Something big just changed in Gold and Silver markets

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Erik T.'s picture
Erik T.
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Something big just changed in Gold and Silver markets

I keep three live charts on my desktop at all times: S&P 500 futures (March contract), Gold futures (April contract), and Silver futures (March contract). For the last few weeks (since the big correction in metals began to stabilize), the three charts have moved in almost perfect unison. If the S&P is trending down then suddenly ticks up, you could expect to see Gold and Silver turn up within a few seconds. The three markets were moving almost in perfect lock-step, sometimes varying in magnitude of price change, but always moving together directionally. Meanwhile long bond futures were moving almost perfectly in the opposite direction.

My interpretation of this was that it's been an entirely liquidity-driven market. Risk capital was flowing in and out of "risk assets" which I put in quotes because I think its silly that the market perceives PMs as risk assets. As the money came out of the treasury market, it was going into S&Ps, gold and silver all together and at once.

This trend broke about two days ago. Over the last 48 hours the S&P has continued to be range-bound with an upper limit around 1079, while gold and silver have suddenly broken out of lockstep with equities and have moved much higher. Also, gold and silver are no longer moving in lockstep with one another as they were a week ago. Previously if you overlayed the gold and silver charts, the scale was different but the shape of the price plot was identical. Now it's changed and the markets appear to be operating independently.

I haven't come to any firm conclusions on what this means, but I am convinced that something rather significant has changed behind the scenes. If anyone has any opinions on what's going on (or links to related articles), please post them here.

Whaddaya think, Morpheus?

Erik

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Re: Something big just changed in Gold and Silver markets

"This trend broke about two days ago."

Hmm.

The coincides with the start of the Chinese new year - The Year of the Tiger.

This suggests the driving force may be coming out of the Far East, and perhaps China.

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Re: Something big just changed in Gold and Silver markets

And GS is talking about the Yuan soon being re-valued:

http://www.zerohedge.com/article/goldman-yuan-what-do-they-know

 

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Re: Something big just changed in Gold and Silver markets

...and gold's up over 2% this morning (10:17 a EST)

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Re: Something big just changed in Gold and Silver markets

I do not know if this is related, but we just learned that China dumped $34 billion in US bonds in December.

http://www.zerohedge.com/article/move-over-china-beijing-sells-whopping-342-billion-treasuries-december-japan-becomes-largest

 

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Re: Something big just changed in Gold and Silver markets
Lemonyellowschwin wrote:

I do not know if this is related, but we just learned that China dumped $34 billion in US bonds in December.

http://www.zerohedge.com/article/move-over-china-beijing-sells-whopping-342-billion-treasuries-december-japan-becomes-largest

 

Just read that. Man, the plot twists and turns.

 

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Re: Something big just changed in Gold and Silver markets
ErikTownsend wrote:

I keep three live charts on my desktop at all times: S&P 500 futures (March contract), Gold futures (April contract), and Silver futures (March contract). For the last few weeks (since the big correction in metals began to stabilize), the three charts have moved in almost perfect unison. If the S&P is trending down then suddenly ticks up, you could expect to see Gold and Silver turn up within a few seconds. The three markets were moving almost in perfect lock-step, sometimes varying in magnitude of price change, but always moving together directionally. Meanwhile long bond futures were moving almost perfectly in the opposite direction.

My interpretation of this was that it's been an entirely liquidity-driven market. Risk capital was flowing in and out of "risk assets" which I put in quotes because I think its silly that the market perceives PMs as risk assets. As the money came out of the treasury market, it was going into S&Ps, gold and silver all together and at once.

This trend broke about two days ago. Over the last 48 hours the S&P has continued to be range-bound with an upper limit around 1079, while gold and silver have suddenly broken out of lockstep with equities and have moved much higher. Also, gold and silver are no longer moving in lockstep with one another as they were a week ago. Previously if you overlayed the gold and silver charts, the scale was different but the shape of the price plot was identical. Now it's changed and the markets appear to be operating independently.

I haven't come to any firm conclusions on what this means, but I am convinced that something rather significant has changed behind the scenes. If anyone has any opinions on what's going on (or links to related articles), please post them here.

