A very good read on the havoc the bond market could play on our investments. A long read but worth it.

Gold Battle
Thrilla in Manila!

Stewart Thomson
email: s2p3t4@sympatico.ca
May 29, 2009

1. I want to talk about the bond market today as it relates to gold. And take you into the very real mind of a very real bond trader. Looking at a bond and gold chart is all very interesting if you like watching ivory tower movies. I do. But movies are not the whole picture. Experiencing the market thru the eyes of a real professional bond trader gives you a sensation of reality, in this case a most horrifying reality, that no chart can give you. I'm going to take you into the mind of a major bond trader who is a very good friend of mine. But first, I want to cover the trading week. Friday is here. Another week comes to a close. Another week of victory, of booked profits for my subscribers in the gold, silver, oil, food markets. If you don't buy weakness, you don't get to book any profits today. Sorry. That's how the market works. If you buy gold near $1000, you don't get to make any profits when you sell at $970. That's the reality. If you just bought at 970 from me, maybe you can contact the US govt and have your gold marked to model, and book yourself a profit today. (Good luck collecting your winnings). If you buy at 880 when geniuses like Dennis "the gold market menace" say "gold is way overvalued here, I'm short!" well, it's kachingo time for you today as it is for me. As it has been for 3 fantastic weeks. Gold market participants fall into two camps. Camp #1 has sold the bulk of their gold as gold rallied to 910 to 930. They are now feeling naked, depressed. Some actually went naked short. The stoploss graveyards have a waiting list to bury those corpses. Camp #2 is: "This is the big one, back up the truck, you can never have enough gold!"

2. If I HAD to pick one crowd to belong to, that's pretty simple, it's camp #2.

3. Luckily, I don't have to. I belong to camp #3, which gets no press. That is: camp moderation. I've been selling into this strength since gold $910 with a portion of my trading position. If we peak here for the intermediate term, fine. If we peak at $1200, fine. If we peak at $1500 without a correction, fine. I'm fine too if we go straight to $2000 or $5000 with no down days. Kachingos all the way.

4. Let's say gold runs straight to $1500 without a down day. That's an approx. 50% move from current levels. A NEW move of 50%. Here's a simple math question: What is 1020 minus 680? Answer: 340. The last run to 1007 from 680 was basically a 50% move. But was an OLD move. Gold had already been at 1007 before. Investors like excitement. Is making 50% in fresh territory better than making 50% in old territory? I don't see any difference.

5. At some point, gold will decline by hundreds of dollars an ounce. The current party atmosphere will be replaced by TERROR.

6. Write "Gold is 680 today" on a piece of paper. Underneath that write: "I want to kill myself, I can't take the pain anymore, sell everything at the market". And paste that paper to your wall with the writing in big fat red letters. And read it out loud before you run and buy gold today or sell all your gold today. Both buying gold here and selling it all are actions of utter madness.

7. What's happening in bond land? The latest US govt bond auction was for $110 billion. Two years ago the average monthly bond auction total was $5 billion, $10 billion, numbers like that. The US govt finances its debt with bonds. A $2 trillion deficit means $2 trillion in new bonds needs to be issued. Approx. $200 billion a month.

8. I want to take you inside the mind of a primary dealer. These are the approx. 20 dealers that have contracts with the US govt to market their bonds. The way the deal works in the govt's mind is: "You buy our bonds and sell them. You can short t-bonds going into the auction and bag a nice profit for yourself. But if you don't sell the bonds to your clients, guess who owns them? You do! If you don't like it, no more primary dealing for you, got it? And maybe we aren't so keen to hand over anymore bailout money or allow fraud accounting of your OTC derivatives. So play ball, or we take you out."

9. I spent two hours yesterday meeting in person with a very good friend of mine who is retired as the largest govt bond trader in Canada for one of the primary dealers. He still manages $1.5 billion as a side gig. His minimum trade is $5 million. He looks like a pitbull and uses 4 letter words like Mr. Bernanke uses a greenback photocopier. He carefully detailed to me the horrors that began roaring thru the bond market, horrors that are growing, since the shocking $110 billion US govt bond auction was announced for this week.

10. The bottom line is: There isn't enough money to soak up all the govt paper screaming down the pipe. The $300 billion in total that Mr. Bernanke committed to buy the bonds over multiple auctions, is a drop in the bucket. It's not enough.

11. There is a daily competition for money in the world's bond markets. The US govt bond is the King Daddy of those markets. The primary dealers will do WHATEVER IT TAKES to sell those bonds. The primary dealers also carry tremendous power against the govt. Let's have a listen to their response to the Gman's "it's my way or the highway". Listen carefully. "How would you like it, Mr. Gman, if we announced that " sorry, we can't find buyers for your triple A rated toilet paper, we're going to announce to your public that you defaulted. Let's see how you do when we cut your credit cards up. You tell us what to do? Wrong. Go ahead, take away our primary dealerships. We're all standing together on this. We give the orders, not you. Got it?"

12. What might those orders be? One order could be: "Your $300 billion commitment to buy T-bonds ain't gonna cut it. Try $3 trillion. Now get to your greenback photocopier start button and start pushing it. We'll tell you when to stop."

13. While that action may be in the pipeline, as of today the ACTIONS taken in the bond market by the players are what is important. And those actions, believe it or not, are to buy bonds. Money is starting to come out of general equities, aka the stock market, and into bonds. Money is not coming out of bonds, it's going in. This is what the chartists don't understand. Money isn't just trickling in, it's pouring in. But it's not enough to meet the govt's skyrocketing demand for money!

