Sand Castles: Part One

By: John Mackenzie | Sun, Mar 27, 2005
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An old adage:

"In a ham and eggs breakfast, the chicken is involved, but the pig is committed"

In Federalist Paper 45, James Madison wrote:

"The powers delegated by the proposed Constitution to the Federal Government, are few and defined. Those which are to remain in the State Governments are numerous and indefinite. The former will be exercised principally on external objects, as war, peace, negotiation and foreign commerce; with which last the power of taxation will for the most part be connected. The powers reserved to the several States will extend to all the objects, which, in the ordinary course of affairs, concern the lives, liberties and properties of the people; and the internal order, improvement, and prosperity of the State."

How far we have strayed from those who attempted to protect our right to life, liberty and the pursuit of property... are we committed or merely involved?

The Incoming Tide

Modern forensic analysis remains a bastion of empirical subjectivity, in large part, due to the deliberate and meticulous saboteurs, separating fact from truth; and again from fiction... it requires an unending commitment to observing inconsistencies; placing a "marker" for further analysis. It is fairly simple to dispel the falsehoods perpetrated and spill forth solid and objective fact in both word and deed. In a world where up is down: ascertaining behavior, confidence and projecting material results is a challenging endeavor.

By example, the much heralded work of Robert Precther has been patently wrong and exceptionally subjective, with Mr. Precther violating his own rules. Is this solid detective work? No it is not. Perhaps it may have something to do with intent, a quick peek into his background reveals very troubling alliances, membership our own president is unwilling to discuss openly when asked point blank about his affiliations Skull & Bones Society. Perhaps, someone should query Mr. Precther as to his affiliations as opposed to holding up his model inefficiencies of the past 18 years. Bob, is no doubt, a very bright guy, but using your intelligence and knowledge for good, the wise choice.

I find no particular pearls of wisdom. Yes, dislocations and distortions end badly, they always have.

Or as King Solomon was kind enough to observe: "There is nothing new under the sun."

The megaphones may announce all the false quantitative metrics they please. There remain a plethora of individuals who will seek out the facts and separate it from the perpetrated fictions. Reminding the riggers, qualitative adjustments are all too painful and obvious, much in the way we herald "new diseases we've cured", the chronic manifestations continue to compound and spread throughout our culture, our people. GDP does not, by any measure offer an accurate accounting of the health of our Nation.

But enough about that... it is merely conspiracy minded non-sense. Coincidence will suffice, probability, merely a number of connected dots blurred by slight of hand by turtles racing about the sandlot and towards their dream of a perfect utopian world of oneness... the greater good.

Confused by the above, don't be. I'll stop for now. There's little point in rambling on about our fate.

Consider this: there are those whom seek the truth, based in fact, and those who are out to destroy it, they are in fear of losing their grip and of having their house of cards blown down.

There remain, on the whole, a decidedly moral bunch of Americans or such has been my experience. For whatever reason, their eyes remain wide open, keenly focused upon separating fact from fiction, the truth from lies and hope from reality. They reinforce my belief there is far more good in this world than bad. These islands of humility share common interests in maintaining their individual rights, liberties, evenly applied justice and generally understand Gold's role as money.

They understand just how ruinous Fiat Currencies have become.

"Gold Bugs" being people and not some subterranean spawn; are subject to the very "Greed and Fear" machinations of the human spirit; emotional and biased as the non-believers are about the paper promises made by presently insolvent parties steering the herd towards ruin.

So let's cut from the ethereal and on to the chase, examining the forensic evidence:

Figure 001: HUI Monthly

Observe the current monthly simple moving averages:

12sma @ 210.92

24sma @ 198.82 w/ Friday's close @ 198.86 or 4 basis points above.

36sma @ 173.79

60sma @ 127.57

Of concern, both the RSI and MACD are rolling over and pointing down. The 12sma is converging with the 24sma, which is healthy, but we see a fairly large displacement between both the 3 and 5 year moving averages. Cycle work done by observers far more astute with their craft than I, would suggest these will need to converge, prior to the next move up. I tend towards agreement, yet believe convention to be a fairly baseless metric in the uncharted waters we've sailed into, cycles do repeat, of this we are certain.

