Posted: Jan 30 2010 By: Jim Sinclair Post Edited: January 30, 2010 at 4:44 pm

Filed under: General Editorial

Dear CIGAs,

WARNING: In the last two days you have received two emails, both more than likely unsolicited by you, yet not unwelcome.

There are some misassumptions concerning their argument for the US dollar and gold in both communications.

The first is:

"Fed’s Currency Swap Lines: A BIG deal for the Dollar"

This article written in good faith, I am sure, but fails on three points.

1. It properly defines the basic currency swap between central banks but fails to follow the money through the transaction to its final destination.

The swaps done with the ECU, Swiss, British and other non-US central banks were for the purpose of bailing out those non-US banks that were the losing debit counter party to major US derivative dealers.

In order to reverse these swaps without non-US central banks having to borrow dollars in the dollar market from others, effecting short term interest rates and upsetting the economic apple cart, the banks bailed out would have to miraculously invent some way to pay back the dollars.

Ask how much of this can in fact be paid back by the non-US banks now. The answer is very little.

The proper conclusion then is if the swaps were to be closed it would impact the short and medium term rates up to one year because it would require the final recipient of the cash to have re-cashed itself miraculously which they have not.

2. How often has the Federal Reserve informed you of what they intend to do before they have actually done it? The answer is rarely unless the MOPE had a purpose that would replace the need to do what was announced or deliver another valuable product. Keep in mind it is hard to sell bonds in dollars when the dollar is moving lower and other central banks wish diversification.

If in fact the swaps were to be repaid you would hear about it after the fact because as it would have already impacted interest rates and the value of the US dollar. Swaps like those now in place do impact currency values. Therefore to pre-announce it would work against the interest of the Federal Reserve’s counter-parties on the swaps. It is akin to sinking your partner on purpose and in public.

3. The only time you can conclude a swap is closed is by hindsight investigation of balance sheets of both parties. This means that this report you received is offering an opinion of what they feel will happen based on MOPE with no solid who, where and when actionable intel.

4. Then you are making a recommendation on the interpretation of MOPE which is usually just what MOPERs wants you to think.

The second is:

"Put your faith in charts. They are much more truthful than people!"

This communication came from an excellent and reliable chart reader. However, I find point one somewhat prejudice, and the second point to be correct but not defined as to the term of impact.

Charts give you guidance according to the definition of what time scale charts you are looking at. Short-term developments cannot be equated to long-term predictions.

This email basically says those that argue fundamentals do it because they market what they make their living by doing it. Can that argument not be applied to a person who sells a technical service? How about those that understand both the technical and the fundamental and do not do either for a living? You can only attack by claiming the later source is simply wrong because he is simply stupid.

Please keep in mind that even if both were right, the right they would be correct, this time, is on a SHORT TERM fundamental or technical event that would end reversing itself at the ending or simply becoming a non-factor when completed.

That has no relevance to insuring yourself against the mountain of debt, the mountain of bankrupt states and nations, the mountain of liquidity that has no practical means of being withdrawn and the weakness of the western world’s economies.

It is also important to keep in mind that any major currency that declines in value increases the demand for gold within that area when paper currencies are in general question as to storehouses of value.

Both parties sending these communications mean well, but have overlooked key parts of the argument they make.

Respectfully yours,
Jim