its name will be anathema.

How many times has Japan capitulated? Secular bear markets are nasty creatures, and do not easily leave the field. When they choose to retire - the field is left a bloody mess. It's simply the nature of the beast.

Harking back to similar times of similar events, Galbraith writes:

"With the advent of the New Deal had come public works and public employment programs - PWA, CWA, WPA ... these were perceived not as a step on from monetary policy ... but as an imperative remedy for joblessness. It was, however, a policy in search of a rationalization, the rationalization that Keynes provided. The effect of "The General Theory" was to legitimize ideas that were in circulation. What had been the aberrations of cranks and crackpots became now respectable scholarly discussion. ... That the proper remedy for over saving was public spending financed by borrowing was henceforth a fit topic for discussion - although it continued to provoke bitter rebuke."


The collapse of the Euro/Yen cross since last July is a reflection of the death of the Yen Carry-Trade, and the beginning of the end of zero rate interest rates, as well as the death of paper fiat debt-money. The demise will take time.

Currency devaluation is taking place globally. The dollar is not strong; it simply is perceived as less weak, relative to other currencies. This may change due to the huge levels of debt being issued to fund all the bailout schemes.

Along these lines I think that many old school inter-market relationships are beginning to break down and or change.

As the paper monetary system gradually self-destructs, although a violent implosion cannot be ruled out, these breakdowns of inter-market dynamics will become more frequent and appear with greater intensity.

In the beginning these changes will come and go, as various nations and central banks implement monetary policy that temporarily papers over the cracks.

Eventually such misguided policy will simply push the day of reckoning off a bit further in time, and cause greater imbalances and unnecessary repercussions. It would be better to get it over with now.

The decline of the dollar index from 121 to 71 shows significant resistance from 88 - 92. This level should hold to the upside.

If price breaks above 92, then a new move up will begin that could be quick and violent. It is not the most probable scenario, but possible.

A break below 88 will mean that a correction is probably beginning. There are complicated undercurrents to the currency markets at this time. Things are not as they appear to be. A lot is going on beneath the surface.

The recent actions by the Swiss Central Bank are indicative. They are monetizing debt. This will have negative repercussions down the road. It is most likely that other countries will do the same, as others already have, and others have discussed such options. All such monetization will be inflationary if it occurs. It could easily run out of control and lead to hyperinflation.

Hyperinflation destroys paper money. The history of all paper money is one of eventual self-destruction. What a few short years ago seemed impossible is now a daily occurrence. To deny such is happening is foolhardy and dangerous. It is better to take the bull by the horns and deal with it.

Besides the existent game of global currency devaluation that is being played out around the world, via zero bound interest rate policy, there is now the specter of bond monetization; whereby one shade of debt is exchanged for another: interest bearing for non-interest bearing debt. There will likely be other mutant strains bred from the toxic waste lands of derivatives gone bad - financial weapons of mass destruction.

My new book Honest Moneytook the liberty to quote Ayn Rand's Ode to Gold as its forward. It is a beautiful piece of prose. The following is a short quip that is very apropos - it could have been written yesterday it is so timely:

"When you see that trading is done, not by consent, but by compulsion - when you see that in order to produce, you need to obtain permission from men who produce nothing - when you see money flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and pull than by work, and your laws don't protect you against them, but protect them against you - when you see corruption being rewarded and honesty becoming a self sacrifice - you may know that your society is doomed."


Gold was down -12.60 to close at 930.10 for a -1.34% loss for the week. The recent rally began in October of 2008 from a low of $681. Gold advanced over $320 dollars to a high of $1,002.20 - a 47% rise in 6 months.

Just three weeks ago gold closed at 1002.20. It has now lost over 7% in 15 trading days. Past corrections have varied from 8% to 33% and have lasted from five to six weeks on average.

So far this correction has measured 7% and has lasted 3 weeks. Time can be more important than price. It doesn't have to be, but it can be.

A 38.2% Fibonacci retracement has prices falling back to $883. The uptrend line is at $895 and the 50 day moving average is at $905.

If the trend line above is broken below on a three day closing basis, then what is now a short term correction, could morph into an intermediate term correction.

There is a possible head & shoulders top forming. A break below the neckline around 900 could lead to a quick drop to 800. I'm not saying this is going to happen - simply that it's a possibility. The stochastic indicator on the monthly chart does not point to this occurring, as least not with the info available to date. Things can change, however.

As mentioned earlier in this report, and for several weeks in past reports: several inter-market relationships have changed; and some appear to be changing again. I believe the turmoil in the markets will cause more of this due to the imbalances and mal-investments that have been made for decades on false beliefs and hopes.

These chameleon-like changes are going to be hard to read. What works one week might not work the next. As such, I'm not going to rely on them for the time being. I will remain aware of them, but I am no longer going to infer anything specific from them. I prefer to put more emphasis on what happens, as opposed to what has happened in the past.

Because of the many on-going global currency adjustments, changing central banks policies, and national fiscal programs; each with their own, as well as the world's agenda supposedly in mind, things can change in this unstable environment without warning. Expect the unexpected and be prepared. This is not any different than going to war - it is war; and war is hell. Make no mistake about it. If you think not, you best stand aside and get out of the way. Collateral damage can be a bitch - from hell.


Platinum prices are trending higher. The chart shows both a rising price channel and the 50 day moving average rising. Stochastics (not shown) are rising as well. A cup and handle may be forming.

Prices have cleared resistance at $1,048.00 and the next objective is $1200.00. Platinum continues to be undervalued compared to past gold prices and offers good long term value. The ratio got out of whack to the upside; and has now corrected to be out of alignment to the downside.

Long term positions bought on pullbacks offer good entries. There is a specific platinum mine that I have accumulated a large position in, as a possible speculative takeover candidate. It is listed under the stock watch list for subscribers.

The above is an excerpt from the full market wrap report available at the Honest Money Gold & Silver Report website. This week's forty-two page report contains thirty-four charts & graphs, including positions held in the model portfolio and on our stock watch list, as well as new precious metal positions bought this past week.

Stop by and see why we are so bullish on gold that we are offering a free trial subscription and a money back guarantee to all new subscribers who sign up this week.

If gold does not hit $1100 dollars an ounce during 2009 your original subscription will be refunded in full. The free book and special reports are yours to keep regardless.

Good luck. Good trading. Good health, and that's a wrap.

Come visit our website: Honest Money Gold & Silver Report
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