All you worried goldbugs out there, repeat after me: Corrections happen. Every
bull market has lots of 5%-10% squiggles that look like the end of the world
to those who don't understand, and like entry points to those who do.
Both gold and silver were hit hard this past week. It's the same story we
have seen many times before. As gold climbed in price, we witnessed in recent
weeks the huge build-up of open interest on the Comex. The gold cartel, which
is a group of bullion banks acting under the direction of the US government,
was selling whatever paper promises (i.e., futures contracts, which are simply
paper representations of gold but not gold itself) it felt were needed to
try slowing and then capping gold's advance.
The weekly reports prepared by the Commodity Futures Trading Commission
clearly show this intervention. The CFTC reports all short positions based
on the size of the firms that hold them, and some large firms are members
of the gold cartel. So the huge jump in the short positions of the large
commercial firms reveals the gold cartel's handiwork. After throwing enough
paper at the market, the gold cartel finally succeeded in capping gold. They
were unsuccessful in the $640s and $660s, but after adding thousands of futures
contracts that caused open interest to balloon to new highs, the gold cartel
stopped gold in the $680s.
Then the rout began. Gold dropped four days-in-a-row, losing $45 or 6.6%
in the process. Fortunately, there was no serious long-term technical damage
to gold's chart - nor do I expect any in the days and weeks ahead. Any reversal
of gold's major uptrend is unlikely because the gold cartel is already covering
short positions at these prices, which will provide underlying support for
gold. More importantly, the same fundamental factors that have been driving
gold higher for years remain in place.
In fact, the volatility in the stock market and growing nervousness about
asset quality of the banks and brokers involved with sub-prime mortgages
is another reason to own gold. Their deteriorating asset quality means that
a financial panic is becoming increasing likely, and could perhaps be similar
to any of those panics we saw in the 1980s as banks collapsed because of
imprudent loans.
The gold market doesn't need a financial panic to climb higher. Gold remains
well below the price it would be trading if government-led gold cartel wasn't
regularly intervening to keep gold as low as it can. But we can take solace
from the fact that gold is in a long-term uptrend, clearly indicating that
the gold cartel is losing the war.
Turning to the above gold chart, I draw attention again to the two red circles
that I have been mentioning in recent letters. But note that I have also
added two red rectangles to this chart. Note what happened to gold back in
2005 after breaking out from the first red circle. It shot up, and then went
into a severe downdraft. It was another gold cartel attack, but gold quickly
reversed and continued within the major uptrend then underway.
Will the same pattern repeat? No one of course knows, but readers of these
letters know that I always put a lot of emphasis on past results. Markets
often do repeat, etching out similar trading patterns on the charts. So if
history does repeat, we are at or near the low, and gold will rocket higher
from here. The gold cartel has probably taken gold as low as they can on
this move because it deals primarily in the paper gold market. Right now
the demand for physical gold is strong, and these buyers don't want paper
promises from the gold cartel. They want metal. The gold cartel only dishoards
gold from central bank coffers sparingly. They prefer to threaten dishoarding
rather than actually do it, because they recognize that their gold is essential,
so they only part with it reluctantly and infrequently. Consequently, the
physical gold demanded by buyers in China and elsewhere throughout the world
has to come from somewhere. It comes from people who already own it, but
are only willing to part with it at a higher price. So either dishoarded
central bank gold or higher prices are needed to keep the market in balance,
i.e., the price of physical gold consistent with the price of paper gold.
Even though I have been and remain bullish, in the last letter I advised
not to "go out and bet the ranch" because the "gold cartel has
been out in force, trying to cap the gold price." In other words, I do
not recommend using leverage if you choose to trade gold (i.e., trying to
profit from its price fluctuations, in contrast to the long-term wealth accumulation
strategy of buying gold month-in and month-out). Leverage is dangerous, as
we saw over the past four days. No doubt there were a lot of margin calls
issued, with the consequence that there was much forced selling. But the
capping by the gold cartel and the subsequent rush for liquidity does not
diminish gold's long-term prospects, a fact no doubt understood by the long-term
accumulators of physical metal who now find gold significantly cheaper than
it was just a short week ago.
Gold did not reach my $720 target by the end of February. But I expect that
we will see that price soon enough, probably within the next two months.
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