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It's not so much that a high flying hot-money hedge fund has crashed and burned. In the search for yield in the current black box driven market, highly leveraged dollars must be risked to "earn" nickels and pennies. The concern is that such a blowup may spark a domino-like effect as a cascading debt default unwinds across the financial spectrum.

Nothing worse than making billions on paper and finding out the corresponding long to your short can't pay. Thus the concept of counter-party risk emerges. Because when you can't get paid for a winner you can't pay for your losers and so on and so on down the chain. It is not uncommon for these hedge funds to be leveraged ten or twenty times their capital. They can literally be wiped out in the blink of an eye.

Then of course there are the derivatives -- what Buffet has referred to as "financial weapons of mass destruction." Some of these derivative contracts can bring leverage of a hundred times across dozens of interlocking financial contracts. They serve to convert low cost debt into paper profits according to modern accounting techniques -- all in the name of "hedging" risk.

There is a fear that a systemic crash along the lines of this firm's woes can easily be triggered by fat tail standard deviations, rogue traders or some kind of event that sparks unheard of volatility. The majority of NYSE trading is now done between computer programs and there is some concern that the US government is monetizing its own debt through offshore purchases in the bond markets.

It is all extremely complicated and based with ever escalating levels of debt as the foundation. No one really knows what is going on now but you should expect to see more of these kind of stories.

I wouldn't worry about it though. After all, we have it on very good authority (CNBC) that the economy is sound.

HG

Have not seen this posted anywhere despite being the lead business news story today. In 1997 LTCM's four billion dollar loss required the sixteen largest US banks to ante up 250 million each to keep the system from imploding.

Paulson must walk a delicate tightrope to enable these hedge funds to unwind in an orderly fashion. Much pressure now.

HG

Asking an old timer like me to "tell more" is like putting a bottle of absinthe in front of an alcoholic -- no telling what will spill out as the evening progresses. But this year the back is hurting earlier than usual which means a storm is coming. Meteorological or financial I don't know -- but I suspect both.

Nickel is an important strategic commodity in time of war and stocks have never been lower although the coming report may show increased stockpiles. Any country with a growing military likes a low paper price during an accumulation phase because it's one thing to trade paper -- and quite another to take delivery. LME went into technical default last month by letting shorts off the hook for delivery by paying a "paper penalty."

When I was young man they had a saying in the pits, "He who sells what isn't his'n, buys it back or goes to prison." Which meant if you had to cover a short sale you were at the mercy of the price -- you had to buy it back regardless of physical stocks available. Now that is not the case.

On the COMEX the short position in silver is far in excess of what can be delivered by existing stocks and is concentrated in the hands of Chinese elements who may settle -- or may not. They have plenty of American paper money -- what they want is to increase their strategic silver stockpiles (as well as nickel, copper, etc) and they can most efficiently do this by manipulating the "paper" price down while they are in their accumulation phase.

Growing up I can still remember Father saying, "Free markets make free men." If market prices are artificially suppressed by entities that can sell what they don't own and then never have to "buy" it back, then those same ones manipulating the price downward can in essence send a false signal to the commodity holders and buy at a much lower price.

The truest beauty of markets is that they always correct. Always -- for markets are stronger than the manipulators that seek to acquire a temporary advantage and then flee. The problem becomes when the natural correction overcomes the system's capacity to regain a true balance.

This of course does not take into question the basic unit of account -- the US dollar which has many problems now. The Chinese are very clever as having found that their dollar hoards cannot be spent for American companies -- they will instead use the paper sword to acquire the raw materials they need to build their own companies.

Should a meltdown at either LME or COMEX go parabolic it will spark a fuse that will be difficult to extinguish with contemporary western financial tools. Combined with the oil market volatility generated by Middle East events and a serious question arises about the true strength of the dollar.

Should the worst happen and there be an exchange "accident" triggered by excessive naked short selling then the entire structure will sustain a concentrated systemic shock. At that time we will learn which financial bulkheads are watertight -- and alas -- which ones are merely paper.