Whaddaya think, Morpheus?

Erik

COT report shows the big institutions have eased-up considerably on their short open interests. Erik, just my .02/100th of a reserve note, but methinks that the big banks are using this opportunity to at least short-term exit their exposure to these markets, due primarily to the surge in the dollar.

However, having just read that China is dumping US debt on the open market, I think several factors are at play. First, the non-institutional long interests have risen without the short-interest counterbalance of the megas. Second, the flood of US paper, while a drop in the big scheme of things, is psychologically bullish on the PMs. Let's face it. Having Japan, which is a mess, as our new primary creditor is disconcerting. Third, China's long-term strategy appears to remain unchanged: It's a net buyer of gold and silver.

IMHO, the near future will depend on the direction of the DXY. It's stalled around 80 the past week. If it's a dollare correction then I think this move is no big deal. If a reversal, then lookout.

I'm not a professional investment counselor and these are mere opinions. So don't sue me. ;)

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Re: Something big just changed in Gold and Silver markets

Erik. The gold-silver decorrelation puzzles the hell out of me too. Don't have an answer to that. Sorry.

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Re: Something big just changed in Gold and Silver markets

Hi there - a quick note from my flat here in London.

Erik, I think the correlation chart you really  want is the Dollar index, espcially the Euro cross.  Everything, and I mean everything including the S&P futures) has been tradiong off of the dollar.  I agree that its a liquidity driven event and I further agree that "risk" is not a realistic or useful measure.

As I scan across my charts I don't notice any significant breaks from the past patterns.

Ny cncer, as always, remains that eh global markets are acting like one gigantic market instead of several independent markets.  This means the degree of asset correlation is very high and that should we get another accident, everything will tumble down the crevasse, seeing as how they are all roped together.

At any rate, I can tell you what is hapening in any market with 80% precision simply by looking at the USD index.  I don't know hwy, but that's how it's been for six to eight months.

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Re: Something big just changed in Gold and Silver markets

The Natives are restless.....

Bomb Explodes At JP Morgan Office In Athens - No One Hurt

Greek police say a bomb exploded Tuesday evening outside an office of JPMorgan Chase & Co. (JPM) in Athens, The Associated Press reports. No one was hurt, the AP says. The bomb went off after a warning call to an Athens newspaper. From Dow Jones.

http://www.zerohedge.com/article/bomb-explodes-jp-morgan-office-athens-no-one-hurt

 Europeans seem to get rather "involved" in their Soccer games makes you wonder about the Banking games???

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Re: Something big just changed in Gold and Silver markets
idoctor wrote:

The Natives are restless.....

Bomb Explodes At JP Morgan Office In Athens - No One Hurt

Greek police say a bomb exploded Tuesday evening outside an office of JPMorgan Chase & Co. (JPM) in Athens, The Associated Press reports. No one was hurt, the AP says. The bomb went off after a warning call to an Athens newspaper. From Dow Jones.

http://www.zerohedge.com/article/bomb-explodes-jp-morgan-office-athens-no-one-hurt

 Europeans seem to get rather "involved" in their Soccer games makes you wonder about the Banking games???

Sad news.

Violence is not going to resolve this.

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Re: Something big just changed in Gold and Silver markets

Surely the gold price over here must be partly due to a loss of confidence in the Euro after the Greek debts that were being covered up?

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Re: Something big just changed in Gold and Silver markets

Re athens bombing.

 

Anarchist groups operating in Athens do this several times a year. Notice they called in the bomb threat in advance and set it off at night. Athens is the anarchist hub of the western world. I think its only a matter of time until the greek gov comes in and takes away their save haven.

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Re: Something big just changed in Gold and Silver markets

I'm still not convinced that gold and silver have pulled a reversal yet BTW.

 

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Re: Something big just changed in Gold and Silver markets

Quis custodiet ipsos custodies qui-tacet consentit?

http://covertress.blogspot.com/2009/08/countdown-to-implosion-of-dollar.html

"You can take your waves, percentages, algorithms, quants and quarks and throw them directly into the basket. The time for lines and squiggles are behind us. The common shares of the US dollar are and have been in a long term downtrend. That downtrend is 81 days 75 days from implosion. [Letter originally written on August 19, 2009.] The selling of the US dollar and US dollar instruments is increasing in international markets, making it ever more difficult to manipulate the popular US dollar index, the USDX."

