The Morgan Report Blog

Bernanke Secretly Gives away Sixteen Trillion Dollars

Richard (Rick) Mills
Ahead of the Herd

As a general rule, the most successful man in life is the man who has the best information

The first ever GAO (Government Accountability Office) audit of the US Federal Reserve was recently carried out due to the Ron Paul/Alan Grayson Amendment to the Dodd-Frank bill passed in 2010. Jim DeMint, a Republican Senator, and Bernie Sanders, an independent Senator, while leading the charge for an audit in the Senate, watered down the original language of house bill (HR1207) so that a complete audit would not be carried out. Ben Bernanke, Alan Greenspan, and others, opposed the audit.

What the audit revealed was incredible: between December 2007 and June 2010, the Federal Reserve had secretly bailed out many of the world’s banks, corporations, and governments by giving them US$16,000,000,000,000.00 – that’s 16 TRILLION dollars.

The GDP of the United States is $14.12 trillion, the entire national debt of the United States government spanning its 200 plus year history is $14.5 trillion. The budget that is being debated in Congress and the Senate is $3.5 trillion.

In the past debt ceiling votes have passed the House and the Senate without question by the majority party (remember there’s an election next year so there’s a need for political grandstanding). When Republicans controlled the chambers they passed debt ceiling hikes with the Democrats in opposition. When the Democrats are in power they up the debt ceiling while the Republican oppose it.

Obama opposed raising the debt ceiling when George W. Bush was President. The debt ceiling is simply a limit of how much a government can borrow and owe regarding public debt. By increasing the debt ceiling, a President would be able to avoid spending cuts.

A default would only occur if the US did not make payments on its debt so not raising the debt ceiling will not result in default – a default can only occur if interest payments were not made.

As the audit of the Federal Reserve has just shown whether the debt ceiling hike passes or not is a moot point. The unelected Federal Reserve will, without Congressional authority, continue to create more money.

The majority of US debt is owned by the Federal Reserve.

The Dow on gold’s terms is telling everybody something important is happening:

In 2000 gold made its $260 per ounce low, in January 2000 the Dow was 10,900

10,900 / $260 per ounce = 41.9 ounces to buy the Dow

Today at 12,592  DJII and $1,600 gold it’s 7.87 oz to buy the Dow.

Investors are starting to realize that gold and silver are a storehouse of value and a safe haven in times of turmoil. Gold and silvers prices have risen because of the abuse and mismanagement of our monetary and currency systems – throughout history, gold has always shone the brightest when trust breaks down, confidence falls and fear climbs.

The Dow/Gold ratio has twice before gone through corrections resulting in a transfer of wealth from one asset class to another. 

 In 1928 the ratio peaked at 14.5 and then dropped to 2.9 as the stock market crashed and the U.S. entered a deflationary depression.  In 1965 the Dow/Gold ratio peaked at 27.6, then started a long correction to 1.57 in 1980 as Volker aggressively raised interest rates and stopped inflation. 

As you can see on the above chart we began a third correction in 1999 when the Dow/gold ratio peaked at 41. 

It presently would be very hard to mount an argument against gold being clearly the winning major investment of the last decade.

 

Latest demand statistics from the World Gold Council:

Gold Demand and Supply – First quarter 2011

  • Global gold demand in the first quarter of 2011 totalled 981.3 tonnes, up 11% year-on-year from 881.0 tonnes in the first quarter of 2010.
  • The quarterly average gold price hit a new record of US$1,386.27/oz (as per the London PM Fix), its eighth consecutive year-on-year increase.
  • During the first quarter of the year, investment demand grew by 26% to 310.5 tonnes from 245.6 tonnes in the first quarter of 2010.
  • ETFs and similar products witnessed net outflows of 56 tonnes.
  • India and China, the two largest markets for gold jewellery, together accounted for 349.1 tonnes of gold jewellery demand or 63% of the total, a value of US$16bn. China’s jewellery demand reached a new quarterly record of 142.9 tonnes up 21% from 118.2 tonnes in the first quarter of 2010.
  • In Q1 2011, gold supply declined by 4% year-on-year to 872.2 tonnes from 912.1 tonnes in the first quarter of 2010. This was despite an increase in mine production of 44 tonnes year-on-year, a growth rate of 7% from year earlier levels, and negligible net producer de-hedging. The decline in total supply was due to recycled gold, which was down 6% on year-earlier levels to 347.5 tonnes from 369.3 tonnes in the first quarter of 2010 and a sharp increase in net purchasing by the official sector.
  • Central bank purchases jumped to 129 tonnes in the quarter, exceeding the combined total of net purchases during the first three quarters of 2010.

