Is Financial Crime A Systemic Risk?

By Ron Hera

October 23, 2012

©2012 Hera Research, LLC

Famed Austrian economist Ludwig von Mises wrote in his seminal work, Human Action (originally published by the Yale University Press in 1949), that “There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”  The collapse of a historic credit bubble occurred in 2008.  However, despite years of further credit expansion, “a final and total catastrophe” of the U.S. dollar system has yet to occur.

While an inflationary U.S. monetary policy has serious consequences, hyperinflation is not an immediate result.  There are three general ways in which the U.S. dollar system could break down: (1) rejection of the U.S. dollar as the world reserve currency, or (2) as an eventual consequence of U.S. federal government insolvency and (3) a domestic failure of confidence.  Of the three, U.S. federal government insolvency is the most serious because it would result in both the loss of the U.S. dollar’s world reserve currency status and also in a failure of domestic confidence.  However, a new threat to the U.S. dollar has emerged which could trigger a hyperinflationary collapse before the U.S. federal government’s finances become unworkable, e.g., when debt service begins to crowd out military and Social Security spending.  Specifically, the perceived legitimacy of the U.S. financial system has not merely been tarnished by recent scandals but is in danger of collapsing.  The consequences of a domestic breakdown of confidence and trust in the U.S. financial system cannot be overstated.

Silver ETF Impact 3

Silver is no doubt tiny on the grand commodities scale.  But its attractiveness, spearheaded by a 1000%+ bull-to-date gain to its latest high, has spawned a wide range of products for investors to partake in.  And one of the most unique and powerful is the SLV iShares Silver Trust ETF.

This ETF’s objective is quite simple, to mirror the price of silver (minus a small management fee of course).  But while simple in its objective, two unique traits have allowed SLV to take the silver market by storm.  First is SLV offers a bridge for stock-market capital to track the price movements of a high-flying commodity, which historically had only been an arena for the futures guys.  And second is it uses this capital to buy the physical metal.

SLV is asset-backed by silver bullion.  So not only is a share of SLV equivalent in value to an ounce of silver, it is backed by a physical ounce of silver that is sitting in a big vault somewhere.

Less than 900 days for hyperinflation in the US?

John Williams, who is the founder of ShadowStats.com, stated during a recent interview that the US is on track to become victim of hyperinflation the latest in 2014. He believes that “open ended QE” (which is nothing more than monetizing debt) is the key problem. He explains there is an annual deficit of 5 trillion dollar per year in the US, which includes the unfunded liabilities.  He declares the situation “beyond containment”. Central planners are responding to the current economic problems by simply increasing the amount of printed money. John Williams his expectations are that  we’ll soon see a heavy sell off in the dollar, quickly followed by a significant first spike in inflation. That will ultimately lead to  hyperinflation the latest somewhere in 2014. We are just before the kick off of inflation.

We recently mentioned in our article “Money printing and inflation” that in fact inflation IS the expansion of the money supply. Inflation results in price inflation (the phenomenon of rising prices). Usually there is a time period between those two events, which makes it hard for most people to relate them to each other. Inflation and price inflation are often confused in spoken language  but it’s mandatory to understand this fundamental difference.

Hyperinflation is a situation that most people can’t imagine they could go through in their lives. Among economic and financial experts and commentators, it’s a subject that triggers a lot of debate. The least you can say is that there is a consensus on when and how hyperinflation hits. If you think about it, it’s very strange as the world has experienced so many periods of (hyper)inflation. Even in the 20^th century, the number of countries that were hit by severe hyperinflations  exceeds what most of us expect (see table below; courtesy of Miles Franklin). Honestly, it’s beyond us that even in the scientific world there is no consensus. The funny result is that most people belong to one of the two camps: either they think that inflation and possibly hyperinflation will hit, either they expect a deflationary situation.

Silver Miners ETF

It’s hard to believe that silver was trading at only $4 just 11 years ago.  And amazingly it was only 7 years ago that silver had hit $10 for the first time in nearly two decades.  Now at over $30 and rising, silver is flexing its muscles as one of the best-performing assets of the last decade.

There’s no arguing that silver’s secular bull has been spectacular.  Since its 2001 low, silver had soared a staggering 1094% to its 2011 high.  And based on its structural fundamentals, silver’s bull still likely has plenty of room to run in the years to come.

Investors who’ve been accumulating this precious metal over the years (like our newsletter subscribers who first started buying with us when we officially recommended it as a long-term investment back in 2001) have obviously fared quite nicely.  But there’s another silver vehicle that in some cases has fared even better.  Silver stocks, leveraged plays on the underlying metal, have had quite the bull market of their own.

