By Jeff Clark, Casey Research

I’m writing from China, where I’m attending Silvercorp Metals’ (SVM) mine tour with other analysts and reporters. We met with company principals the first morning, including CEO and Explorer’s League honoree Rui Feng at their downtown Beijing offices, where the bulk of the discussion centered around a point-by-point rebuttal of the charges made by the now-infamous short sellers. With a reporter’s camera snapping, it became apparent to me that Rui and company have shifted from playing defense to going on the offensive.

“We have eight attorneys now,” Rui explained. “We’re going after these guys.” He admitted that fighting the allegations is getting 100% of his focus right now, something that might be concerning under normal circumstances, but he’s bound and determined to assure shareholders that their investment is sound.

In addition to the lawsuit against some of the short sellers announced last Friday, SVM has hired well-known forensics accounting firm KPMG to audit the company’s books. They’ll be reviewing every scrap of paper, from bank statements to tax receipts, to make their own determination on the soundness of SVM’s finances. A report is expected in about two weeks, and other than seeing ore with our own two eyes, this will arguably be one of the most important steps in fighting the allegations.

Securities regulators are also on the offensive. Not only are they conducting their own investigation into the source of the accusations, other Chinese companies previously targeted by the short sellers are pooling their resources with regulators and SVM. While we don’t know that they’re all innocent, a number have taken aggressive countermeasures; some have been so successful that their stocks have rebounded dramatically.

The tour has been more thorough and transparent than even I expected. We’ve been privy to internal company documents, one of which is a daily tonnage report – something Rui sees every morning. It’s abundantly clear that if operations were exaggerated, it would have to be quite an elaborate hoax. We met with officials from two smelters the company uses, easily seeing that the grades they report match what SVM has documented. We met with the company’s principal accountant in China; a random review of one day’s tax receipts and the SVM’s internal spreadsheet show the numbers match. We also met with four officials from the National Tax Bureau, who informed us in no uncertain terms that SVM’s subsidiaries have generated substantial revenue to the local county. “We welcome any scrutiny,” they added.

I also asked many parties what they thought of the allegations. “They don’t know what we know,” said the deputy general manager at the Ying mine. “They can sell the shares if they want, but we will buy them.” The county tax officials informed us they were never contacted by any party regarding revenue or tax receipts. “The allegations are simply not true,” we heard through an interpreter. I asked an official at one of the smelters we visited what he thought of the allegations; he laughed. We had dinner with four local government officials, with the interpreter telling us the mayor was “pissed off” at the short sellers. And what about the workers themselves? “Many are angry,” Rui told us. “And some just laugh at the accusations.”

But perhaps the most important aspect of the trip and of determining if there is any truth to the accusations is the ore. We saw the parade of trucks drive by us, watched the weighing process, randomly leafed through stacks of records documenting the ore that’s passed through the gates, witnessed the ore being transported by boat and rail cart, looked on in amazement at the new 2,000-tonne-per-day mill in full operation, and observed piles of finished product waiting to be shipped to the refineries. And yes, we toured the Ying mine itself and saw with our own eyes those sparkling veins full of high-grade silver. I’ve got pictures of all this, and I didn’t hide behind any trees to get them.

We have a lot more on the agenda; by the time you read this I’ll be on my way to meet with another tax office and tour the GC and BYP mines. I’ll be filing a full report, complete with pictures and recommendations, for International Speculator and BIG GOLD readers sometime next week. If you have a vested interest in this stock, this is one report you won’t want to miss. I can tell you right now it will contain not only a complete analysis of every aspect of the company, but a very specific recommendation of when to buy.

In the meantime, based on my extensive discussions with management; review of reams of both internal and public documents; conversations with government, tax, and refinery officials; interviews with workers and supervisors; observations of plant operations; and putting my hands on high-grade veins running throughout the Ying mine, I have a message for the short sellers.

You’d better think about covering.

[Now is a good time to get into silver or strengthen your position in silver. Do you know the best way to accomplish that? This free investing guide for silver will get you headed in the right direction.]

Gold bulls and inquiring minds are perplexed by last week’s mayhem in the precious metals markets. In addition to gold and silver, copper prices also went into free fall last week which is an ominous sign for the broader economy in general. We live in interesting times as geopolitical uncertainty, social acrimony, and financial collapse shape the world around us.

The situation in Europe continues to worsen and central banks and wealthy individuals are trying to find safe havens to protect their wealth. Most gold bugs believed that gold and silver would be the answer, but in this environment that hypothesis did not play out. In addition, the Federal Reserve came out with operation twist which market participants despised. Since the 3rd round of Quantitative Easing was not announced, risk assets such as the S&P 500, gold, and silver sold off sharply.

