Quotable
“If Ben goes wacko in Jacko, could stocks spike like the Grand Teton?” – Peter Eavis, The Wall Street Journal

FX Trading – To QE2 or Not to QE2, That is the Question …

Dong, dong, dong….as the hour of Big Ben’s speech this morning from Jackson Hole approaches, bets are being lined up as whether Mr. Bernanke will indeed rev up his helicopter for yet another strategic drop…

Action: Mr. Bernanke says yes, the Fed will embark on quantitative easing #2 (QE2).

Reaction #1: 
1. The dollar get’s whacked hard, as it did when the Fed embarked on QE1 back in March of 2009, thanks to falling US yield differential and larger supply of dollars on the market

2. Stocks rally sharply on all the new liquidity that will be used to bid up financial assets, knowing very little will likely leak out into the real economy anytime soon.

Reaction #2:  My gosh! Is it really that dire?  We really are in the soup.  QE1 didn’t work, and that was with the support of a massive fiscal stimulus to boot.  What’s the incentive to borrow and lend no matter how many more bank reserves are created.  It’s not real money until it gets into the real economy.  Thus, this move will not keep us from tipping into deflation, which will only push consumers deeper into their respective shells and provide yet another disincentive for companies to invest or hire new employees.  

1. Stocks tumble on the realization current earnings expectations are way out of whack.

2. Dollar support on the good old risk aversion trade.

Of course, Mr. Bernanke could say that yes we still have QE2 as ammunition in our arsenal, but we see no reason to use it now.  Interest rates are already low, the credit market is functioning just fine, though the latest data has been soft — we believe things are improving globally and there is very little chance of a double-dip recession.  Germany is rebounding nicely and though China is slowing a bit, there is still brisk demand flowing from Asia and other emerging markets.   Japan is hurting, but we expect new easing measures there will help boost growth and support the global recovery.  Jobs growth has been disappointing, but recently we have witnessed job growth at the state level for the first time in a while, we think this is proof both monetary and fiscal policy, which always work with a lag, are now finally starting to…..

…..read pages 3 – 4 HERE

Money can lose its value through excessive abundance, if so much silver is coined as to heighten people’s demand for silver bullion. For in this way the coinage’s estimation vanishes when it cannot buy as much silver as the money itself contains…The solution is to mint no more coinage until it recovers its par value –  Copernicus

Silver Velocity to rise

Our Hinde Silver Trend model has reached a significant low that usually precedes a dynamic move. This move can be lower or higher but our other technical indicators signal a move higher is the most likely scenario.

Silver Seasonality

Our silver seasonality analysis suggests that the trend will be directionally higher in price.

Silver Volatility

Other than just purchasing silver bullion (in allocated form), speculators could purchase volatility. As one can see from the chart below historical price volatility is at the lowest standard deviation on a rolling 3 month basis that it has been for sometime. Straddle break evens look attractive or likewise out-the-money call premiums look cheap, for those who agree with our directional bias for a move higher.

Silver’s timeless fascination

Mankind’s timeless fascination with silver stretches back millennia. As early as 700 B.C., the Mesopotamian merchants used silver as a form of exchange. Later, many other civilizations also came to recognize the inherent value of silver as a trading metal.

The ancient Greeks minted the drachma, which contained 1/8th ounce of silver; and in Rome, the basic coin was the denarius, weighing 1/7th ounce. And let’s not forget the English shilling “sterling,” originally denoting a specific weight of silver, which has come to mean excellence. In fact the words for “silver” and “money” are the same in at least 14 languages.

Silver or money is derived from the Ancient Greek: ργήντος – argēntos, gen. of ργήεις – argēeis, “white, shining” ). The Incas of Peru called it the “tears of the moon” because they were awed by silver’s strange gleam and the Chinese believed that a silver locket hung around a child’s neck would ward off evil spirits.

In recent years silver has grown to be regarded as the poor man’s gold. However we suspect silver will shake off this unfortunate shackle and give gold a “run for its money” as the old idiom goes.