With the price of gold at US$1600 it’s definitely living up to its oft proven history of  acting as a safe haven in times of turmoil but after being the best performing major assets of the last decade, are the price of gold and silver going to continue higher?

The settlement of the U.S. debt impasse could see a sharp correction in  gold’s price – news of positive results could trigger a temporary price retreat.

Over a little longer term there exists reasonable, sound, and at least as far as I’m concerned, convincing arguments, that precious metals and their stocks are undervalued:

• Central banks are adding to their official gold holdings

• The European Union’s sovereign debt problems are worsening

• The Federal Reserve will continue to create money

• Expanding Chinese, Indian, and other Asian economies means growing wealth and rising inflation. An historic affinity to gold in the form of jewelry and as a saving and investment option means continued demand growth coming from the East

• Gold mining supply declining

Conclusion

Considering the seasonally strong period for gold and gold stocks is right around the corner:

  • Jewelry manufacturers step up fabrication demand ahead of Christmas gift giving
  • Indian dealers begin stocking up ahead of the autumn festivals and the Indian wedding season
  • Chinese lunar new year
  • Increased news flow from junior work programs
  • Resource and Investment conferences

They might be even more undervalued then we think.

History proves the greatest leverage to a rising gold price is gold mining stocks.

I think gold juniors are going to be the most rewarding, the most lucrative way to garner the huge rewards from the coming freight train rush to gold. Those golden tracks are being laid today using the world’s currencies as ballast – when your cash is trash your gold is shining.

Monetary and fiscal authorities around the world are setting us up for an inflationary cycle. This will be the ultimate driver of the gold bull market going forward.

Gold, and gold stocks should be on every investors radar screen. Are they on yours?

If not, maybe they should be.

Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com

If you’re interested in learning more about the junior resource sector, bio-tech and technology sectors please come and visit us at www.aheadoftheherd.com

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***

Richard is host of Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 300 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Uranium Miner, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, and Financial Sense.

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Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.
Richard Mills does not own shares of any companies mentioned in this report.

The S&P 500 & Gold Play A Crazy Little Game of Poker

Life is a school of probability.
                ~ Walter Bagehot ~

Fourth Law of Thermodynamics: If the probability of success is not almost one, then it is damn near zero. 
                ~ David R. Ellis ~

Recently I have had several members of my service requesting my thoughts on the macroeconomic backdrop which is shaping financial markets. I decided I would proffer an article about why I find such practice to be a total waste of time. Don’t get me wrong, acknowledging what is going on in the world around us as a trader is important because economic data and geopolitical events shape social mood.  Social mood is just one catalyst that directly impacts financial markets and it is important for traders to monitor the world around them.

However, building trading plans based on events with outcomes that are unknown and unknowable is foolish. If an event’s outcome is unknown, one would surmise that the market’s reaction to the news is unknown as well. If a trading plan is built on multiple unknowns it can lead to a disastrous outcome for trades built around such premises. I pay attention to the headlines, but I don’t base trading decisions solely on the news cycle. Spending time building detailed thoughts about the future of events and then trading based on those events also cause traders to become biased with regard to price action.

Let me be clear, I do read analysis from experts on global events, but I don’t build trading plans around what I read. I try to look at the news and decipher what impact events will have on social mood. Once I have what I feel to be a grasp of social mood, then I look at fundamentals which could be earnings reports or economic data points searching for more clues about social mood and the strength of specific economies. From there, I use basic tape reading and technical analysis to help identify trades that have sound risk / reward. Trading is not a guessing game, nor is it gambling. The best traders take a variety of forms of data, interpret them, and then build trades that make sense based on probability.

Trading is very similar to playing poker. Everyone sits down with the same amount of money essentially and the money on the table does not really change. All that happens is money moves from one perception of the game to another. Those who understand and accept risk at appropriate times are rewarded more often than those who ignore risk. As time goes on, the players who understand the game and risk the most make the most money as their probability of success is higher than those who play every hand ignoring potential hazards. Trading is identical in thought and practice. Understanding risk and leveraging probability is what separates great traders from speculators.

As is customary, I will provide readers with a little bit of insight about what I believe could play out in the S&P 500 and gold. Before I get into the chart work, I would like to remind readers that this market is treacherous. Risk has not been this high for quite some time and ignoring it is foolhardy. I am trading smaller position sizes, taking profits quickly, and ultimately I’m sitting in cash waiting for price to breakout and offer solid setups where risk is defined. Currently the S&P 500 and gold are stuck between major overhead resistance and underlying support. Breakouts are going to transpire, but the question is which direction price will ultimately go. I’m going to let others do the heavy lifting and wait patiently for a solid setup to trade.

