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Honest Money Gold and Silver Report: Market Wrap Week Ending 4/30/10

Market Wrap
Gold Liberty Coin
Week Ending 4/30/10

Economy

For weeks I have written about the Greek sovereign debt problems and the possibility that the contagion may spread. When the issue was first acknowledged by the authorities, the situation was played down. Greece would get their house in order and that would be that. Slowly but surely things began to unwind.

Now, we have a crisis that may spread to other EU members, and perhaps beyond. Might there be other similar issues that need to be addressed before they grow too large and unwieldy? Isn't an ounce of prevention still worth a pound of cure?

The Fed's monetization of trillions of dollars of toxic waste has turned iron into gold; or so those in high places would have us believe. Government stimulus and central bank intervention has provided a short term reprieve for the markets. Admittedly, stocks have rebounded and the economy is improving; giving a false sense of calm before the storm. Financial alchemy is alive and well. Long live bubble dynamics.

Only unemployment and capacity utilization remain to be brought into the fold. We all know how stubborn unemployment is acting. The following chart illustrates that although capacity utilization is improving, it has a long road to full recovery.

Capacity Utilization

Surging asset prices have produced a drug-like coma in all but the most harden and well-heeled investors. Most participants are unaware of the systemic risk associated with over-zealous reliance on government spending and quantitative easing that inebriates both markets and investors. Quality control of risk intermediation is a forgotten subject - never a whisper is spoken in the hallowed halls of Wall St.

But just where did all this liquidity come from? Doesn't it have to be paid back? Who is responsible for paying it back? These are questions that are usually ignored and swept under the rug. Let somebody else deal with it. Smile, be happy, and forget about it. It sounds like a rerun from the Soprano's.

All one needs to do is to take a look at the Fed's ballooning balance sheet to see where the credit came from - it came from them: the wizards of finance. The chart below shows an explosion of credit on the books starting in Oct. of 2008. Overnight the total balance more than doubled and is fast approaching a 300% increase - over 2.34 trillion dollars - in 2 short years.

Federal Reserve Balance Sheet
Federal Reserve Balance Sheet

At some point in the future the Fed must sell these toxic assets back to the market, to sop up the excess credit it created when it bought them - when no one else would touch them. It is a form of financial leprosy 21st century-style.

Who is going to step up to the plate to buy these rancid "assets", if they can even be called that? And how much are they going to sell for: .50 cents on the dollar; .10 cents; or .01 cent?

No one knows, because it's never been done before on such a large scale, and with such questionable "assets". Will the Fed really be able to sop up all the excess credit it has created? What happens if it can't? Do they have a contingency plan for such a possibility?

World BankThe previous bubble helped disguise underlying structural debt issues at the state, local and federal levels; especially regarding pension funds. Now, they are coming home to roost and the piper is going to demand payment, just as he is in Greece and other EU nations soon to follow. Might this play eventually come to a theatre near us?

What we are witnessing is the writing on the wall - a warning if you will. We all must get our houses in order before it's too late. Time is of the essence and time waits for no man. We can choose to act; or be acted upon. The choice is ours. We should seize the opportunity.

Just as I have written that the bailout of Greece by the EU and IMF will not fix their sovereign debt and financial deficit problems long term; the United State's economic recovery, on its own, and under government spending/borrowing financing, will not solve the deficit.

To reduce fiscal deficits government receipts must be created that are not wiped out by rising expenditures, thus enabling them to be used to reduce the deficit.

Only the expansion of private sector savings and credit can create such receipts. More importantly: expenses must be cut.

Economic recovery is thus far having little impact on deficits specifically because the current expansion has been financed almost exclusively by government borrowing and spending.

This is a recipe for disaster. The following chart shows the hole the government is digging itself into by taking on more and more debt.

Total Public Debt

The amount of credit necessary to maintain an economic boom rises relentlessly, including an ever-increasing amount of questionable credit - not a good recipe for long term sustainability, as we are witnessing in Greece.

Our government and central bank have become reliant on larger and larger injections of credit to keep the junkie "even" in his drug-induced state. The result is systemic overspending and consumption.

Coupled with zero-bound interest rates and excess liquidity, these "fixes" have sustained the bubble - at least for now. How much more the patient can withstand is questionable.

The wizards of Wall St. have always had a talent for transforming questionable "securities" into seemingly safe and liquid "assets" - the fodder that fueled the credit bubble.

Alchemical Wedding TalismanFinancial alchemy has transformed risk intermediation. But the market has become leery of mortgaged backed securities (MBS's), collateral debt obligations (CDO's), credit default swaps (CDS's), and asset backed securities (ABS's); and with good reason.