In my quest to find out what Morpheus' quote meant I found this article, guess the lesson is never make exact predictions on pretty much anything.

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Re: Something big just changed in Gold and Silver markets
Morpheus wrote:

I'm still not convinced that gold and silver have pulled a reversal yet BTW.

Neither am I. I'm back in at about 60% of my previous holding level, but watching very closely.

I think the big question pertains to the equity markets. The current slump in the S&P is either a correction that is mostly over now, a correction that still has a ways to go, or a bona fide reversal that will be a lot bigger than a "correction". As CM alluded, I am convinced that if equities take a serious nose dive, they will take PMs with them in sympathy. Yes I am aware of the myriad reasons that the exact opposite should be the case, but unfortunately the rest of the market doesn't seem to get it yet.

The lousy part is the decoupling of what was previously a nearly lock-step chart pattern. I have been short the S&P against a long position in gold and silver, and it's been working perfectly as a hedge. Now that the correlation seems to have loosened, it's not so easy to use a short equity position to hedge the downside risk in the metals.

I agree that the action in metals is being driven by the DX. I still can't decide whether the DX is in correction or a reversal, and I think that will be the primary factor to decide whether the current strength in metals continues.

I have to say that after following Ted Butler very closely for several weeks, I'm not particularly impressed. He clearly has a very strong understanding of the COT report analysis and I think his views on JPMorgan being involved in a short manipulation are probably spot on. But he seems to operate in a vacuum as if this short manipulation were the only thing driving the market, e.g. his comment in a recent newsletter that the sell-off in metals has been "entirely about the shorts trying to trick the technical funds into selling". That's nonsense - as CM said, the reversal or correction in the DX is the primary factor that caused this downturn in PMs. I think Butler is so absorbed in the manipulation theory and COT analysis that he's turned a blind eye to the real factors driving the market. I don't doubt that the shorts are up to the tricks he describes, but it's the DX action that's making it possible.

Erik

 

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Re: Something big just changed in Gold and Silver markets
In the ZeroHedge article, Tyler Durden wrote:

The most recent TIC data confirmed the Treasury's greatest nightmare: China is now dumping US bonds. In December China sold $34.2 billion of debt ($38.8 billion in Bills sold offset by $4.6 billion in Bonds purchased), lowering its total holdings $755.4 billion, the lowest since February 2009.

Whoa! This really confuses me.

If China had started dumping their holdings from the long end of the curve, I'd feel like I understood what was going on: They finally wised up to the absurdity of taking the interest rate risk inherent to holding long-dated debt owed by an insolvent borrower who has the ability to dilute the currency before paying it back. That would make perfect sense to me.

But China dumped 38.8b in bills and then purchased longer-dated bonds??? That almost sounds like they are trying to intentionally make their own situation worse! I cannot for the life of me comprehend what would motivate them to do such a thing. If we were talking about Joe Q. Public moving out the curve looking for higher yields, I would write it off to Joe Q. being too naive to understand the enormous interest rate risk such a move creates. But the Chinese government is clearly smarter than that.

The only rationale I can think of is that if I were China, I might want to keep my decision to start a massive, systematic, ongoing campaign of dumping U.S. treasury debt a secret for as long as possible, to avoid having the market react in a way that could compromise my remaining holdings. If that were my goal, I would probably sell the most liquid securities first, to avoid moving the market, then start dumping the long dated stuff just before the word got out as to what I was up to. By that logic, if they intended to eventually start dumping long-dated treasuries, they would be doing so by now.

Anyone have any further insight on why they would dump their highest quality (short dated) paper first? I can't believe it's about yield...

