The Rally That Wasn't There

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"The End Of The World As We Know It" mega-event that so many had long feared and had geared up for, took place over the weekend. And, once again, most people woke up, ate their breakfasts, and went to work as they would on any other Monday, while the sky remained in it habitual place. The biggest ever rescue of a financial entity was carried out by the US government. "Frannie" has now been put into conservatorship and half of the US mortgage market is suddenly looking like it will have the support it needed but was lacking in order to avoid a collapse.

If ever there was a Monday to wake up to or expect four-digit gold prices, today would have been that day. A scenario that had been prophesized as the ultimate 'prefect storm' for the safe-haven that gold can be in such conditions, resulted in prices barely edging up to the same resistance level at which they stalled last week - near $819. Later on, that premium turned out to be related more to anxieties about the weather than about the financial system. If anything, one can be somewhat impressed but that fact that gold held up (by not having immediately fallen to $775 or lower) to today's massive dollar rally, rather than disappointed that it did not add $50-$100 or more dollars to its starting value (although that and world chaos continue to be the wishes of the perma-bulls). India and the Muslim world coming closer to festivals could be one answer in the buying equation.

There were some market rallies overnight and on Monday, allright; in domestic and overseas stocks, and in the US dollar. Relief spikes in the Nikkei (up 412 points) and the greenback (up 1.13 to 79.70 on the index and to 1.408 versus the euro) contrasted the sharp drop in Treasurys as investors saw the beginning of the end of the credit crisis in the actions of the US monetary authorities. New York spot gold prices gave up their early morning gains and fell back to just under $800; they were last quoted at $798 per ounce.

The Dow moved 191 points higher amid rising confidence, as more house cleaning took place after the Frannie intervention. For starters, WaMu jettisoned its CEO via a 'retirement' amid that firm's heap of recent troubles. The rally would have likely gone much higher, had turbulence not hit UAL stock when false news of its bankruptcy hit the wires by mistake. Metals traders remain on dollar-watch and will now wait to see how much money finds its way into the debt and equity markets while departing the commodities one, now that a floor has been placed under the mortgage/banking sector. Insiders in the niche have been heavy buyers of their own shares in recent months.

Silver lost 20 cents at $12.02 after having fallen to a low of $11.88 - a new one-year low - earlier in the day. Platinum fell $25 to $1330 while palladium shed $10 to $259 per ounce. The yen and the pound continued to take a beating and the euro did not look much better as the week started. This, despite a realistic (and growing) chance of a pause/correction and re-grouping in the greenback after what has been a mega-marathon rally. Some uncertainties will linger since Mr. Paulson's Frannie plan has its share of things to prove as the hard part of the operation gets underway.

Trading on such mixed and early perceptions and on the week's economic calendar news will yield opportunity for buyers as well as sellers. The bias, however, still favors commodity sellers, and if the dollar breaks 1.40 against the euro, bullion, oil, and other formerly hot relatives could experience further problems - of the type which could bring them back to, or beyond recent lows. None of this will stop the ' buying opportunity of a lifetime' chants from coming your way. Again. We prefer to look at the break as a cost-averaging window in one's quest to build up the largest amount of ounces they are aiming for, at the lowest possible overall cost. And the same goes for silver.

On the other hand, there remain some for whom the world is ending as we speak, appearances notwithstanding. One of them is the illustrious Harry Schultz and numerous times in his writings over the past several decades we have had the opportunity to witness TEOTWAWKI - for different reasons. Harry is back with a chilling account of why this time things are different. Marketwatch via Peter Brimelow brings us Harry's prognostications for worldwide depression, caving skies, and $1600 gold.

"A Fannie-Freddie bailout fillip in financial markets? Maybe, but a megabear says it just shows the world is unraveling right on schedule.

