The consolidation has endured due to a working off of the overbought condition from 2009-2010 gains as well as the lack of a real catalyst. The Fed, though accomadative has been on hold while emerging markets turned their focus to inflation. European bond markets were in fair shape into the summer. However, the good news for gold investors is that a trio of major catalysts lie on the horizon and should easily trigger the next breakout.

The obvious catalyst is a massive bailout of European nations and European banks through a $3 Trillion debt monetization (the figure stated by many). Until last month the European crisis was limited and a hope of being contained. Since then interest rates on French bonds, which had been following Germany began following Spain and Italy higher. The 10-year yield on French bonds has surged in the past six weeks from about 2.50% to nearly 4%. Meanwhile, Ambrose Evans Pritchard, the intrepid reporter wrote that Asian investors are pulling out of German Bunds and Europe all together. Bund yields (10-year) look to be forming a double bottom just below 2%. Bunds stopped rising in last month as yields surged in Spain, Italy and France. Understandably, Germany has stood in the way of an ECB bailout. However, the sooner the crisis spreads to Germany, the sooner we can expect a German-led ECB bailout.

Moving over to Asia, we hear that China has started to turn its focus away from inflation and towards growth. Last weekend the Chinese Vice-Premier, Wang Qishan indicated publicly that “ensuring growth is the overriding priority,” and “unbalanced growth would be better than a balanced recession.” He also noted the persistent weakness in the global economy.

China’s tightening, which began October 2010 has been effective. It was recently reported that Chinese inflation rate has fallen in recent months from a high of 6.5% to 5.5% and industrial production growth slipped to a one-year low. GDP growth has slowed in recent quarters from 9.7% down to 9.1%. According to analysts at Citigroup, the slowdown could intensify. Bloomberg reports:

If tightening measures aren’t relaxed, property investment will “scale back significantly” in the next two quarters, “dragging down the whole production chain and GDP growth,” Minggao Shen and Ben Wei, analysts at Citigroup, wrote in a report dated yesterday. Exporting firms are also facing an environment worse than in late 2008 due to the overseas slowdown and rising costs, they said.

Last but not least let us consider the USA. Our bond market remains the strongest in the world while the US Dollar is likely to rally further in the near term. This combination along with lower commodity prices and a global move to inflationary policies will allow the Fed the political cover to institute another round of debt monetization. Combined with potential action in China and imminent action in Europe, this is powerful policy that should result in a massive catalyst for select markets.

The current investor psychology of fear, indifference, and surrender is leaving them vulnerable as they miss the big catalysts that lie directly ahead. Gold and gold stocks remain in excellent position for a potentially tremendous 2012 and 2013. Required action from Europe, a shift in Chinese policy and more monetization on steroids from the Fed is going to catapult the bull market in precious metals like we haven’t seen since the late 1970s. In our premium service, we seek to manage the short-term risks in this volatile sector while keeping focused on the major opportunities. The technicals are lined up while fundamental catalysts are soon to emerge. The combination could lead to an explosive 2012 for gold bugs. We invite you to learn more about our service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

China’s regulators plan to shift 2-3 trillion yuan ($308-463 billion) of debt off local governments, sources said, reducing the risk of a wave of defaults that would threaten the stability of the world’s second-biggest economy.

As part of Beijing’s overhaul of the finances of heavily-indebted local governments, the central government will pay off some of their loans and state banks including some of the “Big Four” will be forced to take some losses on the bad debt, said the sources, both of whom have direct knowledge of the plans.

Part of the debt will also be shifted to newly created companies, while private investors would be welcomed in projects previously off-limits to them, sources said.

Beijing will also lift a ban on provincial and municipal governments selling bonds, a step aimed at bolstering their finances with more transparent sources of funding.

Many analysts see China’s pile of local government bad debt as a major risk to the economy, especially as the economy slows, but few see widespread banking fallout as they believe cash-rich Beijing can step in to soak up losses.

The Beijing leaders are highly motivated to unseat the Anglo bankers from their perched throne, emboldened by vengeance. The betrayal was to the American people also, since waves of jobs went to China from US shores, since the US sold not only its own Fort Knox gold inventory, but Western Europe’s also, then China’s to boot. Those who believe the USGovt has any gold reserves at all should donate their cerebrums to science while still alive, a euthanized suicide. The USGovt in all likelihood is in possession of less than zero gold, owing both Europe and China massive amounts. It is the American ticket to the Third World, paved by lost industry, locked by vast debt, assured by broken economic principles blessed by high priest heresy. The US banking leaders still believe the US can revive itself by the flood of more debt and stronger consumer spending, without a clue of what legitimate income means or where it comes from.

Before delving deeper into this important thesis topic, a comment is in order regarding President Obama’s State of the Union address and his plan. As forecasted by the Jackass on repeated past occasions, the entirety of the sacrifice to reduce the USGovt budget will come from the domestic, non-defense, non-security side. Aid to businesses and households and dedication to infrastructure will be removed. The higher priority war machine will be preserved. He called it non-security measures, implying the sacred nature of the security of the nation. Ironically, the security of the nation has been put in peril from unspeakable banker fraud, abandonment of industry, and neglect of infrastructure, not to mention the continued ignorance toward capital formation and dutiful embrace of a consumption mindset. The Obama Admin will remain committed to gutting America, undercutting the middle class, and feeding the deterioration of the USEconomy. He will assure a reduced domestic blood supply and food intake. Expect more empty talk of clean energy and jobs. The greatest potential for spending cuts are from the defense budget, for which the USGovt spends more than the rest of the world combined. A vast array of military bases, embassies place on foreign soil, and weapons projects will be preserved. The maintenance of the foreign threat will be steadfastly maintained. The ethics of drone weapons, regeneration of enemies, destabilization of governments, and the absent economic multiplier effect from defense/offense spending will all conspire to weaken the United States in ways that our leaders seem incapable of understanding. They promote the Fascist Business Model, the very same that has contributed to the wreckage of the nation. The victims are economic growth, rule of contract law, sanctity of private property, and truth. The legitimate threat to the nation comes from its internal situation and the impunity of large scale financial crimes. When reference is made to a Sputnik moment for the United States, try not to laugh. A deeply indebted nation with spiraling deficits latched at the hip to a currency besieged by monetary inflation cannot afford any grand initiative, especially when its highest national priority is war. Survival will soon escalate to a higher priority.

OVERVIEW OF THE CHINA-EUROPE CARD

The Chinese are well along a full court press to secure Gold bullion and dominate in the next phase of the global chess game that will span the next decade or more. With the expansion in the European Dollar Swap Window by the Chinese, the Euro currency has risen impressively. No benefit to Gold has been realized despite the USDollar slide in the last month. One must suspect the Chinese are busy as yellow jacket bees dumping USTreasury Bonds. But also, the Chinese might have suspended some of their Gold & Silver purchases. They might have actually drained for a time the COMEX gold inventory, and await its replenishment. Enter the BIS after midnight from the loading dock. Beijing leaders might be anticipating a high volume Gold bullion purchase flow from the back door in Europe. Refer to EuroBonds bought at discount using the Dollar Swap Window, converted eventually to Gold. My guess is the harlot Intl Monetary Fund will facilitate the Gold conversion, from the EU member nation central banks associated with PIGS nations. If inadequate supply of Gold is a problem with PIGS nations, perhaps some gold swap contracts can be enabled with the help of the Bank For Intl Settlements in Switzerland. But those swaps would seal the PIGS nation fates, since they would hand over industrial, commercial, and other collateral, assuring banker elite ownership of whatever keys to the kingdom are left. Therefore, Gold is vulnerable to hits during the time China takes its foot off the accelerator pedal. China has found a way to purchase high volumes of Gold bullion at a discount. The discount is essentially the EuroBond sovereign debt discount under distress, which might be in the 10% to 20% range. So the PIGS debt will be rescued for a while, but with forfeit of their central bank gold, or borrowed gold.

TRADE AS GEOPOLITICAL LEVER

The last several decades have revealed some sordid bilateral contracts, critical deals like what was made with the Saudis. The USGovt pledged to protect the House of Saud and their kingdom, helped along by massive USMilitary weapon sales. The Saudis in turn would demand payment for crude oil in USDollar terms exclusively. The entire Persian Gulf has toed the line on US$ oil sales ever since, even other OPEC players like Nigeria and Indonesia. A difficult balancing act has been required, and still is required, to keep the peace and minimize the friction between Arab nations and the headquarters of the multi-faceted syndicate helm that has controlled the USGovt with tight reins for nine years and four months. The USGovt prefers to enforce and sustain its global domination with heavy handed banker tactics, financial market rigging games, export of crippling acidic debt, usage of the World Bank and IMF tools, and numerous clever devious nasty methods in the shadows best not described. Lately, a chief US export has been price inflation, most evident in food prices, courtesy of the QE2 program by the USFed. In the last decade, the chief export was toxic debt securities. The Chinese have a different approach, one that might have been more prevalent in the United States half a century ago. They have made 180 trade deals across the world, the exact number exaggerated. They do not place military personnel on foreign soil. They do not lace foreign banking systems with toxic debt. They establish multi-faceted contracts that involve the build-out of port facilities, railroad lines, schools, hospitals, and community living centers. They ignore ugly government facts of life like what exist in West Africa. They operate a sophisticated guerrilla economic warfare in sharp contrast to what the US does. The Chinese build partnerships, not without some friction, while the Americans ignite violent conflicts and demand that allies take sides, while extorting bank ruin, living above their means. The source of the ignition events is kept well under wraps. The ultimate motives of the Chinese is likewise kept rather quiet.

