Gold Market Update
Originally published December 23rd, 2008.
The way things look it will soon be impossible - or very difficult and expensive - to obtain physical gold and silver. The first major wave of physical buying has bought up all of the coins and small bar gold and silver available on the market, with the result that if you want any, you must pay a large premium. Right now, the second wave is underway, with astute investors forcing the Comex to deliver, which is having the effect of drawing down their warehouse stocks at a rapid rate. As the Comex is massively leveraged and trades hundreds of times more gold and silver than it has in its possession, it is clear that immediately their warehouse stocks are completely depleted, there will be a mad scramble to buy physical gold and silver in order to meet contract obligations. This will light the fuse under the Precious Metals sending them into the stratosphere - and gold and silver have plenty of other reasons to go up anyway, apart from failure of the Comex. On Jim Sinclair's jsmineset website the battle to overcome the stranglehold of the Comex is portrayed as a David and Goliath contest, with all the little guys banding together to overcome the big bad Comex. The reality however is that the little guy usually wins when he aligns himself with big money, and you can bet that if gold is going to go up alot, big money is going to get a sizeable slice of the pie, as usual. This is actually good news for goldbugs, for ahead of a major upside breakout big money will move in and grab a huge chunk of the pie and it will be this that steamrollers the Comex into oblivion. So watch for some powerful players demanding delivery going forward.
It is therefore most important when reviewing the charts for gold and silver, which are for the paper market, that we take into account the implications of the rapidly tightening physical market. For right now the charts are deceptively flaccid and lacklustre, although on closer inspection we can see that even the paper market is firming up in readiness for something big. The key point to grasp is that immediately all of the physically available gold and silver has been bought up, prices are set to rocket, and that must include the paper Comex price, unless the Comex wants to stand idly by and watch a flourishing black market that will have the impetus to foster the creation of another exchange in another country if they don't want to play ball.
On the long-term chart for gold we can see that, despite the mess and mayhem in commodities generally and in the stockmarket, paper gold has held up well this year, and it has not even reacted back to the long-term uptrend line dating back to the start of the bullmarket. Technically we still have a trend of lower highs and lower lows from the March peak and the next important intermediate uptrend cannot be considered to have started until it breaks above the red downtrend line. That said, however, the low appears to have been put in in October and it appears to be powering up for an upside breakout.
Due to the worldwide explosion of Fiat resulting from the desperate attempt to maintain liquidity and avert recession/depression, gold is expected to remain in a vigorous bullmarket against most currencies. It is therefore worth comparing its dollar chart to that for one of the dollar's principal competitor currencies, the Euro. On the long-term chart for gold in Euros we can see that gold looks healthy and is in position for another upleg, which could be very substantial if it should rise to the upper channel return line, and given that gold could rise in an accelerating arc, it could very well continue higher than that.
On its 1-year chart gold's rally on the recent dollar plunge might be viewed as disappointing, as it barely made it to the lower of the red downtrend lines. However, we should remember that this is the paper price that as yet does not reflect the heavy drawdown in the physical market, which if it continues as expected must result in a crisis at the Comex resulting in panic buying as mentioned above. Once this happens gold will blast through the resistance at these trendlines and at the March highs as if it isn't there - which it won't be due to the extraordinary conditions that will then prevail. While the current minor reaction may continue a little longer, the reason for it, the bounce by the dollar after a savage plunge back to strong support above its 200-day moving average, will soon have exhausted itself, and the dollar should resume the downward path.
On the 1-year chart for the dollar we can see the dramatic plunge from the Head-and-Shoulders top pattern that had formed from mid-October through early December. We had correctly identified this pattern back on 5th December when a Dollar Special update was posted on the site warning of a probable severe breakdown. This plunge resulted in a clear break of the uptrend line shown, signaling the end of the dollar spike, which was not related to the currency's intrinsic value, for it has none, but was rather the result of a tidal wave of commodity and stock liquidation, a sizeable proportion of the proceeds from which were sluiced into the dollar in order to buy Treasuries as a safe haven. The dollar breakdown is a signal that the flood of funds from the torrent of forced liquidation is now abating, and that, therefore, one of the principal drivers of the bubble in Treasuries is vanishing - and given the incredibly overbought status of Treasuries, they are now clearly acutely vulnerable to a savage reversal. The dollar breakdown is also the inevitable consequence of the incredible expansion of the money supply in recent months, that is made dramatically clear in the following chart of the monetary base, which shows the sum of the notes and coins in circulation.
The exploding money supply has necessitated the renaming of "Helicopter Ben" on account of the fact that helicopters cannot drop money fast enough. Ben Bernanke is henceforth known as "Lockheed Galaxy Ben" as this aircraft is best suited to making strategic money drops of the magnitude required in places where they are most needed like Wall St. Detroit is not on the radar, except perhaps for temporary food parcels.