14. The losses in the bond market have pounded bank capital ratios. Balanced funds must now sell stocks and buy bonds to meet their mandated percentages. Losses on corporate bonds bought over the past year are staggering. Many hedge funds leveraged their purchases and are now in dire trouble.

15. I have warned you all repeatedly about taking delivery of a portion of your stock certificates. Securing your gold. Holding 1 to 12 months expenses cash outside the banking system.

16. The bond market auction was this week. Again, I want you to FEEL what the bond traders are feeling. They are white with terror. They aren't looking at some chart in internet candyland, they know there isn't enough money to buy all the govt bonds.

17. Where we appear to be headed is for a test of the Dow lows. You had better pray those lows hold. Because if they don't, your money could become a target of the govt as its demand for money skyrockets, while the supply of money tanks. The ideal situation is a fast crash towards those lows with perhaps either the Dow transports or the industrials breaking, but not both. While that happens, the bond market must rally.

18. The nightmare situation is the Dow just slowly rolls down, and bonds mount no major rally. If both the Dow transports and the industrials break the lows, the global banking and brokerage system will likely be closed soon after that, the first of many such closes. Short selling would likely be banned. A national sales tax would be simply one of a zillion money grabs.

19. I do things in moderation. If the Dow industrials and transports break the lows, I would seriously consider moving 5% of your IRA and 401k money out and into physical gold on the next correction in gold. Looking back, you should have bought gold bullion in a pyramid formation instead of opening IRA and 401k accounts. It's too late to turn that clock back. It's a small number, but you may not need that much insurance than 5% given the magnitude of the dangers at hand. Nothing is fixed. Nothing is repaired.

20. If Ben Bernanke fails to drastically increase the Fed's purchases of bonds, another vortex of asset destruction is a near certainty, as the primary dealers will exert mindblowing pressure on the managers of other assets to move those assets into bonds. Some of the movement is being triggered automatically thru asset allocation algorithms. Let me repeat: money IS not just moving into bonds now, it is POURING in. But... that money is not enough to soak up all the bonds the govt is issuing.

21. Most money managers are only just this week starting to understand this reality. And what kind of horrific situation this is. If Mr. Bernanke steps forward and announces massive new bond purchases, that could disintegrate the USdollar and send gold to $1200 in weeks or even days. On the other hand, if he doesn't, the primary dealers have no choice but to order a massive liquidation of equity and commodity assets to feed the Gman's maniacal demand for money. Picture a black hole. Everything is being sucked into it. That is the US govt's demand for money. This week's announcement of the $110 billion auction is literally seen by the bond traders as announcing that a real black hole has opened up on a sandy beach. EVERYTHING is slowly being sucked in. Even the sand. And it is accelerating fast in a massive deflationary vortex. As the govt gets the money, it is BURNED. As the sand (and people) pour down the hole, even gold could get sucked in as everything is sold to feed the Gman. Here's the gold chart, the weekly. The chart looks phenomenal. Indicators almost all right in the middle "sweet spot." Perfect to activate the head and shoulders.

22. Sadly, the massive increases in the commercial short positions of gold and other commodities over the past few weeks suggest it could be the deflationary vortex that emerges the victor of this clash of the titans. Will gold soar or melt? I wouldn't bet 10 cents on one scenario exclusively over the other. I want my subscribers to be 100% prepared for any and all scenarios. Remember the tools Mr. Bernanke has laid out. After the purchase of the t-bonds fails, (and it is badly failing right now) the next step is gold revaluation. If you think the United States govt is going to stand around like a wet noodle while their t-bonds are liquidated and watch all "their" money pour into gold without taking action to prevent that, please report to your new home on Fantasy Island. And don't expect there to be any gold there for you when you arrive. Own gold stocks bought into weakness and take delivery of a portion of your certificates. Own gold jewellery. Secure your gold before the govt secures it for you. Jim "Mr. Big" Sinclair, the world's largest trader of gold in the last bull market, feels gold could begin a skyrocket move to 1200, within 3 weeks! Jim "Mighty Man" Rogers feels gold could fall to 700! The bottom line right now is the bond market will decide the victor. The good news is Mighty Man will be a buyer at 700 if it happens. If he is correct, another massive wave of asset destruction is just around the corner, one that could require in excess of $50 trillion in money printing to cover the announced otc derivatives losses that will probably follow. The IMF may have no choice but to start a massive liquidation of its gold very quickly if the bond market doesn't reverse. They have no money and they may be enlisted to buy US govt debt. This is the clash of the titans and the public, who has just loaded up on stocks in time to be killed, is on the verge of being totally obliterated. Regardless of which way this plays out. Ironically, as money pours out of other assets to buy US govt bonds to feed US Gman Friar Tuck, it could have the effect of a giant short position on the USD being unwound, triggering a massive USD rally. The scenarios for huge price movements in all the major markets in all kinds of directions is arguably stronger right now than ever in financial history!

23. This is the ultimate nail biter, the Financial Thrilla in Manila! Will it be Jim Sinclair's bull rocket, or Jim Rogers' sledgehammer? I'd like to leave you with an even bigger question for the weekend, and that is:

24. Are You Prepared?

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May 29, 2009
Stewart Thomson
Graceland Updates
website: www.gracelandupdates.com