DOLLAR SWAP WINDOW

The most important factor to bear upon the financial markets globally in the last several months, the greatest change agent, in my view, is the creation of the Dollar Swap Windows by China. They are being erected in Europe. Their focus is on the PIGS nation sovereign debt. The debt of Greece, then Portugal, finally Spain very recently, and later inexorably Italy have found and will find a major buyer in China. They will buy PIGS debt at discount. They will win favor across the continent. They will gain advantages not well publicly mentioned. They will cut off geopolitical opposition in extremely subtle manner. They will open up the pathways for greater technology transfer. They will offer a semblance of stability to the currency markets in turmoil. They will spread their global presence, if not dominance. They will work some backdoor deals with motives to secure large volumes of gold bullion at discount. They will solicit more cooperation from previously devoted Anglo tools like the Intl Monetary Fund, and perhaps turn the IMF itself into a Chinese agent. They will possibly pave the way to a mild colonization movement, perhaps having already chosen Southern Spain over Southern California. The Mexican Civil War might have frightened them off any plan to send a million Chinese to North America, equal in intensity to the realization of rising hostility and trade war with the USGovt. Somehow friction with Basque Separatists and detente with Andora versus Spain seems tame compared to roving gangs of Mexican drug lord lieutenants ready to dole out violence on US soil, whose battle lines are drawn by tribal history far more than the US press reports. The systemic failure of Mexico was forecasted in the Hat Trick Letter in the summer 2007, with timing expected for some climax events and recognition in mid-2010, a correct forecast. The USGovt has gone from assisting China in economic and industrial development to blaming them for the depleted US condition. The bigger problem is obviously the deeply entrenched domestic devotion to asset bubbles and colossal bank fraud, run in parallel with the absurd destructive consumption mindset.

HIDDEN EURO IMPACT

So the Dollar Swap Window has been constructed, with expansion a certainty. The Chinese will have an opportunity to dump a big batch of USTreasury Bonds on a regular basis. My full expectation is that the Chinese will sell far more USTBonds than they purchase PIGS nation sovereign debt. In other words, they are building a dumping ground. Key parts of the equation are that the Europeans have been promised a willing buyer (although with ulterior motive) in the Chinese for PIGS sovereign debt. The Germans are sick & tired, fed up to the gills, in supporting the Southern Europe welfare system which identifies the broken element of the faulty European Union. Its foundation had cracks from the start, more than the Jackass recognized admittedly in past years. The Europeans have been promised some important support for the embattled Euro currency. Every time the Greek crisis made the news in past months, the Euro currency sold off with gusto. No more! A strong broad plank of support for the Euro has been provided by China. They are selling their USTBonds and buying EuroBonds with PIGS brand markers. The Euro currency has risen from a January 10th low of 129 all the way to almost 137 in this month alone. The rise has occurred despite the ongoing saga of PIGS debt distress. The Portuguese sovereign debt has been shored up by Chinese promises of purchase. The Irish Govt debt is a totally different animal. They accepted and swallowed the lethal IMF poison pill, cut their budget, and seen enormous deficits spiral out of control as their economy craters. They have resorted to monetary inflation approaching Weimar style as proof of the disastrous error in decisions. Translated to US size difference terms, Ireland has expanded their Euro money supply the equivalent of the US doing so by $12 trillion, all in the space of three months on the Emerald Isle centered in Dublin. They are not keeping Dublin tidy!

The financial news reports fail to mention the China card. They fail to mention that China is exchanging USTBonds for Euros in order to purchase EuroBonds with PIGS skin labels. They fail to mention that large Chinese hands are supporting the Euro currency. My belief is that the news media does not wish to stress the expansion of Chinese influence. For a century, or perhaps three centuries, the cultural and heritage linkage between Europe and the United States has been firm and solid. A grand Chinese wedge has been inserted, not so much between Central Europe and Southern Europe as between Europe and the United States. China will be crucial in casting the Southern nations aside from the European core. They will become wards of China, even for exploit. The Dollar Swap Window constructed by China has actually isolated the USGovt in serious ways. Relief to PIGS EuroBonds is obvious. The numerous other effects are not, and those effects are not in the news. They are main elements of the Hat Trick Gold & Currency Report, and have been for several months. The expansion to Spain was a forecast made in November and December, with confirmation coming by denials in Madrid.

Something unique and unusual has happened in the last three weeks. The Euro currency has risen noticeably from 129 to 137, but the Gold price has fallen from $1385 to $1335 per ounce. For almost a full decade, the correlation between the US$ DX index and the Gold price has been in the minus 70% neighborhood. What has happened in the last month has been a gigantic outlier. It is not just significant with umpteen standard deviations above the norm. It is in the wrong direction. My best guess is that the Chinese have temporarily halted their usage of the COMEX avenue for gold acquisition. They have permitted the corrupted COMEX to push down the gold price, using its fraudulent paper mechanisms. They have given free rein for the Wall Street maestros to lower the gold price for any IMF deal to secure European gold bullion in exchange for EuroBonds. Most gold & silver contracts are settled in cash anyway these days, since the COMEX does not have much precious metal in its possession. Imagine the day coming before too many months when gold & silver can be traded in contracts at the COMEX with no gold or silver metal exchanging hands. That day is coming, along with ruin of the GLD and SLV defaults, ruin, deep discounts in share price versus the metal price, and investor lawsuits. As for the Gold & Silver price, they will rise when the Chinese decide to resume buying. Right now, their attention is diverted to EU gold bought at deep discount, and in volume. As usual, they are thinking at least 20 years ahead. The Gold & Silver price will rise soon enough for the patient minded. The physical market wrests control always, as the mid-term forces take over.

OBTAINING GERMAN TECHNOLOGY

Germany is grateful that a new benefactor has come to Southern Europe. No longer does the German Govt feel burdened by the welfare enforced by the European Union dictum. The Germans are exhausted from $300 billion in annual welfare support of a deadbeat set of children in Portugal, Italy, Greece, and Spain. Over the last ten years, the drain of German wealth has been $3 trillion in total. A German banker has kept me up to date on the details. He frequently mentions that it is not a matter of willingness for the Germans to continue to support the broken nations of Southern Europe, complete with their grand deficits and inefficient economies, and greatly different work ethic, and their preference for song and dance and wine. The Germans are NOT CAPABLE of the continued drain of $300 billion per year, since the cost has turned into a nightmare burden.

In return for the outsized Chinese relief of PIGS debt, the Germans have offered key exports in technology. The main items are machine tools, telecommunications, construction equipment, and cars. Germany is the technology leader in Europe, with no close second competitor. France is a distant second. The German Economy is not a war economy, as they possess world class technology for domestic purposes. In the early part of the last 2000 decade, the technology transfer was significant from Japan to China. It enabled a great leap for Chinese industry. In many instances, the installed Japanese technology, like with machine tools and sophisticated manufacturing floor control systems, the Chinese leapfrogged the US easily. Enter the current phase, where the Germans are working with the Chinese in major deals. My view is that the Eastern Alliance, whose participants are Germany, Russia, China, and the Persian Gulf states, has many components not easily seen. They are working on the New Nordic Euro currency, complete with a gold component, in order to establish a replacement for global banking and commerce. It could become a new global reserve currency, all in time. Expect the alliance to include commitments for vast Russian resources, vast German technology, vast Chinese bank reserves, and guarantees of vast Arab oil supply. The Dollar Swap Window is an important component to the advancement of the Eastern Alliance, in which the US and UK are not players. They are shut out.

ISOLATE USGOVT IN TRADE WAR

A significant hidden effect for the Dollar Swap Window has been the interruption of the trade war alliance encouraged and solicited by the USGovt. Evidence was clear at the most recent G-20 Meeting of finance ministers. The USGovt attempted to find wider support for hostility against China. They all fell of deaf ears. The American delegation was embarrassed, isolated, and stunned. With the Chinese acting as chief debt benefactor in Europe, with the Chinese forging Asian, Arab, South American alliances, nobody joined the adolescent US chatter to confront and combat China. The USGovt is increasingly isolated in its trade war against Beijing. The great trade war will be bilateral, with perhaps no other allies at the side of either nation. Witness the battle for global control and leadership. A great transition is in progress, as the global leader mantle passes from West to East, from the US hands to Chinese hands. The US is expert at creating enemies. As the Islamics fade in perceived threat, enter the Chinese who “stole” the US jobs and “sit on” vast hoard of money from “ill-gotten trade surpluses” in great ongoing accumulation. The ugly truth is that 60% to 65% of Chinese trade surplus from 2004 to 2008 was derived from US and Western corporations having expanded on Chinese soil with factories, fully endorsed by USGovt and Western Govts, often with direct support of ministries. The Europeans are courting the Chinese, and that is big news. China is playing the Europe card at the geopolitical table. Maybe the numerous NATO military bases will eventually fly Chinese flags and be converted to commercial supply transport usage.

The hypocrisy is thick. However, the incessant annoying shallow charges of currency manipulation ring hollow when the US Federal Reserve announced the Quantitative Easing #2. They hypocrisy was extra thick, since the USFed had heralded an end to the 0% monetary policy. The Exit Strategy was followed by monetary inflation, US style, mimicking as best they could the Weimar program 70 years ago. The hypocrisy was doubly thick since the first QE round was promised to be the only round. It was followed by QE2, as forecasted by the Jackass all last year. Expect a QE3 later this year, to rescue states and muni bonds, but only after government pension obligations are abandoned and smashed. In the process, the United States has become isolated. Numerous trade deals exclude the USGovt and USEconomy. The new perverse grand trade partners for the United States are war continuation, war expansion, and a deep embrace of the Printing Pre$$, the monetary inflation machinery. As USTreasury Bond creditors have stepped away, the USFed has entered with powerful demand from printed USDollars, all done electronically, boasted at zero cost. In my view, the cost is infinite, with broad capital destruction and economic disintegration.

BACKDOOR GOLD PURCHASE

Word is gradually leaking out that the Chinese have a powerful ulterior motive to purchase EuroBonds, not so much out of altruism, not even so much out of global expansion of influence. THE CHINESE WISH TO CONVERT DISCOUNTED EUROBONDS TO SECURE HUGE VOLUMES OF EUROPEAN GOLD. The Beijing leaders must for instance have a plan to convert a fixed percentage of EuroBonds to gold bullion, even a cut deal with European leaders and bankers, arranged carefully in advance. They wish to replace the gold bullion possibly swindled by the USGovt. Any USGovt gold leases to European nations from past years might be repaid directly to the Chinese, to close out the lease contracts. The acquisition will NOT be front page news, will NOT be discussed by European leaders, and will NOT be publicly debated. The choice for PIGS nations has been and will continue to be default on sovereign debt or to cut deals with China that buy time. Since Germany has let it be known that their credit line is cut off, China has filled the void. But Beijing leaders are crafty. They have very likely secured deals whereby the IMF harlot will facilitate huge gold bullion sales to China with the EuroBond securities. The IMF has run past cover in lease close-outs from the USGovt, complete with grand deceptions. The key to unmask the lease close-out deals is that the IMF never identified buyers. There were none often. A sale without a buyer is an end to a short trade after the passage of years in time. Without some promised conversion to gold, China would not have cut the deals. It is the quiet underpin. The common denominator in the great majority of Chinese deals forged worldwide in the last decade is the secured supply line of hard assets, like commodities. They also have a preference for port facilities. Energy supplies, mineral wealth, and foodstuffs are the main objective of the numerous Chinese trade deals, which increasingly involve establishment of currency swap facilities and conversion systems. See Brazil and Russia, which do not bother to use the USDollar in trade settlement. In the future, look for commodity deals that supply China with fresh water.