Erik

 

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Re: Something big just changed in Gold and Silver markets

Erik,

I think you're probably on the right track regarding China's purchase of long-dated bonds.  Trying to see it from their perspective, I might assume they see that the odds they get back ALL the money owed to them before the US defaults (either outright or through devaluation) are slim and none.... and Slim just left town.  So the next best thing is to accept the situation as it is and instead find a way to get as much of that money back as possible rather than focusing on getting it ALL back.  Perhaps after careful consideration they figured a strategy like yours would be the best way in getting the biggest possible amount back before the game is up.  All about taking one step back in order to go two steps forward.  Another possibility is that they could be maneuvering so as to be able to inflict maximum financial damage on the US economy when the time comes to make that last grab for what they can get.  Would a mass sell-off of almost exclusively long-dated bonds be more devastating to confidence in the dollar and the US economy than one involving just bills and short-term bonds? 

These are just thought exercises on my part though, so take that all with a grain of salt.

- Nickbert

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Re: Something big just changed in Gold and Silver markets
nickbert wrote:

...Another possibility is that they could be maneuvering so as to be able to inflict maximum financial damage on the US economy when the time comes to make that last grab for what they can get.  Would a mass sell-off of almost exclusively long-dated bonds be more devastating to confidence in the dollar and the US economy than one involving just bills and short-term bonds? 

You've just hit upon what I believe to be the most absurdly under-reported story in history: The national security threat the U.S. government has created for itself.

Take a moment to contemplate how many billions of dollars were spent and how many thousands of lives were sacrificed during the cold war to prevent the Soviets from attaining the power to cause the demise of or debilitating injury to the United States. Then consider that through their debt-centric monetary and fiscal policies, the U.S. Government has handed China - practically on a silver platter - the ability to take out the entire nation at the push of a single button. No, not a nuclear missile launch button, but rather the "Sell all holdings at the Market" button on their trading workstation. Sure, China is unlikely to do that because they would forfeit all of their $2T in U.S. treasury holdings and loose Wal Mart as a customer for their exports. But when you compare $2T of treasury bonds they already know will never be paid back in real terms to the cost of building aircraft carriers, an air force, etc. it's actually a pretty cheap weapon. And in case anyone has forgotten, there is one and only one known way to take out a nuclear superpower nation: That way is to manipulate their government to spend beyond its means so that the country falls into economic collapse.

The fact that the magnitude of the national security risk created by having a single creditor with the ability to crash your entire economy overnight at the push of a button has never been reported at all by the MSM (to the best of my knowledge) borders on criminal.

Erik

 

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Re: Something big just changed in Gold and Silver markets
ErikTownsend wrote:
nickbert wrote:

...Another possibility is that they could be maneuvering so as to be able to inflict maximum financial damage on the US economy when the time comes to make that last grab for what they can get.  Would a mass sell-off of almost exclusively long-dated bonds be more devastating to confidence in the dollar and the US economy than one involving just bills and short-term bonds? 

You've just hit upon what I believe to be the most absurdly under-reported story in history: The national security threat the U.S. government has created for itself.

That's been obvious for several years and particularly since the Sept '08 crash, although the idea of crashing long bonds rather than shorts seems novel if that's their strategy.

ErikTownsend wrote:

The fact that the magnitude of the national security risk created by having a single creditor with the ability to crash your entire economy overnight at the push of a button has never been reported at all by the MSM (to the best of my knowledge) borders on criminal.

Erik

Standard MSM procedure. Also you have to consider whether there are really any investigative reporters any longer (or at least those who are able to get published without pulling their punches). Move along, nothing special here.

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Re: Something big just changed in Gold and Silver markets
ErikTownsend wrote:

....

The fact that the magnitude of the national security risk created by having a single creditor with the ability to crash your entire economy overnight at the push of a button has never been reported at all by the MSM (to the best of my knowledge) borders on criminal.

Erik

 

Erik, I posted a link in the Feb 3 daily digest on this article in the Wall Street Journal because I agree with you the on the importance of the security risk of the US debt.

-Tom

http://finance.yahoo.com/banking-budgeting/article/108736/deficit-balloons-into-national-security-threat

 

 

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Re: Something big just changed in Gold and Silver markets

The China bond situation cannot be understood through the TIC report alone.  That is one avenue of flows that is measured.  A second, and more important one in terms of size/scale is the custody account.

