John P. Hussman, Ph.D., Hussman Funds

Brief remark - from early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 4% of the purchase price - the remainder being "non-recourse" financing from the Fed, Treasury and FDIC. This essentially implies that the government would grant bidders a put option against 96% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats

Over the next 10 days we will be migrating the bullionmark site to an exciting new media rich platform. Those of you using bookmarks, taking RSS feeds, feedburner subscriptions or widget connectivity should not be impacted during the migration.

For the first month or so we will run old and new site in parallel to ensure we have all the bugs sorted out. The new site will be located at http://www.bullionmark.com the existing blog will move to http://bullionmark.blogspot.com

The migration will commence on Monday 30th March. Please feel free to email us on bmarkblog@gmail.com should have any comments or questions.

Thank you for your continued support

Mark

Long time followers of this blog will be familiar with our view that JP Morgan is essentially the Federal Reserve and therefore the US governments bank. JP Morgan's share price provides a proxy for the markets view of whether the Fed and US Treasury are winning or losing the battle. It should also be noted that as the chief government executioner JP Morgan carries hundereds of trillions of dollars worth of derivatives on its books that have been used to manipulate markets. Consequently JP Morgan is a nuclear accident waiting to happen. When (note I didnt say if) JPM fall they will take the Federal Reserve and the current financial system with them. US sovereign default will also occur as a result.

JPM rallied strongly recently but has broken down from long term resistance at $27.50after the Feds PRINT PRINT PRINT policy this week to close just above $23. If JPM breaks recent lows of $15 the US government and financial system are in big trouble.

Got gold?

Back in early March we called for a big stock market rally of about 20%. From the low point on March 6th of 666 on the S&P500 to yesterdays high of 800, we have seen a 20.1% rally. Given the dramatically oversold nature of stocks at the time it wasn't that hard to predict the rally. However what happens next is far more difficult.

Our original forecast was for a 20%+ rally with a big sell off from mid to late April with new lows in October/November. We stick by this forecast but caution you that the duration of the rally may not last until April and a sharp correction or even crash may be imminent.

Lets look at the charts to understand why:

S&P500 long term back to 1982 with Fibonacci levels



As you can see todays close of 766 is right on the 2002/2003 double bottom low. If it does not hold this level we will see a break of the recent 666 low. The fibonacci level of 638 is the next obvious support but if this breaks there is no major support until 444 a whopping 42% under todays close. Again I state that my forecast is not 444 but you should be aware that it is a possibility in a panic sell off.

www.GoldForecaster.com

It is clear now that central banks are buying gold for their reserves. Here is a brief history leading to today and the present position of central banks as they turn to buying gold.

Massive Gold Sales!

From the early 1980’s and for the next 20 years gold was under the threat of massive sales from the world’s central banks. Many commentators reported that the overhang of gold above the ‘open’ market was so great that such sales would eventually lead to central bank reserves in the developed world having no gold at all. Central Banks had further worsened the situation by loaning gold to mining companies, through the bullion banks, allowing them to finance gold production to a far greater extent than warranted by the price of gold during that time. This acceleration in the production of gold allowed the gold price to be pressed down $850 to $275, the point at which Britain, at the instruction of the current Prime Minister Gordon Brown instructed that Britain sell the bulk of its gold reserves. From the turn of the millennium this perspective changed dramatically.

Limitation of gold sales by central Banks!

In 1999, through the establishment of the Washington Agreement, the signatories announced to the world that it need not fear uncontrolled sales of gold reserves for the next 5 years. While the U.S. and Japan were not signatories, they gave tacit agreement to such a limitation. Since then neither of them have sold gold on the open market. Following the end of the ‘Washington Agreement’, a second agreement, called the Central Bank Gold Agreement, extended the situation for another five years. This agreement ends on the 26th September this year. Sales were limited to the sales previously announced by the signatories, with the exception of Belgium and Spain who made no prior announcement to their sales. Under the Washington Agreement these were limited to 400 tonnes a year. Under the second Agreement the sales were limited to 500 tonnes a year. These limitations have not been met under the second agreement as sales are below this limit so far.