It seems to me that social mood is pretty poor at this point, economic data has not been great, earnings have been solid except for Caterpillar, and headline risks are plentiful. With that said, I am starting to lean slightly in the bullish camp. My reasoning is built around the fact that the majority of retail investors and novice traders are all setting up for a nasty selloff.

The only selloff I see possible is in the Treasury bond market and possibly the U.S. Dollar. In either case, equities could rally and it would be a surprise to most investors and traders. Mr. Market will punish as many traders and investors as possible and the majority are leaning bearish, so my contrarian instinct says to watch for bullish setups, but be patient enough to see them breakout before jumping aboard.

I intend to trade the S&P 500, but I am waiting on a confirmed breakout in either direction. I really don’t care which direction it is, I just want to be patient and let Mr. Market talk. Once I know the expected directional bias, I will have a solid risk / reward entry because I will be able to define risk at the breakout level regardless of which direction price ultimately arrives at. The key levels I’m watching on the S&P 500 Index are shown on the daily chart below:

If the S&P 500 extends to the upside above the S&P 1,350 price level a test of the 2011 highs will take place. I believe that if tested a second time we could see the 2011 highs taken out and a trip to the S&P 1,420 – 1,450 price levels before year end. Consequently, if price breaks down on the S&P 500 below the S&P 1,295 level  I expect price to work down to the March pivot lows. If they breakdown, a trip to the S&P 1,150 – 1,180 area is likely.

Thus the conundrum described above is now in focus. The S&P 500 remains range bound and until a confirmed breakout takes place, I will likely remain neutral with a slight bias to the upside for good measure. However, I would point out I am simply going to be patient and let Mr. Market dictate the terms of price. I am just going to wait Mr. Market out instead of having some kind of trading plan built on assumptions about the outcome of multiple independent variables which at this point are unknown.

My most recent article discussed the likelihood for a small correction in gold and silver. We pulled back quite a bit, but news coming out of Europe and the flight to safety has bounced gold prices back near recent highs. I will likely establish new long positions in gold and silver on a breakout over recent highs that has strong momentum and volume. I continue to believe that in the longer term gold and silver will remain in a bull market due to the continuing devaluation of various currencies by deficit laden, overextended federal governments around the world. The daily chart of gold is shown below:

Gold similarly to the S&P 500 is trading in a range between the recent all-time highs and the breakout level which was offering resistance and now stands as support. If price breaks above the recent highs I will expect a move higher that could close in on $1,700 – $1,750/ounce by the end of the year. If price breaks below the recent breakout level (1,580) a thrust as low as $1,410 – $1,480/ounce could play out in a short period of time. I continue to believe higher prices are far more likely, but I will respect the price action. The weekly chart below of gold prices illustrates the key price levels:

In closing, I would remind readers to monitor their risk aggressively, keep position sizes small, and protect capital at all costs. Risk is extremely high currently and price could go either direction in a variety of asset classes.

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

Take a look at www.OptionsTradingSignals.com/specials/index.php today for a 24 hour 66% off coupon.

JW Jones

Portfolio Diversification Myths: Why Pension Funds Need to Rethink Their Strategies

Pension funds across North America are facing record shortfalls. Research shows that 33% of Canadian pension funds are struggling to meet liabilities(Figure 1); the Ontario Teachers’ Pension Plan funding shortfall, for example, ballooned to $17.1 billion in 2009, despite strong investment returns.

Read rest of article here…

http://www.bmgbullion.com/lib.pl?rm=show_document&record_id=915

Precious Metals and Crude Oil Shows Signs of Strength

The past couple months (May and June) have been tough on precious metals and crude oil. But recent price action shows that buyers are stepping back into the market buying up these commodities once again.

Let’s take a quick look at the charts…

Gold Futures Daily Chart:
As you can see from the chart below, gold is making a new high. The big question is if it will do what it has done many times in the past, which is make a new higher for only a few days to get the general public (herd) long, only to then get sold into and come back down? The next few sessions will give us a better feel for this breakout/rally.

 

 Silver futures Daily Chart:
Silver on the other hand has not performed as well as its yellow sister. Rather we are seeing a base being formed. The exciting thing about base patterns is that the larger and longer the base takes to form, the larger the potential move once a breakout occurs.

 

 Crude Oil Hourly Chart:
Crude oil looks to be forming a base and or inverse head & shoulders pattern. Both these patterns point to higher prices with a price target around the $110-112 area.