HG

The epic battle between the naked shorts and the sharks has put the LME into technical default the past few weeks. By allowing paper money premiums to settle for unmet delivery of physical delays, the Exchange in essence has failed its contractual obligations. These quotes almost meaningless now as physical supplies have evaporated.

The situation is similar on the silver contracts at COMEX. At some point the concentrated short positions held by "rogue" Chinese traders will threaten to collapse the entire market as continued price suppression by naked shorts eliminates the price discovery these markets are supposed to reveal. Already there is a disconnect with physical purchases and the COMEX "spot" price. Silver will explode in price between now and the new year with but a single miscalculation by Beijing.

These manipulations endemic of the fraud perpetuated now in all markets. The west on the verge of an historic economic collapse. All paper markets suspect now.

Oh well, you seen one Great Depression -- then you've seen 'em all.

HG

I hope those evacuation teams are mighty careful when they start to ferry our citizens out of there. It sure looks like a whole lot of people on all sides are spoiling for a fight now and nothing would make the liberal media go ballistic with the war drums like a bunch of American citizens being harmed.

Funny how the media wants the US out of Iraq but is leading the charge for intervention here...

Otto Skorzeny was the man who rescued Mussolini from the allies and later shipped the German gold out of Europe. He is also the fellow who infiltrated the Polish frontier the night before the war began and with his team wearing Polish uniforms attacked the German border posts. This gave Hitler his excuse to go to war with Poland the next day.

This idea of pulling the Americans out by helicopter risks too much for too little. Especially when nobody knows who or what is running around on the ground. With superior firepower best to just go slow and easy and let the liberal media rant all they want to. Most Americans don't want to turn around a week from now and see US troops in Lebanon like they were in 1959 and 1982.

Of course a few liberal elitists in some very high non governmental places do...

Gold trading opens in Asia in about six hours. Should be a big week for honest money.

HG

It's times like this that a person likes to have physical gold in hand. When you combine an imploding debt based economy factored by an escalating Middle East crisis, the chances of a multiple standard deviation financial "event" is greatly increased. That American Gold Eagle bought last week for 660 is in the money now less than a week later. The "insurance premium" is paid so to speak and what remains is an asset that is no one's liability and exists as true money anywhere in the world.

The nephew and his crowd have been buzzing the last few days about events in Lebanon and the possibility of Israel and/or the US going to war with Iran. They get to carrying on a bit and the next thing you know they are talking about nuclear war and World War III. I try and tell them to calm down a little bit and get some perspective.

I remember 1948 and 1956 and the politics that went on in both of those fights. Few remember the 1956 fight and the internationals' dirty hands in that one but it was dicey for a day or two. In 1967 Israel came out swinging and set the stage for 1973 -- that was the one that caught them all by surprise.

In October 1973 we didn't have this here Internet or a hundred channels of cable TV. I seem to recall news reached the States late on a weekend night and was just a blurb. "Israel battles on two fronts" or something like that. That was a close call in a lot of ways...

Even when it was over it wasn't as the oil shock came...

I don't think there will be mushroom clouds springing up in the coming days or that World War III is starting. However another Middle East war seems likely and in all probability gold and oil are going to the moon in the coming weeks. If the worst happens then when the smoke clears that gold may mean survival as things come back to normal. However in all probability it will just mean that wealth is maintained.

Which is plenty good enough. By now you should know why those darn Asians are buying all the gold. Anyway, you see one Arab-Israeli war then you've seen 'em all. The price Monday will tell us plenty.

HG

Gold is up around 35 this past week on news of Middle East tensions and escalating oil prices. We may turn around next week this time and see it over 700 and marching upward with a vengeance.

I see plenty of critics about gold on this forum but for the last two thousand years it has been highly desirable when the Four Horsemen start riding. On Monday things will either be better or they will be worse in Lebanon when the New York trading starts -- a big move in early Asian trading could set the tone for a record day.

HG

Gold still looks dirt cheap at 630. That means for the average American to own an ounce of gold they will be spending about 640+ for a Krugerrand or 660 for an American eagle if they know how to negotiate. A little more if they are first time buyers and don't know how to haggle like they are in a Teheran bazaar.