The halting of Central Bank Gold Sales!

Of great significance has been the actual slowing of gold sales from European banks, which appear to have lost all appetite for gold sales.

Indeed France was an unwilling seller, but under Presidential instruction has done so. Italy has had no plans to sell any of its gold. Germany had the option to sell 600 tonnes but has not taken this option up. Switzerland took some of this but has ceased selling now. It would be surprising if the signatories sold more than 150 tonnes of gold let alone the ceiling amount of 500 tonnes by the 26th of September this year. And next year, we expect no such sales [the I.M.F. sales are potential sales that are not part of a central bank gold selling policy] from central banks.

Central Bank buying of gold for reserves!

Just as the tide turned from damming gold in the monetary system in 1999 it appears we are rapidly approaching another watershed in the history of gold in the monetary system.
Countries not seen as an important part of the global monetary system have, in the last few months, turned buyers of gold. Ecuador [28 tonnes - 920,000 ounces - doubled its reserves from 26.3 tonnes], Venezuela bought gold [ 240,000 ounces - 7.5 tonnes - taking it up from 356.4 tonnes] , but this is not deemed of great significance.

Russia at last, after talking about it for over one year has begun to buy gold. It was reported that Russia has bought as much as 90 tonnes of gold for its reserves, lately [Previously it held 495.9 tonnes]. This is much more significant as it is a large figure in the small gold ‘open market’. Prime Minister Putin is reported to have said that Russia wants to see gold forming 10% of Russia’s reserve. The slow process of getting them up to that level could have begun. Even so Russia has little influence on global central bank thinking, so such increase are not thought to directly influence the principles behind gold as a reserve asset. So as not to minimize such purchases, if Russia were to keep up this pace of acquisition, it would be able to buy 360 tonnes a year and have a very significant impact on the gold price.

But the principles behind gold, as a reserve asset, are affected far more by the following news. Last week the European Central Bank reported that one signatory to the Agreement purchased gold [which for the first time we have seen them do it], because the purchase was not simply of gold coin [which has happened before – seemingly for good housekeeping reasons] but simply “of gold”. In other words the ranks of central bank selling in Europe have been broken and one has turned buyer!

We feel more positive now in our belief that European Central Banks are unhappy sellers and are inclined to change their views to the buy side. The very fact that one central bank in Europe has turned buyer confirms this. There is little doubt in our minds that there are conflicting views now amongst the heads of the leading European central banks on gold now.

Major changes taking place in central bank policies on gold!

According to the World Gold Council’s new chief Executive Aram Shishmanian, in the Middle East the new monetary union there intend to have “gold play a prominent role in Gulf CC economies.” He said, “It may play a role in that basket of currencies on which the GCC common currency will be pegged”. Of course, please bear in mind that the inclusion of gold in a basket of currencies, would simply be for valuation purposes and does not, of itself, imply that these central banks will buy gold for their reserves.

He continued, “Gulf central banks, along with the central banks of Brazil, Russia, India and China are expected to increase their gold reserves. Central banks with low reserves of gold are looking to increasing their reserves. They are trying to analyze what the right balance should be. They are becoming aggressive. Currently the belief is that if more than 20% of a central bank’s reserves are in gold, it is overweight, but this perception is changing! The metal is becoming an assert class in the region and Gulf investors are looking at long-term investments in gold as a hedge against inflation.” We are certainly not in a position to contradict what he says. After all he has the resources and contacts to be authoritative on the matter.

However after nearly 30 years of opposition to gold by central banks ands occasionally governments, it is a remarkable turnaround that tells us that gold is returning to the monetary arena again! [The gold world has expected this for so long it feels a bit like seeing an oasis in the desert.]

If right, expect to see both Russian and Chinese gold production go straight into those countries reserves and not even reach the open market. That will account for nearly 600 tonnes of supply disappearing. Now add to that the halting of sales from European central banks, a perceived 500 tonnes a year. If this trend continues gold, as an investment, will be fully rehabilitated.