Expect this trend to increase to the point that eventually the Chinese Yuan (renminbi) is a global currency with full convertibility. Later, it might serve as global reserve currency. What gives it the edge in such a role is its rise, compared to the USDollar’s decline. The next decade will see the Redback (Yuan) more and the Greenback (US$) less in banks worldwide, and in trade settlement. The extreme wild card in the entire equation is eventually colonization by the Chinese elite. If they aid in government debt purchase, then hold title to property, while providing supply lines to a wide range of consumer products (someday cars too), what would prevent them from sending 100 thousand people per year to occupy abandoned homes and empty apartment buildings held under proper title? Nothing!

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

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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 25 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

Use the above link to subscribe to the paid research reports, which include coverage of critically important factors at work during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

Numerous are the threats to the USEconomy and US financial structures. Many are hidden threats, subtle challenges to undermine increasingly fragile support systems, planks, and cables that hold the system together. The year 2011 will be when the system breaks in open visible fashion, when the explanations that justify it sound silly and baseless, when the entire bond world endures major crashes. All thing financial are inter-related. Recall that in summer 2007, the professor occupying the US Federal Reserve claimed the subprime mortgage crisis was isolated. The Jackass countered with a claim that the bond market was suffering a crisis in absolute terms, where all bond markets were on the verge of fracture, perhaps globally. In year 2008 the banking system in the Western world broke, fatally and irreparably in my view. In 2009, the solutions, the treatment, the official programs were all exaggerated for their effectiveness while banker welfare became a fixture. Neglect of the people on Main Street became policy. In 2010, the system revealed it is still broken. The global monetary system after all rests atop the sovereign bond market. This year, it must fight off a collapse. Many are the hidden points of vulnerability. Gold & Silver will continue to be the great beneficiaries.

BOND OUTFLOWS

Huge outflows have struck from US-based bond funds, while the outflows continue for stock funds since may 2010. Even the flagship pimco bond fund saw net redemptions. The public is stepping aside as the usfed does its destructive work. No end is in sight for the stock fund outflows. A public boycott seems firmly in place. The new event is the largest bond fund outflow in almost 30 months. The Investment Company Institute reported that in the week ended December 15th, another massive outflow took place from domestic stock funds. It was the 33rd week in a row, amounting to an exit of $2.4 billion. Worse, taxable and municipal bonds saw a nasty shocker of $8.62 billion in outflows, which included another record $4.9 billion in muni bond outflows. Bond mutual funds had the biggest client withdrawals in more than two years, as a flight from fixed income investments has accelerated. The withdrawals were the largest since mid-October 2008, when investors pulled out $17.6 billion from bond funds. The US bond fund retreat showed acceleration signs, since the rise was from $1.66 billion the week before, according to the ICI report. So outflows are in progress for both US stocks and US bonds!! Year to date, investors have yanked $100 billion in funds from US-focused equity mutual funds, offset by a smaller $16 billion in comparable inflows into equity strategies via ETFunds. The $250 billion PIMCO Total Return Fund, managed by Bill Gross, had its first net withdrawals in two years in November as investors pulled $1.9 billion, according to Morningstar.

The public has grown jaded by stories of flash trading smears of the stock market, insider trading scandals, and incessant internal reports of stock support from the Working Group for Financial Markets. They sense stock prices are heavily manipulated and not a reflection of true value. They might on a wider basis believe that most US financial markets are either in ruins or corrupted. The vast record outflows accompany a rise in the S&P500 stock index, which is a clear signal of USGovt prop programs in a corrupt market. Ridiculous illogical and ludicrous interpretations continue to be disseminated about the USEconomy in recovery. The false story has become a billboard message of deception. We are told that investors are retreating from bond funds after signs of an economic recovery and a stock market rally, which have lifted interest rates broadly. The reality is something quite different. The selloff in USTreasurys happened exactly after the US Federal Reserve in November offered specific details on its pledge to purchase $600 billion in bond assets to revive the sluggish USEconomy. The 10-year USTreasury yields lie in the 3.2% to 3.4% range, much higher than the 2.49% in the first week of November. The bond market contradiction to the USFed monetization plan is without precedent in US bond market history, a grandiose insult.

The QE2 team is buying $100 billion in USTBonds per month, taking up the slack, without producing any decline in bond yields. The USFed is running a dangerous desperate gambit. Attempts to hold together the ustreasury market during its QE2 strongarm episode are underway. Obviously the USFed is the USTreasury market, with outsized USTBond purchases as part of its QE2 program. An approved posse of market specialists is buying hundreds of $billions of USTreasury securities on the open market. They are filling a vacuum. They are offsetting global creditors in abandonment. They bought in 2011 a full 75% of all USGovt debt issuance, just like Banana Republics!! They must keep the interest rates low. They must prevent a credit derivative blowup event. The USFed is fast losing all credibility, exhausting its power, testing its limits, fighting off demands for independent audits. The QE2 team seeks the best price available. However, due the fully advertised initiative and the heavy volume, is destined to pay a premium price. They have tipped their hand, as they buy $100 billion per month in USTreasurys. It is not possible to be a known buyer with a schedule and agenda, and execute favorable prices. An unexpected backfire occurred on the way to the QE2 launch. Bond yields fell sharply between August and November as the markets anticipated the new program. Bond yields have defiantly risen since details on QE2 were formally announced in November, delivering losses to the frontrunners in the autumn months. Too much doubt was left lingering on the volume of the program, and furthermore, whether a QE3 would launch. Bernanke actually hinted of a third launch, foolishly. The states need several hundred $billion, another monetization object.

GOLD & SILVER PREPARE FOR ANOTHER BREAKOUT

A major consolidation is taking place in the Gold price. A near total disconnect has occurred between the physical Gold & Silver markets and the control strings from the paper futures market held by the maestros. Grotesque shortages exist in silver. Difficulties in gold delivery are commonplace. The central banks and Bank For Intl Settlements scramble to keep gold & silver supplied to the exchanges, in order to avert openly visible defaults. A strong uptrend with rising moving averages is evident in Gold. The breakout in October has been consolidating for three full months, while Europe experiences its open sores of sovereign debt distress. Its price will soon encounter the uptrend lines for likely ignition. When a European aid package is assembled, whether of substance or not, merely if it seems credible, the Euro currency will rebound and the Gold bull will resume. In year 2011, the global monetary system will fracture in visible fashion. Its broken debt foundation will be the proximal cause. Gold is widely regarded as a reserve asset, no longer a stodgy secure asset for Arab sheiks. The dirtiest little secret might be that private Wall Street firm accounts own vast Gold bullion accounts, while their corporate banking entities in South Manhattan own the short futures positions, soon to be dumped on the USGovt in formal fashion. The greatest propulsion force to the Gold price is obviously the USFed and its grandiose QE2 initiative. Their purchase of $100 billion in USTBonds per month signifies that they are the USTreasury Bond market. PIMCO is worried sick about the unbridled monetization. The USFed monetized 75% of USGovt debt in 2011. When the USFed is done with QE2, they will argue for a QE3, probably to cover state debt shortfalls. The precedent has been set. The global currency war is in full swing. Simply put, the Gold price will rise when China is prepared to pay a higher price, after exhausting supply at lower prices.

The greatest offender in currency manipulation and currency undermine is the United States. It is essential that the USGovt continue to make accusations against foreign central bankers, in order to deflect attention. The problem is QE2, and the likelihood of a followup QE3. The USGovt is without permission forcing a debt writedown on foreign USTreasury creditors by installing inflation engines. See the commodity prices, led by food & energy. The USFed and USDept Treasury will proclaim victory by mid-summer, as price inflation begins to rage much hotter. They will call it economic growth. Check import price inflation from the last three months of 2011. Import prices rose 3.7% during that brief time. Not just emerging economies like China and Brazil are contending with price inflation. The US does too, but it calls it growth, since its economic trackers are much more accomplished decepticons. When job losses mount in the second half of 2011, the lies will be unmasked. The USFed is the greatest destoyer of working capital in the history of the world. Their balance sheet is negative $1 trillion and growing worse, their highly appropriate report card. Their wretched financial condition matches their decaying reputation. They are the buyer of worthless toxic bonds, the buyer of last resort. The housing market will NOT recover to bail them out.

USGOVT BUDGET BATTLES

Budget battles are sure to reveal the true fascist motives of those in power. The people will be denied while the war machine is preserved, guns & bombs over bread & butter, big banks over households. In fact, the defense budgets will not be reduced. Rather, defense contractors will be forced to eat cost overruns without volume cutbacks in weapon units at all. The war is sacred, the signature mark of the fascist state. The USGovt seems to have suddenly found religion in reducing the budget and its deeply engrained deficit. It is more superficial than from the heart with conviction. The new wave is all about perceptions. To be sure, some in the USCongress are worried sick and scared pale over the prospects of a structural $trillion deficit. A decade ago such a deficit magnitude would be considered a telltale signature of a Banana Republic nation sliding toward the Third World perilously. The budget battle with the new USCongress will be extremely revealing of the priorities for the Syndicate in full control of the USGovt and press networks. The budget process will in my view continue to place the war as a sacred priority not to be touched, not to be altered, not to be disrupted. In rough terms, the USGovt budget contains components 20.0% Defense, 21.0% Social Security & Medicare, and 14.0% Safety Net System.

In my view, the budget cuts will come exclusively from the people and their homes and work centers, their pensions, their Social Security & Medicare. Tax deduction removals and phaseouts will be a centerpiece. The war machine has given stress to the defense contractors, who will be expected to absorb cost overruns in weapons programs, according to recent Pentagon pronouncements. Enormous costs are involved with the war machine support. The base military budget is $536 billion. The extended budget for the wars adds another $170 billion in supplemental spending, which officials prefer to call Overseas Contingency Operations since it sounds more sophisticated.

