-- Posted 31 May, 2006 | |

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Jim Willie CB is the editor of the “HAT TRICK LETTER”

For specific detailed analysis of the Gold, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and Fed monetary policy, see instructions for subscription to my newsletter research reports, which include stock recommendations positioned to rise in the commodity bull market. Articles in this series are promotional.

Technical chart analysis is called an art form, highly subjective, given to experienced interpretation, and not the least a hard science. With all the hubbub over the noticeable price corrections in gold, silver, copper, a fire has lit under my seat to address the chart pattern flashing bull in silver. Such a signal is not immediately obvious. It is debatable whether the silver pattern is from the textbook. Some see a top pattern instead in the silver chart, especially since upon retest, the 14.50 previous high gave way to a 15.0 high. My conclusion (losing fuzziness each week) is that silver is consolidating before another earth-shattering move up toward the 20 level. It has found support at the 50-day moving average. There is no rounded top, no head & shoulders reversal, no exhaustion top, none of these in evidence. Only a serious pullback with some stair stepping. In fact, it looks “fibrillated” much like a person experiencing a heart attack, except the heart attack victims are primary market dealers and perma-bull economic forecasters.

A garden variety “bull flag” was nailed solid by this here analyst in gold over two months ago. It was like straight out of a textbook, oozing and screaming in a shrill but beautiful golden tone. Gold did break out upside in a powerful move. Find the chart below in “A Walk Down Currency Lane” from March 2006.

As we know, gold rose past 725 in early May, so as to confirm the bull flag identified. For almost a year, gold wrestled inside above the 400 level. Its flag in pause was bound by an interval centered at the 550 level. In a nearly symmetric extension, gold topped 700, only to climb higher. The Gold Train was only resting, dropping off “infidels” and taking onboard “new converts” instead. The quality of the passengers on the bull locomotive improved. They sensed a worldwide monetary revolution among officials, revulsion by bankers, and a reversion to real money in lieu of garbage toilet paper currency. My belief is that the inauguration of Ben Bernanke is far more significant than recognized to date. He is an avowed inflation advocate, a man who boasts of low-cost money printing operations, mocked with helicopter analogies of his own coinage, and suitable for the label of “Weimar Bernanke” in absolutely shocking disrespect. The man has no business experience, no banking experience, no financial market experience, yet is named to the most important central bank post on earth. Gold is the refuge, as fiat money has a master inflationary engineer at the helm on powerful and overused machinery, whose controls are hidden under the darkness of a discontinued M3 money supply statistic. Ben is expected to print money to monetize every asset class under the sun, sure to put the USDollar at risk. IT IS NOT POSSIBLE TO PRINT THE WORLD RESERVE CURRENCY WITH ABANDON, AND AVOID A MONETARY CRISIS. The rest of the world comprehends this basic notion. US-based economists and financial mavens seem not to understand this fact at all.

What is not to love with gold, as the world openly is in the process of rejecting the USDollar as the world reserve currency. What amazes me is that at least 95% of the US public remains totally unaware. Not only is the United States home to the most incompetent economists in the modern era, who serve as inflation liars and apologists, but it is the homeland to countless ignoramuses on all things related to inflation, to currencys, and to gold itself. So gold pays no dividend yield? Neither did Intel or Microsoft or IBM or EMC or EBay or Google. So jewelry demand is down. But central bank accumulation of gold, and diversification away from the USTBond in reserve holdings, are more than offsetting on the investment side. HoHhhhppppdddddIt can be safely said that as the USDollar is rejected, and the USEconomy suffers a heart attack, citizens in this country will be both in shock & awe and mystified as to what is happening. They have no concept of world events pertaining to central bank attitudes or currency confrontations. If one mentions China, in knee-jerk style we think of cheap products flooding our shores. We think of jobs outsourced. The public never think of how Beijing has made changes to its $860 billion in foreign currency reserves, with a quadruple in planned gold holdings. These remain as blind spots, perhaps intentionally inadequately reported in the US financial press & media. My maintained belief is that the USGovt prefers to have its citizens hate China and push for trade protection. A citizenry hell-bent on belligerence, arrogance, and ignorance serves a purpose to a nation instigating war for economic purpose in a classified energy policy.