I haven't looked at the custody account in a few months, and probably should, but last I checked it was continuing to set records.

The way I understand it, a foreign country can still be accumulating Treasury bonds/bills/notes via the usual auction route and stuff them into its custody account without triggering a TIC reading if it uses funds that are already here in the country.  The TIC report measures cross-border flows and only those flows.

The biggest source of custody account funds comes from the interest portion of a principal and interest rollover event at a refunding auction.  Those interest monies originate in the US and never leave the US (nor the custody account) if they are rolled into a next auction.  This happens a lot and explains much of the astonishing growth in the custody account and also the buying pressure at auction.

Because we have such poor insight into the close details of the custody account I am hesitant to say if China has really dialed back its treasury appetite or not.  My guess, based on the DX, is that the answer is "not."  When (not if) they do, we'll see both rising interest rates and a falling dollar - an even that will trigger an alert from me because it will signal that a profound shift in the game is underway.  So far, I don't see it.

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Re: Something big just changed in Gold and Silver markets

Chris. What might be some of the motivating factors for China hiding it's treasury acquisitions in custody accounts? That puzzles me. I see no advantage to a move that would give the perception that China's appetite for US debt is waning, but in reality it is "steady as she goes". 

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Re: Something big just changed in Gold and Silver markets
cmartenson wrote:

The China bond situation cannot be understood through the TIC report alone.  That is one avenue of flows that is measured.  A second, and more important one in terms of size/scale is the custody account.

I haven't looked at the custody account in a few months, and probably should...

Chris,

Obviously I understand you are swamped with both a bad cold and a huge number of speaking engagements. But that said, when I read this post I got an incredibly strong gut feeling that this China-Treasury situation needs your attention.

I've been scouring the net - ZeroHedge, SeekingAlpha, and even random Google searches. There's a lot of analysis out there on what's going on with China and treasuries, and frankly I have an overwhelming gut feeling that the analysts are not seeing the forest beyond the trees. Something is up, bigtime I think, and it's not obvious to us mortals who don't share your extraordinary ability to "connect the dots".

I humbly request that you consider doing a Martenson Report on what's going on with China and U.S. Treasuries. I have no idea what the angle is, but somehow I have an incredibly strong intuitive feeling that you are going to come up with insights and perspectives that the other gurus in the blogosphere have missed.

I can't wait.

Erik

 

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Re: Something big just changed in Gold and Silver markets
Woodman wrote:

Erik, I posted a link in the Feb 3 daily digest on this article in the Wall Street Journal because I agree with you the on the importance of the security risk of the US debt.

-Tom

http://finance.yahoo.com/banking-budgeting/article/108736/deficit-balloons-into-national-security-threat

Tom,

THANK YOU! I missed that on the digest because I was traveling on the 3rd, but I am absolutely delighted to see that FINALLY the MSM is picking up on this story.

I am probably being too emotional, but this stuff really pisses me off. I think about the assasinations and dirty dealings of the CIA during the cold war years, and how inhumane their KUBARK torture tactics were. Butthe U.S. government asks me to forgive my objections in the name of National Security. This sort of thing is "necessary", they said, in order to protect the sovereignty of the nation. I used to actually believe that rhetoric.

But when I see the US Gov't handing China the keys to the USA-Destruct switch on a silver platter, my thoughts immediately turn to the humanitarian issue of all those who died horrible deaths (never mind the billions spent) trying to prevent the Soviets from getting the same power the U.S. gov't has given to the Chinese without them even asking for it. It really freaks me out, frankly, but seeing that the media is finally reporting on the obvious has a reassuring effect. Hopefully one of these days America will wake up and pay attention to what is happening.

It's truly shocking how easily people's integrity is compromised for money. The USA would never have let the soviets get a leg up on us like this, no way. But then again, we didn't need a loan from the Soviets.

Erik

 

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Re: Something big just changed in Gold and Silver markets
Morpheus wrote:

Chris. What might be some of the motivating factors for China hiding it's treasury acquisitions in custody accounts? That puzzles me. I see no advantage to a move that would give the perception that China's appetite for US debt is waning, but in reality it is "steady as she goes". 