Many gold investors believed that gold is a “safety” trade. I would agree with them if the objective is to remain “safe” from ever rising inflation. In a “run for the exits” sell off caused by deflationary pressure and debt destruction, gold will generally show relative strength versus equities. However, I would remind readers that during the deflationary period back in 2008, gold held up far better than the S&P 500, but prices were volatile.

The gold futures chart from 2008 is shown below:

As can be seen from the chart above, gold futures were volatile throughout 2008 with the March high point representing a 19.83% gain for the year. The low point for gold futures in 2008 was in October and represented a loss of 21.07%. The total return for gold futures in 2008 was 1.94%. Clearly gold futures showed volatility throughout 2008, but gold clearly outperformed the S&P 500 during the same period of time.

The S&P 500 was lower by 37% in 2008, thus gold was clearly the safer asset during 2008 in terms of return. However, one asset class was safer still and had considerably less volatility . . . the U.S. Dollar. In 2008, the U.S. Dollar index futures closed the year with gains around 8.44% with far less volatility than gold or the S&P 500. I am pointing this out to readers because a similar situation is unfolding presently.

Moving forward to the present, the U.S. Dollar Index futures have put on an impressive rally that started back on August 30, 2011. Since August 30th, the Dollar Index futures are trading higher by around 7%. As it turns out, on August 31st I entered a long call ratio spread using the UUP ETF with members of my service and we were able to lock in a gain of around 30% recently.

The daily chart of the U.S. Dollar Index futures is shown below:

All of the calls for hyperinflation in 2011 and a massive crisis in the U.S. Dollar are not coming to fruition. In fact, the opposite is occurring as deflationary pressures are helping force the U.S. Dollar higher. I would point out that the majority of economists and analysts were all predicting hyperinflation for several years and so far they have been wrong. Gold nor any other asset can rally forever, but long term investors must understand that even during a raging bull market corrections and pullbacks are commonplace and healthy.

I want to point out that I sent out multiple articles warning about the possibility that gold prices could sell off or correct dramatically. In every instance, my email inbox was littered with hate mail and vitriolic remarks from gold bugs. Back on August 29th, I wrote the following in my article, What Could Lie Ahead for the S&P 500 and Gold:

“There is an ominous pattern starting to form on the gold daily chart which if it is carved out and triggered, it could produce the next leg of this selloff.”

The daily chart of gold is shown below:

“While it is far too early to determine if a head and shoulders pattern will be carved out or if lower prices take place, I am of the opinion that this selloff will offer an attractive entry point for longer term investors. At this point it is a bit too early to get involved, but if my analysis is accurate the next leg of the gold bull market will be potentially extreme.”

As it turns out, the head and shoulders pattern did not play out as I had hypothesized but a double top did emerge which ultimately produced similar price action. The extreme nature of the recent sell off backs up my analysis in that gold prices had gone parabolic and we needed to see regression back to the mean in terms of price.

We are seeing that process unfold now, but as I stated in the article above the completion of this sell off is going to offer an attractive entry point for long term gold investors. While I have routinely discussed pullbacks and corrections regarding gold, I continue to be a longer term bull.

Gold has sold off sharply in the past week, but the following chart illustrates some key support levels for the yellow metal:

While gold and silver sold off sharply, the S&P 500 was also under extreme pressure. My most recent article written on September 21 prior to the Federal Reserve announcement illustrated two outcomes based on what rhetoric came from the meeting. Unfortunately for equity investors my downside prognosis is holding sway. The follow is an excerpt from my article entitled The S&P 500 & the Dollar Ahead of the Fed Statement:

“The flip side of that argument would see the S&P 500 jamming into recent resistance around the 1,230 price level. If prices rolled over and momentum picked up, a test of the recent August lows would likely transpire and could produce a breakdown and a lower low.

When looking at recent price action, the S&P 500 Index has put in a series of higher lows which is a bullish signal, however the S&P 500 has a long road ahead to break out above the 2011 highs. If the S&P 500 carves out a lower high on the S&P 500 Index at 1,230, 1,250, or even 1,280 and subsequently takes out the August lows then the secular bear will be back. The weekly chart of the S&P 500 Index ($SPX) shown below illustrates key support levels:

For now I am just going to sit in cash and wait for Mr. Market to provide me with some better clues. The trading range is pretty wide going from around 1,100 to 1,280.”

My downside scenario played out last week, but I will be watching closely to see if the S&P 500 can push below the August lows. If the August lows are taken out, we could see support come in around the 1,085 price level. If that level breaks down then the 1,008 – 1,040 price range will be in play.