Institutional demand will follow!

But this is by no means the largest effect that this change of heart will bring about. The recognition by central banks that gold has a role in the monetary system will influence investors, both institutional and individual. Should that happen and say 5% of funds placed in gold by funds such as Pension funds, then an amount of $920 billion, in the States alone, could head gold’s way. Only a five figure gold price could accommodate that volume of money in the gold market. Now add to that the same inclination in the rest of the world. Any such rise in price will stunt the demand for sure, but be certain that gold is not simply in a bull market.

If the World Gold Council’s CEO is correct, then he will have confirmed that 2009 and 2010 will be the year that heralds the return of gold to the global monetary system!

“Gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historicallyhas always been the reason why governments hold gold.”

from Jesse's Cafe Americain

To net today's FOMC statement for you, the Fed today made an aggressive commitment to monetary expansion today in the expansion of its balance sheet to support the financial system.What was particularly repugnant was the co-ordinated actions in the market ahead of this announcement. This included a major bear raid on the precious metals, and the panic-covering of the financial shares before the official announcement. The cure of the crisis ought not to be an occasion for looting, fraud, deception, and personal enrichments by insiders who in many cases caused the problems which are facing today.The US government is engaging in the same artificial tactics that lead to the tech bubble and the housing bubble. They are artificial because they are not accompanied by systemic change and meaningful reform. We are shooting the patient with morphine so they can go back to work without treating the disease.The next phase of this financial credit crisis may be take down the US Bond and the dollar. That is what is known as a financial heart attack.

Release Date: March 18, 2009FOMC Statement

For immediate release Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession.Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.To provide greater support to mortgage lending and housingmarkets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of thesesecurities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments

The rumblings for change are growing growing louder...........

from the Moscow Times

The Kremlin published its priorities Monday for an upcoming meeting of the G20, calling for the creation of a supranational reserve currency to be issued by international institutions as part of a reform of the global financial system.

The International Monetary Fund should investigate the possible creation of a new reserve currency, widening the list of reserve currencies or using its already existing Special Drawing Rights, or SDRs, as a "superreserve currency accepted by the whole of the international community," the Kremlin said in a statement issued on its web site.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.

The Kremlin has persistently criticized the dollar's status as the dominant global reserve currency and has lowered its own dollar holdings in the last few years. Both President Dmitry Medvedev and Prime Minister Vladimir Putin have repeatedly called for the ruble to be used as a regional reserve currency, although the idea has received little support outside of Russia.

Analysts said the new Kremlin proposal would elicit little excitement among the G20 members.

"This is all in the realm of fantasy," said Sergei Perminov, chief strategist at Rye, Man and Gore. "There was a situation that resembled what they are talking about. It was called the gold standard, and it ended very badly.

"Alternatives to the dollar are still hard to find," he said.

The Kremlin's call for a common currency is not the first in recent days. Speaking at an economic conference in Astana, Kazakhstan, last week, Kazakh President Nursultan Nazarbayev proposed a global currency called the "acmetal" -- a conflation of the words "acme" and "capital."

He also suggested that the Eurasian Economic Community, a loose group of five former Soviet republics including Kazakhstan and Russia, adopt a single noncash currency -- the yevraz -- to insulate itself from the global economic crisis.

The suggestions received a lukewarm response from Foreign Minister Sergei Lavrov on Saturday.

Nazarbayev's proposal did, however, garner support from at least one prominent source -- Columbia University professor Robert Mundell, who was awarded the Nobel Prize in 1999 for his role in creating the euro.

Speaking at the same conference with Nazarbayev, he said the idea had "great promise."

The Kremlin document also called for national banks and international financial institutions to diversify their foreign currency reserves. It said the global financial system should be restructured to prevent future crises and proposed holding an international conference after the G20 summit to adopt conventions on a new global financial structure.

The Group of 20 industrialized and developing countries will meet in London on April 2.