The total sum, over $700 billion per year, is the sacred cost of the USMilitary. It includes hundreds of overseas bases, lavish embassies, and endless weapon systems, of types conventional, nuclear, and drones. The United States spends as much on annual military investment as the rest of the world combined, according to the Stockholm Intl Peace Research Institute. One must wonder if the wars are to produce enemies. The United States maintains troops at more than 560 bases and other sites abroad. The outsized yawning Defense spending is a primary cause for USGovt insolvency. It has a staggering deficit impact on the budget and the negative international image of the nation. Watch the unfolding events as the USGovt and USCongress grapple with spending cuts. They will avoid Pentagon and defense budget cuts with fierce opposition. This is a key part of the Fascist Business Model, as sacred as Wall Street largesse.

Harken back to the 1950 decade, during the post-WW2 glow. President Dwight Eisenhower once said, “Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.” The words from Ike fell on deaf ears. Not until the last decade have his words rung shrill. He never met the current crowd in control, but he could see a path to their evolution, which he called the Military Industrial Complex. No disrespect is meant to soldiers who have sacrificed. One must wonder for what cause their sacrifice has been, and toward what outsized profits to defense and service contractors, even Syndicate bank accounts. Talk has already begun, that “out of respect for our fighting soldiers and veterans” who have served in active duty, the defense budget will be spared of cuts. Watch the priorities be revealed as the battle unfolds over the budget. In my view, the potential for defense cuts and huge savings is great but it will not be tapped. Instead the people will be asked to expect less aid, to rely upon less, to eat less, to expect less federal help, and endure poverty more.

SHADOW HOME INVENTORY

The standard inventory of homes comes from brokers and multilists. The hidden inventory of homes adds another 50% to 80% to the working supply, half of that from pending seizures, half from bank owned units festering on their balance sheets. Home prices cannot rise in such a deeply distressed climate. The unofficial shadow inventory is another one million homes. Any economist who overlooks the hidden supply of homes is a hack. The housing market cannot recovery for another two years, until it works off the hidden inventory. The problem is that the ongoing home foreclosures results in more bank seizures, and a steady source of renewed hidden inventory. Housing is a crippled market, one that acts like a gigantic millstone around the USEconomy. Housing prices will descend further in 2011, as the shadow inventory acts with powerful forces upon the Supply & Demand equation. It still applies despite any messianic proclamations from banking high priests or Wall Street marketing agents. The mainstream has finally begun to grasp the wreckage and ruin, but not that the housing sector will cause a systemic failure for the nation. It is most assuredly coming. The contradictions and shallow work of Roubini are worth a pass. His work has been ridiculed in the past by the Jackass, like a few months ago when he expected the gold market to turn down. Instead, it rose another 10% to 15% in a string of breakouts. Yet he is still revered, and sought as a guest on the financial networks.

Nouriel Roubini offers some obvious commentary, followed by contradictory nonsense about a USEconomic recovery. His inconsistency earns him a ‘C Minus’ grade in his own class. The professor is a fool once again. Roubini acknowledges that the housing market is in a double dip, as prices can only go down. He brought attention to what he called below trend economic growth as baseline, but also two negative factors specific to the housing market. The first factor is the expiration of federal home buyer tax credits for first-time home buyers. The housing prices have been falling every month since the tax credit expired last May. He correctly identified the stolen demand from the future to take advantage of the home buyer credit. So he makes an obvious point. The second factor putting downward pressure on home prices is the ongoing chaos with mortgage documentation, and the related temporary moratorium by banks for mortgage foreclosure proceedings. The suspension appears to be ending. Aware of an imminent flood of housing supply, Roubini said “There has been an effective moratorium on foreclosures. The shadow inventory of not-yet-foreclosed homes, due to the moratorium, will surge in the next year. Supply will increase, demand will drop.” Obvious points, enough to force a USEconomic recession without a remote chance otherwise.

Roubini remains a shallow economist without strong basis for his opinions, even plain contradictions. He does not expect a double dip recession, since he believes the USGovt kool-aid on doctored statistics. The dull blade Roubini said, “The rest of the economy is recovering. Most of the numbers are consistent with a growth rate of 2.7%, still below trend. So unemployment will likely remain above 9%. The EuroZone shock, long-term structural deficits, and state & local governments operating near bankruptcy are other ominous economic signs on the horizon. The 12 million households are already in negative equity and 8 million more have an Loan-to-Value between 95% and 100%. Thus even a 5% fall in home price will push an extra 8 million in negative equity with risk of millions walking away from their home, i.e. jingle mail.” Without realization, he undermines his own assessment of slow USEconomic growth, and provides ample justification for a worse recession than already is in progress. His housing market observations contradict his economic outlook. He does not realize (or admit) that price inflation is running at over 7% right here, right now. Therefore the GDP estimates are all way high, exaggerated by 5% or more. The USEconomy is mired in a deep recession. Sadly, Roubini is a victim of the establishment, which ordered him to compromise his work in order to continue to occupy an important post. See the CNBC article (CLICK HERE).

The Great Roubini is awakening to the disaster in housing, but he does not yet grasp how it will result in a systemic USEconomic failure. He begins with a slow growth scenario, then cannot justify it, even to contradict it while discussing relevant factors. He will be one of the first shoddy economists to claim the USEconomy is in recovery, as price inflation accelerates, which will incorrectly be labeled it growth. My theory is simple. If the entire USEconomy depended upon the housing boom to expand from 2003 to 2007, then it will be capable of collapsing the same structures given the extreme vulnerability to debt. The vicious cycle will be powerful, unstoppable, and deadly. It has been game over since the September 2008 events when the US banking system collapsed and died, led by Lehman Brothers, Fannie Mae, and AIG. The weight of the continuing housing market decline, combined with strangulation in the banks with toxic debt paper and a surplus of home inventory, is easily sufficient to cause a systemic failure to the entire USEconomy. The big banks are stuck in mud at the cemetery gate. That failure is in progress with momentum. Guys like Roubini and Krugman will be the last to realize the collapse. They are celebrated cheerleaders within the system, compromised souls.

LABOR MARKET STEP-DOWN

The economic step-down is a hidden powerful effect in the de-industrialization of America. The job growth is not a sufficient condition for the USEconomy recovery. People are taking lesser jobs, with huge declines in income. Fewer opportunities exist, while survival demands tough decisions. The endless USEconomic recession has an ugly trademark. People are taking steep pay cuts, enduring lasting reductions in wages. People are taking jobs far below their skill levels. Between 2007 and 2009, more than half the full-time workers who lost jobs (held for at least three years) and found new jobs later reported wage declines, according to the USDept Labor. The detail is 36% of them reported the new job paid 20% less than the previous lost job. An effect rarely seen in recessions since the Great Depression, wages have taken a sharp and swift decline for a significant slice of the labor market. THIS IS A THIRD WORLD HARBINGER. It is worse for many others. The unemployment rolls include 14.5 million people, even 6.4 million stuck jobless for more than six months. A key part of earnings losses, according to the survey, is that workers skills acquired over the last two decades that are fast becoming outdated and obsolete. Then instead of gaining new skills for a higher paying job, they often settle for a lower wage and stop their job hunts, unable to benefit from training. Lack of retraining programs is a huge dropped ball by the USGovt, whose economists cannot find their hind parts with their hands. Research shows that children of displaced workers also suffer in a domino effect. Even those fortunate to remain on the same jobs have seen wage cuts. Many assume more duties too.

RETAIL LEADERS ON THE ROPES

Howard Davidowitz screams his case on the broad retail distress, with details. He warns of huge unresolved problems with commercial property loans, with great stress for landlords. A Paradigm Shift is underway, for smaller footprint shopping centers, as the United States footprint is double anything reasonable. The consumer model is fast breaking down. Davidowitz does not mince words, as he destroyed the illusion of a USEconomic recovery, pointing out absolutely no consumer renaissance. During a recent Bloomberg interview, retail expert Howard Davidowitz shattered the consensus klapptrapp, with quality content and logical thought. He said, “I am not surprised by the strength of retail sales, because I knew that 30% of consumers are responsible for retail sales, and these 30% did much better because of the performance of capital markets. I do not think it is indicative of anything going forward. I do not think the economy is going to get any better. If you look at our fiscal and monetary policy, we went two trillion dollars in the hole last year. Two trillion, to produce this, and unemployment went up to 9.8%! We have spent two trillion dollars. We are printing money. We are going bananas. Our the balance sheet, we have $2.6 trillion on there, and for what? Look at government securities, and mortgage backed securities. If interest rates go up a point Bernanke’s bankrupt. Everything he has bought is underwater. All the mortgage bonds are underwater, the whole country is underwater. Does anyone see the issue now with why rising interest rates, aside from predicting a supposed recovery, may also, courtesy of its [greatly increased wrecked bond investments], actually predicts the insolvency of the Federal Reserve?” His comments are not a breath of fresh air, strewn with honesty.

Davidowitz provided several key observations on the supposed retail renaissance. Wal-Mart makes for 10% of US retail sales, has 150 million customers, and its stock it is down six consecutive quarters, not a good sign. Sears is the largest department store in America, but their stock is in terrible shape. Best Buy suffered a huge earnings miss. The financial loss recorded by ToysRUs increased last quarter. Supermarket chain A&P recently filed for bankruptcy. Department store chain Loehmanns just filed for bankruptcy. Charming Shoppes announced plans to close 100 stores. TJMaxx just liquidated AJRight. Davidowitz honed in on Sears for crucifixion. Sears is in the tank, ready to fold its tents in his opinion. Eddie Lampert took over the company recently from his hedge fund position, lacking any conceivable operational experience. He has engrained a policy that departs from price competition. He has not invested in capital equipment upgrades. He has sold his best stores. His online investment has not succeeded. The corporation is gutted, heading for the dumpster, then cemetery. If Lampert were smart, he would sell the company to a greater fool. A joke has surfaced, that A&P might merge with Stop & Shop, with a new corporate name of Stop & Pee, which would open enormous marketing potential.

