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November 23, 2008

Honest Money Gold and Silver Report: Market Wrap
by Douglas V. Gnazzo

Market Wrap

Week Ending 11/21/08

The following is an excerpt from the full market wrap report available by subscription only at the Honest Money Gold & Silver Report website. Stop by and check it out. Twenty-four pages with twenty-three charts this week.

The bear market in stocks and commodities has caused investors to shun risk and to seek the relative safety offered by short term U.S. debt. Purchases of Treasury notes and bonds increased to $88.9 billion, compared with $30.6 billion the previous month.

China has passed ahead of Japan as the largest foreign holder of U.S. Treasuries. Japan was a net seller of Treasuries for four of the past six months. China increased its Treasury holdings by $43.6 billion to $585 billion. Japan reduced its holdings by $12.8 billion to $573.2 billion.

From 2001 to 2006 the Bank of Japan (BOJ) kept interest rates near zero and flooded the banking system with liquidity in an attempt to loosen up lending that had frozen up in the face of deflation. It didn't work, as the chart below shows. For two decades Japan has been in the doldrums.

The bear is 13 months old and the low of Oct. 10 is less than 2 months old. During the 2002-2003 bear market it took nine months just for the final bottom to form.

July of 2002 saw the first low. In October the final low was made. The retest of the low didn't occur until March of 2003. The magnitude of this bear is in keeping with previous ones, but it is short on time. This suggests there is more to come. A rally "should" occur, but expect lower lows down the road.

Gold

Gold closed up 6.64% for the week (continuous contract) with most of the gain coming on Friday as the daily chart below shows. Gold has been range bound for the past few weeks and today it broke above horizontal resistance and is now testing its 50 dma.

Last week's report stated that gold appeared to be consolidating and that if horizontal resistance was broken above a nice pop up would result. That is exactly what happened. Our position in DGP performed admirably well.

Gold Stocks

The gold stocks, as represented by the GDX had a good week. GDX was up 12% for the week. This is a 2 to 1 performance compared to physical, which is better price action and confirms the precious metals sector is improving.

Individual stocks outperformed the index; a few had 20% gains - all of which can be viewed at the Honest Money Gold & Silver Report website. A few of the mining stocks had double top breakouts on Friday via their P&F charts.

The U.S. dollar has lost 96% of its purchasing power since 1913, the year the Fed was created. The charts below tell the story.

Federal Reserve Bank of New York President Timothy Geithner has been sited to be the next Treasury secretary. Lawrence Summers who was rumored to be a candidate for the job is now said to be up for a senior White House role. This is the same Lawrence Summers that is famous for his role in the gold suppression scheme under the guise of Gibson's Paradox that can be read about here: Gold Wars: Gibson's Paradox & the Gold Standard.

An excerpt from Gold Wars reads:

Lord Keynes, in one of his more lucid moments, coined the term "Gibson's Paradox", in an attempt to explain the correlation between interest rates and the general price level observed during the years of the classical gold standard.

The reason it was a paradox is that Irving Fisher suggested that interest rates should move with the rate of change in prices, i.e., the inflation rate or expected inflation rate, rather than the price level itself.

Mr. Summer's has the following to say on the matter:

"The price level under the gold standard behaved in a fashion very similar to the way the reciprocal of the relative price of gold evolves today. Data from recent years indicate that changes in long-term real interest rates are indeed associated with movements in the relative price of gold in the opposite direction and that this effect is a dominant feature of gold price fluctuations."

The above translates into English as meaning that gold prices move opposite (inverse) to real interest rates - in a free market that is. Although free markets are doubtful, the rest of the thesis remains plausible, at least for a while.

The following chart is from the same paper.

On the chart, the 30-year U.S. Treasury bond yield minus the annualized increase in the Consumer Price Index (calculated as the sum of the monthly CPI increases for the preceding twelve months) defines real long-term interest rates.

The chart clearly shows that the inverse relationship between long term interest rates and the price of gold remained fairly intact until something funny happened around 1995, as the relationship suddenly diverged in the opposite direction of what it had been.