The collusion among monetary powers can succeed for a time with capping the gold price. Doing the same with the silver price is another challenge, much more difficult. With numerous industrial uses, most of which irreplaceable, silver doubles with a monetary role next to gold. In many corners of the world, such as India, silver is widely endorsed and utilized as a store of value. Throughout the entire 19-th century, a Bimetallic Standard ruled for many decades within the United States. Gold was forcibly priced at 16 times the silver price. Great strain was felt back then, even arbitrage over the border. Discoveries in Colorado and California upset the balance. Arbitrageurs existed (yes, even over a century ago) between the United States and Canada. As new gold or silver was discovered, new supply rendered as unenforceable the 16:1 fixed price ratio. Arrogant ineptitude created profit opportunity more than a century ago, amazingly. Smugglers profited heavily across the border, exploiting the USGovt fixed price scheme. The current ratio is a whopping 50 or more. The ratio is sure to come down, favoring silver.

DISTILLED INFERENCES

The last year, especially the last few months, have seen critical changes to the mortgage finance sector, the derivatives world, and the silver market. Some things we know for certain, others left for guesswork. A wise mental approach has served me well. Look at the facts. Look at the past. Look at the forces. Look for what is not reported, which must be but which can only be distilled from facts and forces. Lastly, think like a thief and harbor deep suspicions. There are no grand coincidences, not when big money is involved. For instance, an easy one is that Fanny Mae is in unofficial bankruptcy receivership. Why? How can one know this? Because they boasted of “convexity” when interest rates fell. Refinance proceeds were used to buy bonds and leveraged bond futures contracts, which pulled interest rates even lower and triggered a new round of refinances. Now that interest rates are rising, we hear nothing about “convexity” on the dark side, as rates are rising, delinquencies mount, defaults pile up, and refinances are denied. Conclusion:  Fanny Mae is kaput, news suppressed. Their hedge book and investment book must be working through laundry cycles by the great protectors of the housing bubble, all for the greater good. Over a thousand accountants are busily cleaning up the mess, not making re-statements of any kind, as they convert Fanny’s giant portfolio, and receive huge monetized assistance from deep within the shadows.

Another distilled conclusion pertains to the upside down pyramid morass that is the derivatives market. JPMorgan is well known to own the lion’s share of the bond derivatives. Interest rates have risen in the last year, as have mortgage rates. Up till now not a peep on quarterly statements for JPM on massive writedowns. Why? My inference is that JPMorgan has been integrated into the US Federal Reserve, with certain operations on that side of the wall, other operations on this side of the wall. Worse still, JPM merged with Japanese giant Sumitomo bank, complete with a $1400 million dowry delivered over two years ago. The belief that the USFed and Bank of Japan are a unified conglomerate entity is inescapable.

Back to the silver world, where yet another suspicion can be distilled. Warren Buffet might have bought his way out of legal trouble. He at Berkshire Hathaway sold prematurely the 129 million oz of silver. Why? Cannot this financial genius read the gold tea leaves? Cannot this legendary investor comprehend the monetary earthquake shaking the central bank paper pillboxes? Buffet was in hot water with buddy Hank Greenberg and the AIG fraud investigation. You see, the icons and powerful people often do not live under the same rules as little people, nor laws. My conclusion is that he possibly lent a helpful hand to Barclays in London, sold way too early his silver hoard. Records show the silver exchange fund run by Barclays might not have bought all that much physical silver in the open market. In return, the dogs might have been called off on Buffet investigations. After all, Warren is one of the good guys. We must draw the line on scandals, you see. Maybe my suspicions are too contrived. It could be that Buffet simply exited his silver trade early, bagged the still sizeable profit, offset his huge loss on the USDollar short currency position, then washed his hands of commodities and currencys. He gambled against the USDollar almost precisely at the intermediate bottom, in the last months of 2004. He misinterpreted the effect on the USDollar from the USFed tightening cycle, as did many in the gold community. Warren don’t know currencys.

Some plain facts stand as indisputable. Silver was breaking out in price from a defended range. Stories abounded on the shortages of silver at the exchanges. Rumors persisted that big dealers were underwater, COMEX owners were on the hook for unmet client margin calls. Yet Buffet unloaded his vast silver hoard way early? Veteran to the financial wars, well aware of the Hunt Brothers, this Buffet superstar simply dumped his entire silver treasure precisely when he could have cornered the silver market, precisely when he could have forced that silver price to $20 for the benefit of his Berkshire Hathaway investors? No way. A fool’s story has been told and eagerly lapped up. The other story is to be distilled amidst the cloud of missing information. Anyone who claims Buffet sold silver without covert inducement as it began to break out is a fool in my hedge book. No, Buffet had another motive, and plebeians will not be told its details. Warren earned some official brownie points. His adoring investors should be OUTRAGED. Regardless of why, a huge hoard of physical silver has been taken off the market.

