"Unusual and exigent circumstances"

This phrase may come back to haunt the powers that be.  The Federal Reserve exercised its authority to deal with Bear Stearns.  With increasing frequency, policy makers are using little known, obscure powers granted eons ago.  There are so many laws with so much fine print that just about anything can be done if you know where the verbiage is.

The Federal Reserve Act (1913) allows the Federal Reserve to lend, in a crisis, to just about any institution, organization or individual, and against any collateral the Fed deems fit. Specifically, if the Board of Governors of the Federal Reserve System determines that there are “unusual and exigent circumstances” and at least five (out of seven) governors vote to authorize lending under Section 13(3) of the Federal Reserve Act, the Federal Reserve can discount for individuals, partnerships and corporations (IPCs) “notes, drafts and bills of exchange indorsed or otherwise secured to the satisfaction of the Federal Reserve bank…”.  See http://www.federalreserve.gov/aboutthefed/section13.htm

I would love to tap into this deal.  I have a crying need (exigent).  I want to buy $1 billion of 5% bonds and borrow the money at 2% for the next 5 years.  I could simply live on the interest of the 3% spread.  Whoops!  I’m not in the club.  Not only am I not in the club but I don’t even know where the entrance is!!  I guess if I had diverted my career into investment banking and moved to New York I could be in the club.  C’est la vie!

This week had the ultimate attempt to "spin" the economy and the U.S. dollar.  There was an orchestrated attempt to push the dollar up and gold down, as well as silver.  The investment banks and the Plunge Protection Team (PPT, AKA The President’s Working Group on Financial Markets) know where all the leveraged investors’ positions are.  With enough money, you can push just about any stock or commodity down temporarily.  That happened this week.  Europe’s economic well being is in trouble as well as the U.S. economy.  The Fed is in a desperate situation.  To strengthen the dollar they need to raise interest rates but that action will severely damage the financial system which is in triage now.  In lieu of interest hikes, they can attempt to manipulate market perception and psychology using the herd mentality.

Gold and silver prices were hit hard this week.  Those who had leveraged positions in gold and silver were taken out Thursday night and Friday morning.  There was blood in the streets of leveraged metals investments.  I recommend against leverage in this market.  Why?  I believe the use of technical analysis has many flaws.  With computerization of price charts, technical analysis was initially successful.  However, once a larger population of traders began to use technical analysis, the very large players (guess who?) began to "paint" the charts and manipulate the pricing to take out most technical traders at a loss.  Technical trading can be helpful when used to pick entry and exit points in fundamental trading.  Are there technical traders who are successful?  Yes, a small minority.

Below is the 10 year gold price chart:

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The direction is clear.  The trend is up and there is no fundamental reason for gold to return to $300 per ounce.  I believe that it will see $3,000 before it sees $300.  Silver took a tumble as well.  Look at the following 1 year chart.  Silver is trading at nearly 50% of its moving average.  What a buy!

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The phones were busy at the bullion dealers on Friday.  Many who were not scared off by the dramatic coordinated intervention went shopping.  With gold headed for $1,200 soon and silver at $30, this was a gift indeed.  Thank you PPT!

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