In addition to dissecting the collapse of Sears, analyst Davidowitz observed what should be a loud glaring alarm signal for guys like Ackman and all those who are betting on the resurgence of the US mall storefront with vehicles like General Growth. The bulk of retail store traffic is moving online, where incidentally the only jobs created are those of packagers and quality control line people either in China or in some warehouse in Texas, California, or Florida. Davidowitz said, “Online sales have to lead you to question the whole retail selling strategy. We have 21 square feet of selling space for every man woman and child in this country. We already have double of what we need. With the explosion of online sales, what happens to all these retail malls and shopping centers which are marginals? Huge changes are going to be taking place as people continue shopping online. A revolution in retail is coming in both size and location of stores, a trend starting with the advent of much smaller Wal-Mart stores. In the end what to do with the retail space is going to be a huge question for retail in the next ten years. That is why Wal-Mart is starting to build smaller stores. That is why Wal-Mart is building more overseas than they are building here. It is going to be the biggest retail change that we have ever seen.” The bulldozing of half the US retail malls will be a positive move for economic progress, but extremely disruptive.

The biggest losers in the maverick analyst’s estimation will be commercial real estate landlords. Expect great pain for the REIT investments (stock trusts). Howard continues in his railing, making the point of commercial loans next collapsing, a point made by the Jackass for the last 18 months or more. He said “Landlords better start figuring it out pretty quick because they already have occupancy problems, rent problems, and everything else right now. I do not think the Commercial Real Estate (CRE) problems are fixed by any means. That is why we are going to close hundreds of community banks going forward. We are going to close hundreds more. Those CRE debts are coming due and they will not be able to be rolled over. We have lots of problems still coming up in the banking system, and the problems in the real estate issue is here for a long time. In other news, Kool Aid to be served in aisle 5 of the next door Sears box from now until permanent closing time.” The man is solid as a rock in his retail analysis, accurate as a sharp knife, with no nonsense.

COMPLEX SOCIETIES & SYSTEMS

Complex societies do not last forever. They break down from internal stresses as often as from external. A society must maintain its system, with more energy expended when more complex. The reserves can be tapped repeatedly if crisis is not averted from regulatory machinery. In time, neglect enters the picture, as stresses break the fabric. Joseph Tainter is well-known for his classic book entitled “The Collapse of Complex Societies” despite his expertise as an archeologist. He must have done much thinking about the collapse of societies whose ruins he unearthed in massive digs. Tainter is on record with his developed thesis, born out of his dissatisfaction with prevailing collapse theories. His argument is straightforward. Human societies are problem solving organizations, which supply the necessities along with entertainment, as well as training to ensure continuation. The over-arching Sociopolitical systems require energy for their maintenance. If left without proper tending, they fall apart like a garden without attention. Increasing complexity carries with it increased cost per capita. Simple monarchies need much less maintenance than democracies, as voices are heard and justice grinds slowly. Investment in sociopolitical complexity often reaches a point of declining marginal returns, as time passes, interest wanes, justice disappoints. When debt saturation occurs, like today, the cost of maintenance and decline can be overwhelming. The complex system becomes vulnerable to collapse after great stresses and what Tainter calls perturbations, better thought of as disruptions or disturbances.

Stress and perturbation are a constant feature of any complex society, always occurring somewhere in its territory. The developed operating regulatory machinery is designed to deal with unplanned changes. Imagine spotty agricultural failures, border conflicts, large scale accidents, social eruptions, and disease outbreaks. Such localized stress tends to recur with regularity, and thus can be anticipated with preparations. To meet major unexpected stress surges, the society must have some form of net reserve. It can take the form of excess productive capacities in farm output, stored energy, or stockpiled minerals, or hoarded surpluses from past production, even reserve savings. Stress surges of great magnitude cannot be accommodated without such a reserve. A society beset by regular self-inflicted crises will be forced to draw upon its stored reserves too quickly. As declining marginal returns are experienced, the society must contend with rising systemic risk. The costs outweigh the yield put in reserve. Excess productive capacity will at some point be exhausted, and accumulated surpluses allocated to current operating needs will be used up. Even when the adversities are met and the surges are dealt with, a detriment to the system as a whole occurs. The society is weakened in the process, and made more vulnerable to the next crisis. Once a complex society develops the vulnerabilities of declining marginal returns, collapse might require the sufficient passage of time to render probable the occurrence of an insurmountable calamity.

More importantly, declining marginal returns make complexity a less attractive goal to maintain. The problem solving strategy takes a secondary role to instituting simpler systems. The society tends to accept the option for less costly and less sophisticated social forms. The alternative embraced eventually is an endorsed level of disintegration. This has occurred to the United States in grand style. As marginal returns deteriorate, tax rates rise with less benefit to the local level. Irrigation systems go untended, bridges and roads are not maintained, the frontier is not adequately defended, product liability is not protected, and fraud prevention is compromised. Notice in the US how cities exhaust their funds with pension programs, unable to provide proper services like police protection. Notice how the US has countless bridges and pipelines (water, sewer, energy) that have gone without proper care. The nation has turned too much attention to war.

As the process degrades, many of the social units that comprise a complex society no longer pursue the increased general advantage, and instead pursue a strategy of personal independence. Then begins a different pursuit of their own immediate goals rather than long-term goals of the networked hierarchy. They see little benefit coming from systemic contributions. Behavioral interdependence (constructive groups) yields way to broader independence (working on one’s own). Shrinking resources are strained even more, as control slides away and is lost. The investment in regulatory systems is crucial, as efficiency devices. When they degrade into support systems for corruption, the system falters from its own rotten moral fabric and invites the seeds of rebellion. Eventually, perturbation occurs from within, as civil disobedience takes root. The lack of justice, the apparent predation by the upper hierarchy levels (bankers), and public frustration breeds anarchy like thousands of microdots within the society. See the home mortgage voluntary defaults. Justice is a delicate factor within a society. When justice is dealt, order tends to be preserved. When justice is absent, like for the big US banks, like for military aggression, the people object and depart from norms. The presence in the last two decades of bigger amplitudes in the crisis pain and cost, together with greater frequency of events in cycles, has combined to deplete the reserves of the nation. The Rubin Doctrine of surviving today even if taking aware reserves from tomorrow has assured much greater risk of systemic ruin. In my view, it has guaranteed ruin and collapse. See the Naked Capitalism for a thought provoking article (CLICK HERE). Complex systems are fascinating, especially when they enter a period of dysfunction.

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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 25 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

The Chinese really must think the American strategy and behavior to be braindead and self-destructive. The US helped them assemble a manufacturing industry, replaced US income with debt, and finally faces the Grim Reaper in a national episode of systemic failure. The US leadership is as stupid and mindless as the population is driven by compulsive consumption over the cliff, as the nation faces ruin. The Jackass warning has been for five years that the Chinese experiment would end in tragedy, and that when a preponderance of USTreasury debt is owned by foreigners, especially a single foreign nation, the Untied States will lose its sovereignty. It is worse. It lost its vitality entirely. With its financial engineering backfire, the nation is broken from a sequence of repeated asset bubbles & busts. With its wartime economy, the nation seeks new enemies and prefers exports of weapons to productive goods. The nation is like a Sherman Tank sinking in a sea of quicksand with credit cards as banners flown, all overdrawn and canceled. The globe has come full circle from a century ago. The export of opium by Britain to China back then, the US monopoly on narcotics nowadays. Uncle Sam prefers selling contraband to legitimate industry.

A spectacular sequence of events has taken place with respect to China and the United States in the past decade. The disastrous outcome was extremely visible long ago to the competent economists. This article cannot fully discuss and analyze the entire sequence, which in my view took the USEconomy from imbalanced, debilitated, and on the verge of ruin in ten years to chronic insolvency, accelerated breakdown, and systemic failure today. The official policy toward China by the USGovt on bilateral trade highlights the incredibly stupid and irresponsible nature of American leadership, especially in economic and financial matters. Let this piece serve as an outline of ruinous self-destructive policy, resulting in a climax failure in the Untied States. At the doorstep to a much darker poorer place, with countless traits associated with the Third World, the US as a nation with its USGovt and Wall Street compromised leadership refuse to admit grotesque errors. They do what they usually do, create more money to toss at half-baked solutions, and create a new enemy to lay blame on foreigners. This time though, the Chinese object of criticism, rebuke, hostility, and retaliation is the largest USTreasury creditor. The counter-attack from Beijing after an amateurish display of ignorance and tantrums seems directed at purchases of Gold & Silver, along with developing a stranglehold on the commodity supply chain. The financial managers in China have found inventive ways to discharge vast amounts of USTreasury Bonds. Their challenge includes finding secure worthwhile investment locations for the over $20 billion in bilateral trade surplus they build each month with the US, a formidable challenge indeed.

MOST FAVORED NATION TICKET

The rationale for the Clinton Admin to grant a Most Favored Nation status to China in its closing months in 1999 was a mystery to me. To be sure, the gesture went a long way toward developing detente with the slumbering giant. But it awakened the Middle Kingdom after two centuries of quiet, marred by a half century of harsh communism. Without question, some big promises were made in bilateral agreements. My suspicion is that the USGovt sought a lock on a new large scale creditor to purchase USTreasury debt securities, regardless of the consequences. Perhaps the USGovt sought a bagholder both either USTBonds or USAgency Mortgage Bonds, or both. With Japan and South Korea as neighbors, China would surely not resort to purchasing US weaponry. Given the coincident timing with the handover of Hong Kong from the British at the end of its 99-year lease, one must suspect that China might have promised not to transform HK into an economic prison camp shrouded in communist rules that would render it a wasteland, if the US and UK would only promise to assist the Asian giant with technology transfer, industrial support, and massive business investment. China probably promised some big bait of cheap imports to the USEconomy, the grand US achilles heel. The US was well along its pattern of consuming itself to death. Witness the retail emphasis within its economy, its crippling reliance upon debt, its junk food preferences, and its obesity. The China might have laid a great trap, and the US took it. Maybe the entire deal was well planned, a leftover of Mao Tse Tung days when he was a member of the Skull & Bones group.

The Most Favored Nation status was the ticket that opened the door, a New Open Door policy, for investment, lower cost in production, and the general awakening of the sleeping giant. What followed was a natural course of events to unseat the Untied States, converting it into a hopeless debtor with neither the prospect nor the means to repay its debt. Enter the new age of China, all perhaps the plan, the ever patient giant. The parallel to the destruction was a course taken by former USFed Chairman Greenspan. He guided the nation through the avenue to financial engineering and consequent implosion brilliantly, offering ideological justification, legislative obfuscation, and near the end, a nearly total abdication. He was a tremendous mesmerizing high priest. Greenspan’s second paycheck from his Swiss masters is consistent with working an agenda toward the demise of the American Empire.