SILVER MARKET HEART ATTACK

The silver market is in huge trouble. Shortages exist. Much attention focuses upon the size of the gold shortage in the futures contract world. Two years worth of global gold output is the size of the short position hanging around the necks of the gold cartel. Here is yet another pearl distilled. Given that JPMorgan, Goldman Sachs, and others are on the hook for gigantic cartel gold short obligations, why are these guys now touting gold and profiting from it on the bank side? My guess is the USGovt has taken, relieved, absolved, and assumed their gold short positions and risk, all for the greater good. Now the individual banks can open new, clean, fresh pristine accounts free to profit from the gold bull market. Why? Because the banks see a profit potential, and their past positions have been forgiven. If these guys are winning suddenly in the gold game, then something had to occur on the down side, with sanitized books and absolutely zero transparency and plenty of stock options.

Details are sketchy on the magnitude of the losses at the COMEX in the past few weeks in the gold market, silver market, and copper market. Unofficial accounts testify that hundreds of million$ in silver losses were suffered. No ambulances, no funerals, at least none on display. Silver dealers lost heavily, some possibly out of business. They got burned bigtime. They will step aside when silver rises on its next uplegs. Like with a stage coach from the Old West, remove the harnesses, let the horses run free, and they run hard fast and wild without the restraint. Like the free horses, gold and silver are meant to run wild in a land of debt-backed printing press money. That is what silver has next in store. If the same horrendous bad judgment is used by the silver dealers to keep a lid on the silver price, they risk losing their entire fortunes, their businesses, their way of life. No, this time, they get the heck out of the way. Central bankers cannot aid them, since govt vaults contain no silver.

The silver locomotive will be more powerful than the gold train, powerful in its own right. The silver story is doubly powerful due to its consumption. Don’t be duped by the moronic propaganda centered on digital imaging and the shrinking demand for silver in photographic applications. China and India more than compensate for photographic demand and consumption, with growing middle classes and nowhere near the penetration of the digital imaging market from computer usage. What jewelry demand propaganda is to gold, digital imaging propaganda is to silver. Silver has numerous applications in industry. Heat dissipation, engine contacts, photographic processing, electronic circuitry, cold temperature superconductors, water filter purification, medical antiseptics, these are key applications. However, in the last couple years, yet another really cool silver application came down the pike. It seems arsenic oxide is bad for the environment, but very effective to prevent insect infestation in pressure treated lumber. When camping, this here analyst learned never to burn scrap green colored pressure treated wood parts, as in NEVER. Fumes were lethal in a more closed space. So silver compounds will come to the rescue of PT lumber. Score another win for precious metals and silver. Again, these are unique silver applications. In these usages, recycling is rare. The cost to retrieve silver from IC circuit boards is impractical. Most silver is consumed and not recovered, unlike gold. Scientists have been struggling to discover silver substitutes for decades, only to fail to find a cheap replacement. There is something truly special about silver!!!

Unlike the platinum group metals, substitution with palladium or rhodium or whatever is not possible, not an option with silver. Recall the days back in chemistry class, that copper, silver, and gold all lie in the same column on the periodic table of elements. This means they share similar outer shell electron characteristics. Copper is the lightest in weight, silver next, then gold the heaviest. They are all special, not inert, just unique. An inert substance cannot combine into larger molecules. See helium, argon, neon. Once the sun merges two hydrogen atoms into helium, and releases vast energy, it remains helium. The copper silver gold column ends right there, as other elements in that column are among the highly unstable heavy metals. These are extremely special metals in the world and should be priced as such. Silver recovery technology should be a high national priority. We care more about scrap steel, plastic, paper, and card board than we do about copper, silver, or gold. Upside down priorities again.

