The Careful Gambler

February 14, 2009

An Anniversary Celebration!

Scene of death from Chicago St. Valentine's Day massacre 80 years ago today

Our beloved and popular President Bush declared several times during his two term presidency that “justice shall be served”. And with respect to the eventual fate of Saddam Hussein and his band of fascist thugs, justice was indeed served by Iraq’s own court…and rope. But CG wonders whether Bush had ever considered that justice could be executed just as easily on his own country, the USA.

As we celebrate Valentine’s Day in the tradition of chocolates, roses and other things that are red and sexy, we should at least pause for a moment to consider that 80 years ago today (1929) was a defining moment in Lincoln Park Chicago (near Obama’s home turf) as Al Capone murdered 7 members of it’s local rival gang headed by “Bugs” Moran. Indeed, justice is not a respecter of political party, class, or ethnicity, and that it may be executed quickly and with devastation on any one of us when we find ourselves in a compromised position, is sobering.

CG uses this horrific example to make a point: When one lives in a land where the rule of law, which characterizes a civil society like the Republic of USA (no, we are not a Democracy!) is disrespected and moral hazard prevails (spelled BAILOUTS), we should not be surprised when justice is served ON US. Indeed we should anticipate it and this should even pervade our investment philosophy if we are to at least break even.

And just how is justice being served on us now?
In terms of economic justice, it has been happening for over a year now….and this will continue. Why should it not? Have the events over the first few weeks of Obama’s term encouraged you that THIS administration will be any MORE ethical, MORE bipartisan, MORE effective, than the last? In under a month an additional 2 trillion (with est’d accrued interest) of OUR MONEY was allocated between the US Congress and the US Treasury to further advance an elitist controlled nationalized bank Ponzi scheme while simultaneously guaranteeing the survival of the least productive industries…not to mention that the main thrust of stimulus would not occur until late 2010 and 2011, the year before Obama seeks re-election. How convenient for our new Messiah-in-Chief! He has already gone to great lengths explaining that “I inherited this recession” (i.e. don’t blame me)…even though we won’t mention the fact that HIS party controlled the Legislature for the last 2 years. But let’s not get hung up too much on finger pointing. Remember both parties have become corrupted and are all guilty of defrauding us, more or less.

As CG pointed out in his “Inaugural” newsletter on January 20t, gold was potentially on the verge of a major breakout, as evidenced by the falling domino's of world currencies. Then it was the Aussie Dollar and Sterling. In February more currency dumping took place as gold valued in both the Swiss Franc and the Euro broke out to new all time highs. Consider that the Swiss Franc is an innately strong currency, that is perhaps THE MOST gold backed currency in the world. Anyway one slices it, since Obama’s election we have witnessed a MODERN DAY VALENTINE’S DAY MASSACRE IN THE CURRENCY MARKETS! Remember, just a few years ago the Euro was the darling of currencies. What a turn of events. It was toasted the last few weeks.

Let’s again reflect on the charts…
Last month CG saw this pattern in gold trading in Euros and stated we were “just a few percentage points below it’s (gold’s) all time high of 640 Euro…this pattern often precedes a breakout”.

Skipping along to the current view (below) of this same chart, we clearly got the breakout. It now costs 700 E to buy an ounce of gold. Now Europeans are joining Australia and Britain by preferencing gold over their own currency.

CG could show you the same sort of chart for gold denominated in Swiss Franc too, but what would be the point? For Americans, the question is HOW LONG WILL IT BE UNTIL OUR DOLLAR BUCKLES? CG has good reason to believe that the seasonal tendency of metals (strong now) along with the continued bank INSOLVENCY CRISIS, firming energy and general commodity prices, and a MASSIVE reflation effort underway in China which will lead to higher commodity prices are all bullish for gold and even more so for silver. And remember what CG has also lectured you on in previous sessions – that dollar strength is not real strength. It is RELATIVE flight to safety (short term US treasury cash and repatriated money flows) from crashing equity markets overseas and soon to be weakening bond markets.

The dollar chart below shows the confines of the dollar range now. On the low side is the early 2008 low in the low 70’s and on the high side the 2004-2005 top at 90. What these numbers represent psychologically are as follows…

• 90 = good old housing bubble days. Approaching this level begs to take profits in stocks and bonds while moving into precious metals
• 70 = last support, before run on dollar could ensue, move to gold.
• 80 = also a key psychological support level because it represents the previous multi-decade historical low that was touched in the late 1970’s, the early 1990’s then again in late 2005 but not breached until 2007.

Basically the play here is the idea that a strong dollar is only REFLECTIVE of BOND and EQUITY WEAKNESS and has no other fundamental basis for strength. In reality the 78-80 level is a key to the dollar’s medium term direction. A break below 80 would almost certainly cause a test of the low 70’s low. Breaching 70 in this environment of bank insolvency, investor fear and uncertainty would be catastrophic and extremely disruptive to all the markets except physical precious metals. If and when the 70 level is breached is beyond CG’s scope at this time. But if this tsunami wave appears on the horizon CG will alert his readers. One thing for sure, with the banking system so fragile a strong move below 70 would feel like an injustice to America. But with all the financial shenanigans of the last few decades from the Fed, Treasury, Wall Street and Congress, it would really be “justice being served.”

Feb. 14, 2009