Though there is no silver-stock index that has a long-enough history to give us a direct comparable to silver over the course of this bull, the next-best comparable is the performance of gold stocks given their tight correlations.  And the venerable HUI gold-stock index is probably the most conservative metric (the HUI is comprised of the world’s largest gold stocks, along with a couple of large silver stocks).

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Weekly Market Update Excerpt

Sept 28, 2012

Morris Hubbartt

US Dollar Bear Flag Chart

• The dollar has hit my initial downside target. To ascertain what’s next, I use three important charts to create a financial roadmap.

WHAT THE ANALYST CONSENSUS FOR GOLD IS TELLING US

The big news in the commodities world lately is $10/barrel drop in the
oil price in the last several days. The decline was initially blamed on
Fed-Ex lowering its outlook for global growth and industrial production
when it reported its latest quarterly earnings. The world’s second
biggest package delivery company forecast a continued slowdown in global
trade. Reports that Saudi Arabia is keeping production high to drive oil
prices lower were also blamed.

The actual reason for the drop in crude oil was likely political; with
an upcoming election, the current administration is pulling as many
strings as it can to keep voters happy and remain in office. Gasoline
prices above $4/gallon and crude oil above $100/barrel isn’t
politically acceptable so close to a major election.

"Goodbye QE3, Hello QE4" - Stewart Thomson

 Sep 25, 2012

1.  The gold consolidation may already be over.  Please click here now.  On this one month chart, you can see that since QE3 was announced on September 13, gold has essentially moved sideways.  That “trading box” is likely a consolidation pattern.
2. Please click here now.  You are looking at a two day chart for gold.  A small but significant head & shoulders pattern has formed, implying that the gold price will rise above $1800, before a correction occurs.
3. Many technical indicators and oscillators are overbought on the daily chart, but they can stay that way, while gold marches higher.
4. Investors who hold solid core positions in gold, silver, and gold stocks should stand their ground.  Traders could lighten up a bit, in the $1775-$1825 price area.
5. Please click here now.  A beautiful channel has formed on the GDX daily chart.  A “non-confirmation” is highly likely now; GDX could move higher, while the technical indicators move lower.
6. I would suggest that traders focus their attention on the green HSR (horizontal support & resistance) lines that I’ve highlighted on the chart.  The indicators and the trend channel are exciting to watch, but they don’t offer the same precise entry points that HSR does.
7. Longer term investors should probably focus their buying around the important HSR at $48.72.  That point is also the “neckline” of a double bottom formation.
8. Please click here now.  The technical target of the double bottom is the $56-$58 price zone.  A rally towards that area would provide a great profit booking opportunity.
9. Gold has climbed about $270 from the lows, so keep in mind that any further strength is only going to make gold much more technically overbought than it is now, in the short term.
10.  The $1775-$1825 area should be viewed as the “wild card zone”, because anything is possible.  Gold could shoot quite a bit higher, or careen lower.
11.  Intestinal fortitude is going to be more important than charts or economic reports, during this stage of the gold bull market.
12. Sell-offs are likely to get much more frightening, and price spikes could become enormous. Unless the gold price arrives at one of your pre-set buy or sell points, try to ignore all the intra-day “stage drama”.  The drama is nothing more than static noise interfering with your golden symphony.
13. Please click here now.  You are looking at the daily chart for oil.  Lower oil prices and higher gold prices tend to make institutional money managers very excited about gold stocks.
14. The cost of operating a mining company drops when fuel prices drop.  Oil is also wealth itself, so I’ve drawn in some buy zones on the chart, highlighted with green lines.
15. Aggressive traders can buy oil in the $90-$95 area, while passive investors could focus on $75-$80.
16. I’ve highlighted 3 areas to book some profit, with black lines.  The $97 target has already been hit.
17. QE3 has only barely started.  Some analysts have noted that defensive healthcare stocks are performing well, and they worry that this means another recession is coming.
18. I think it’s far too early to call for a new leg down, especially when QE3 is only 2 weeks old.
19. I’ve suggested that the current $40 billion a month cap on QE3 mortgage security purchases could grow substantially, and already Morgan Stanley’s chief American equity strategist is predicting QE4!
20.  “QE3 will likely be insufficient to significantly boost equity markets and we wouldn’t be at all surprised to see the Fed dramatically augment this program (i.e., QE4) before year-end, particularly if economic and corporate news continue to deteriorate as they have over the past few weeks." – Adam Parker, chief U.S. equity strategist for Morgan Stanley, Sep.  24, 2012.
21. It’s hard to see any fund or retail investor who is short gold, or out of gold, being very comfortable reading Adam Parker’s statement.  Major banks around the world are calling for much higher gold prices before year-end, and I believe the reason is because they anticipate QE3 being replaced with QE4.
22. The key Employment Situation Report will be released by the U.S. Department Of Labor on October 5, and you can be reasonably sure that Ben Bernanke will have his eyes glued to it.
23. The weekly jobless claims reports are not showing a noticeable drop in unemployment.  This means the Fed is more likely to accelerate their QE program.
24. It’s possible that Dr. Bernanke holds the view that if the employment situation improves, it is because of his QE actions.  He could then press even harder on the money-printing accelerator pedal. I expect QE3 to morph into QE4 very quickly, creating a surge in the gold price to record highs.  The gold correction is interesting, but new highs is where your real excitement lies!

