More drama in the making

04/09/2009 by Philinje.

Sorry, in the last post I meant starting Tuesday, after Labor Day in the US, the traders are back to work.

Sep 10 is a cycle high date so selling a bit then or a day or two before might be a good idea.

I do not mean to sell everything you have. Sell some into strength, maybe up to 1/3 as Jim Sinclair recommends, in order to have some cash to buy more at lower prices. The question is, how low. Setting stops on some of your remaining investment is a good idea, but on your core investment, ideally in physical bullion and/or coins, hang on.

Two articles have been circulating today in various forms and I’ll reference them here just to keep current. China has been in the news a lot lately, regarding the recent decline in their equity market and a letter to several US financial institutions saying their State-Owned Enterprises will be allowed to default on derivative contracts, as well as the not insignificant news that China has purchased $50 billion of IMF bonds: http://moneynews.newsmax.com/financenews/china/2009/09/03/255910.html

The first article is related to the idea that China is divesting its dollars. But it also indicates that China is determined to see the price of gold rise, possibly as some kind of counter-measure to the severe shorting that takes place on the Comex in conjunction with low lease rates on gold, though lately the lease rates have been going up.

China pushes silver and gold investment to the masses

http://www.mineweb.co.za/mineweb/view/mineweb/en/page33?oid=88452&sn=Detail

“What appears to have happened in China is a total relaxation of strictures on holding precious metals by the individual with the government pushing gold and silver as an investment option, seemingly at every opportunity.  This is a far cry from the situation only a few years ago where the distribution of gold and silver was strictly controlled.  Now, the Thunder Road Report notes that every bank will sell gold and silver bullion bars in four different sizes to individuals and gold related investments are said to be soaring in popularity.”

The second article speculates that the Chinese action of reneging on derivative contracts will trigger a significant bank default in the US. The support of this view lies in the action in the markets over the past few days.

China and the Buzz of a Pending Bank Default

http://thefundamentalview.blogspot.com/2009/09/china-and-buzz-of-pending-bank-default_03.html

Lots of juicy bits in this one.

“Here’s a brief overview of what might happen should these companies, and others, default. The banks, namely Goldman Sachs, J.P. Morgan and from other accounts possibly Deutsche Bank will find themselves LONG on oil futures with no customers on the short side of the derivatives. This will most likely lead the banks to sell the excess oil futures without a care for the price. This is no different than what happened when Bear Stearns was forced to sell off their gold futures in March of 2008 which then resulted in a sharp downturn in the price of Gold.”

This time, oil would get whacked but this would have a carry-on effect with other commodities. More importantly, it would cause a panic and that could cause the dollar and bonds to rise sharply. Gold may rise too, but probably after some decline.

The point here is to keep your investments balanced and un-leveraged. You need to be not too surprised by whatever unfolds. And most important of all, you need to be able to sleep at night.

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