The daily chart of the S&P 500 Index is shown below with the key support levels illustrated:

In closing, last week was wild in terms of price action and volatility was nearly palpable. I am anticipating some additional volatility this coming week. Gold prices could bounce as price is sitting right at the key 50 period moving average. If gold works through the 50 period moving average additional downside will be likely.

Similar to gold, if the S&P 500 is able to push through the August lows additional sellers will step in as stops will be triggered on a breach of the S&P 1,100 price level. News flow and headline risk coming out of Europe will continue to impact price action. I would also point out to members that there is a standing chance that the U.S. government could shut down as budget issues continue to manifest within the confines of the U.S. Congress.

Risk remains extremely high.

Review my track record and join now at www.OptionsTradingSignals.com/specials/index.php and receive a 66% off coupon which expires tomorrow.

JW Jones

Tyler Durden From RanSquawk

• Markets remained nervous ahead of a teleconference between Greece and the Troika, which has already been delayed until 1700BST today
• ECB’s Liikanen said that Eurozone growth risks are substantially on the downside, adding that sovereign debt crisis is not just individual countries’ problem, but is a systemic Eurozone crisis
• According to a study by the DIW research institute, Germany’s 10 biggest banks need EUR 127bln of additional capital
• According to Japan’s Economic Policy Minister, the country may announce outlines of measures to counter the strong JPY as early as tomorrow
• Moody’s said it would finish reviewing Italy’s sovereign credit rating for a possible downgrade within the next month, adding that Italy faces a challenging economic and financial environment

Market Re-Cap

European equities traded lower amid risk-aversion as concerns surrounding the Eurozone debt persisted, while focus remained on Greece. Underperformance was observed in financials partly due to a funding-shortage faced by Greek banks, together with a study by the DIW research institute suggesting that Germany’s 10 biggest banks need EUR 127bln of additional capital. Markets remained nervous ahead of a teleconference between Greece and the Troika, which has already been delayed until 1700BST today. Downbeat comments from ECB’s Liikanen on the Eurozone growth allied with a downgrade of the German 2012 growth by the IW research institute further dented the appetite for risk. Elsewhere, strength in the USD-Index weighed on commodities, which resulted in underperformance in basic materials and oil & gas sectors. In the forex market, EUR traded lower across the board on the back the ongoing Greek debt fears, whereas strength in the USD-Index weighed upon EUR/USD, GBP/USD and commodity-linked currencies. Also, JPY came under pressure following comments from Japan’s Economy Policy minister overnight that Japan may announce measures to counter the currency’s strength as early as tomorrow.

Moving into the North American open, the economic calendar remains thin, however markets will keep a close eye on the outcome of the teleconference between Greece and Troika. In fixed income, there is another Fed’s Outright Treasury Coupon Purchase operation in the maturity range of Mar’13-Mar’14, with a purchase target of USD 0.5-1bln.

Asian Headlines:

According to Wu Xiaoling, a former deputy central bank governor, China should refrain from boosting credit and fiscal spending again as stimulus measures to avoid fuelling inflation and pushing up government debt. (RTRS)

**Note: Today is a Japanese market holiday.

US Headlines:

A White House official said President Barack Obama is expected to seek a new base tax rate for the wealthy to ensure that millionaires pay at least at the same percentage as middle income taxpayers. The so-called “Buffett Rule” is due to be unveiled Monday. (Sunday Telegraph) However, US Republicans criticised President Obama’s proposal for a new tax on millionaires, calling it ‘class warfare’ and predict it will face heavy opposition in congress. (RTRS)

In other news, Fed Bernanke has asked Philadelphia Fed President Clarles Plosser and Chicago Fed President Charles Evans to work with Vice Chairwoman Janet Yellen on how the Fed can better explain its economic goals to the public, citing people familiar with the matter. The main agenda would be to detail the changes in unemployment and inflation it would take to make the central bank turn away from its low interest-rate policy. (WSJ)

EU and UK Headlines:

According to an article in the Kathimerini newspaper, Greece plans to supply banks with loan guarantees of up to EUR 30bln to ease their liquidity squeeze. (Kathimerini)

• UK Rightmove House Prices (Sep) M/M 0.7% vs. -2.1%
• UK Rightmove House Prices (Sep) Y/Y 1.5% vs. -0.3% (RTRS)

EQUITIES

European equities traded lower amid risk-aversion as concerns surrounding the Eurozone debt persisted, while focus remained on Greece. Underperformance was observed in financials partly due to a funding-shortage faced by Greek banks, together with a study by the DIW research institute suggesting that Germany’s 10 biggest banks need EUR 127bln of additional capital. Markets remained nervous ahead of a teleconference between Greece and the Troika, which has already been delayed till 1700BST today. Downbeat comments from ECB’s Liikanen on the Eurozone growth allied with a downgrade of the German 2012 growth by the IW research institute further dented the appetite for risk. Elsewhere, strength in the USD-Index weighed on commodities, which resulted in underperformance in basic materials and oil & gas sectors. Moving into the North American open, equities continue to trade lower, with basic materials and oil & gas as the worst performing sectors.