Financial Astrology: A Silver Lining For the Dollar & Key Dates For Precious Metals

This article was written by financial astrology expert Karen Starich as a result of a Q&A with GoldSilverWorlds.

There have been some very significant events in the astrology recently that suggest a turn, or shift, has occurred for gold and silver, as well as for the dollar.  In July I wrote to my subscribers that on August 2nd  there could be a significant pullback to both gold and silver that could rattle investors who were long.  There was a harsh Saturn (rules gold and mining) aspect in the Federal Reserve’s chart that suggested a potential restriction on the metals that could have led to a serious pullback.  I also felt there was potential for a flash crash.  On August 2nd Knight Capital Group nearly went bankrupt and became another MF Global, and events of that day were tenuous as many stocks experienced trading irregularities.  Gold and silver both pulled back but not as severe as I thought, which leads me to believe the sector made a very important turn after August 2nd that suggests the old tricks of manipulation are not working as well as they used to.

For September we could continue to see strength building for the metals, and I want to highlight silver here as I see potential for silver to make stronger advances than gold in the short term.  We could see institutional investors moving into silver September 25th-28th. We could see an acceleration for silver October 16th-26th that is potentially very bullish and moves silver to test previous highs near $37.  I advise caution Near October 27th up to the elections for a general market correction that could bring a pullback.

Theodore Butler: Transparency

I’ve gotten more mail than usual from subscribers recently, most with a common theme – I should publicize the real goings on in silver to a wider audience. Many suggested taking out advertisements in popular media sources, like the Wall Street Journal, accompanied with genuine offers of contribution. Others suggested I approach the big hedge funds to interest them in investing in silver. Not only do I agree with the suggestions, but I have been trying to extend the reach of the real silver story for quite some time. It’s kind of what I do.

I don’t think The Wall Street Journal would even accept an ad that accused one of their most important advertisers and sources of information, JPMorgan, of wrongdoing under any circumstances. But that doesn’t mean these subscribers’ suggestions were off-base. After all, I’ve been long convinced that as the facts in silver become more widely known, the manipulation will be brought to an end as investors will buy silver once they learn the truth. What could be better than reading about it in the mainstream media?

More importantly, these suggestions go to the heart of the concept of transparency, the issue front and center in current efforts to enact modern financial regulatory reform. It was the lack of transparency that largely led to our great financial crisis; from AIG hiding their exposure in credit default swaps to ratings agencies assigning phony credit ratings. Transparency would have exposed Bear Stearns and Lehman Bros. much earlier and with less collateral damage. It would be hard to describe Dodd-Frank without using the word transparency and for that reason it is one of the most used terms in CFTC chairman Gary Gensler’s public vocabulary. The word is up there with the most revered of financial words. Who (except for the banks) could be against making everything as open and honest as possible?

Manipulation of the Gold Price & the Crash of Paper Gold

By Jeff Thomas, Internatioal Man

There is much discussion these days as to whether the price of gold is being manipulated. The answer is simply “yes.”

It is likely that most potential gold investors would agree that the major financial institutions have the ability to influence the gold price. They would also agree that to do so would be of benefit to those institutions. Yet, many investors still have difficulty making the final leap to agree that, if the institutions can manipulate the gold price and, by doing so, will profit from it, they will actually manipulate the price. Odd, as this would seem to me to be the easiest of the three premises to accept.

However, there are also many investors who do believe that manipulation exists. From time to time, investors have commented to me, “I don’t know how they’re going about it, but I’m sure it’s being done.”

This view suggests that the method of manipulation is difficult to understand.

Much of the manipulations that financial institutions perform are complex and confusing to those who are not involved in the industry, and this is intentional. The muddier the waters, the less transparent the activities are.

So, let’s take away the detail and express one common method of gold price manipulation in simple terms:

Bullion banks generally hold only a small percentage of what they sell. Banks claim to hold 10%, but a real number may be as low as 1%. This is possible because most buyers keep the gold stored in the bank where they bought it. All the buyer really has is a piece of paper stating that the gold exists in the bank and is being held for him.