There are key fundamental differences between gold and his poor cousin silver. Demand for gold is almost entirely from those holding for financial safety and protection of purchasing power and likewise from fabrication that preserves it. Gold is rarely if at all consumed. A base metal is the opposite, it is consumed. Like iron for example.

Here silver is unique, industry will consume it, and others will buy for financial gain and protection. Fluctuations in the price of gold primarily arise from changes in demand as annual mine supply is small compared to existing stockpiles; of the same magnitude as the small amount lost or consumed each year. Hence over ground supplies don’t change much.

Silver ounces come and go. Unlike gold silver’s active chemical properties lend it to practical industrial use that see much of it used beyond practical recovery. The uses for silver in modern industry are growing. It is the best conductor of both heat and electricity, the most reflective, and after gold the second most ductile and malleable element. It is used in photography, electrical applications, particularly in conductors, switches, contacts and fuses. Silver alloys are used in batteries as cathodes. As a bactericide, silver is used in water purification and air handling systems. Silver is also a natural biocide and is very effective against bacterial infections such as MRSA. New products using silver’s biocidal qualities are being developed each year; clothing, bandages, toothbrushes, door-knobs (flu-protection), keyboards, the list goes on growing.

Silver is much less rare than gold and as a consequence less effort goes into salvaging and protecting it. Annual mine production and consumption are large compared to existing stock piles, so price fluctuations in theory come from both these factors as well as investment demand. 

….read mid page 3 – 11 HERE including these topics:

Silver supply demand imbalance

Money velocity rises leads to Silver rise

Exchange traded commodities are very cheap

SUMMARY of the most important Gold Silver ratios

.…start at mid page 3 – 11 HERE

Manipulating the Silver Market

If someone were manipulating the silver market, you would see exactly what has actually occurred in silver over the past several days. 

To manipulate the price you would use your buying power and accumulate long positions until you force silver above resistance in the high $18.40s and thereby trigger all the buy-stops sitting there, including the one we placed.  You would then sell your long positions into those buy-stops and keep selling until (1) you became short and (2) your selling drove prices lower. 

I have just described exactly what has just taken place in silver.  What we have seen is a classic textbook case of market manipulation.  We have seen it so many times before in recent years, it is the reason I warned on 18 August: “Let’s see if silver can hold this level, particularly with option expiry coming soon.” 

I expect that we will see the rest of this repetitive pattern of manipulation play out over the next few days until this month’s options expire.  I also expect that silver will remain under $18 during this period.

There may in fact be another bout of selling pressure by the shorts to shake out some more weak-hands.   It would give the manipulators an even bigger profit when they buy back on even lower prices the short positions they established on the breakout above $18.40.  Consequently, I will not be surprised if the 2-year uptrend line in the following chart is broken this week.

I don’t think that uptrend line will be broken, but don’t panic if it is.  And don’t be distracted from the big picture – both technical and fundamental.  Technically, silver has nearly completed a huge accumulation pattern, and the ‘head-and-shoulders’ pattern in the above chart is far more important than the 2-year uptrend line.  Silver is approaching an important upside breakout.  It is the breakout that I have been anticipating for months.

The fundamental picture for silver is just as bullish.  Monetary debasement throughout the globe is causing astute people everywhere to carefully look for prudent alternatives.  It is inevitable that they eventually discover what countless people have already discovered over the past decade – that gold and silver are safe-havens from monetary debasement.

Thus, everything remains in place for an upside explosion in silver.  With each passing day, week and month we are getting closer.  Be ready for that breakout by not losing sight of the big picture.

For my specific trading recommendations, see Trading.

About the Free Gold Money Report
James Turk began publishing the Freemarket Gold & Money Report in March 1987 as a subscription-based investment newsletter focusing primarily on precious metals and national currencies.  In August 2009, the newsletter completed a total transformation to become a free, web-based commentary.  Accordingly, its name was changed to the Free Gold Money Report.