 

 Mid-Week Trend Report:

In short, I feel commodities are now in the spot light and where investors will be looking to put their money to work over the next couple weeks as the falling dollar directly helps boost their prices.

The equities market continues to be volatile with large waves of buying and selling almost hitting the them every trading session. During key pivot points in the market we know pricing for investments get a little crazy at times and we manage positions accordingly and anticipate some moves.

That’s all for now, but if you would like to get my pre-market video analysis each morning and intraday updates along with trade alerts be sure to join my premium service here: http://www.thegoldandoilguy.com/free-preview.php

Chris Vermeulen

Dollar Looking Toppy which Could Send Stocks and Commodities Higher

It’s been an exciting couple months as stocks and commodities have moved like they are a roller coaster at a theme park. We all know every good roller coaster has a few monster hills which make their clients scream in fear/excitement that’s what it’s all about!

But if we step back into the financial world where fear/excitement cost people month it is not so fun. Look at the US Dollar index you will see three monster hills which investors/traders have just finished riding. These quick price movements were enough to make most traders hit the sell button in fear of wilder price action. This is the type of price action which can whip-saw traders in and out of positions for several back-to-back losses.

Having multiple losing trades back-to-back triggers a series of events causing most traders to lose large percentages of their trading capital.

First the trader starts to become frustrated and starts second guessing themselves. This causes revenge trading meaning they start to trade more frequently without proper setups and risk reward levels. Which lowers their confidence, while increasing the rate of their trading. This generally makes for a blowout trading session or week.  Meaning they lose 20-50+% of their trading capital in a very short period of time all because they are trading off pure emotions and not clear trading rules.

Avoiding roller coaster rides with your trading capital/emotions is one of the things I do well. I do this by focusing on the US Dollar index because it plays a very large roll in what both stocks and commodities do.  I analyze the dollar trends and use its price action to help gauge how big and long its next trend is. If the dollar index looks as though it may top, then I will be looking to buy/ accumulate some stocks and commodities simply because a falling dollar helps boost the value of stocks and commodities.

Take a look at the dollar index below. Just a quick glance and you get a gut feeling that it’s trying to top and could have another sharp sell off in the next 1-3 days.

 

Now if we take a look at the SP500 daily chart and use the dollar index analysis above, I would expect to see stock prices pause or pullback for a few days while the dollar tops and then look for a reversal pattern on the shorter time frame charts to add more to our position before stocks continues higher.

Looking at the price of gold we can see that it has been trading in a large sideways range since May and also near a resistance trend line (red line). We could easily see a 1-3 day pause/pullback in gold while it builds energy for another surge higher. Which could take it through the resistance level.

Pre-Week Market Trend Analysis:

In short, I feel the dollar is trying to put in a top which could take a few days to play out. If that unfolds then we should start seeing stocks pullback to support levels and then bounce with rising volume.

That’s all for now, but if you would like to get my pre-market video analysis each morning and intraday updates along with trade alerts be sure to join my premium service here: http://www.thegoldandoilguy.com/free-preview.php

Chris Vermeulen

The Dollar Speaks While Gold, Silver, Oil, & the S&P 500 Listen

Investors and traders alike were watching the action unfold across the pond earlier this week. It was seemingly a foregone conclusion that Greece would get the bailout they desired in order to prevent a potentially catastrophic default. The Greek default situation increased volatility in financial markets around the world. In addition to the Greek dilemma, the end of the 2nd quarter and the customary window dressing by institutional money managers only heightened the volatile situation.

For the past week or so I have been sitting in cash, watching the price action and waiting for setups that have defined risk and solid rewards. With the heightened volatility I did not want to get involved because a trade in the wrong direction would wreak havoc with my portfolio. As this week evolved, the validity of those concerns was unquestionable.

Commodity investors have faced some tough price action recently as gold, silver, and oil have traded significantly lower quickly. Now that we have witnessed some heavy selling pressure set in particularly in the silver and oil markets investors want to know where price is heading in the short term.

U.S. Dollar Index

For the past several months I have been monitoring the U.S. Dollar Index futures in order to gauge the price action in commodities and the S&P 500. The Dollar is currently trading at a key support level and the price action in coming days will be telling. While I do not trade solely on analysis pertaining to the Dollar, I do look for setups where an underlying is dramatically impacted by its price movements.

