Fed Shocks; Marc Faber could be Right on Gold Price

Expectations for a David Rosenberg surprise scenario playing out at the conclusion of the FOMC meeting shattered into a heap of broken crystal balls, yesterday.  Every asset class not nailed down, save long-term Treasuries, were piled high in the demolition, too.

Not only did the Fed tell the markets more bags of tokens in the Max Keiser ‘Casino Gulag’ economy won’t be handed out after all, the 12-member cabal of interest-rate-price-fixers handicapped the U.S. economy to a downgrade of a less than show—and by the pancaking nature on the yield curve envisioned by the Fed through ‘Operation Twist,’ financials are looking worse than ever today, too.  Will CNBC have Dick Bove back on to defend BofA again?  He’s got a lotta splainin’ to do.

And, as if in a coordinated attack to assure another September event, Warren Buffett’s Moody’s downgraded Warren Buffett’s BofA (NYSE: BAC) and Wells Fargo (NYSE: WFC).  Surely, someone on zerohedge.com will take on the task of explaining that one to the fans.

Moving on to gold.

Those expecting a shock and awe from Bernanke and the Feds, well, certainly got it yesterday, which brings up Marc Faber’s loose call for the gold price to retreat in the coming weeks.  As improbably as it may have appeared on Tuesday, Faber could turn out to be right this time on the short-term direction for the precious metal.

If you’ve been keeping track of the divergent calls for the future gold price for the months of September and October between Goldmoney’s James Turk and Gloom Boom Doom Report’s Marc Faber, Faber had been looking for a pullback in the yellow metal to the $1,500-$1,600 range (approximately the 12-month moving average) before considering making a buy recommendation.  On the other hand, Turk sees an assault on the $2,000 mark by the end of October amid the crisis in Europe signaling an imminent major event of announcement out of the Troika about Greece—or worse, from the bond vigilantes in the Italian, Spanish and Belgium markets.

Though Halloween is still far off, in overnight trading in Europe, gold and silver have cratered to $1,736 and $37.29, respectively—as of 13:23 London time.  So it appears that out of the gates, Faber has taken the lead here.  But given the explosive moves these metals can muster, at anytime, Turk could still ultimately win again on his contrarian call in the face the headwinds of October’s bad seasonals to match gold’s ‘extremely overbought’ technicals.

But for those ready to throw in the towel for Turk, he, too, has shocked the fans with his seemingly call for an implausible huge rally in gold during the seasonally low summer months.  He turned out to be on the money.

Following the demolition work ordered through the Eccles Building in Washington, yesterday, Turk refused to back off on his prediction for gold $2,000, and told King World News, “While we may move sideways [ in the gold price] for a few more days until everybody reads the writing on the wall, I think we should be preparing for much higher prices. So I am sticking to my $2,000 target before the end of October.”

Citigroup’s call for the Silver Price

Here comes yet another prediction for the precious metals.  This time, Citigroup Global Markets chimes in with its price prediction for the most popular “thing” to front run the coming full-blown repudiation of paper money in our future—silver.

“If the final rally in the last bull market repeated then we can expect $100 over the long term,” Citigroup’s (NYSE: C) Tom Fitzpatrick and two other analysts wrote in a research report of July 15. “While the high so far this year was at the same level as the peak in January 1980, we are not convinced that the long-term trend is over yet.”

Fitzpatrick’s mention of January 1980, the month of panic, mania and silver’s meteoric rise to $50 on the backs of the Hunt Brothers, takes us back to a time when Jimmy Carter was president, Abba and the Bee Gees dominated the music charts, and a new home could be built for $76,400—though, the median-size of a new home back then was approximately 20% smaller than today’s, according to U.S. Consumer Financial Protection Bureau Special Advisor to President Obama, Elizabeth Warren.

Nevertheless, a comparison of some reasonable benchmarks between 1980 and today reveals some food for thought regarding the ultimate price silver can achieve during a riot rally soon to spark in gold’s kissing cousin.

In 1980, the Dow reached a high of $903.84 on February 13, 1980, and a low of $759.13 on April 21, 1980. The average close of the Dow 30 Industrials in January 1980 was $860, about the same price as an ounce of gold at that time, and 17 times the peak price of silver at $50.

For the same ratio to be reached between the Dow and the silver price, today, silver needs to climb to $735 per ounce, the Dow must drop significantly, or the two must meet somewhere in the middle—or, in the deep out-of-the-money hyperinflation scenario, the Dow and the silver price could add a bunch of zeros to today’s levels.

