Showdown at the Gold

...Silver & Commodities Corral!

by DeepCaster LLC, deepcaster.com | February 22, 2008

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As we usher in the last week of February, 2008 we are witnessing a truly extraordinary time in many Markets. Record highs and major inflection points occur in several markets against a backdrop of financial institution meltdowns, and significant price inflation in the recession-afflicted U.S. economy.

But the Main Question for Gold, Silver, and many Commodities which have seen record highs lately is: 'Quo Vadis?’ Where do we go from here? Well, there are clues.

Responding to the ongoing, and increasing, Lending Sector Meltdowns, Gold is hitting record, albeit nominal, highs. Silver is trading at the highest levels since just before the Regulatory Evisceration of the Hunt brothers years ago.

Wheat, and other foodstuffs are similarly at all time price highs, spurred not only by The Fed’s massive monetary inflation, but mainly by the demand of the 6.8 billion people in the world, a number increasing by about 80 million a year.

The USA is not exempt from food and energy demands generated by its 330 million people, a number growing by a mass-immigration-generated 4 million per year. (The U.S. Census Bureau numbers are seriously low, and are about as accurate as various CPI numbers which claim that U.S. inflation is only 2 to 4% per year. Actual Annual Consumer Price Inflation in the United States (January, SGS Alternate) is running at 11.8% per shadowstats.com.)

And the USA is in Double Trouble because its Policy Makers have chosen to focus on making a key food--Corn--into a fuel, Ethanol. While Ethanol is arguably cleaner burning, it is a net-energy loser, (i.e. it takes more energy to produce than one gets from burning it) and its use for fuel drives up the cost of a Basic Food.

And we have only seen the beginning of the Lending Sector Write-offs and Meltdowns, as Deepcaster has noted on several occasions. The Big Lenders likely have many Write-offs left to announce -- it appears they are trying to dribble the announcements out in increments to avoid spooking shareholders and others.

The Mortgage Bond Market write-downs have only just begun as Deepcaster extensively detailed in an article on “Collapsing Paper” just a few days ago. [Note: Erratum, but likely in time only: In Deepcaster’s recent piece on mortgage bond losses, we relied on PhD. statistician Jim Willie’s calculations that the Prime AAA Bonds Index on credit default swaps for mortgage bonds had lost about 30%. Willie has now amended his position to contend that there will “in time be 30% losses on prime mortgages.” Deepcaster agrees, the basic point about massive losses in the Mortgage Bond Market is still a sound one, nitpickers notwithstanding.]

The Municipal Bond Market is close to collapse. Increasing numbers of Municipalities can not get their Bonds -- to finance hospitals, schools, roads, and bridges, for example -- sold. And if that continues much longer it will be a real disaster for both the communities and the financial system. And it appears the Auction-Rate Securities Market could cease to exist.

M3 is still increasing at about 15% per year. This fact, coupled with the Financial Sector Meltdowns, SHOULD continue to propel Gold and Silver much, much higher. And with Mr. Bernanke's Printing Presses and Helicopter Distribution System running 24/7, the prices for key foodstuffs are not likely to be looking lower either.

But there are Clouds over the Cornucopian Vision of Gourmet (albeit pricey) Foods in Silver Bowls on Golden Tables, as it were. The recent Commitment of Traders Report (COT) for Silver contract positions held as of February 12, 2008 indicates the four largest short traders now hold a record position of 59,564 short contracts, or about 298 million ounces. That is about 170 days of world mine silver production, as Ted Butler informs us. Never in history have there been larger concentrated short positions in Silver.

This Silver Reality raises an Opportunity OR a Specter. It is surely in the interests of these Shorts to have the Market driven down, way down and soon, so that they can cover. And we expect that IF this happens, it will happen soon and with considerable assistance from The Fed-led Cartel* of Central Bankers.

A similar potential for a Major Takedown exists in the Gold Market, created, doubtless, similarly, by The Cartel*. BUT if The Cartel is not able to effect such a Major Takedown and soon, the Short Covering Rallies should propel Gold over $1,000, and Silver over $20/ounce, in not much more than a heartbeat. Deepcaster has set forth its Forecasts for Major Moves in Gold and Silver in its most recent Letter and Alert at www.deepcaster.com.

So The Showdown is near. On one side we have The Cartel with more than $1 TRILLION in Derivatives available for manipulating the Gold Market alone, and with its daily Repo Injections to further ensure that its Will Be Done in Gold, Silver and other markets (see Deepcaster's January, 2008 Letter). De Facto, via its exponentially increasing derivatives positions (publicly reported by the BIS), The Cartel has the largest positions in several major Markets, so one must remember the time-honored adage: The Largest Player/s in a Market make the Market price.

On the other side, we have an Ongoing Financial System Meltdown which, coupled with Raging Inflation (Monetary and Price) and Raging Fundamentals, should continue to propel Gold and Silver and key commodities prices higher, much higher. Which side will prevail? It is not yet clear.

What we do know is that The Denouement is approaching soon, very soon.

Copyright © 2008 DeepCaster LLC
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