Figure 002: HUI 120 Month

The above is an exceptionally compelling case for the Gold Bull. We have managed to retrace 10 years of abuse under the auspices of the "Strong Dollar" regime heralded by the Clinton/Rubin Statists and furthered by the present administration. We currently reside directly above a contentious level on the Ten Year Monthly chart.

HUI's intermediate term trend line is currently at 198, by intermediate, I define this period as 18 to 30 months, with 24 being the preferred SMA as it cuts precisely down the middle. The trend is up sloping, which remains BULLISH. It is only our short term monthly trend line which has flagged caution by turning down. Longer term trends we use for calculating the trend remain firmly footed in up sloping channels @ 173.79 (3year) & 127.57 (5 year), the very leading end of the longer term trajectories.

I am by no means an expert chartist, in trying to keep the "picture" as clear as possible, I lean towards simplicity, the simpler the better. A clear picture, free of noise and clutter is best in my opinion. There are remarkable chartists who employ a vast array of tools within their skill set. I follow their work and remain an extraordinary fan. My one concern with Technical Analysis is this: it is latent. Not that T/A cannot "project" forward; it certainly can, but were it an exacting science, technicians would who had mastered the Art would have taken their science away from prying eyes. Probabilities are what solid technicians cite and rightfully so, there remains a reflection of cause and effect as well as, more importantly to technicians, the ability to project effect to unknown cause, arriving precisely at the destination projected. I have seen it work far too many times to ever dismiss burgeoning empirical evidence.

Where we currently struggle is with the fundamental forensics that may have yet to appear within the matrix of cause and effect. A quite common practice within our managed markets is to manipulate signals in order to accomplish a desired effect.

Observation, by its very nature compounds our understanding in both scope and scale through an ever broadening horizon of possibilities, events and outcomes. In adjusting outcomes for specific agenda, the riggers send incorrect signals to the unaware and unsuspecting. Such, I believe, is the case with precious metals at present.

But don't take my word for it. Lets continue to dig and see what we find within the Charts.

Figure 003: CRX WEEKLY - Morgan Stanley Commodity Related Equity Index

After reviewing the Monthlies, we move to the Weeklies and continue to use a methodology that has worked for some time when it comes to analyzing the weekly charts. The 37, 65, 98 & 130 simple moving averages have served us well. Again, simplicity for the sake of argument.

We can see the extension of the intermediate term trend lines beginning to diverge. This confirms the steep rise of the CRX over the last 12 months. The phrase "Parabolas get sold" haunts me. Yet, if we review parabolic rises, they do eventually come back to earth, it remains merely a question of timing.

To the consternation of speculators, Commodity prices are coming back to earth, for how long will certainly depend upon the United States being able to maintain its hegemonic first abuser privilege as the World's reserve Currency. Certainly, as the Dollar falls in relative value, the price of imported goods would/will rise were those holding Dollars as Foreign Reserves going to accelerate their liquidation. We continue to expand our dependence on Foreign Savings to help balance our sorely titled and maligned propensity to consume.

As consumption contracts, we may see adjustments, albeit minor, to the Current Account, but certainly not to the Fiscal impropriety currently underway by our present Administration. That will continue to expand as the alternatives are certainly grim, the Federal Government has become far too large a cancer on the body of our decaying market economy. The patient may well be dead already, kept alive on the interconnected "life support" systems of an intertwined and interdependent Global Financial Economy.

At a very simplistic level, things I had difficulty in acquiring are now quite plentiful. L16 Lead batteries, all I need after several months of "made to order" purchases. Aluminum and Copper were relatively scare for framing and conduit, now I there is ample supply, for now. These are personal experiences in the Real Economy. The one that requires savings to perpetuate capital investment; the economy which affords a standard of living to those will to risk capital to meet needs.

There can be little doubt of the cause for concern surrounding Peak Oil. The supplies of near surface Crude Oil are finite, the overall supply of Crude Oil may well last into the next century. It would depend on many variables, chiefly demand. Demand is subject to the business cycle and with a contraction in economic activity comes a slackening of demand for Crude Oil. This is not to say the threat has been mitigated in all but the short to intermediate term. Were conflict to expand within the Mid East, we could rapidly see the Supply of Crude Oil contract dramatically, even at greatly reduced levels of economic activity. This event, fortunately, has yet to occur. Yet judging by the Imperialistic and wanton ways of the present administration, this is likely to change.