When the planets align, I will take a trade with a directional bias that is supported by the price action in both the underlying that I’m trading and the U.S. Dollar’s price action as well. At this point in time, the U.S. Dollar Index is trading right at a key support level marked by the 20 & 50 period moving averages as well a recent low. The daily chart of the Powershares U.S. Dollar Index Bullish Fund $UUP is shown below:

UUP Daily Chart

 

Gold & Silver

The recent bounce higher in the U.S. Dollar has been a factor in pushing gold, silver, oil, & the S&P 500 lower. Silver and oil were impacted in the harshest manner, but all four asset classes were negatively impacted. Precious metals tend to weaken during the summer and then pick back up in the fall. However, the selloff in silver the past few months has been breathtaking. For precious metals bulls who entered silver late in the rally the only outcomes were dismal. Late comers to the silver bull market were either stopped out or are currently experiencing significant pain.

While I remain a longer term bull as it relates to precious metals, in the short term I expect lower prices to continue. A major factor in my analysis stems from a longer term standpoint; the U.S. Dollar has likely put in an intermediate to long term low. There are a variety of reasons as to why, but suffice it say that from a market cycle standpoint the Dollar has likely achieved a major low and a reflex rally is likely.

Issues in the Eurozone are far from over and as time passes I expect the impact of fiscal issues rising in countries like Ireland, Portugal, and Spain to have a major impact on U.S. Dollar prices. If the sovereign fiscal issues in Europe result in a default or even a more mild technical default, the impact will likely be bullish for the U.S. Dollar.

The daily chart of the SPDR Gold TR ETF $GLD and the Ishares Silver Trust $SLV shown below illustrate the key areas which may be tested before the bull market in precious metals continues:

GLD Daily Chart

 

SLV Daily Chart

I am of the opinion that if precious metals investors are patient an outstanding buying opportunity will present itself in both gold and silver in weeks ahead. Looking at the daily chart of the two shiny metals and identifying key levels that make sense to acquire positions is important in the trade planning process.

I like to have a trading plan in place should my expectations unfold because it removes emotion from my trading. Planning a trade and trading a plan are extremely helpful when investing in volatile markets like silver and gold. In the longer term, I continue to believe that gold and silver will shine, but in the short term more price weakness may be ahead.

Crude Oil

I am a long term gold and silver bull, but the single asset class that I am the most bullish about is energy. Oil prices in the long term have only one direction to go – HIGHER. I realize that a slowdown in the economy will put downward pressure on oil prices, but as the world’s demand for oil increases and the supply level plateaus or decreases oil prices will be forced higher. If the Dollar does rally as I expect, oil prices would likely be negatively impacted and a buying opportunity would be forged.

The daily chart of the United States Oil Fund ETF $USO is shown below with my future price expectations and current key price levels illustrated:

Oil Daily Chart

 

 S&P 500

The S&P 500 is in a very tricky spot for traders. Right now price action is testing the underbelly of a major descending trendline on the daily chart shown below:

SPX Daily Chart

 

However, if we take a look at a weekly chart note the massive head and shoulders formation that many traders have totally missed. A rally to the S&P 500 1,340 price level would complete the pattern. While head and shoulders patterns have failed several times in recent history, this is a major head and shoulders pattern on the weekly chart which holds more credence than shorter time frames such as the hourly or even the daily charts. The weekly chart of SPX illustrates the head and shoulders pattern. 

SPX Weekly Chart

 

In the short run I think the S&P 500 can work higher, but if I’m right about higher prices for the U.S. Dollar in the future I expect to see much lower prices in the S&P 500 in the intermediate term, particularly if the weekly head and shoulders pattern plays out. If the S&P 500 struggles to breakout above key resistance levels, I will be of the opinion that the bear may have stopped hibernating and an impending recession may be thrust upon us in short order. There are signs pointing in that direction, but right now it remains too early to call.

Conclusion

In closing, my analysis reveals that the U.S. Dollar is poised to push higher, particularly if current support holds. If the Dollar can push above key resistance levels overhead, I expect the resulting price action in gold, silver, oil, & the S&P 500 to be dismal for the bulls.

I will be watching the Dollar closely looking for clues about price action. If I’m wrong and the Dollar breaks to new lows I would expect a massive rally in precious metals, energy, and domestic equities. With the recent price action that we have seen in the U.S. Dollar, I find it much more likely that the U.S. Dollar extends higher in coming weeks. As usual, time will tell.

If you would like to be informed several times per week on SP 500, Volatility Index, Gold, and Silver intermediate direction and option trade alerts…

Take a look at www.OptionsTradingSignals.com/specials/index.php today for a 24 hour 66% off coupon, and/or sign up for my occasional free updates.

JW Jones

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