A BULL FLAG, WITH FIBRILLATION

Is the silver shortage fixed, remedied, addressed and relieved? Not a chance. Just what is the source of the silver supply? For three years, my answer was two vast pools, the Indian savers in the Asian subcontinent and the Warren Buffet inventory. Scratch that inventory. Gone, sold in wholesale form to Barclays perhaps, so as to help launch the SLV silver ETF double quick. What about the vast Indian pool of silver? My guess is they read the news, observe the growing trend, and are well aware of the silver bull market. One last vast pool might be silver coming out of Chinese stockpiles of refined product. Given the heightened tensions, escalating trade friction between China and the United States, and recent announcements that China intends to accumulate commodities of numerous types, my guess is China will not do the West any favor in relieving a silver shortage. China will draw from any potential silver stockpile of refined product in their possession, and let the US squirm. One must be blind not to detect the growing tension, friction, and veiled hostility in recent months. We as debtors are insulting and antagonizing our creditors. Leadership, statesmanship, and diplomacy are in short supply, thus added strain on the USDollar and additional demand on gold & silver.

The silver chart appears to display an unusual pattern, more similar to a bull flag than to anything else. It is not too much a stretch to identify the pattern as an erratic cousin to the bull flag. The fundamentals echo this interpretation. If correct, silver is heading for the 20 level. If symmetry is any guide, the 7-8 range of last year, which gave way to the 12-15 range recently, should permit a rally past 20 and capture world attention. The current chart question is whether silver will honor the 50-day moving average, firm at 12.5 per oz. Despite the pullback and consolidation, silver relative strength remains at or near the 50 mark, hardly worse for wear. The daily stochastix might be in the early stages of a bullish crossover, but dailys are not too reliable. The weekly charts for gold and for silver each display a nice “doji star” pattern, which is a sign of increased stability. They will be covered and analyzed in the June Hat Trick Letter report.

What would cause the fibrillation, that highly erratic price movement? Two titanic and opposing forces have begun to wage battle in the last two months. On the demand side is intense investor enthusiasm for the silver ETF, launched finally. John Q and Jill Q Public can now purchase silver just like any stock. Evidence to confirm price inflation here there and everywhere has led to both private investor and institutional investor purchase of both silver & gold as portfolio protection. The mature markets of Treasury Bonds and TIPS simply fail to reflect the nascent rise of price inflation. Note how the TNote 10-yr yield is 2% below the annualized CPI out for March, a wider gulf soon to be seen. As for the Treasury Investment Protection Security, what a corrupted farce it is. The TIPS might protect against the heavily suppressed core CPI, if that.

The breakout by gold this springtime had powerful coat tails to lift silver as well. On the supply side is sudden sale of speculative silver contracts, urged by increased COMEX margin requirements. One can argue that the legalized corruption in rules management struck again. Imagine being underwater on your investments, then changing the rules to give yourself an assist and limit some losses. The only comfort the small guys can take is that these insiders lost their shirts, and perhaps an arm & leg. Have no sympathy. The ironic dynamic to investment profit comes from the realization that we hope to become wealthy, even as the owners of the exchanges (in which we profit) become poorer. Politics usually makes that transition unlikely to come without a struggle and surely not to occur swiftly.

The chart of gold versus silver, as well as physical metal versus mining stocks, were examined and analyzed in the May Hat Trick Letter issue. Gold has gained ground on a relative basis during this spring correction. The next round will surely see silver reassert itself as the dominant precious metal from an investment standpoint. Gold fights the political battles on the geopolitical stage among central bankers. Silver solves industrial problems. Central banks don’t own diddly silver. Dealers have become desperate. Once burned badly, dealers will permit silver to soar unimpeded next time. Miners enjoy the higher revenue stream.

The bull flag in the silver chart is not clear. Last March the gold bull flag was straight out of the textbook, easy as pie to identify. One must go out on a limb in order to call the silver chart a bull flag. My name given for it is the “fibrillated bull flag” since it is laden with volatility. Some mistakenly regard this gold and silver pullback as a sign of a precious metals breakdown. That is not an analysis, but rather a hope, a conclusion seeking supporting evidence. Kind of like that weapons thing in Mesopotamia, where we are smack dab in the middle of a civil war. Explosions and deaths ensued over there. Explosive upside price moves are next for silver, with financial deaths littering the market place. The interactive explosive device is called the futures contract.

THE HAT TRICK LETTER COMBINES MACRO ANALYSIS WITH INVESTMENTS.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting.   He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at  www.GoldenJackass.com . For personal questions about subscriptions, contact him at  “JimWillieCB@aol.com”