FX

EUR traded lower across the board on the back the ongoing Greek debt fears, whereas strength in the USD-Index weighed upon EUR/USD, GBP/USD and commodity-linked currencies. Also, JPY came under pressure following comments from Japan’s Economy Policy minister overnight that Japan may announce measures to counter the currency’s strength as early as tomorrow.

COMMODITIES

WTI and Brent crude futures traded lower during the European session weighed upon by strength in the USD-Index together with the Eurozone debt concerns.

Oil & Gas News:

• Kuwait and the UAE are pumping more than their OPEC quotas and aim to maintain output, oil officials from the countries said.
• The OPEC secretary general said IEA has assured that OPEC will not release more oil stocks and they have agreed to improve cooperation over the oil market.

Geopolitical News:

• China urged regional powers on Monday to revive moribund nuclear disarmament talks with North Korea, with its foreign minister Yang Jiechi defending Beijing as an honest broker seeking to defuse confrontation with Pyongyang.
• Tension is prevailing on the streets of the Yemeni capital, Sanaa, a day after at least 26 anti-government protesters were shot dead and hundreds wounded by troops and gunmen loyal to President Ali Abdullah Saleh.
• Troops loyal to Libya’s interim leaders have been advancing towards the coastal town of Sirte, Col Gaddafi’s birthplace and a stronghold of his loyalists.

by Tyler Durden

Is that H₂SO₄ that Warren is pouring for his next deeply introspective bath? Or will he double down and throw good money after bad money that was good as recently as 2 weeks ago (and according to Cramer was supposed to trigger a “massive short covering squeeze in the XLF.”)

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If “legendary Wall Street figure” ever described anyone, it was turn-of-the-last-century financier J.P. Morgan. You can throw in “bigger than life” to boot.

Morgan was used to getting his way. His steely eyes cast a “ferocious glare.” His bulbous nose added to his imposing presence.

Beyond appearance and persona, Morgan was a one-man central bank. Historians credit him with bringing calm — and loads of liquidity — to the “Panic of 1907.”

While he “stared down” that financial crisis, even J.P. Morgan would be no match for today’s national debt. In 1907, the Wall Street legend gathered New York City’s biggest bankers into his office and demanded that they had 10 minutes to collectively pledge $25 million to keep the NYSE open. Morgan got his way.

At the time that was a lot of money. But let’s see how far an equivalent sum (constant dollars) would go today.

I used several methods to calculate constant dollars from 1907, and the highest estimate (relative share of GDP) converts $25 million then to some $11 billion today.

Yet $11 billion doesn’t even make a dent in our $16 trillion national debt.

Interestingly, the 1907 Panic eventually led to the 1913 creation of the U.S. Federal Reserve. Then as now, the central bank’s function is “financial stability.”

Specifically, the Federal Reserve serves as a “lender of a last resort” — the role Morgan and his banker friends played in 1907.

Fast-forward ninety years: In 2002, Robert Prechter published Conquer the Crash (now in its second edition), and said this about the central bank:

“Congress authorized the Fed not only to create money for the government but also to ‘smooth out’ the economy by manipulating credit (which also happens to be a re-election tool for incumbents). Politics being what they are, this manipulation has been almost exclusively in the direction of making credit easy to obtain.”

Sounds a lot like today, doesn’t it?

And just a few weeks ago, Fed Chairman Ben Bernanke said he wants to keep interest rates very low:

“Issuing a grim new assessment of the American economy, a divided Federal Reserve said it now expects to hold short-term interest rates near zero for at least two more years.”

Los Angeles Times, (8/10)

Since the start of the Great Recession, the Fed’s easy money policy has not restored health to the economy. Why should the same policy work in the next two years?

Notice how the above quote uses the phrase “a divided Federal Reserve.” With that in mind, here’s what Prechter published as recently as July 16:

“…when the trend in social mood turns down again, dissension will increase. The Fed is fracturing internally…”

Elliott Wave Theorist, July 2011

The U.S. Federal Reserve was created almost a century ago. Has it kept us financially stable? What does the future look like for America’s central bank?

Get your Free Report titled Understanding the Fed, and learn more about America’s “lender of last resort.”

This complimentary report goes way beyond the history of the U.S. Federal Reserve, and shines a bright spotlight on the central bank’s machinations today. Most importantly, your free eBook helps prepare you and your family for the “economy of tomorrow.” We see big changes just ahead.

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