First Japan, the the UK, then the US?

Japan, the second largest economy in the world, just lost the AAA rating on its government bonds. Standard and Poor just said the United Kingdom may lose its AAA rating in the near future. They didn't mention the United States (yet) but the yield on the 10-year note has recently risen from 2% to almost 3.5%. That is not a ringing vote of confidence. Bear in mind that this outfit (S&P) gave its AAA rating to mortgage-backed securities that now sell for 10 cents on the dollar.

This information finally seems to be getting through to the financial markets. Since March (the day the Fed announced quantitative easing) the precious metals and mining stocks have roared ahead against all currencies, but especially against the US Dollar. As I write this, gold is at $956 and silver at $14.69, as both have rallied sharply. However, the commitment of traders has deteriorated, and the technical wizards say the metals are overbought, which means at some point JP Morgan will pull its bids and try to engineer another sell off in silver and gold. That is inevitable, but another piece of news just surfaced.

The Bank for International Settlements just issued its semi-annual report, indicating that gold derivatives declined sharply, from $649 billion to $395 billion, or roughly 40%. I take this to mean the shorts are finally starting to cover. That is a decline of 7600 tons, or close to three years of production. If I had to guess, I would say we will see $1200 gold this year, and I expect the gold/silver ratio to decline, so silver should outperform gold for the rest of the year.