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Silver And Gold Rise As Investors Sell US Treasuries In Rejection Of QE 2 And Budget Deficits

Financial market report for December 28,2010

I … Investors poured into silver and gold stocks and commodities causing the commodity currencies and commodities to rise, as investors sold out of US Government Treasuries expressing their conviction that US Federal Reserve Policies constitute monetization of debt.
Junior Gold Mining Stocks, GDXJ, +5.8%
Silver Mining Stocks, SIL, 3.9%
Natural Gas, UNG, 3.6%
Silver, SLV, 3.3%
Gold Mining Stocks, GDX, 2.6%
Copper Mining Stocks, COPX, 2.5%
BHP Billion, BHP, rose to a double top
Gold, GLD, 1.6%
Base Metals, DBB, 1.4%

Commodities, DJP, 1.1%

Gold Mining Stocks rising strongly included, UXG, ANV, ASA, AZK, GBG, GFI, GSS, NEM, NGD, NSU, and KGN

The HUI Precious Metal Mining Stocks Relative To US Treasuries, $HUI:$USB, rose to a double high suggesting that the gold mining the gold mining stocks have topped out in value.

Other evidence for the gold mining shares having topped out comes from the chart of the gold mining shares relative to gold, GLD:GDX, having topped out on December 13, 2010. The conclusion here is that wealth is best preserved by investing in and taking physical possession of gold rather than investing in gold mining stocks.

Monetization of debt by a central bank stimulates the investment demand for gold, GLD. The gold ETF rose through a consolidation triangle today to close at 137.2 today. Note how a strong rise in gold began in the second week of August 2010.   

Global Economic Crisis  wrote on August 11, 2010 Federal Reserve Begins Massive Monetization of U.S. Government Debt: In a step that will be one of the markers on the road to economic and financial catastrophe, the Federal Open Market Committee (otherwise known as the FOMC) of the Federal Reserve, made a bombshell policy decision on August 10, 2010, one fraught with dangerous long-term consequences for the American and global economy. In a policy being dubbed QE2, the Federal Reserve’s FOMC conceded that the so-called U.S. economic recovery has “slowed,” and required more stimulus from the Fed. However, with federal funds interest rates now effectively at zero, the only aspect of monetary policy left is money printing. Thus, the Federal Reserve, in effect, will use its printing press to buy long-term U.S. government debt.

Of course, that is not how the FOMC is positioning this major escalation in quantitative easing by the Federal Reserve. In the dry, obtuse language that the obscurantists of the Federal Reserve love to engage in, the committee’s official statement said: “To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.”

In its first bout of heavy quantitative easing, in the wake of the implosion of the major Wall Street investment  banks in the fall of 2008, Ben Bernanke, utilizing his printing press, purchased $1.25 trillion in mortgage-backed securities, and an additional $200 billion in debts owed by so-called government-sponsored enterprises, primarily Freddie Mac and Fannie Mae. This massive explosion in the Fed’s balance sheet has thus far failed to stimulate economic activity and retard a persistent deflationary recession. All that Bernanke has accomplished has been to create a new asset bubble, this time on Wall Street, with equities exploding in price far beyond their post-crisis lows. Beyond the Dow Jones index, however, the impact of Bernanke’s balance sheet expansion has been impotent in the face of economic realities, particularly a collapsing labor market and the contraction in consumer demand. The erosion in the M3 money supply, a statistic the Federal Reserve no longer publicly discloses, attests to the failure of its policies.

Now that the Federal Reserve admits, though in its typically obscure linguistic constructs, that a double-dip recession is becoming increasingly likely, Bernanke is going to enter a buying binge of long-term U.S. Treasuries. The hope is that this will stabilize financial markets, and somehow force liquidity into the economy. That, at least is the hope. Given Ben Bernanke’s track record, I would not bank on hope in the infallible judgement of the Federal Reserve and its FOMC.

What is likely to result from the QE2 phase of the Federal Reserve’s disastrous policymaking? In time, sovereign wealth funds will recognize Bernanke’s manoeuvre for what it is: monetization of the U.S. national debt. When that happens, Treasury auctions will begin to fail, and yields will advance. This will all put added pressure on the Fed to print even more dollars, and monetize an increasing proportion of the federal government’s debt. This will unquestionably inject liquidity into the U.S. economy. But this Federal Reserve monetary injection will be as beneficial as money printing was in Weimar Germany in the early1920s, or Zimbabwe more recently.

In deciding on a process that will lead to an ever-growing proportion of the U.S. national debt and yearly budget deficits being monetized by its printing press, the Federal Reserve, under the leadership of its chairman, Ben Bernanke, has taken a fateful step towards irredeemable economic and financial ruin, ultimately convulsing America with a savage, hyperinflationary depression. And, as history teaches us, severe economic depressions bring along other unanticipated consequences, often leading to political and social turmoil and even global war.

Bloomberg reports Sugar Extends Rally to 30-Year High as Worldwide Demand Outpaces Supplies. Sugar futures extended a rally to a 30-year high on mounting concern that dry weather in Brazil, the world’s biggest producer, and record rainfall in Australia will slash worldwide supplies. Note the volatility in the chart of Sugar, SGG, which rose to 100.61. Investing in sugar is not something the average investor should attempt.

II … Investors sold out of US Government Treasuries, causing bonds,
BND, to massively sell off.  The 30 10 US Government Debt Yield Curve, $TYX:$TNX, flattened as investors sold out of the longer dated bonds more than the shorter duration bonds.