Interest rates and the price of gold are no longer running inverse to one another, but in the same direction - and the direction is down.

As real rates declined from 4% to 2% the price of gold dropped from $400 an ounce to around $270 an ounce. According to Summers and Gibson's Paradox, the price of gold should have moved in the inverse direction - or up in price. So what happened? [From Gold Wars - Gibson's Paradox]

The rest of the paper is pretty interesting as far as gold and the pricing thereof goes. Some of the quotes from Fed meetings are incredible.

Birds of a feather flock together; and as the pieces of the puzzle fall into place the picture is becoming clearer by the minute: the more things change the more they remain the same. It appears it will be business as usual or unusual depending upon one's perspective.

On the Honest Money website one member posted the following on the public bulletin board discussion group concerning the above topic. It is from a speech Geithner made to the CFR.

"Rapid technological innovation and greater economic integration have brought stronger growth and higher levels of productivity. The acceleration in productivity growth that occurred in the United States in the second half of the last decade seems likely to remain intact. And productivity growth is accelerating outside the United States, most strikingly in some of the large emerging economies.

Financial innovation and greater integration of national financial systems has contributed to the strength of real economic activity by improving the allocation of resources within and among economies. Improvements to risk management and to capital cushions are likely to have made the financial system more stable and more resilient. Management and to capital cushions are likely to have made the financial system more stable and more resilient."

This topic is so important I would like to add some further lines from the speech. Now remember - this is the guy supposedly to be put in charge of cleaning up the financial crisis.

"And macroeconomic policy has improved around the world. The increase in monetary policy credibility in a broad range of countries has produced lower rates of inflation and more stability in inflation expectations. Greater public confidence in monetary policy was critical to laying the foundation for the improvements in real economic performance, by providing a stable foundation for long-term investment decisions."

"To a significant extent, these financial developments reflect a high degree of confidence in future macroeconomic and financial stability, reinforced by the improvements in inflation performance, growth outcomes and financial resilience of the past several years."

I never thought I would hear someone better than Greenspan was, but I think we have a winner. But if he wins - who loses and pays the price?

51% of the US budget goes into building the war machine. As with all empires, the conquest of war reigns supreme. Many question how the U.S. can begin to solve its trade deficits and other financial problems. One needs to look no further than the excessive military budget. The U.S. has troops in nearly 150 countries. Bring the soldiers home. Give up the imperialistic conquest of the world. It would save a great deal of money and lives.

The G20 meeting came and went without much fanfare. France's Sarkozy called for broad global regulation of the markets. Canadian PM Stephen Harper said that such an idea would be a violation of national sovereignty. I agree it would be. I wonder how Mr. Harper squares that with his ideas on the North American Union. Next meeting is in April in London.

Invitation

The latest full-length version of this week's market wrap is available at the Honest Money Gold & Silver Report website. All major markets are covered with the emphasis on the precious metals. Twenty-three charts for your viewing with commentary.

There is a lot of information on gold and silver, not only from an investment point of view, but also from its position as being the mandated monetary system of our Constitution - Gold and Silver Coin as in Honest Weights and Measures. In today's turbulent times of financial crisis gold and silver are more important than ever. They provide a strong anchor during rough seas.

Just made available on the site is an audio version of the book Honest Money. A free copy is included with all new subscriptions along with a free special report: Investment Vehicles for Bull & Bear Markets: A list of over 50 ETF's and other investment vehicles offering profit potential on both the long and short side of the markets: stocks, bonds, currencies, gold, oil, water and more. Stop by and check it out.

Good luck. Good trading. Good health, and that's a wrap.

Come visit our website: Honest Money Gold & Silver Report
New Audio-Book Now Available - Honest Money

Douglas V. Gnazzo
Honest Money Gold & Silver Report

Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous websites, and his work appears both here and abroad. Just recently, he was honored by being chosen as a Foundation Scholar for the Foundation of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly, Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

Douglas V. Gnazzo © 2005-2009
All Rights Reserved Without Prejudice

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