There is a very clear and substantial body of evidence suggesting every effort is being made to conquer the World's remaining Crude Oil supplies. Having 72% of these reserves concentrated within a relatively small landmass assures a concentration of force within in the region.

Demand for base metals, such as Iron ore are the core ingredients in waging war, as is Copper, Silver, Lead, Nickel, Zinc and many other scarce resources which require energy to remove from the earth's surface. Tremendous amounts of energy are required in order to do so, namely, in the form of Crude Oil.

The future trends appear abundantly clear as to the cost of these materials.

For now, I tend to align quite closely with the speculative nature of the initial phase of this far reaching bull market for commodities, but with reservation in the short run. Antal Fekete has convincingly outlined the case for flows between Bonds and Commodities, and although it appeared to have gotten off to a somewhat rocky start, his thesis holds immense promise.

What we have witnessed, initially I believe, is precisely what Alan Greenspan and his string pullers wanted to avoid: A rush to "Hoard" the tangible. I do not believe this propensity has even begun as most are unaware of the dangers we face as Individuals and as Nation States. In order to mitigate the damage, a managed contraction has been set in motion with tacit agreement amongst the members of the G7.

The great irony here is this, our trading partners and allies are actually willing to own our insolvent promises in order to perpetuate the price of paper over real value. At some point in the not too distant future, this will change.


It will be every nation for itself, alliances will form by proximity and trading blocks akin to Orwellian land mass will appear. They have begun and remain in plain sight. Although NAFTA has been an abject failure for both Mexico and Canada, it has served the United States greater good all too well... so far.

To date, the hand holding has been shaky. As we look into Liquidity as a driving force of speculation we see Alan Greenspan and Company have, on balance, begun to drain liquidity. Federal Reserve Repurchase Agreements were no longer serving to inject liquidity into the Broad Markets. The exception to this trend was last Thursday where we saw two rep's totaling $15.5 billion come to the rescue. Will this continue? It is difficult to project at present, but if it is a stated goal of herding capital to Bonds and away from Alternatives such as Commodities, then yes, I expect we will see a very measured level of liquidity provided by the Fed.

March has been an interesting month to watch. Day in, day out, manipulation has spread from the SPX and into both the DOW & NDX. We observe these daily machinations and have never witnessed such a degree of sheer panic thrown at the tape in the form of Bids. Bids, so large, there is only one entity that could afford to make such egregious errors.

Is this related book squaring for Derivatives, Japans year end markups or is the Fed backstopping these sales in order to bolster confidence? We don't know yet. What we do know is this has happened daily, with increasing frequency, since the beginning of March:


Last trade NMS: -0.24 at 36.27 on 0.05 downtick

Trade vol: 330,800 = 1.4% ttl vol.

Ttl blk vol: 4,556,644 = 19.2% ttl vol.Block equals 0.8% shrs out

Avg blk vol: 23,237,006 = 24.2% avg daily vol

Ttl vol: 23,728,332 = 24.7% avg daily vol

Avg daily vol:96,047,848 / Prev day -0.20 on 109,185,280


Last trade NMS: -0.54 at 118.00 on zero tick

Trade vol: 150,000 = 0.9% ttl vol.

Ttl blk vol: 4,468,000 = 27.4% ttl vol.Block equals 1.0% shrs out

Avg blk vol: 18,562,858 = 34.8% avg daily vol

Ttl vol: 16,321,600 = 30.6% avg daily vol

Avg daily vol:53,398,120 / Prev day -0.82 on 61,885,000

Last trade NMS: -0.60 at 105.36 on 0.01 downtick
Trade vol: 100,000 = 5.1% ttl vol.Block equals 0.1% shrs out
Ttl blk vol: 679,400 = 34.9% ttl vol.Block equals 0.9% shrs out
Avg blk vol: 2,090,492 = 32.0% avg daily vol
Ttl vol: 1,946,500 = 29.8% avg daily vol
Avg daily vol: 6,534,453 / Prev day -0.33 on 10,707,400

If I had a dollar for every instance this occurred in March, I'd be able to purchase a few Maple Leafs.