The "bubble factory" has in a relatively short space of time manufactured the stockmarket boom and bust, the carry trade scam, the dot com boom and bust, the housing boom and bust, and the commodities boom and bust. The elites who created these bubbles have profited vastly from each of them, which was not hard for them to do as they are in possession of the itinerary. These have culminated in what for them is the crowning glory, the Treasuries bubble. Treasuries are mainly the province of big money and it is ironic that while most investors are disappearing into a vortex of wealth destruction, they are cleaning up yet again. However, they have now come to the end of the road, as the entire global economy is disappearing into the black hole of the greatest depression of all time, destroyed by the massive concentration of power, particularly in the United States, that has spawned enormous debt and profligacy which are the inevitable consequence of unbridled Fiat money creation. The US Treasury market is teetering on the verge of total collapse, which will be brought about by the cessation of liquidation funds flowing in, leading to a collapse in the dollar exacerbated by the zero attractiveness of zero interest rates coupled with massive increases in the money supply in the US to bail out the banks and Wall St. The collapse in the dollar will cause foreign bond buyers to shy away, and increasingly to ditch their current enormous holdings of US Treasuries, which will lead to a self-feeding downward spiral.
The 1-year chart for the US 10-year Treasury Note amply demonstrates how massively overbought and out on a limb Treasuries are. As we can see, with all short-term oscillators showing a critically overbought condition, this Treasury looks like it may be right at the top of the Head of a Head-and-Shoulders top pattern. On its suspected final ascent last week a bearish "Rickshaw Man" showed up on the chart, the appearance of which last September enabled us to call the reversal in this market at that time. The Rickshaw Man is bearish because it indicates a market that is very unsure, as the price fluctuates wildly intraday but makes no net progress, and closes where it opened. The extremely overbought condition of this market is further illustrated by the huge gap between the price and its long-term moving averages. With the dollar having staged a dramatic reversal it is considered highly likely that the Treasury market is about to do the same.
The world is facing a financial crisis of magnitude 10+ on the Richter scale. The man in the street knows that something is very wrong but has, perhaps fortunately in certain respects, no idea just how bad things are going to get. Even seasoned professionals who may know intellectually how bad it could get cannot wholly grasp it. Perhaps one of the best indications that it is going to get really really bad is that Mordor itself is threatened. The elite citadels of Goldman Sachs and JP Morgan, where you only need to have a pulse to get a $20 million bonus, are under siege. This is unprecended. Unlike the auto giants Chrysler, Ford and GM, however, who are having to grovel for a paltry $20 billion or so to keep the wolf from the door, Mordor can expect unlimited access to taxpayer largesse, made possible by the Paulson bailout plan trojan horse earlier this year. Whether this will ultimately save it remains unclear for it is threatened first by the explosion of the derivatives mountain and then if it survives that by the filthy dispossessed hordes, who will clamouring for blood at the gates.
As we know the largest hogs have made repeated visits to the bailout trough where they have been seen munching away contentedly, their huge ears flapping above their eyes - small wonder that the bailout funds made available have ballooned to something like 10 times the amount proposed under the original Paulson Plan for $700 billion. Here is a picture of one of the largest ones returning from a session at the trough...
In relation to what we have discussed, the following steps are considered to be the amongst the most logical and efficacious in respect to capital preservation and maximising gains going forward.
1. Sell all US Treasuries without delay
2. Buy any gold and silver coins and small bars etc on offer that you can find, providing that this does not involve paying a large premium. It is understood that this is difficult now. Certain items of jewellery, such as high grade gold rings may also be considered.
3. Those with the economic capability to do so should buy as much gold and silver, proportional to budget and overall situation, as possible on the Comex using near-expiry contracts and DEMAND delivery. In doing this one should be aware that as time goes on the risk of the Comex defaulting is rising. For guidance on this please see The Delivery Process for Gold and Silver in the jsmineset archive.
4. Those lacking the financial clout to buy on the Comex in sufficient size to take delivery may want to consider trustworthy intermediaries such as James Turk's GoldMoney and goldsilver.com These services undertake to buy the gold and silver on your behalf and store it in designated secure depositories. It is bought in your name and so documented. The writer cannot vouch for the absolute security of these services. We will be taking a closer look at them on the site before long. The premiums/fees for these services have not as yet been examined.
5. Buy mining stocks, but only those of producers or companies that have large proven resources and have zero or very low debt, and do not have the need to raise capital. These are the stocks which are being featured on the site. Demand delivery of stock certificates in your name. This will prevent your broker from possibly plundering your stock at a later date.
6. In the cutthroat environment that we are moving into it can be assumed that anyone who has the power to rob you will do so. For this reason gold and silver ETF's are no longer trusted - rotate out of these into "gold you can hold" or use the services mentioned under number 4 to buy gold and silver on your behalf. It should do harm to wait until the next upleg to do this.
Finally, if you have made the mistake of opening and reading this article just before Christmas, it is understood that it may have the effect of wiping out whatever Christmas good cheer you were able to summon up this year. But if you are one of those who believes in the saying "forewarned is forearmed" and like to know the truth about what is going on however awful it may be, you will find more comfort in knowing than in not knowing, and being plagued by vague doubts and fears. If nothing else what is written here should given you something to chew over and even chuckle about as you sit trapped in a room full of relatives you haven't seen for a year and can't stand, and if what is written here turns out to be correct you may find you that you are able to turn the situation to your advantage and triumph in the face of adversity.
A Happy Christmas and New Year 2009 to all readers.