Dear CIGAs,

The Bear case for gold is made up of the following points:

1. The Federal Reserve slows down on rate cutting.
2. The Euro Central Bank raises rates modestly.
3. The US dollar then rallies.
4. Commodities fall, especially crude and edibles, because the dollar rises.
5. Shortages in foodstuffs globally stop.
6. The US Equity Markets rise.
7. Gold falls.
8. All problems solved.

These points make up the flavor of this week.

All short-term market movements in anything produce the assumed reasons “why” after the fact.

The reasons “why” then at that moment (see above) seem acceptable because the market that produced them is moving in their direction, as was the case today.

The primary reason why this scenario is weak is due to the “CONSEQUENCES” of the actions taken to produce the appearance of normalcy.

Monetary inflation ALWAYS produces price inflation regardless of the level of business activity.

There is no question that international liquidity is growing at a rate that would double it if kept up until 2012. That even in one year is beyond rationality or belief.

Those that deny international liquidity is moving higher at this rate have actually accepted the announcement of the Treasury Auction that put cash into the banking, investment banking and other fanatical entities at or near bankruptcy as normal a Treasury action. They then write tomes saying the Fed actions are monetarily neutral, exposing themselves as damn fools dressed in academic clothing.

Regardless of how normal the perspective is spun, the cellar is full of unprecedented financial rot. The need to keep that rot from starting a domino effect requires that any and all funds required will be produced to prevent any primary US Treasury dealer or significant OTC derivative grantor from going broke.

The reason to keep primary treasury dealers alive is self-evident.

The reason that Bear Stearns could not go broke is that it would have caused their more than 20,000 OTC derivative counter-party financial entities to fess up to the fact that the specific performance contract with Bear Stearns cannot function and is therefore valueless.

The only time nominal value becomes real value with an OTC derivative is when the specific performance contract goes bankrupt and one side, the losing side, cannot perform. This is FACT.

The upcoming plague of hyperinflation is raising its head due to a combination of the hot-dry long weather cycle and global demand for crude products, but more so from the unprecedented amount of international liquidity created in order to offset true valuation of the OTC derivatives.

The CONSEQUENCES of the expansion of monetary liquidity will NOT be vacated. It cannot be by any measure, action or spin.

As an effect of the about-to-balloon Federal Budget deficit and the CONSEQUENCES of not letting major financial institutions collapse, the euro will reach $2USD and the US dollar will hit .5200 USDX.

What the Bears fail to realize is:

1. Of course the Fed has to slow down rate cuts as they are closing in on zero quite quickly. Dropping the rate significantly now would empty the ammunition locker for spin if an emergency drop becomes again required.
2. The Central Bank of Euroland may increase rates, but common to those who have experienced their currency dissolve due to inflation, the decrease would be quite gradual.
3. Comparative US/euro interest rates price itself into an equation of the dollar/euro rate, finding an equilibrium point. That point is equally impacted by what the Fed is doing in all areas.
4. As the Fed (at what they call Treasury Auctions) buys OTC derivative paper in exchange for cash or treasuries, their balance sheet weakens and that factors into the dollar/euro relationship.
5. As Federal spending stays even or increases in the face of decreasing Federal tax revenues, the growing Federal Budget Deficit is factored into the dollar/euro relationship.
6. As a change of guard closes in on the US Administration, the economic policies of the candidates factor into the dollar/euro relationship. There are only 270 days, 8 hours, 13 minutes and 38 seconds at this writing until a new guard arrives, more than likely a clone of the present.
7. The shortage of food cannot be solved by closing US markets, no matter how Mr. Gartman feels, as food trades everywhere and traders that matter trade everywhere. That will be factored into the dollar/euro relationship. In Asia a shift has been made from eating a purely carbohydrate diet to eating a protein diet and that WILL NOT reverse, no matter how much Mr. Gartman feels the impact of stopping US futures trading on foods means.
8. Hyperinflation is unavoidable as a product of the expansion of international liquidity that persists, regardless of Western business conditions that would be an on balance factor for the dollar/euro relationship.
9. A dollar rally from a change in the US momentum of lowering interest rates would be a modest affair as world central banks awash in dollars that have declined drastically are eager to offload. Sovereign Funds, investments via loans to private companies and other methods of getting out of US dollar would accelerate. This is certainly true in precious, base and strategic metals, as well as food production. Most of this will take place in the financial acquisition of Africa.
10. Should a dollar rally occur from these levels it wouldn’t have legs because of the financial rot in the US system and the debilitation of the Federal Reserve balance sheet that occurs as junk is bought for cash and treasuries with no equal or even near equal value.
11. Closing of markets, as Mr. Gartman proposes, will not happen, as it is the same as saying currency controls can act to correct the value of currencies when the underlying fundamentals are violently contrary to that assumption. His proposal is akin to price controls of foodstuffs resulting in more food to feed the many. That is simply wrong.
12. I have given warning that shorting equities has to be for a fast cover because liquidity is the grease of the wheels of equity value, not business activity.
13. In the Weimar experience the stock market went up violently before it all exploded during a period when business activity was awful.
14. Gold can have significant reactions at any time yet whatever gold is to do on the downside should complete by the first week of May. As far as gold shares are concerned they should reverse by May 8th at the latest even if gold is still chopping for a bottom.
15. This reinforces my plea to the average person not to use margin in anything gold as you lose your freedom of action, you are not disciplined enough and you have a financial death wish.
16. For the gold investor in anything gold without margin, the reaction from the first penetration of $1000 is meaningless. The market has NOT topped.
17. What differentiates today from the early 1980s is the mountain of garbage paper called OTC derivatives and the growing demand for proper valuation, much of which is zero. There is no Paul Volcker at the controls.

You are all welcome to call me if you need me. I can be reached at 860-364-1830. If I am on the phone leave a message and I will return your call.

Your friend,
Jim