INVESTMENT PARTNER

The first active stage between the United States and China was as investment partners. Rough figures of Western corporation (US, Canada, Europe) investment were $23 billion for the years 2001, 2002, and 2003. It was probably more. The Chinese industrial base expanded to the point that 60% of all Chinese trade surplus originated from Western corporations new to the scene. Yet the US leaders complained about the big surplus gathered, being part of its process. Worse, the Chinese factories often were equipped with the next generation Japanese machinery, like in machine tools, automation, and fabrication. A few years later, the German machinery entered the factory floors to some extent. US corporations saw an opportunity to tap the cheaper Chinese labor, and did so. The consensus opinion was that China could not be ignored for another century, so include them, partner with them, bring them into the fold. China quickly became the centerpiece to the globalization movement. One must wonder if the Western economist corps was so clueless as to be ignorant of the downside effects. China would draw countless jobs from the US and Europe. China would accumulate reserves rapidly. China would own foreign debt securities well beyond a critical mass. When the Hat Trick Letter started in 2004, my warning was constant and consistent, that China would eventually became a rival then a trade war opponent. The differential in labor costs would lead to a gigantic arbitrage that ended up at a breaking point, with extreme conflict at the end chapter. We are there. It will be a miracle to avoid a hot war.

THE LOW COST SOLUTION

The people of the United States no longer hear about the famed Low Cost Solution bandied about in 2002 and 2003 endlessly. It was supposedly a good thing, to reduce the cost of home electronics and housewares. For a idiot consumer society, that is a good thing supposedly. For a wise nation, it is a prescription for disaster. That was how the Jackass saw it. The solution of a lower production cost had a flip side, with staggering consequences that would put the US as a nation on a collision course with the Third World abyss. Simply stated, China’s gain would be America’s loss. The new jobs created in China to enable the lower cost in producing exports to the US consumer, hellbent on consuming his entire house in home equity, hellbent on consuming his entire future in order to live for today. The result would be assuredly lost jobs in America. It was obvious to all except the clueless cast of hack US economists. They proclaimed that the lower costs of production would enable cheaper imports into the USEconomy, a new wave of spawned growth with ripple effects in benefit, wider distribution from this vast Asian pool, more retail jobs, and a new American growth spurt. What utter nonsense! But they continue to ply their trade.

Quickly the jobs vanished from the USEconomic scene. Home appliances took much of the news headlines. The drain of jobs spread to Japan, as its robust economy began to feel the impact. In time the majority of consumer items like cell phones and home stereos were built in China for export to Japan. The labor arbitrage in globalization spares no advanced economy, which must operate under a higher cost structure. Follow washing machines, dryers, dishwashers, stoves, and more, came housewares and hardware items. The crowning blow was the announcement that Wal-Mart had 160 Chinese manufacturing sites in place. Sam Walton would not approve, as his motto was Made In America. The die was cast. Then came the problems of quality and reliability. Food imports from China had gradually earned a tarnished reputation of recycling chicken from reject sources and even roadkill for fresh caramel color and quick export to the US grocery shelves. The home building industry saw problems with drywall quality, even carpet chemicals. The SARS epidemic eclipsed the news headlines though, usurping attention. The same type of software reliability problems seen in the 1990 decade from India were experienced from Chinese exports. The greatest impact in the early stages of the Chinese industrial experiment were

• the loss of US jobs in favor of growth in China

• the loss of income from value added tangible industry in the USEconomy

• the rise of home equity debt from US households

• the US dependence upon asset bubbles for economic growth

• the growth of income in China

• the growth of the bilateral trade deficit with China

• the growth of the mammoth FOREX reserves in Chinese Sovereign Wealth Funds

• the increasing share of Chinese ownership of USTreasury Bonds

• the increasing share of Chinese ownership of USAgency Mortgage Bonds

• reduced quality and reliability of imported products to the USEconomy

• strain for the macro economic impact to the USDollar and Chinese Yuan

• strain for the macro economic impact to the USGovt debt and USTreasury Bond

• resentment in the US for jobs stolen by China

• blocked large firm acquisitions (see Unocal, BHP Billiton, 3Com)

• new areas of friction (e.g. bank rules, security rules like Google)

• a fast rise in tariffs and protectionism

ALARMING FOREX RESERVES

For US-based economists not to foresee a simple direct consequence of fast rising, alarming levels of FX reserves being accumulated by China, the American economists showed their true stripes as short-sighted and incompetent. The Jackass siren call was that eventually the Chinese holdings of USTreasury Bond debt would grow so great that US sovereignty would be challenged, compromised, then lost. The concept never entered the corrupted thought chambers of US economists and the cranium cavities. The challenge became so great within China for managing such huge sums of money, each and every month, that they created several Sovereign Wealth Funds. The Arab nations developed the concept, as did South Korea and Singapore, but the Chinese saw such funds flourish. When they collectively tipped the $1 trillion mark a few years ago, the news captured global attention. Nowadays, the Chinese total reserves from diverse accounts totals $2.65 trillion, a center of great power. Heck, that is almost as much money as has been stolen by past US presidents, and stolen by US defense contractors, which happens to be about $1.5 trillion from Fannie Mae and $2.2 trillion from the Pentagon misappropriations. One must love the verbiage, as misappropriation sounds better than stolen. And that does not even address the $2.3 trillion in counterfeit USTBonds sold (over and above issuance) into the market by JPMorgan Chase, whose evidence was in the Building #7 at the World Trade Center, turned into a heap with pervasive thermite residue.

In recent months, the US-China bilateral trade deficit has remained over $20 billion per month in stubborn fashion. The labor arbitrage is a dynamic that will not go away. Chinese labor, as the Jackass wrote in 2005, could rise by 50% and still be far below the US wage scale. In order to cement their grip on trade, and assure a reliable supply line, which keeps firm their surplus revenue stream and economic vitality, the Chinese embarked on a fortification strategy. They bought the Long Beach California port facility. They bought much of the Vancouver port facilities. They bought much of the Mexican port facilities. In the last year, they expanded to building the primary Brazilian port facility. Call it a stranglehold of deep water ports. The major challenge for China with gargantuan reserves and fast growing new entries into reserves is the management of them. They have major challenges in investing all that money. Well actually, it is not money, but rather credits acknowledged to contain value in recognized purchase power. The Chinese have been engaged in extremely brisk investment plans to secure energy supply, metal & mineral supply, and on the other side to secure markets to sell their finished goods. Instead of weapon sales, they typically promise to build community centers, schools, hospitals, marketplaces, railroads, and port facilities. Of course in the process, they ignore local dictatorships. They have made great inroads in West Africa, a region the US ignores except for Nigeria, where the common practice is to use muscle and bribery it seems. See the ex-VP Cheney case. China has made great inroads in the Persian Gulf and in Turkey, opening up Middle East markets and African markets.

SCAPEGOAT FOR US WRECKAGE

As the disaster unfolds from a mindless self-destructive pathway toward the climax in consumerism coupled with labor market abandonment, the USGovt has followed its usual pattern of blaming the trade partner. China has been labeled a currency manipulator, a thief of jobs, everything but the old heartless yellow scourge. Save that label for last. The USGovt, with its recent Wall Street masters, has been deeply involved in wrecking the integrity of most every financial market it touches. The USTreasury Bond market has a scad of naked shorts, failures to deliver, and leverage from Interest Rate Swap contracts that help to maintain the high value and low rates. The USGovt keeps the Consumer Price Index under wraps, preventing an unwanted rise from appearing. In the 2000-2007 period, the rising home price component was carefully removed from the CPI. It featured the home equivalent rent component instead, a tame moribund figure. After 2007, the stat rats decided to include the home price component again, since it is falling. Now the CPI features a home price item that consists of 25% of the index incredibly. Then the USDept Treasury assures that enough Treasury Investment Protected Securities are bought by the USFed, so that the early warning system on price inflation is cooled by a bathtub of cold water at all times. Then the USGovt uses suppression of the gold price in order to keep the USDollar elevated. The currency stabilization funds are commonly recognized mainstays of USGovt financial management. In fact such stabilization funds have about 20 to 30 hidden agencies busily defending the USDollar value, our freedom, and our way of life. During all this market manipulation, the USGovt has angered its creditors to the extreme.

So the USGovt reveals its many currency manipulator sides. A scribe would be negligent not to mention the Shadow Banking System that is the province of the US banking industry, fully supported by the USFed and the USDept Treasury. The hidden banking network has the unique feature of profiting from other nations as their financial structure heave from the great stress, and decline into a wrecking field. Keep in mind they include vast import of fraudulent bonds from the US issuers. The shadowy system used to boast $1400 trillion in credit derivatives and other nuclear sewage, now perhaps only $1000 trillion in a celebrated deleverage initiative. Try not to laugh. These instruments go a long way to manipulate the value of USTBonds, the USDollar, and the entire usury costs of the US universe of corrupted value.

The USGovt finally has complained about Chinese Yuan currency manipulation so much and for so long, not to mention with such shrill vacant thought, that the world has isolated the US on the global stage. Take the South Korean G-20 Meeting a month ago. The US was given lip service as appetizer hors d’oeuvres, and a cold shoulder at the dinner table. Nobody followed the US lead, nobody. It was the most shameful G-8 or G-20 Meeting in Untied States history. The finance ministers took their cues from the Chinese delegation. The crowning climax to duplicity has taken shape in the last year. Early in 2010, the professor occupying the USFed Chairman post repeatedly mentioned his plan for an Exit Plan from the 0% rate corner. The Jackass dismissed such nonsensical propaganda, along with equally lunatic delusional notions like Green Shoots of USEconomic recovery. If Bernanke were graded like a graduate school student for accountability on forecasts, analysis, and white papers, he would fail quickly and exit the program (a very different exit strategy). As the distress to the USEconomy and US financial system became acute in 2010, the USGovt blamed China for more currency manipulation. It became a tired old song with little or no meaning, more like a blunt stick to beat the Chinese investment partner from 2002, to pummel the creditor. How quickly we forgot our trade partner, our source of Low Cost Solutions!!