The Zeroes, ZROZ, -3.1%
30 Year US Government Bonds, EDV, -2.1%
The 10 to 20 Year US Government Bonds, TLT, -2.0%

Notice how investors began to sell out of the 30 Year US Treasuries, EDV, when QE 2 was announced in early August 2010.

Long Duration Build America Bonds, BABS, -1.1%
Build America Bonds, BAB, -0.8%

Monetization of the US Debt has caused a strong sell off in corporate bonds. The accompanying rise in corporate borrowing interest rates will turn profits and the economy down.
Long Term Corporate Bonds, BLV, -1.4%
Corporate Bonds, LQD, -0.8%

Bonds, BND, fell massively, -0.7% today.

III … Stocks falling today included

Shanghai Shares, CAF, -1.8% The Shanghai shares are leading the world stocks into a deflationary collapse
China Materials, CHIM, -2.3%
Vietnam, VNM, -2.0%
Solar, TAN,  -1.5%
China Real Estate, TAO -1.2%
Home Building, ITB, -1.2%
Leisure And Entertainment, PEJ, -1.1%
China Small Caps, HAO, -1, 1%

Ruths Chris Steak House, RUTH, -3.6%
Krispy Cream Donuts, KKD, -4.2%
Saks, SKS, -1.6%
Active Power, ACPW, -4.7%
Office Supplies, Deluxe, DLX, -2.3%
United Stationers, USTR, -1.9%

The Ratio Of The Russell 2000 Growth Shares Relative To The Value Shares, IWO:IWN, has turned down suggesting that the rally in the Russell 2000, IWM, is now over.

Small cap growth stocks that fell lower today included:
Network Equipment Technology, NWK, -4.8%
Acme Packet, APKT, -2.2%
F5 Networks, FFIV,  -1.1%
Finisar, FNSR, -3.2%
Riverbed Technology,RVBD, -2.3%

The chart of the ProShares Ultra Russell 2000, URTY, clearly shows as being topped out. Notice the awesome gain that has come to investors in the rise from 70 to 160. Monetization of US Treasuries and concern over European Sovereign and Banking Debt gave moneyness to the US based small cap shares.

IV … Volatility rose; does rising volatility suggest a stock market sell off is at hand?

Mid Term Volatility ETN, VIIZ,
S&P Short Term Futures Volatility, VXX,

V … Inverse volatility fell

Inverse Short Term Volatility, XIV,
Inverse S&P 500 Short Term Volatility, XXV,

VI … Currencies rising strongly included

Russian Ruble, XRU, 1.4%
New Zealand Dollar, BNZ, 1.1%
Swiss Franc, FXF, 0.9%
Indian Rupe, ICN, 0.7%
Canadian Dollar, FXC, 0.7%
Australian Dollar, FXA, 0.6%
South African Rand, SZR, 0.5%
Japanese Yen, FXY, 0.5%

The US Dollar, $USD, traded unchanged; while the Euro, FXE, fell 0.3%

The currency yield curve, that is The Small Cap Value Shares Relative To Small Cap Growth Shares, RZV:RZG, rose forming a massive lollipop hanging man candlestick suggesting that a massive currency sell off is at hand and that the US Dollar, USD, will be rising from its close at 80.36

The Australian Dollar, FXA, rose to close at 101.2 in a dark cloud covering candlestick at the top of an ascending wedge suggesting that a market top has been achieved.

The Australian Small Caps, KROO, rose to form a dark cloud covering candlestick at the top of an ascending wedge suggesting that the market top has been achieved in the Australian shares

The Swiss Franc, FXF, rose to close at 104.22 in a massive lollipop hanging man candlestick suggesting that a top is in for this manipulated currency.

Th Canadian Dollar, FXC, blasted to a double top high to close at 99.43.

Chinese Yuan, CYB, rose in an ascending triangle to close at 25.31

The Euro Yen Carry Trade, that is the EUR/JPY, FXE:FXY, fell lower today as the Yen, FXY, rose strongly, while the Euro, FXE, fell lower to close at 130.67.

Today’s trade lower in the EURJPY has put selling pressure on the European Shares, VGK and the European Financials, EUFN, both of which are already in an Elliott Wave 3 of 3 Down sell off.

VII … In today’s news

Nathan Vardi, of in Where Home Prices Are Falling Dangerously relates that in a number of major major American cities, housing prices have taken a sharp turn for the worse. "There is a large supply of houses on the market," says David Blitzer, chair of the index committee at Standard & Poor's. "And further, hidden supply due (shadow inventory) to delinquent mortgages, pending foreclosures or vacant homes."

Of America's largest urban housing markets, Cleveland seems to be deteriorating the most. Home prices in Cleveland dropped a frightening 3% in September alone, according to S&P/Case-Shiller, and are now 1.9% lower than they were a year ago. Like much of the rest of Ohio, Cleveland hasn't found replacements for the manufacturing jobs lost over the past decade starting from the 2001 recession. The unemployment rate in Cuyahoga County, which includes Cleveland, was 9.2% in April. These days it's at 9.7%.  Patrick O‘Donnell, of The Plain Dealer in July 18, 2010 article District 7 Cuyahoga County Council Democratic Primary Focusing On Crime, Jobs, Poor Neighborhoods voted 88% for Obama in the 2008 election and 32% live in poverty and includes the Hough Neighborhood. A search of Zillow for the Hough neighborhood shows prices have been utterly decimated.