You asked "What coming financial meltdown?" and that is a fair question. Some of the nephew's colleagues at the University like to have that discussion and he tells me after several beers half of them agree it will be a hyper-inflationary tsunami while the other half swear it will be a deflationary collapse. The one thing they all agree upon is that its coming.

Those in charge have created too much money -- the asset bubble of all asset bubbles. Except of course "dollars" are not assets (unlike gold) but merely debt instruments. I guess in simple terms, there is so much debt out there that there will never be enough money created to service it at some point -- let alone pay it back. Massive systemic-default is the liquidity crisis magnitudes beyond the central banks' ability to "soak up excess liquidity."

Debt trap dynamics reach their tipping point and then accelerate. When it happens it will move around the world with lightning speed.

Gold has been man's only protection from the central bankers since John Law rode into France. The day the average Joe learns what has been going on he is going to be some kind of upset. If he has bought gold at 450, 630 or even a thousand he will survive. If not he just may go hungry because at some point those Krugerrands and American eagles will get scarce at any price in terms of paper "dollars"

Of course you will always be able to exchange Morgans or Peace dollars for gold. But that's another story for another time. Believe it or not there was a time in this country when a dollar was solid and meant something.

There's a reason those darn Asians are buying all the gold...

HG

People are quick to jump on president Bush and his economic advisors for the coming financial meltdown and to a certain degree they are right. After all, a bit of fiscal restraint is supposedly part of the conservative viewpoint. However I suspect that down the line historians will grudgingly credit him in fooling those darn Arabs for so many years in getting them to take worthless paper dollars for crude. Think about it, the Arabs have to dig those wells, inject that water and still ship all that oil to America. In exchange we give them "dollars" we can print at will for all their effort.

We can print as many dollars as we need while they are running out of oil. Not that they don't know this a lot better than us...

The problem is the point where they won't take dollars anymore and demand gold for crude. Then we have a situation. Anyway, the gold-oil ratio is something I don't see discussed too often on this forum. In theory this revaluing of the ratio might be a price signal confirming oil shortages in the near future. As we get ready to go volatile in the coming weeks it may help in understanding the true price structure dynamic.

HG

As the post above mentions, it's a no brainer to be hoarding pennies and nickels now. You can't lose the intrinsic metal value of them even as the purchasing power of the "dollar" declines -- and you can always spend them in a pinch. Some will tell you that you lose out on "interest" by holding coinage rather than keeping the paper "money" in the bank but most by now should figure that collecting interest at a rate slower than the metal's appreciation is a sucker's game.

It's been awhile since I've posted due to health problems but the illness hasn't kept me from watching the gold price jump up and down and I can tell you now that gold is getting ready to take off again. It's back over 600 now and the billions of dollars the central bankers have thrown away to knock it down for the last six weeks was just another economic piss in the wind.

I was born shortly after my namesake president Harding was elected. Granny said we were so poor that they only had enough ink to write my initials in the family bible so I have been HG ever since. I saw the Great Depression first hand and now that this quack doctor says I'm going to live it looks like I'm going to see another. Because sure as the sun is coming up tomorrow, we are about to have a crash in this country that's going to make 1929 look like a country picnic like we used to have.

I wrote once before how Father coming back from the Great War with gold coins kept us alive during the Great Depression. Of course if he hadn't been such a damn fool and bought all those stocks on margin we wouldn't have lost the city house and had to move to the country. But those gold coins erased a lot of sins in those days and when everybody was wiped out Father still had his gold coins from France.

We ate while others starved.

That thieving dog Roosevelt tried to take everybody's gold and Father just laughed when the subject came up. The other thing he brought back from the war was a Hun Mauser and he knew how to use it and said that anyone that tried to steal his gold would wind up getting lead instead. He called it "reverse alchemy" when he had been drinking a little.

Right now gold is dirt cheap at 600. For about a quarter of that price you can buy a hundred year old British Sovereign or even a German 20 Mark coin like Father acquired in France. If you have extra money do it soon before the price starts going vertical by the end of this year. Gold is one of only two protections the citizen has against central bankers gone mad. If you've read this far you know the other one.