 

I don't really see it as "hiding" - the reason is that China has an open policy of pegging the Yuan to the dollar.   Holding Treasuries in a custody account provides the great simplicity of not having to even think about any potential curency impacts caused by cross border flows of money.  It is automatically sterilized because it never goes anywhere.

So I think China has a larger strategy around how many Treasuries to hold and uses the custody account as a matter of convenience.

But perhaps there's an element of 'hiding' in there as well that provides some perceived benefit as well.    The downside wuld be having less control over those funds...note that Argentina had their custody account funds frozen by a US judge (of all things!) during the spat over the firing of the Central Bank head by the Arg president.  If part of my strategy was to be able to wield my vast hoard of Treasuries as a financial weapon I think I'd prefer to have them held somewhere else.  But that's just me.

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Re: Something big just changed in Gold and Silver markets

By way, and way off topic for which I apologise in advance, I am riding in a quiet, smooth train that has an electrical outlet next ot my coach seat and functioning and free wifi.  As an American I find this eminently civilized and wonder why such amenities are not available in my own country?

It's time's like these that the "We're No. 1!!" chant seems a bit hollow.

Sorry for the diversion.  Back to the topic.

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Re: Something big just changed in Gold and Silver markets

Chris,

Believe it or not, I sometimes find myself getting annoyed with how WELL things work here in Asia. Similar technology maturity, everything works, and there's no graffiti or vandalism. Every time I see it I feel, "Hey wait a minute, MY COUNTRY INVENTED HIGH TECH. WE SHOULD BE THE LEADERS IN IT". But the truth is that the USA has fallen WAY behind.

Here in Hong Kong my iPhone has unlimited 3G high-speed data, something like 50 TV stations (you guys in the states didn't even know iPhones could do live TV, did you?), unlimited local calling, 100 free minutes of international calling to any country in the world, and a bunch of other services that are not even offered by AT&T's Cadillac iPhone plan that costs $180/month.

So what's my cost here in Hong Kong? About US $40/month total, all inclusive. America has to get real and get competitive again or it's going to be run over by Asia. It sucks but it's true.

Erik

 

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Re: Something big just changed in Gold and Silver markets

China sold $34.2 billion of debt..

Who did they sell it to?

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Re: Something big just changed in Gold and Silver markets

hasn't the IMF mentioned regurgitating 140+tonnes of the PM?

 

robie

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Re: Something big just changed in Gold and Silver markets
ErikTownsend wrote:
Woodman wrote:

Erik, I posted a link in the Feb 3 daily digest on this article in the Wall Street Journal because I agree with you the on the importance of the security risk of the US debt.

-Tom

http://finance.yahoo.com/banking-budgeting/article/108736/deficit-balloons-into-national-security-threat

Tom,

THANK YOU! I missed that on the digest because I was traveling on the 3rd, but I am absolutely delighted to see that FINALLY the MSM is picking up on this story.

I am probably being too emotional, but this stuff really pisses me off. I think about the assasinations and dirty dealings of the CIA during the cold war years, and how inhumane their KUBARK torture tactics were. Butthe U.S. government asks me to forgive my objections in the name of National Security. This sort of thing is "necessary", they said, in order to protect the sovereignty of the nation. I used to actually believe that rhetoric.

But when I see the US Gov't handing China the keys to the USA-Destruct switch on a silver platter, my thoughts immediately turn to the humanitarian issue of all those who died horrible deaths (never mind the billions spent) trying to prevent the Soviets from getting the same power the U.S. gov't has given to the Chinese without them even asking for it. It really freaks me out, frankly, but seeing that the media is finally reporting on the obvious has a reassuring effect. Hopefully one of these days America will wake up and pay attention to what is happening.

It's truly shocking how easily people's integrity is compromised for money. The USA would never have let the soviets get a leg up on us like this, no way. But then again, we didn't need a loan from the Soviets.

Erik

 

Erik. I'm a digital circuit designer by trade. I make little tiny micro-computers less than half the size of a credit card with a capacity that would blow your mind. 

I make them for government and commercial applications. 

I often ask the same damn thing that you ask. Why not? 

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