Figure 004: Crossed Block Sales

Again, an all too common occurrence in the month of March, the above is but a mere sampling of many days of distinctly similar activities.

There is certainly a Buy for every Sell, but who and to whom. The majority of the above were low blocks and the closing sell imbalances in March have been considerably, nearly each and every trading day.

Is this a healthy market or one fraught with an undercurrent of fear?

An astute observer might inquire as to what the rush to liquidate is all about. Perhaps the mining sector is under distribution as well, although there are few indications of such, but consider the ongoing insider sales at Newmont and GoldCorp's recent announcement to sell its stash of 240,000 ounces of gold and use $70 million of the proceeds to buy a gold deposit in Mexico. These are interesting actions indeed. Footprints do make a trail, but where does it lead? We're not certain just yet.

Please review the following 260 Week Trailing Price of the HUI.

Figure 005: HUI 260 TTW

Although we had an impressive rally, we believe it is now time for a breather, enough of one to warrant caution and a decided reversal of course from our December 2003 imminent breakout and impending higher highs. Certainly it is clear the MACD & RSI are pointing down now, this is not bullish.


Simple, the game changed and although it took some time to unfold, when we make an epic blunder, we admit it, adjust course and attempt to contain the damage. The above chart signifies a clear change in trend for the Short Term. Allow me to explain why.

In December of 2003 the spigots were wide open, money was flowing freely into all arenas much to the dismay of the Federal Reserve. As we began to move out through 2004 we saw a dramatic decline in Mining Equities begin in early April and a successful retrace to near the prior highs. Most importantly, we did not exceed them. If we begin to view the above chart in light of a POTNETIAL change in trend, then we must begin to observe the targets. You will see precisely why 222 was a pivotal target for the HUI.

Figure 006: HUI Condensed

Assuming the Short Term trend has changed and we do, we would look for a symmetry that matches the ascent, but with potentially far greater slope in this present environment. We have had Price rejection on several instances above and it has signaled a downturn. The HUI should begin to retrace Fibbo's off the December 2003 high at minimum. There are quite simple to calculate and would serve as important pivots for continuation or reversal. 184 on the HUI looks wide open to these tired eyes, we will wait to provide further commentary until this juncture.

Sentiment is troubling at this juncture, further serving to compound our short term bearish tilt. The senitcators flip all too quickly for there to be a healthy bottom in place. We observed sheer desperation and loathing manifest itself all rapidly into joy, complacency and a "buy every dip" mentality.

Is this how bottoms are formed? I do not believe so.

Instead, I believe we have changed trend for now and the herd is unaware. Judging from the rather sharp and pointed responses to the contrary, my spidey senses begin to tingle.

The Gold Advisor Herd flips faster than a coin toss at opening day. It's not their fault... this is an exceptionally difficult market. Far smarter and more experienced people than I have made significant blunders, errors in judgment and perhaps have allowed their "systems" to dictate what should be a wait and see approach. Most have firmly moved into the Bear camp. This has to be frustrating for investors, I know from first hand experience. The hate mail continues to expand geometrically, but I would be remiss it if did meet this head on and offer an adjusted and fair assessment of the current market anomalies.

Of note is Volume, which we view purely in the context of cause and effect. Volume is simply not there, but then it is nowhere to be found. So we're at a loss until it comes back in and it will with the given continuation of trend.

Our position is clear: we have moved to cash and remain there at the end of each and every trading day. We will do so until we have confirmation, which we believe is coming shortly, in one to three weeks.

I would be remiss if I did not state, this is again, MY OPINION. You'll notice "I & We" are used interchangeably throughout this essay. The reason is I spend many hours everyday with a very good group of traders, analysts and investors who lend their expert opinion to the mix. A community of Individuals not predisposed to the Bull or Bear camps. They are a remarkable group who separate fact from fiction and emotional bias from beauty.

They are all proponents of Honest Money and work very hard to solidify its restoration to the public's awareness. It is a group I am honored to be a part of, one of many.

In closing, it is your money, but now you understand, in part, what we are doing with ours.

Part Two to follow.


Author: John Mackenzie

John Mackenzie

John Mackenzie manages private capital.

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