This is why the Fed's balance sheet has ballooned - it takes on all comers that need a place to lay their weary heads, no questions asked. Its buy first, and asks questions later. Greece comes to mind. Who will be next?

The following chart shows that standard loans to the private and commercials sectors of the economy have just about come to a standstill. Lenders are reluctant to lend to just about anyone - even from bank to bank.

Commercial and Industrial Loans

Total Consumer Credit

All of which begs the question: what have the banks done with all the "money" the Fed has injected into the system? Some of it is kept on deposit with the Fed, as it now earns interest. A large portion of it is used to buy U.S. Treasury bonds (debt), as the following chart shows.

US Government Securities at all Commercial Banks

Greece RiotAt some point, the Fed is going to have to mop up all the excess credit it has created. The private sector will have to step up to the plate to finance the on-going deficits; unless they are somehow dramatically reduced.

For private credit to replace government credit, an expansion of loans with increasing risk will likely occur. These loans will originate within the financial sector; subsequently they will be repackaged and sold to investors - that's when things could get dicey. The credit-worthiness of these instruments will be sorely tested. This means that another crisis-like event could be in the offering.

These problems can only be swept under the rug for so long. Soon that bulging lump becomes a dangerous trip hazard that sticks out like a sore thumb. We would do well to listen to those few who warned us of these events long ago, such as Congressman Ron Paul.

The above issues are critically important, not only for the present generation, but for our children and their children to come. We do not want our progeny born into a life of debt-servitude, having to work long hours to pay debt accumulated by others. To accept this type of lifestyle is to accept the unacceptable.

We have a chance to stop this before it gets out of control. We must stand up and refuse to accept the unacceptable. We must demand accountability from our elected officials for every dollar spent.

Tricky TrichetThe future of our children hangs in the balance. We best get this right the first time; we may not get a second chance. A return to a currency of gold and silver coin, as mandated by the U.S. Constitution would be a step in the right direction.

Where to get the needed supply of gold and silver? Why not return all the precious metal held on account in Fort Knox and other depositories that was confiscated from U.S. citizens during Roosevelt's infamous New Deal.

Give the gold and silver back to the people from whom it was taken, on a per diem basis. Open our markets to all foreign coin as the Constitution also mandates. This will provide more than enough supply.

The Constitution also states that no bills of credit (Federal Reserve Notes of debt obligation, i.e. promissory notes) are to pass between the states as legal tender.

Any further issuance of such bills should be halted. Allow the existing paper money to circulate along side of gold and silver coin and let the free market decide which it prefers - promises or payment: paper or honest weights and measures.

The above excerpt was taken in part from this week's full market wrap report available at the Honest Money Gold & Silver Report website. A FREE one-month trial subscription is available. Stop by and check it out. The following is from the currency and commodity sections of the report, which tie in with the above discussion of risk intermediation and its effects on sovereign bonds and currencies, which in turn affects commodity prices.

Both Australia and Canada are countries dominated by commodity exports; and their currencies reflect this fact, closely tracking the price of commodities.

As the chart below shows, both currencies appear to be in a topping process, which suggests that commodities may be topping as well.

It's also possible that the Aussie and Canadian Dollar are simply consolidating before another leg up begins. The issue will be resolved by whether higher highs are put in; or lower lows.

Australian Dollar

Commodities

Last week's report discussed how the energy sector had broken out to new highs and was starting to play catch-up with the rest of the market, as it had been underperforming.

As the charts that follow show, this came to an abrupt end this week. Both the energy sector (XLE) and the energy service sector (OIH) reversed course and closed down hard on the week.

XLE gave back -3.51%, but the OIH got whacked for an -8.51% loss. XLE is testing last week's breakout level at 60. OIH has clearly broken below its breakout and has now negated the breakout. Presently, it is testing lower trend line support going back to August.

XLE

The action in the energy sector suggests that the move by gold and silver was based on currency factors and not commodity trends, as most commodities were down for the week, with oil being a slight exception; while gold and silver advanced.

OIL Service Holders

The DBC commodity index had a slight loss (-0.12%) for the week. Its weekly chart shows the rally off the 2009 lows to be rather weak so far, as compared to the stock market and pm markets. The index has not recouped its first Fibonacci retracement level (38.2%).

At the bottom of the chart is a comparison of the DBC index underperforming the S&P 500. The index needs to break above resistance at 25, and better its Jan. high to have any chance of a sustainable rally. If the Jan. high can be broken above, the index may make a run towards its first Fib level (28.62).

