Dan Norcini

The King World News weekly precious metals review finds Bill Haynes of CMI Gold and Silver reporting a quiet week on the retail front but futures market analyst Dan Norcini shaking his head at brazen intervention in the gold market by central banks. 
You can listen to their commentary at the King World News Internet site HERE
Collateralized debt obligation is now effectively worthless because the collateral behind the debt can no longer be collected. The banks cannot go and get it.
Let’s say you have 10 mortgages at $1 million a piece, the sum total of those mortgages are $10 million. So, the banks took the 10 mortgages and bundled them together into a collateralized debt obligation or CDO with a face value of $10 million.
They then sold that new entity that they created to an investment group of some sort, a pension fund, hedge fund, etc. promising them a yield of let’s say 7%. The sales pitch would emphasize the fact that this CDO was backed by real collateral. In the event of loan defaults by the borrowers, the banks would tell the buyer of the CDO that the collateral behind the loan could be sold to recapture any potential losses on the part of the purchaser.
Everything seemed to work fine until the defaults began and the foreclosure process kicked into high gear. The foreclosure process has exposed fatal flaws in the system and the flaw is that the banks cannot prove clear ownership of the mortgage.
Consequently, they are then barred from foreclosing on the property. Because they can no longer foreclose on the properties, the CDO is now effectively worthless.
The hedge funds and the pension funds cannot now sell these CDO’s on the open market, so how are they going to recover their original investment? Perhaps you may say that won’t be a problem because these instruments were insured. The problem is now the credit default swap or the insurance policy that was purchased to protect against default assumes that the insurer has the financial wherewithal or resources to make good on the claim.
If there were only a small number of these problem CDO’s this would not be an issue. But as the number of the foreclosures continue to skyrocket, and more and more banks are prohibited from seizing the collateral behind the property, the sheer magnitude of the number of claims presented to the insurer will overwhelm their balance sheet.
In effect what you have is an insurance company which doesn’t have enough money to pay off the claims. Compounding the problem is the fact that the CDO’s and credit default swaps related to these claims form a mass network of interdependence. This then ripples through the entire system and creates a domino effect which can cause the failure of entities creating the next financial crisis.
Ultimately the Federal Reserve will be asked to step in and buy up the now worthless CDO’s and put those on its balance sheet. In order to do this the Federal Reserve will have to engage in massive quantitative easing, taking onto its balance sheet the worthless CDO’s in exchange for newly issued treasuries.
This of course will have a horrific effect on the US Dollar which is why gold and silver are heading much higher.
Dan Norcini (JS Mineset)
What follows is “Trader” Dan Norcini‘s excellent review on Monday’s P.O.G. clobbering:

Comex gold was taken sharply lower beginning at 4:00 AM CST and then at the usual shellacking time of 7:00 AM, CST in New York. The reason given for the sell off was “risk aversion” as the US equities were sharply lower which once again saw further foreign currency selling and repatriation into the Dollar. There was the usual chatter of “long liquidation” but that has been ongoing for nearly 4 months now as open interest has continued to plummet since July and so is not particularly enlightening. One look at the Japanese Yen and that is all we need to know about why gold is down. Not to fear friends – this same kind of mindless selling was being seen across the spectrum of the commodity futures markets this morning. Every single commodity market that I track was showing red in its line on my quote screens this morning, regardless of its current fundamentals. That is the tipoff that the selling is indiscriminate and is originating mainly from the index funds and from some of the hedgies. Give them a dose of stock market friendly news and the same dopes will be all buying everything in sight once again. Unless you are a short term trader, and by that I mean a trader whose long term horizon is a 60 minute bar chart, all you can do is to simply laugh at the foolishness that passes for “sophisticated trading strategies” these days. If you think gold is acting irrationally, you should try trading cattle. Yes indeed, Microsoft stock and Amarillo, Texas have lots in common these days.

Having watched these markets nearly tic by tic for as many years as I have now been doing, I have to laugh at those who keep telling me about the “efficient price discovery mechanism” that our glorious financial markets are. Ask any bona fide commercial end user or producer who has to employ the futures markets to hedge their risk whether the futures markets are the least bit “efficient”. If you are not careful, you are liable to get whacked across the knees with a 2 by 4. As far as many of us are concerned, the futures markets have been completely ruined by the index funds. I for one wish they would all simply go away as that would make a wonderful Christmas present. Come to think of it, a few more hedge fund failures would also suit me just fine. Think about what these guys do. For “risk aversion” they run into a paper currency known as the Yen and run out of “risky” gold during a time of financial chaos and uncertainty. The guys who write economic textbooks in the future years from now will have to go back and proof read their texts to make sure that they actually got this right as it will be so bewildering to them that they will suspect that the printer typeset the words incorrectly.

Meanwhile, yields on some Treasuries are now at 50 year lows! Before long you will have to pay the government to buy their debt at this rate! And to think we have people who are throwing away gold in order to stash their life’s savings into US debt paying these kinds of yields. My suggestion is to buy brass, gunpowder and reloading equipment instead. You get to own something tangible and at the same time can keep the idiot who stuck all his money into worthless US debt from trying to steal your tangibles that are actually worth something.

I mentioned last week that many traders wrap up their trading year around the Thanksgiving holiday and take off the rest of the year. The result is that liquidity begins to dry up considerably with the spread between bids and offers widening out and smaller orders moving the market much further than such an order would move the market under more normal trading conditions. We are already seeing the effect of this combining with the plummet in open interest (it dropped yet again to 271,000). I see no reason whatsoever for this to change anytime soon. It will work the same way when the market moves higher. The perverse effect will be that so many traders will be getting whipsawed that more and more of them will have had enough of the madness and they too will move to the sidelines further compounding the already out-of-control volatility.