As the federal debt limit talks move into the bottom of the ninth inning in Washington, the Tea Party pushes Republicans to make the $14 trillion federal debt an issue during the upcoming 2012 political campaign.  Similarly, in 1980, Americans were up in arms regarding a federal budget nearing the, outrageous at the time, $1 trillion mark.  A few years later, Ronald Reagan became the first $1 trillion president during his first term in office (1981-84).

Using the federal budget as a comparative metric, the peak price of silver at $700 wouldn’t seem that crazy.  In fact, some pretty intelligent and steady-handed bullion analysts have suggested numbers not too far off that number.

In 1980, U.S. GDP reached $2.8 trillion, while federal spending topped $590 billion at the end of fiscal 1981.  Fast forward to today, and we find Washington spending $3.6 trillion, which includes interest on $14 trillion of accumulated debt.  The silver price when compared with federal spending and total federal debt (not including more than $150 trillion in unfunded liabilities, according to B.U. professor, Laurence Jacob Kotlikoff and economist John Williams), calculates to $305 and $250, respectively.

In terms of the Fed’s monetary base statistics, the monetary base in 1980 stood at $133 billion, compared with the $2.7 trillion at the close of business on July 17, according to Federal Reserve statistics.

“The price of silver would have to reach $980.57 before it is in 1980 bubble territory,” according to CQCA Business Research, the firm that posted on its Web site the calculations when comparing the Fed’s monetary base and a $36 silver price.

Using 1980s peak price of $50, the silver price of $1,325 would look like today’s gold price at the end of this bull rally.

Back to Citigroup’s research report.  The boys at Citi feel the nosedive decline in the silver price, which began in May, is now over, giving investors the green light to back up the truck and load it up with silver.  A less gutsy call than James Turk’s call for a bottom (presumably) when silver was still in free fall as it hit the $33 level.

“The move down from the April high this year has come to an end and the double bottom is a good platform for a turn back up,” the three Citigroup analysts said in their report.

At today’s price of $40 the ounce, silver has already soared 650% from the average price of $5.33, set in 1999.  If investors had hooked onto the likes of James Turk, Jim Sinclair, Peter Schiff, Richard Russell, and the raft of bullion experts and old hands frequently interviewed on King World News, the massive profits could have already been made in silver.

But, after reviewing the particularities between the years 1980 and 2011, Citi’s call for $100 silver isn’t quite going out on the limb.  Jim Sinclair’s call for $12,000 gold and, presumably, $600+ silver (given the historical ratio between the tow metals at their peak prices), is, indeed, a bold call—but not an unreasonable one.

Warren Buffett Moves on Citigroup

Citigroup (NYSE:C) is back in the spotlight once again. After plummeting to near penny-stock status, then rebounding, this banking stock became the darling of the hyper active high frequency trading brigade. The robot traders had a ball with Citi’s deep liquidity and ultra tight spreads. However, this algorithmic army quickly lost interest in the stock when Citi instituted a 10-for-1 reverse split pushing the share price above $40 per share.  This strategic move knocked the high frequency trading boys out of the game, but may create more long term institutional interest in the financial stalwart.

Now, perhaps the most interesting Citigroup rumor of all, has hit the underground secrets media network.  The Oracle of Omaha Warren Buffett’s juggernaut acquisition machine Berkshire Hathaway (NYSE:BRK) may be part of a consortium to purchase Citi’s troubled consumer finance division, One Main Financial. Pre-financial bust, this unit was known as Citi Financial.

Center Bridge Partners and Leucadia National Corp. (NYSE: LUK) are also rumored to be part of the buyout group.  Interestingly, One Main only has a book value of $2 billion but may obtain a bid in the $8 billion range due to its extensive asset base.  Citi has been in talks for the last several months about spinning off this division, but this is the first time that Buffett has been involved.  The star power of the Oracle combined with his mountain moving resources may just be the impetus Citi needs to actually flip this troubled unit away from itself.  Time will tell, watch this one closely!

Mr. Big dumps Bank of America

After making headlines last year for his brilliance in foreseeing a rebound in bank stocks following the March 2009 stock market crash, hedge fund manager John Paulson has made headlines again, but not for his record fee take down, but for his recent timing blunder from his substantial sale of his fund’s stake in Bank of America (NYSE: BAC).

According to a CNBC news report, the $38 billion Paulson & Co. founder sold shares in BAC through to the announcement made by the bank that it had settled for $8.5 billion with angry investors who bought misrepresented mortgage-backed securities related to the bank’s Countrywide subsidiary.