Oil Rig

DBC

The DBB Metal index has been in a strong uptrend since the beginning of 2009. In Jan. it put in a new 52 week high and then corrected into Feb.

The index rallied again and ran into resistance offered by its recent new high just above 23.

It bounced off resistance and has declined for the past two weeks. This week it fell almost 5%, closing at 21.44.

As the weekly chart shows, the index has fallen below its rising price channel. The next likely target is support further below at its Feb. low (19), which coincides with its 38.2% Fibonacci retracement level.

At the bottom of the chart is the US dollar. Notice that when the dollar is declining that the DBB (metals) index performs the best.

DBB

Up next is the weekly chart of the United States Oil Fund (US0). Since April the index has moved sideways in a tight trading range. The rally off the 2009 lows has been quite weak compared to other assets, as the comparison at the bottom of the chart indicates.

USO has recouped about half of its first Fibonacci retracement level (38.2%), which would be considered a "standard" counter trend rally after such a huge fall.

Thus far the rally has been weak and below par. Oil needs to break out above its trading range if it is to have any chance of gaining its first Fib level (60). If the dollar continues to rally strongly look for USO to correct hard, perhaps testing its Feb. low. The dollar is pivotal for most markets right now, especially the commodity markets.

USO

Gold

Lots of stuff going on in the pm arena and there are tons of charts to look at, so let's get to it. Up first is the daily GLD chart.

For the week, gold gained 21.60 or +1.87%, closing at $1179.20 - a new high for the year. Gold now has its all-time high of Dec. 2009 (1226.40) well within its sight.

Regular readers of this report will find gold's new high of no surprise, as we have been talking about it for months. We have been so bullish on gold that back in the beginning of March we offered a money backed guarantee for all new subscribers if gold didn't reach a new yearly high by the end of April. How's that for timing?

From the Market Wrap Report - Profits on March 3rd we quote:

Money Back Guarantee

Troy OunceNeedless to say, the report has covered gold fairly well over the past year, and I am confident it will going forward. How confident am I? Confident enough to offer a full, money backed guarantee, on all three month trial subscriptions, initiated by March 21, 2010: if gold does not reach a new yearly high by the end of April, your subscription price ($69) will be refunded in full, and the free book and other materials are yours to keep without obligation (From March 3rd Report - Profits).

I want to thank all the new subscribers who were kind enough to show support and sign up; unfortunately gold made a new high, so the offer has expired; however, the many stocks recommended in the stock watch list and model portfolio have more than made up for the subscription cost, so it was a good deal all the way around. Value was had by all.

The going has not been easy, as gold has given us a couple of false starts (breakouts) and the bull has been tough to ride. Nevertheless, the ride has been successful and we look forward to more yet to come.

In last week's report I stated that the close of GLD above 112 was encouraging, but that it was crucial for gold to hold those gains. Not only did it hold the gains, it added another 2% to them.

I also stated that the MACD indicator needed to make a positive crossover, if the move was to have any chance of being sustained. As the chart below shows, MACD responded in kind and made a positive crossover. This is why I added to positions per Monday's (4/26) email alert.

GLD

The weekly chart is improving as well. Last week's report mentioned that CMF money flows needed to improve and they did, but more is needed for a sustainable rally of any significance. I would like to see the 0.2 level reached in fairly short order.

Volume expanded on the move, but it could have been stronger. A couple of spikes above 100M would be nice, showing strong conviction on the part of buyers.

Last week's report mentioned that it looked like a positive MACD crossover set-up was forming. MACD did in fact put in a positive crossover this week. So far, so good - let's see if it continues.

GLD

Gold Kilo Bar

Gold PM Fix

Above: Gold's inverse head & shoulder formation on the daily chart - alive and well. Support at 1150.00. Below: Gold's inverse head & shoulders formation on the weekly chart - alive and well. Support at 1050.00.

Gold

Gold PM Fix Pounds

Above: Gold making new highs priced in British Pounds. Below: Gold making new highs priced in euros. This shows gold trading as a currency, not just a commodity.

Gold PM Fix Euro

The Greek debt crisis has important ramifications, not only for Greece, but for the rest of Europe and the world; as it raises important questions concerning the dynamics of sovereign debt issuance and deficit financing by all nations across the globe.

These questions are weighing heavily on the euro, which in turn is affecting other markets. It's possible for this to spread to the world's stock markets as risk aversion rises.

If you would like to read a weekly report that discusses these issues and their influence on the markets, especially commodities and the precious metals, we invite you to visit the Honest Money Gold & Silver Reportwebsite and check out our FREE one month trial subscription.

Good Luck. Good Trading. Good Health. And that's a Wrap.


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