The middle class in America is being destroyed through inflation and it breaks my heart to see what has happened to this great land of ours. Sometimes when Father had been hitting the bottle hard he would start carrying on about British bankers starting the war and getting all his buddies killed in France. When Roosevelt was elected he said it would be the end of America in my lifetime and if I can hang on a few more years I think he will have been proven right.

Start buying gold and silver -- quietly. Shhhhhh .... as another Roosevelt might be right around the corner. The price is low now because the central bankers will do whatever it takes to keep the price down by creating more money and naked short selling gold on paper. But eventually they print so much money that the paper becomes worthless -- when that happens gold and silver have no theoretical upside in paper dollar terms

If you can't afford silver and gold start hoarding pennies and nickels. You won't lose any money and each one saved ultimately is worth more than its paper equivalent.

During this July 4th holiday take a moment or two to think about these things. You might find you have a lot more in common with the Founding Fathers than you think.

HG

Who in the heck would be spending pennies and nickels now? As you mention, the pre-82 pennies have over two cents of copper in them. The post-82 pennies were almost at par with their zinc content a couple months ago. Nickels have more than five cents of metal in them.

And now commodity prices are starting to roll again. When hyper-inflation comes these small coins will retain their intrinsic metal value escalating against the collapsing dollar -- and in a worse case scenario would become "small change" for your Silver Eagles or 90 percent.

The nephew regularly "buys" hundred dollar boxes of nickels and twenty-five dollar boxes of pennies from the bank. His reasoning is that he can never lose money on the deal and in a financial meltdown the coinage will hold value better than paper money.

The government is destroying the middle class with the hidden tax of inflation caused by excessive money supply. For a supposedly conservative forum there is very little discussion of hard money economics here.

When it all comes tumbling down you would much rather hold a hundred pennies or twenty nickels than one paper "dollar" of American debt vouchers. Copper and nickel with a bit more substance than paper.

Oh well, you seen one Great Depression then you've seen them all.

HG

A year ago each of those coins could be had for less than $500. Now they are over $700. Increasingly gold becomes "too expensive" for the average American to own. Or so they think -- gold still dirt cheap compared to where its going.

Yet the value of gold does not change -- only its relationship to paper assets in terms of "dollars". Now when a "dollar" was ten dimes, four quarters or two half dollars of the pre-1965 coinage your post references the relationship with gold could only change so much because the dollar was based on silver content.

Now a dollar is just a bunch of 1's and 0's on the computer screens. Heck, lots of people are starting to hoard nickles and pennies because the copper prices are going so high. The dollar is becoming a joke.

Gold may be expensive -- but it won't sell you out like an American politician.

HG

Gold and silver exploding today. Meanwhile the government just keeps printing more and more money and then the people wonder why prices are going up. Someday they will figure it out and when they do they will be some kind of unhappy.

Gold going to the moon. If you haven't figured it out don't worry -- soon enough you won't be able to ignore it. After all, if you are going to ride the Titanic, you might as well go First Class.

HG

Everybody is whining about the high price of gas and if you have heard this comment before I apologize for repeating it.

A gallon of gas in 1964 cost thirty cents. That is, three silver dimes would buy a gallon of gas. Today with silver at $14, a silver dime has one dollar worth of silver in it and you guessed it -- sells for about one dollar (10 times face) at the coin shop or coin show or on the street.

With gas at $3/gallon, three silver dimes will still buy you a gallon of gas just like in 1964. It's not the price of gasoline going up -- but the value of the American dollar going down.

We are taxed to death in this country. But it is the hidden tax of institution engineered inflation that is the worst of it all. When the American people wake up like the rest of the world has then there will be a gold rush like never seen before.

In six months you will be hard pressed to buy an American Eagle for less than $800. There may be a "price" for it on the paper exchanges but increasingly you will be unable to find the actual physical metal.

Oh well, you seen one Great Depression, then you've seen 'em all.

HG

The CBS News on Friday had a report from the Tehran marketplace. People were trying to buy gold coins and the price was going vertical -- like Gold in New York in the coming months. Those people have been trading on that ground for more than three thousand years and when trouble's coming gold smells it first.