Harry Schultz' The International Harry Schultz Letter was posted last night right about the time the Fannie Mae-Freddie Mac bailout was reported. But Schultz anticipated it, writing sarcastically:

"Flash: As we go to press, the US Government reveals plan to take over Freddie Mac and Fannie Mae, the biggest bail-out by taxpayers in history. It also wipes out the shareholders! Sunday selected to avoid stock market action same day, just as bank closures are told after market close Friday. That tells you what shape markets are in when government and CEOs hide behind holidays."

Schultz had earlier made his overview clear (I'm translating slightly from of his text-message style):

"Fed maneuver room approximately gone. Any $US injection big enough to avert a depression triggers runaway inflation. If not big enough: depression. US on knife-edge. Gold helps you either way.

"Which brings us to [Pimco bond king] Bill Gross. He went crazy last week, urging government to bail out everyone, to save the system. Either he is a closet socialist, a corporate fascist ... or just trying to get government to bail him out of 61% of his toxic waste mortgage backed securities."

Schultz suggests just two alternative scenarios, both equally appalling:

"If Bush bails them all out, the die would be cast for inflation unseen in the West since 1923 Germany. If no bail: Hello, 1929." Gee, thanks.

Schultz' apocalyptic style is easy to ridicule. Two generations of financial pooh-bahs (the sort of people who ran Freddie and their journalist groupies have been dismissing him. And Schultz is having a hard time right now. Over the past 12 months, HSL is down 14.4% by Hulbert Financial Digest count, vs. a loss of 10.1% for the dividend-reinvested Dow Jones Wilshire 5000. It's getting worse: Year-to-date, HSL is down 25.8% vs. a loss of 10.3% for the total return DJ-Wilshire 5000.

This is presumably because the great post-millennium hard-assets bull market has stumbled recently, albeit not for the first time. But the Aden sisters, Schultz protégés and publishers of The Aden Forecast, seem to have handled the stumble better, while remaining true believers. Still, over the past five years, HSL has achieved a 17.82% annualized gain, vs. 7.85% annualized for the total return DJ-Wilshire 5000.

And Schultz was quick to recognize the end of the last hard-assets bull market more than two decades ago. But he still hasn't called the end of this one.

Plus ... well, Fannie and Freddie have collapsed, haven't they?

In his latest issue, Schultz summarizes:

"Widespread stagflation will probably now build more inflation than stagnation, then gradually morph into more stagnation than inflation. Then, deflation takes over, and ultimately, depression. All this over next 9 years.

"For the moment, seal off major wipe-out risks. Exit all money funds and currency time deposits, step up gold & oil positions, move into 1-2 year government bonds (non-US $) in First World nations. Swiss first choice. Think not of yield; think of an ark's life preserver around your neck."

Schultz is currently negative on the stock market. On gold, he writes:

"We were unduly cheerful about gold's path in last HSL. The entire commodity market from asbestos to zinc took a dive, along with most stock markets, not to mention a business slowdown. It was caused in part by the overshoot all markets had in recent years -- many going to record highs -- which eventually called for a mega correction to the mega rise. And in part caused by the global monetary mess which is having a deflationary pull-down effect."

But he concludes:

"Our upside gold targets are still valid, as soon as the currency/metal/oil corrections exhaust themselves, as all storms do."

Schultz' upside target, at last report, was $1,600 in fairly short order."

Nervous, choppy conditions will dominate - specs have further reduced long positions last week. Dollar direction and Ike to a lesser extent, will remain in the driver's seat. There is a definite absence of gold pundit-originated (aside from Mr. Schultz) comments about gold benefiting from the epic "Frannie" news. The spin has turned to how little value has been lost. Must be some kind of price intervention of the 'third kind.' The search is on for a new reason due to which the world as we know it will end. Soon. Advance doomsday writing teams have been dispatched to Area 51 and to Roswell, New Mexico.

Speaking of Area 51:

We hope to see you in Las Vegas and the Hard Assets Investment Conference. Even if those assets are a bit softer than previously experienced at the New York event in May.

Happy Trading.