The Fed and the U.S. Administration are intervening. They are mad as heck that China will not revalue the Yuan by at least 5 to 10 percent, and they are not going to take it anymore.

Ergo, the pause in hiking rates, despite all concerns that the USD and bond markets would crater.

You see, a cheaper USD means a cheaper Yuan. China, in spite of its balance of trade with the U.S., is a net importer nation. They buy from all the countries in the region " Japan, Korea, Singapore, Australia, etc. A cheaper Yuan means more inflation in China, which is the ticket to the Chinese having to raise rates or slow money growth in order to raise the Yuan.

You see there is only so much financial pain the Chinese can take before they are forced to release the near-peg on the USD.

The authorities in the U.S. have made the decision that unless the Chinese authorities revalue the Yuan, there is no hope of America ever solving the trade deficit, and it will just get worse.

So, as I see it, this is like a poker game. The Americans have called, and now the rest of the players are waiting for China to make its move.

But there are only so many gold chips that can be put on the table " meaning that the price of the metals can only be squeezed so high and USD and bonds can be drawn on so much.

If the Chinese authorities call the U.S. bet following Wednesday's Fed decision (not to hike), there is only so much longer the game can continue before the table collapses and the game is over.

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p.s., metals prices could soar even further based on a crashing USD; however, metals, including gold and silver but especially copper, nickel, zinc, etc, have industrial use. The price of the metal can go only so high before industrial demand will change, and the way business gets done will change. This is upsetting to business operations, which need to be conducted in a stable environment, regardless of country.

For example, at what point does auto manufacturing have to stop because supplies of platinum cannot be acquired or are unaffordable to manufacturers who must work within a certain cost structure. Across all forms of manufacturing that is dependent on metals, we're talking trillions of dollars in capital investment in production lines that would be shut down or require change.

Think about it. What happens when manufacturers have to switch from copper to aluminum. The implications are phenomenal.

So this money game can go so far before the business cycle breaks down. This is a dangerous game that the U.S. is playing. The twin deficit is of their doing, and must be resolved within America. So by putting global metals in play, which is what happens when the USD tanks, there are implications, and they are pretty serious at a point.

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P.S. #2

"Bill - following is from the Metals Insider (daily publication). Wondering what your thoughts are and if you see us on the cusp of a major downturn in the metals group?

Thanks, Bob"

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China signals more interest rate rises on the horizon

Metals Insider - 8 May 2006

China signalled that its recent 0.27 point hike in interest rates—the first since October 2004—may be a precursor for several more as it attempts to rein in still-rocketing fixed asset investment and several over-heating sectors of the economy.

The signal came from vice minister of finance Li Yong, who was speaking over the weekend at a seminar at the Asian Development Bank's annual meeting in India.

The rate increase, he said, showed the world that China "will depend more on market discipline" than direct macroeconomic edict in terms of cooling parts of the economy.

"In the future we will use such kinds of instruments more and more," he said, adding that interest rates would be adjusted again from the current 5.85% "if necessary".

His comments were the clearest official signal yet of what the markets have believed for some time—that Chinese interest rates are going to have be raised several times to lower fixed asset investment from the sort of pace—up 32.7% year-on-year—seen in March.

As we have said before, though, it is not the headline figure that really matters so much as the nature of that investment. Too much is still being invested "blindly", to use Chinese officials' own preferred terminology, in excess capacity in some sectors of the economy. That's just storing up trouble for the future and the authorities' awareness of this problem and their willingness to use interest rate mechanisms to tackle it should be welcome for anyone looking for the country to build sustainable growth over the medium rather than short term.

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Bob, isn't it obvious. I issued an alert on equities and metals. You cannot have U.S. bonds and USD crashing without fall-out across the board.

But if the correction happens quickly (soon), then the metals will come back strong for the long-term.

This is a time to preserve capital. Reduce risk.