The climax came with admission that the USFed would embark on Quantitative Easing #2, a correct Jackass forecast cited all through the first six months of 2010. The USFed would print money, buy USTBond debt, flood the bond market with liquidity, and directly manipulate the USDollar currency in the process. The debt monetization in 2009 and 2010 was much bigger than the exposed QE1. The USDollar has been in downtrend ever since. Gold has been in powerful uptrend. The duplicity comes from the USGovt continuation of charges that the Chinese Govt manipulates its Yuan currency. The DC spin has no other message. To be sure, China keeps a loosely managed peg to the USDollar, never to permit too fast a rise. But the USGovt by comparison is the undisputed world champion of currency manipulation, debt production, market undermine, statistical distortion, and bank ruin. See the Flash Trading in the stock market.

CURRENCY WAR & TRADE WAR

The Competing Currency War has ramped up, heated up, and agitated every single major and secondary nation in the global economy. The primary detonation trigger for the currency war was QE1, the printing of $1.4 trillion of phony money by the venerable USDept Treasury, blessed and managed by the august USFed, and subsequent purchase of two gaggles of USTBonds and one gaggle of USAgency Mortgage Bonds. The world watched in horror, as the USGovt gradually lost its buyer base in Treasury Bond auctions. The totally lost USFed under the myopic stewardship of Professor Bernanke, the great student of Great Depression revisionist history, pounded the podiums about an Exit Strategy once again. Except this time after the nutty home buyer tax credit expired, the USEconomy slid further into recession. The lies told and reports published on price inflation, which rages higher at 8% according to Shadow Govt Statistics competent analysis, permit a 5% to 6% lie to be built into the GDP calculations. If price inflation is not really 2% to 3% as reported, then the GDP growth is not 3% as reported, but actually minus 2% to minus 3% instead. If simple annual GDP is compared to annual GDP from a year ago, then the GDP is running at a 7% recession. This revelation is astounding!!

So the USGovt refuses to effectively stimulate the USEconomy, since beholden to Wall Street for $trillion welfare programs. The USGovt conducts revolving door sessions on home loan modification, offering much sweeter incentives to the foreclosure mills run by the FDIC for the big banks. And the USFed admitted in August and September that the QE2 project would be unleashed. The engine for the global Competing Currency War is clearly the United States, where the asset bubbles were engrained in policy, where the multi-$trillion bond fraud originated for global export, where the criminal prosecution is nowhere, where the multi-$trillion monetary press is hard at work. The response from global trade partners is shock and horror, followed by hasty actions. The central banks around the world are busily responding to rising currencies. The December Hat Trick Letter gold report shows evidence in the TIC Report on USTBond holdings by major nations. Some nations are reducing US$ exposure by USTBond sales. Other nations are quickly buying up USTBonds to prevent a fast rise in their native currencies. Other nations are part of the hidden US-UK network that conceals their vast USTBond purchases, all of which are denied by Bernanke before the USCongress. Why would the United Kingdom be so busy if not part of the illicit game of currency ruin in a desperate survival initiative? The United Kingdom, despite being locked in an intractable downward spiral with insolvent banks, wrecked home equity, and horrendous national deficits, has somehow seen fit to increase its USTBond holdings by more than triple, from $126.8 billion in September 2009 to $459.1 billion. And China is a currency manipulator!!

The Competing Currency War has a long way to go. Healthier nations with a brisk export trade must be careful not to suffocate under a strengthening currency, as the USDollar steers itself down into the devaluation morass. The brain trust of the Wall Street and London pedigree know full well that the game is over, the fiat USDollar is trash, and that the Paradigm Shift features a power handoff to China and the East from the insolvent West, whose flagship in the US & UK is preoccupied by war. The Competing Currency War is utterly fascinating, since it can be pre-written according to a tight script. Japan is buying USTBonds to prevent a fast rise in the Yen currency, which has already done harm to their export trade. The emerging nations are being flooded with speculative funds chasing higher bond yields, proceed funds from commodity sales, and much more. They will be harmed by rising native currencies. See Brazil for example, which has instituted new rules and taxes on incoming speculative money flow. They have a food price inflation problem, which is not from speculation, but rather from in my non-expert opinion a result of three decades of cutting and burning the Amazon Rain Forest. Their rain patterns have changed radically.

The real big battlegrounds are between the US & China and among nations within the European Union. The Europeans cannot continue with the fractured common Euro currency more longer, especially with defaulting sovereign bonds underneath them. Its Euro Bonds are so different, that arbitrage pulls apart the Euro at a time when the sovereign debt structure is falling like a series of dominos. The big enchalada is clearly Spain, which is near default. It will change the EU landscape radically. Today some silly nonsense propaganda deception news was promulgated that $40 billion would be needed to fix Spain and its banks. If Spain is three times larger than Greece, and the Athens banks needed $110 billion, one might use lower math to conclude that perhaps over $300 billion would be needed to come to Spain’s rescue. A rising Euro renders great harm. So again, according to script, the EU leaders and the EuroCB chieftains will do what they can to bring down the Euro currency, an exceptionally easy task. Such an easy task to order more Euros and bail out more European banks. The decision is simple, and in the process of pushing down the Euro exchange rate, the Gold & Silver prices rise substantially. The Competing Currency War swirls. The only winner is Gold and its shiny quicker brother Silver.

GRAND CREDITOR & LIQUIDATOR

China has become the world’s great creditor. So far they have not abused their role and position. They tend to cut trade deals more than weapons deals like the US has done with the entire Persian Gulf for five decades. The most clever action so far by China in the last two years was to establish a Dollar Swap Window for Greek Govt debt conversion. They obviously are using USTBonds in a dumping exercise. They are building a broader Dollar Swap Window for conversion of Portuguese and soon Spanish Govt debt. They have won a freeze on trade war decisions at the governmental level across the entire European continent in a brilliant stroke. They won access to world class German industrial products. They have an avenue to dump USTBonds and in a sense enter the EU as a member nation, its creditor partner. The maneuver essentially isolates the Untied States further. Just this week, the clownish notion of US insulation from PIIGS sovereign debt was smashed. The US banks are vulnerable, despite past denials.

China has discovered that it can dump far more USTBonds by purchasing discounted EU member nation debt securities than it ever could in buying up West African deposits or Persian Gulf energy sources or South American deals. American observers shook quake in their boots, since China has learned how to enter the world of high finance. Sovereign debt is the closest thing to currencies in existence. The bonds are the obverse side of the currency. China has begun to expand its Yuan convertibility. Moves with Brazilian Real were followed by a less significant move with the Malaysian Ringgit. In late November moves with the Russian Ruble were cemented. In two years, the Chinese Yuan might be on nearly equal footing as the USDollar as a global reserve currency. The fact that it is rising will be one of its strongest features.

GOLD CENTER OF RETALIATION

The trade war has blossomed from import & export of goods & products to the financial sector. The resentment over currency manipulation has a backfire. China is heavily motivated to purchase Gold and to convert reserves to Gold. They are using USTreasury Bonds to buy Gold. They are fast exhausting the available supply of gold bullion, the real tangible physical version with inherent value. They are encouraging the Chinese population to buy gold in any form, relaxing the rules. At the same time, they are playing the Wall Street and London corrupt rigged game. They are using USTBonds to purchase layers of indexes futures contracts in gold. So as they buy up gold bullion, they pack underneath layers of long contracts at slighly lower prices. It is like a rugged strangling of the victim about the neck while covering the mouth & nose with a brutal cupped hand. The Chinese has engaged in the active war of words. They have called the USDollar a joke for a global reserve currency, unworthy since it is linked to gargantuan deficits. They carefully avoid accusations of bond fraud. The Chinese have called the USDollar the ultimate in currency manipulation, due to its open abuse as a monetization instrument. The mere fact that the USDollar is the object of a new carry trade, on then off, is another insult. Imagine using the USDollar at 0% cost as the source to fund speculative trade. It guarantees a powerful longstanding enduring decline.

GOLD & SILVER BREAKOUTS

The breakouts in the Gold & Silver prices will continue for the next two years and beyond. Every several weeks, a fresh record high will come. The unique aspect of the precious metals breakout is its foundation in a crumbling global monetary system. Demonstrated proof is that the Gold & Silver prices are making record highs in all major currencies. The gold chart is less impressive than the silver chart. The long held favorite by the Jackass is silver. Central banks own none, and industry demands plenty, as substitutes are few. Gold & Silver have found their place as global reserve assets and currencies within FOREX accounts during the global assault on sovereign debt. The claims that Gold & Silver are in a bubble are as stupid as they are humorous. Money is never in a bubble. The big bubble is USTreasurys. The desperation of the captains of fiat fraud is showing like underwear worn on the outside in plain public view.

Note the Silver price breakouts in all four major currencies, from upper left to lower right in the US$, the Euro, the Pound Sterling, and the Yen. The promised land for many precious metals investors has been to witness a bull run in all currencies. It has begun, and it will continue until the series of pre-ordained climax events occurs. It will be as tragic as exciting. The global monetary system is collapsing, led by sovereign debt ruin and amplified monetary expansion that brings no viable solutions anywhere. The major banks are collapsing in insolvency and futile defense of their broken fortresses. Government deficits are spiraling out of control, whose solution in fiscal austerity only makes the economies weaker. The metals exchanges are being systematically drained, even as revealed for the leveraged paper fraud they operate. They buy and sell paper gold and paper silver without too much benefit of physical, permitting naked short sales by the biggest US and London banks. Their game is being called. The Swiss banks are under critical eye for foot dragging on gold & silver withdrawals from Allocated accounts.

The Chinese have done something remarkable, only to be done if they know the game is over and the victory over fiat paper money is complete. The Chinese have laid out their game plan, their modus operandi, their tactics if not strategy, through an anonymous London broker. Hats off to the King World News for sharing the invaluable information that should encourage even the most timid and reticent investor. The Anglo bankers are stuck!! They are running out of physical metal to sell in a fractional scheme. They cannot afford to pounce too hard on the price, with either naked shorts or higher margin requirements. Doing so only plays into the Chinese hands, which are grabbing all the bullion available. So the challenge is for the Anglo bankers to control the pace of the demise of the Gold & Silver metal market. This is game over. In these times of monetary hyper-inflation, called euphemistically and absurdly Quantitative Easing by another name, the prospects for a double and triple in the Gold & Silver price is utterly obvious.

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After QE2, analysts were looking for possible consequences of the Federal Reserve Bank’s actions. What has become apparent is that the Fed has created another bubble in China. Investors globally have transferred devalued US dollars and euros to buy Chinese property and equities. China has had to combat imported inflation with rapidly rising asset prices. An influx of capital has caused a real estate bubble, a rise in costs of basic goods, and excessive speculation in the commodity markets. The Chinese central banks will be observing the inflation data which should be coming out this weekend and will be compelled to act aggressively to prevent China from a bust similar to the housing crisis which occurred in the United States in 2007. Yesterday’s IPOs showed that irrational exuberance is here once again, none since I have witnessed since the late ’90s.