CNBC’s Kate Kelly reported Thursday that Paulson had sold a “substantial portion” of his stake in BAC in April and May, citing persons close to the transactions.  According to SEC form 13-F, Paulson & Co. held 123.6 million shares of BAC with a market value of $1.65 billion.

Paulson’s dumping of BAC during the second quarter comes off the heals of his fund’s liquidation of 80,000 shares of Citigroup (NYSE: C) and 2 million shares of CIT Group (NYSE: CIT) during the first quarter, which strongly suggests that he has become less optimistic about the future of the banking industry, maybe even less sanguine on the outlook for the U.S. economy—as the banking sector traditionally leads out of economic recession.

However, Paulson’s positions within the banking sector, specifically in BAC, have taken a backseat to the rest of the story behind the man who charged his investors $5 billion in fees last year for his stellar market performance.

Paulson’s “brilliance” last year may have been a fluke (or the result of collusion with Goldman Sachs on some MBS deals), speculate analysts.

In the case of BAC, since the beginning of 2011, shares of BAC have dropped approximately 20%, leaving Paulson & Co. investors with an estimated $200 million – $300 million haircut to the funds NAV.  And now, CNBC reported that its sources told the financial news outlet that Paulson may be considering buying BAC back, now that the bank has decided to settle the Countrywide MBS class action suit.

Following BAC’s late-afternoon announcement on Wednesday, shares of BAC soared 3% to more than $11.  Some stock technicians suggest that Paulson was fell for an amateur-like whipsaw.

His recent substantial loss in BAC follows another large loss, an embarrassing one, on Sino-Forest (TRE.TO), a Chinese tree plantation.  After research firm Muddy Waters released a report in early June that asserted Sino-Forest overstated its timber holdings, shares of TRE plunged 71% on the Toronto Stock Exchange (TSX).

For the year, TRE has dropped 85%.  Paulson & Co. took a $750 million loss on TRE in June, according to the Wall Street Journal.

Overall, in stark contrast to last year, 2011 has so far been a tough year for Paulson & Co.  Through June 10, Paulson’s flagship Advantage Fund Plus has shed approximately 20% off its NAV, according to two WSJ sources.

Jim Rogers’ Top Two Commodities

In an after-the-bell interview with CNBC’s Maria Bartiromo, Wednesday, commodities king Jim Rogers said he’s a bull on all commodities now, but especially likes silver and rice.

The 68-year-old Rogers, known for his partnership with George Soros at Quantum Fund, spelled out what he expects of Ben Bernanke and other central bankers as the financial crisis plays out—that is: print money.

Strong demand from Asia’s growing middle class from a pool of a 3-billion-plus population as well as an anticipated continuation of loose monetary policies by central banks worldwide will lift commodities prices, he said.

“It [print money] is all they know to do in Washington, Tokyo and a few places,” said Rogers.  “They’ll print more money.  And if they print money, you should own silver and rice and real assets.”

If the world economy grows, Rogers likes commodities.  If the world economy goes back into recession, Rogers likes commodities.  It’s a heads you win, tails you win play, he explained.

What happens after QE2 expires at the end of June?  Rogers didn’t venture a guess on the effects on the equities markets as the end of June approaches, but he expects more money printing from the Fed, especially in front of an election year.

“QE2 definitely will go away.  Now it may come back with a different name,” he speculated.  “They may call it cupcakes.  Who knows what they’ll call it, if it comes back.  But they’re going to bring it back, because he’ll be terrified and Washington will be terrified.  There’s an election coming up in 2012.  Washington’s going to print more money.”

On the subject of the debt ceiling impasse in Washington, Rogers doesn’t expect a U.S. government shutdown.  But if the U.S. government didn’t raise the debt ceiling, he surmises that “the dollar would go up,” he quipped.

But a shutdown of the U.S. government won’t happen, he said.  Governments throughout history have all opted to try to inflate out of burdensome debt levels, and this time the response by today’s governments won’t play out any differently, Rogers has repeated stated in the past.

But at some point, the currency crisis comes, and we may be coming close to that tipping point.  “The markets won’t put up with this much longer,” said Rogers.

The billionaire investor’s portfolio is long some currencies (likes the Chinese renminbi) and commodities.  He has no long positions in the U.S., and is short emerging markets and U.S. technology stocks—with the latter, he believes, are in the midst of a bubble, mentioning Facebook (presumably referring to valuation estimates of the social network leader) in particular.

Rogers is also short a U.S. bank stock, but refused to state the name of the bank on two separate occasions during the Bartiromo interview.  Since Rogers initially mentioned more than a month ago that he’s short a U.S. bank, rumors have spread throughout the Web that the bank in question is Bank America (NYSE: BAC).