It does seem to me, however,that given the rather minor extent of the Dollar’s rally this morning along with the corresponding weakness in the Euro-Yen cross, the sell-off in gold is way overdone. I mention that only to emphasize the effect of the falling liquidity and how it is acting to exaggerate any moves either up or down. Those who like to play games with market prices LOVE conditions such as this as it amplifies their ability to push the market in the desired direction, namely DOWN. All you need to do is place a few strategically large sell orders to get the ball rolling and then step back and let the lemmings do the rest of your work for you as you pick their pockets. Even though I personally despise what the bullion banks do with the Comex, in some sense the longs who refuse to change tactics deserve what they get. If they will not adapt to what their enemy is doing, they should not expect to obtain a different outcome. Take the metal and end the charade. Play the paper game and lose. It is that simple.

Those of you wishing to secure some more physical gold from the Comex warehouses so that you may deprive the shorts of their only line of defense, just received a discount of nearly $5,000 on your purchase price for 100 ounces compliments of that same crowd. Each time one of these bear raids occurs and the weak longs rush out of the exits, those who want the real metal can easily step in and lock in a better purchase price for the physical. The more metal that flows out of the warehouses the more the shorts are being set up for a religious experience. The key is not to let up the pressure from the physical side of things. It bears repeating: the paper shorts have NO DEFENSE against determined longs who are taking possession of the actual metal at an increasing rate. Have you had enough of this phony paper market yet? Are you tired of the cart leading the horse around? Then take the metal away from the warehouses and the Comex will cease being the corrupt den of thieves that it is. Do not forget how the Hunt brothers handled the silver shorts in the late 70’s before the Feds stepped in to bail out their pals who were short the metal. The problem the Hunts had was that there were just two of them – an easy target – but in the case of thousands and thousands of investors who take physical delivery of the gold out of the Comex warehouses what is the claim going to be from the Feds? That the Comex market should not be a place where buyers can go and obtain gold? If not, then shut the damn thing down. If so, then buzz off.

Today we had another 2,566 deliveries that were taken, or stopped, against the December gold contract. That brings the monthly total to 11,166 ounces in just two days worth of deliveries. The entire month of October had only 11,554 to give you an idea how heavy the buying of the actual metal has been so far. Once again the stopper of size has been Bank of Nova Scotia. We are off to a very good start but cannot relax.

Meanwhile, back over in the HUI and XAU worlds, the indices were taken back down below the 50 day moving average after having successfully managed two consecutive closes above that important technical level. Generally, such a performance would be a confirmation that the lows are in especially with the shorter dated 10 and 20 day moving averages turning higher and threatening an upside crossover of the 40 day. What we will want to watch then will be at what level the dip buyers will perhaps make their presence felt. It looks to me from the HUI chart that the region near the 208-210 level should provide us some buying support. Below that is support near the 198 level although I would prefer to see the former level hold to keep the bearish chatter to a minimum. The shares had been managing to begin separating themselves somewhat from the broader US equity markets until today tripped them up so let’s see if they can regain their footing sooner rather than later.


…lest we forget where we stand vis-a-vis the Gold Bull Market.

Some elementary T.A. compliments of Trader Dan (JSmineset.com):

click chart for pdf analysis

Click on graph for some great analysis in pdf format.

Click chart to enlarge the latest action in gold in PDF format as of April 23, 12:30 pm CST with commentary from Trader Dan Norcini

click for pdf

By Dan Norcini,
Monday, February 25, 2008
Today the Continuous Commodity Index made yet another all-time high as Minneapolis wheat prices surged almost $4 to an unfathomable price of $23 per bushel. Palladium prices are up to $520; soybeans hit another all-time high of $14.55; corn roared to nearly $5.40 a bushel; and cocoa notched a 24-year record. The list could go on and on and on.
This report from Reuters — http://uk.reuters.com/article/consumerproducts-SP/idUKL2552499120080225 — details what is taking place in France as a result of these record-setting moves across the entire commodity complex. But France is just an example of what is taking place globally.

That is why the noise about gold sales by the International Monetary Fund is just that for those who understand the game that is being played with the yellow metal by the Western monetary authorities. Wrap your mind around what is happening on the inflation front and then ask yourself: How much longer do they think that by attempting to drive the price of gold lower they can convince the public that inflation is under control?

The simple truth is that gold has either broken into all-time highs when measured in terms of every major currency or is threatening to do so. To reverse this inexorable trend, these haters of gold will have to work their alchemy on wheat, soybeans, rice, corn, sugar, cocoa, coffee, etc. In other words, they will have to wave their magic wands and reduce food prices. And from what hidden stockpiles of agricultural goods do they intend to do so? Good luck, fellas. You are going to need it.

Meanwhile, those rising economic powerhouse Eastern nations with burgeoning reserves consisting predominantly of less-than-desirable U.S. dollars will be more than happy to take all the gold that the hapless dolts at the IMF are willing to part with. With the staggering sums contained in their sovereign wealth funds, these countries can gobble up any and all gold the IMF wants to get rid of, and they will welcome the opportunity to buy gold in size at a set price.

Once again, the West is shown to think in terms of a checker game while the East is playing chess.

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…stay focused with this series of superb charts (in pdf) drawn by Trader Dan (Norcini) from J.S. Minest: HERE

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