I never grew so fearful of the Chinese market until I began hearing the fanfare around yesterday’s IPOs. I began to read the marketing language and began to have strong feelings of déjà vu. I felt like I was reading something that I read almost 10 years earlier with a company called boo.com, which was labeled the next Amazon (AMZN). They were also underwritten by Goldman Sachs (GS). Boo.com burned through $185 million in 18 months and did not make any profits. Investors were wiped out. {FLIKE}IPOs are a measure of market sentiment. Companies come to the market as the future looks bright and they’re expected to expand. A pattern of IPOs begins to show over-enthusiasm and possible peaks in the market. The number of IPOs is a useful tool for technicians to confirm tops and troughs in the market.

Investors are obsessed with China, just like the IPOs in the late ’90s right before the tech bubble burst. They piled into two new IPOs, Youku and Dangdang, which are not showing much of any profit and only offering panaceas. This year approximately one in four IPOs are Chinese companies. Investors are expecting exponential growth, and even though these have been marketed as the next YouTube (GOOG) and Amazon, both companies have a long way to go; they are currently not making much profit at all. Lessons should be learned from the tech bubble: Highly marketed IPOs should be viewed as a contrarian signal. Ironically, these latest IPOs come at a time when the Chinese central banks are committed to fighting excessive speculation.

International markets are going to carefully examine China’s inflation data (to be released this weekend). This information should evoke central bank response by early next week.

The chart above shows the rapidly accelerating price appreciation of housing markets in China’s major metropolitan areas. China has already implemented regulations to curb rampant speculation in their housing market.

Many investors are unaware of the rising dangers of externally generated inflation. Month after month applications to start real estate operations from foreign entities are doubling. The carry trade has become apparent. Investors are exchanging easy, electronically printed money for Chinese assets.

The chart above illustrates the China 25 Index (FXI) and shows a possible “V” reversal top and negative divergence. This is when price breaks into new highs, then with no warning, the price breaks the uptrend and support levels. The FXI broke through the 50-day moving average and has already failed to regain the 50-day on the upside once. Until it regains that 50-day, I am cautious on commodities and equities. Ideally a break into new highs should show some follow-through strength, and this has not occurred. The Chinese markets are showing weakness, and this effect has morphed over to the precious metals and commodity markets.

It would be naive to think that a surprise hike in rates and a downturn in China would not put pressure on gold and silver. Gold (GLD) and Silver (SLV) are beginning to show signs of bearish reversals after a powerful move. Open interest in gold futures peaked on November 9, a major reversal day. A tightening policy in China could keep buyers away for a significant amount of time or until prices come down to a more reasonable level.

The demand and consumption of raw materials in China has a major impact on commodities. It used to be that one had to watch a sneeze from the US, but precious metals investors need to also be aware of a sniffle from China.

Source: China Gold Imports Increase Five- or Six-fold

After outperforming pretty much every asset class, most certainly stocks, and even gold, year to date, the “poor man’s gold” may surge even more. The reason: China may cut silver exports by as much as 40%. As Bloomberg reports: “Shipments may decline from about 3,500 metric tons in 2009, said Feng Juncong, chief analyst at the state-owned Antaike, without providing a specific forecast. Customs data show exports plunged almost 60 percent to 970 tons in the first eight months. Cancellation of an export rebate in 2008 is also hurting shipments, she said.” This is in line with recent expectations from the World Gold Council which has previously stated that China will likely become an increasingly greater buyer of gold both institutionally and at the retail level. And while we have discussed the impact that China’s (temporary) ban on exports of rare earth minerals will have on prices (hint: not down), this will also end up driving silver prices higher. The catalyst, as usual, inflation: “There are Chinese investors now hoarding silver, along with other resources, amid anticipation of higher inflation. China is short of resources so these investors believe the metals will be more valuable in the future.” These investors are correct.

More from Bloomberg:

Reduced exports may bolster prices that are trading near a 30-year high on speculation that governments worldwide will take further steps to stimulate their economies, weakening currencies and increasing demand for assets that are a store of value. China, the third-largest producer after Peru and Mexico, revoked export rebates in August 2008 to curb use of natural resources.

“There is huge demand in China this year and that has affected exports, which were already hurt after the tax rebate was abolished,” said Ng Cheng Thye, head of bullion at Standard Bank Asia. “The demand is coming from all areas, including jewelry, investment and fabrication and this has resulted in a physical market shortage in the Far East.”

“China may sharply reduce its silver exports this year following the scrapping of the rebate and as domestic demand picked up amid expectations for higher inflation,” Feng said. This year’s 5,100-ton quota is unlikely to be fully used, she said.

China’s silver production, including mined, by-product output and recycled material, grew by an average 14.9 percent every year in the 20 years since 1990 to 10,348 tons in 2009, Feng said. Growth was mainly because of the fast-growing production of lead, zinc and copper, which generates silver as a by-product, Feng said.

The country’s silver output dropped 1.9 percent in the first eight months to 7,445 tons, she said. About 60 percent of China’s silver mined output is in the form of by-product of base metals, according to Antaike estimates.

The one natural better seller in the silver axe has long been JPM. The question of how the bank will cope with an increasing demand of investors for physical, as well as overall rising prices and creeping margin calls to its trading desk so far remains unclear. We were not surprised that none of the analysts on the conference call asked the question: after all, they are all in the same boat. It is also not surprising that there is an increased selling pressure on gold today, which even with the DXY and stocks reclaiming yesterday prices, remains at largely depressed levels. Some more skeptical observers believe the whole action over the past two days was merely enacted to break the very tight (and higher beta) correlation that PMs had exhibited vis-a-vis risk assets. So far, it is succeeding.

Original: http://www.zerohedge.com/article/chinese-silver-exports-drop-40

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There has been a great deal of excitement about the recent performances of gold and silver with most analysts extremely optimistic regarding their potential. That being said technical analysis shows that gold is in for some very choppy seas ahead compared to the surging seas of the Chinese stock market. Perhaps today the refrain “Got Gold?” should be replaced with the words, “Buy Chinese Stocks!”

Gold in a Bull Market With a Bearish Basis for the Intermediate-Term
At this point with the gold price sitting at an all-time high it has developed two major patterns that should draw our attention.

1.  Ascending Broadening Wedge
The first pattern is a 7-year Ascending Broadening Wedge or megaphone formation confined by line A and line B. This pattern is similar to a rising wedge but with a broadening price pattern and it tends to appear in a bull market with a bearish bias. The most important feature of this pattern is that the swing amplitude between two boundaries becomes larger and larger, and price movement gets more and more volatile. This feature indicates that price sooner or later will have a downward swing to re-touch or re-test the lower boundary (line B), although the big upward swing generates a great attraction like fireworks.

Gold currently has a very broadening range between 900 and 1400. Once a downward swing happens, a drawdown could be very significant, with no mention of any potential downside breakout.

2. Rising Wedge
The second pattern is a 2-year Rising Wedge formation confined by line A and line C. This pattern also typically has a bearish bias but it can be realized only when a downside breakout happens at the lower boundary of the wedge. It looks like that two boundary lines of the current rising wedge on gold will merge at near the price of $1,500. It indicates there is a big potential for the price of gold to test the lower boundary line C of the rising wedge in the next three to six months before reaching $1,500.

A combination of an ascending broadening wedge and a rising wedge is a typical characteristic of a state of increased disequilibrium driven by overconfident market participants and is a sign of setting up a potential powerful volatility storm in the near future.

Shanghai Stock Exchange Composite Index Expected to Have a Fierce Advance Soon
Since the bearish Death Cross in the early part of this year (see chart below) the Shanghai Stock Exchange Composite Index (SSECI) has been depressed and has been in a downward channel for the last 14 months. However, a new uptrend should start after the bullish Golden Cross, which is defined by a successful breaking through both the 17-week moving average and the median line of the 14-month downtrend channel. Please note that my definition of the Golden Cross is different from the traditional Golden Cross of the 50-day and 200-day moving averages.  

Indeed, with the Golden Cross being confirmed on October 8th, the SSECI has surged 10% and is fast approaching the target level of 3,000 at the upper boundary of the 14-month downtrend channel which probably will not be able to resist a fierce advance.

Three Peaks and the Domed House
A special chart pattern, “Three Peaks and the Domed House“, is emerging from China’s SSECI. With my modified version of George Lindsay’s basic model (see below), the “Three Peaks and the Domed House” pattern can be divided into five major phases:
1) Three Peaks phase,
2) Basement phase,
3) First Floor phase,
4) Roof phase, and
5) Plunge phase.

This modified version, using “phase-counting”, is a macro approach to Lindsay’s basic model, and it is different from the classical micro approach using “number-counting” from 1 to 28. In the chart the SSECI is plotted as a red line against Lindsay’s idealized model in a black line.

From June of 2009 to April of 2010, the Shanghai index developed the “Three Peaks” phase. Then it had a sharp separating decline to reach the July 2010 low at 2320 and formed the “Basement” phase during this summer. Now it just started a rapid advance in order to build the “First Floor” of the Domed House.

Calibrated against Lindsay’s model:
a) the SSECI should reach the “First Floor” phase near 3300 with a 10% upward move from the present price by the end of this year
b) the target “Roof” phase of the Domed House is projected at 4200 for the SSECI by the middle of next year which represents an 81% upward measured move from the low of the “Basement” to the high of the “Roof”.

(Last week Market Vectors China ETF (PEK) was launched by Van Eck Global with the claim that it is the first and only U.S. listed ETF designed to give investors exposure to China’s A-Shares market. It would appear to be a very timely introduction!)  
Conclusion
There you have it! The ascent of the price of gold to $1,500 is going to be VERY volatile over the next few months while the Chinese stock market is about to take off in a major way. The choice is yours.
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Dr. Nu Yu (fx5186.wordpress.com/), co-founder and president of Numarkan Investments and an affiliate of the Market Technician Association, is a frequent contributor to www.munKNEE.com “It’s all about MONEY” and www.FinancialArticleSummariesToday.com “A site/sight for sore eyes and inquisitive minds”. He can be contacted at editor@munknee.com