June 22, 2012

By Kevin Michael Grace

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Gold was down (at press time) $54.10 (-3.3%) for the week to $1,564.50, and silver was down $1.47 (-5.2%) to $26.94. Reuters reported, “Gold fell 2.5% Thursday, nearly wiping out this year’s gains as renewed fears of a global economic slowdown and disappointment over a lack of aggressive US Federal Reserve stimulus dampened bullion’s inflation-hedge appeal.”

Translation: Bernancus Magnus descended from his Olympian redoubt Wednesday and delivered a gloomier assessment than previously. Zero Hedge comments, “In April, the Fed saw 2012 GDP between 2.4%-2.9% and unemployment of 7.8%-8%. The just released updated forecasts table has these two critical for the election campaign data points at 1.9%-2.4%, or a major drop since April, for GDP and unemployment declining to 8%-8.2%. One thing is certain: whatever GDP and unemployment are at the end of 2012, they will not be whatever the perpetually inaccurate Fed forecasts.”

In the event, the Fed did not unleash the Kraken, ie, the much anticipated and feared QE III. Instead, it “extended its Operation Twist program and will swap $267 billion in short-term securities with longer-term debt through the end of 2012.”

At Seeking Alpha, Gary Tanashian called Thursday’s selloff “a disgusting display indeed with the gold sector doing exactly what yesterday’s policy release…said it should do.” He explains, “What does Operation Twist do? It seeks to negate the natural forces (and thus the signals we derive) of the [Treasury] bond market in favor of painting a handy picture. As for gold, the monetary barometer to systemic and inflationary pressure, it has—since the acute phase of the credit bubble implosion began in 2007—tended to follow the spread between 30-year bonds and 2-year bonds.”

And thus the Great One has delivered “A nice, quaint and sanitized way of going about interest-rate manipulation that seeks to bail out and fund the areas of the economy (housing, mortgages, etc.) that experienced the most egregious abuses while pretending that all bonds are equal and selling short-term (excluding ‘Fed funds,’ of course, the inflationary ZIRP) notes to sanitize the process.”

Three days earlier, Tanashian asked, “Really, how long can they keep it up?” That remains to be seen. How long will they try? Until the day after the end of the world or the day after the world economy collapses, whichever comes first. ZIRP is essential to the “stimulus” that has done so much in aid of the “recovery,” but there is another reason why it must remain perpetual. That would be the $200 trillion [sic!] in derivatives held by US banks.

Ellen Brown writes, “When Jamie Dimon, CEO of JPMorgan Chase Bank, appeared before the Senate Banking Committee on June 13, he was wearing cufflinks bearing the presidential seal. ‘Was Dimon trying to send any particular message by wearing the presidential cufflinks?’ asked CNBC editor John Carney. ‘Was he…subtly hinting that he’s really the guy in charge?’”

It was asserted by many that the Senators were obsequious to Dimon because JPMorgan has them in its pocket. Brown reports, “Financial analysts Jim Willie and Rob Kirby think it may be something far larger, deeper, and more ominous. They contend that the $3 billion-plus losses in London hedging transactions that were the subject of the hearing can be traced, not to European sovereign debt (as alleged) but to the record-low interest rates maintained on US government bonds.

“The national debt is growing at $1.5 trillion per year. Ultra-low interest rates MUST be maintained to prevent the debt from overwhelming the government budget. Near-zero rates also need to be maintained because even a moderate rise would cause multitrillion-dollar derivative losses for the banks and would remove the banks’ chief income stream, the arbitrage afforded by borrowing at 0% and investing at higher rates….

“Interest rate swaps are now over 80% of the massive derivatives market, and JPMorgan holds about $57.5 trillion of them. Without the protective JPMorgan swaps, interest rates on U.S. debt could follow those of Greece and climb to 30%. CEO Dimon could, then, indeed be ‘the guy in charge’: he could be controlling the lever propping up the whole US financial system.”

How long can they keep it up? Brown believes the jig may already be up and that JPMorgan may already be bankrupt, not that hoi polloi would be allowed to know this until too late. We say that the banks are TBTF, Too Big To Fail, but it would be more accurate to say that their failure would be TBTC, Too Big To Contemplate.

Stock Tips and the Joke of the Week

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