And in the good ole US they keep printing money like it's confetti. When government debases currency by excessive creation it must eventually go exponential in its price to real assets. When that happens the theoretical price for gold is infinity.

As I mentioned on another thread, the nephew reported that last week in the Carolinas and Georgia, coin shops were refusing to sell silver at any price because of the huge price run-ups ($14 today). When they won't sell gold for any price you will know it is near the end for the dollar.

Those darn Asians are buying all the gold!

HG

The American dollar is taking a nose dive like a Stuka over London in the Battle of Britain. Gold always plays the role of the Spitfire in this scenario and the dollar pilots on a steady course to crash and burn.

The nephew says that most coin shops in the Carolinas and Georgia will not sell silver at any price this week due to volatility and gold coins are becoming scarce. When so called coin dealers refuse to buy or sell then there is no "market" for the small time buyer to get in.

Soon the ads will appear in the papers offering to buy gold and silver. This will mark the next leg up as the public becomes engaged. The trading days of Gold below $700 and Silver below $14 can be counted on two hands (if not one.)

Gold and Silver will go sky high this time as paper money goes on the strategic defensive. Like the Luftwaffe the dollar will be decimated in the coming months.

Oh well, you seen one Great Depression then you've seen them all. Those darn Asians are buying all the gold!

HG

A rising gold price acts as a barometer for financial storms ahead. The daily rise and fall reflects buying and selling as with any other commodity. If you believe some of the GATA types then a lengthy conspiracy to suppress the price of gold and silver through illegal naked short selling is finally coming apart at the seams. If this is accurate then a parabolic spike not only could happen but should happen as the shorts are crushed.

If those holding gold don't sell then the price continues to zoom as the shorts must cover. Current paper trading practices at the COMEX would get people thrown in prison in any other endeavor.

However that is all about the price of gold in dollars. If people want to trade pieces of paper in the hopes of acquiring more pieces of paper then they need to make sure they are not the last ones holding the (paper) bag.

In Asia the Chinaman is quietly buying gold. Most Americans would not know a Krugerrand or American Eagle from one of those fancy gold plated dollar coins. Meanwhile gold, silver and copper explode in "price."

The world drowning in dollars and debt yet an ounce of gold remains an ounce of gold regardless of the actions of government...

HG

Funny how every day it costs more dollars to buy an ounce of gold. People think the value of gold is going up but it's actually the value of the dollar that is sinking.

The rants of the anti-gold forces on this forum are hilarious. "Doesn't pay interest, bought at $850 in 1981 lost money, has no value," etc, etc. I don't even want to start talking about silver.

Gold is still dirt cheap. There will be days when it goes up fifty dollars in the coming months. The Chinaman has his belly full of dollars and he wants gold -- now.

Those darn Asians are buying all the gold!

HG

I've written here before about how Father bringing gold coins back from the Great War allowed us to eat during the Great Depression. Those Hun 20 mark gold coins kept a lot of Germans alive during 1922-23 when the money supply went parabolic. By that time Father had them back home and put away for a rainy day. A small bag of them kept us going until things recovered.

When that thieving dog Roosevelt stole all the people's gold it really started to rain. Some folks think it has been cloudy skies ever since.

The government is printing too much money and I suspect they are buying their own Treasury Bonds with part of it which is another bad sign. Funny thing about the gold price is that it does not lie. It will always tell you exactly what the paper currency of the day is worth.

HG

Some people understand gold is the only honest money but most don't. The average Joe in America wouldn't know a gold coin if he found one on the street. In Asia, the Middle East and Europe everybody with any level of wealth owns gold -- passed down from generation to generation. Those folks have seen what happens when war and economic calamity intertwine.

Gold normally goes up on Thursdays. I guess those Islamics like to buy it just before their day of worship. I sure wish America would stop spending so much money she doesn't have but my wishing won't get it done.

When this crash comes it's going to be something and those with gold will manage to eat more than once a day. Oh well, you seen one Great Depression then you've seen 'em all. We were poor in 1929 but we just didn't know it.

Those darn Asians are buying all the gold!

HG