Peter Schiff: We are on the Precipice

In his typical candid style, Peter Schiff said he believes the U.S. is again on the brink of another banking collapse—this time the crisis will be worse than the scary swan dive of 2009.

“The stimulus is wearing off and the much anticipated hangover is starting to set in.  The economy is now in worse shape because the government stimulated it,” Schiff told King World New’s Eric King.  “The stimulus merely interfered with the corrective process.  So instead of resolving some of our economic imbalances, the government has made them worse.  Now we are on the precipice of a bigger economic decline than the one the stimulus interrupted back in 2009.”

The irascible president of Europacific Capital, Schiff (known for his no-nonsense responses to interviewer questions), is well-liked by investors who cherish forthrightness amid the legion of perma bulls paraded on financial television programs throughout both bull and bear markets.  The stock bulls of 2000 and 2008 as well as the housing bulls of 2006 still regularly appear on those financial programs.

Schiff has stated many times that he wonders why those who have gotten it consistently wrong are still asked to appear on television in front of a mass audience, while on the other hand, he, who’s gotten it right, is periodically browbeaten for their “fear mongering.”

Schiff, like many independent investors, doesn’t trust the Federal Reserve and the Treasury to come clean on articulating the core problematic issues surrounding the reasons for the precipitous decline of the U.S. dollar against nearly all Forex currencies, commodities and precious metals. Schiff has not only offered blunt assessments when asked about the dollar, he’s been spot on the mark with his predictions, too, which in turn has steadily increased the size of his flock of Schiff disciples.

Those fortunate enough to have followed Schiff’s commentary prior to the collapse of Bear Strearns, Lehman (LEHMQ), AIG (AIG), Fannie and Freddie (FNMA, FMMC)—or have read his book, Crash Proof: How to Profit From the Coming Economic Collapse, weren’t taken by surprise by the dramatic swings and crashes that followed the Bear Stearns fiasco.

So what’s Schiff saying about the U.S. dollar at this juncture?

He told Eric King, Monday, “It’s going lower, last Friday the U.S. dollar closed at a new low against the Swiss Franc.  You need a $1.18 to buy a single Swiss Franc.  I think you are going to see much more of the safe haven money going into other currencies or precious metals and the dollar is going to lose that bid, especially if the Fed launches QE3.”

Schiff continued, “… If you look at the economic relapse that’s going on right now, look at Friday’s abysmal job numbers, look at the housing numbers, understand that all of this is taking place with record monetary and fiscal stimulus.  What happens if we remove those supports?”

Schiff told KWN he believes the Fed’s actions to bailout the banking system throughout the years 2009 and 2010 have made the initial problem of highly leveraged banks vulnerable to a downturn in the economy more acute, so the next crisis will result in a bigger problem for the Fed and less options to cope with bank and broker/dealer insolvencies.

“I think it’s a certainty,” said Schiff in his response to KWN’s question on the chances of another banking system meltdown.  “The financial crisis in our future is bigger than the financial crisis in our past.  We are more vulnerable as a nation, we are more heavily leveraged now than we have been at any other time.  We are more vulnerable to an increase in interest rates or a run on the dollar and either of things or both of things could happen soon.”

Just as Schiff predicted before the crisis began in 2008 that the Fed would fight a U.S. economic collapse with massive money printing, Fed chairman Ben Bernanke will print again if the U.S. economy cannot grow on its own, Schiff warned.

“It [the Fed’s balance sheet] just hit a record size on Friday.  It’s $2.77 trillion, almost $2.8 trillion,” he said.  “We’re approaching a $3 trillion balance sheet, but the thing is in order for the Fed to keep this phony economy on life support that balance sheet has to continue to grow.”

He continued, “Once that happens we can build a lasting and sustainable period of prosperity.  The one we have now is doomed, it’s an abomination, it can’t survive.  It depends on ever and ever greater injections of credit so that we can keep on borrowing to consume and import.  If we try to do that indefinitely we will destroy the economy completely because we will destroy the currency completely.”

Schiff predicted gold’s ascent well before the debt crisis became apparent to everyone in 2008, and he again expects more bullish moves in the monetary metals in the months and years to come as the beginning of “Act II” of the global crisis—as George Soros described the volatile financial markets in March 2010 (during the Greece sovereign debt crisis)—plays itself out around the globe.

“The more mistakes the Fed makes, the more stimulus the government pours into the economy, the brighter gold and silver are going to shine.  Since I am optimistic that the government will keep doing the wrong thing, I’m optimistic that gold and silver prices will keep rising.”