Same Old Song and Dance

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Today the ADP report came out claiming U.S. private-sector firm employment rose 42,000 in July. "July's rise in private employment was the sixth consecutive monthly gain," said Joel Prakken, chairman of Macroeconomic Advisers, which produces the report from anonymous payroll data supplied by ADP. "However, over those six months increases have averaged a modest 37,000, with no evidence of acceleration."

On Friday, the government is scheduled to report nonfarm payrolls for July, and economists polled by MarketWatch are looking for a decline of 60,000. That payrolls estimate includes an expected increase of 96,000 jobs in the private sector, and layoffs of about 145,000 temporary Census workers. All in all stimuli continues to evade the private sector more than a year after its implementation. Congress and the administration continue to give lip service to the problem of high unemployment but offer no real solutions. The inability to create jobs reflects the stress in the small and medium-sized business sector as they have been completely shut out of the

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credit market as government and the banking sector absorb all available credit in order to save their own skin. This crowding out will only increase as deficits increase and that's why GDP will continue to decline and unemployment will continue to rise.

I have to laugh a little bit when I see headlines announcing that Barclays had fewer bad loans than projected or markets are rallying because the bond sales in Greece and Spain went well. What they're not telling you is that the central banks are buying up all of this bad debt in an effort to steer clear of a financial disaster. Unfortunately, central banks have no assets of their own. Fiat currency is not an asset because it is a "promise to pay" and that is debt. So they manufacture debt in your name and use that to retire bad debt, at face value no less, held by privileged third parties. That is precisely what is happening now in both the US and Europe, and it is manifesting itself in all of these wonder balance sheets that the banks are producing. These superb results will go part and parcel with provisions for obscene bonuses for upper level management. Think of it as one last trip to the financial trough!

The financial markets are of course pricing all of this in and that's why stocks have been on the rise, the dollar has been falling, and bonds remain stubbornly at the top of their trading range. The bond vigilantes see more liquidity along with historically low rates to infinity and beyond. I have even mentioned on occasion that the Fed will, at some time in the future, implement a negative interest rate. Of course it's all in an effort to reverse the primary trend from bearish to bullish, and as everyone will find out the hard way, it is to no avail. The dollar is now anticipating an avalanche of supply coming down the pipeline, and that's why it has been in decline for

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more than a month and a half. Yesterday the greenback fell again and closed right on its 200-dma at 80.40, and within shouting distance of critical support at 80.16. In the process the US dollar has become extremely oversold and is due for a correction. Any such reaction will more than likely be of the 7 to 12 day variety and will take the index no higher than 83.39 which is the level it broke down from. Then we'll see a real test of 80.16 and I am convinced the dollar will break below it at that time. That will be considered a vote of no confidence with respect to US economic and fiscal policy, and result in an eventual test of the all-time low at 70.70.

As I pointed out several days ago, gold is observing the same phenomena but from the other side of the mirror. It sees the never ending deficits coming out of the US, no initiate on the part of the US and Europe to actually write off bad debt, and the inundation of fiat currency that is on the near horizon.  That's why gold started to inch its way higher just when

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everyone was convinced that it was on its way down to 1,000, or even as low as 850.00 depending on whom you asked. Instead last week gold held the first line of support at 1,158.20 and is just now sticking its head back up above 1,200.00.

I look at gold, silver and the HUI and I see all three following an upward trajectory over the coming weeks and even months. The September silver futures contract is up another eight cents at 18.50 and that is right on decent resistance. Silver continues to look cheap to me and I have noticed that with both gold and silver the spot price trades above the futures price on numerous occasions. This tells me that there might very well be a shortage of physical and that is precisely the rumors floating around the COMEX right now. I have no doubt that large interests sell paper gold and silver to defend their positions/suppress the market, especially the silver market, and sooner or later you'll have a lot more paper obligations than physical to meet that obligation. Since the Commodities and Exchange Commission does nothing to enforce abuses, or control naked short selling, I would not be surprised if we are now at the tipping point. If that's the case metals prices will explode once the cat is out of the bag. Finally, my only real concern is with gold/silver stocks and that concern is twofold:

  • If a mining company produces gold and silver, and a government is pressed for cash, they will nationalize the mine. You as the owner can buy insurance for country risk but who's to say the insurance company will be around long enough to pay you off,
  • If the stock market seizes up, you can own the shares in the best gold mine in the world and you won't be able to trade them

Therefore I will continue to liquidate my portfolio, selling into strength, over the next month or so.

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August 4, 2010