The Gold Wars: What The Fed Is Scared Stiff Of
"The art of war is of vital importance to the State."
Back in October of 2005 in Gold: Stage One or Two? we stated that when $500 becomes support rather than resistance - stage two would without question be here.
Presently an intermediate term correction appears to be unfolding in gold. We are of the opinion that the $500 level will remain intact as support, and that support will most likely come at higher levels.
Further to the above, we stated:
"If you want to know for sure that stage two is occurring, the crossing of the $500 level and the change from that level being resistance to support - will undoubtedly indicate stage two."
We showed this chart and said:
"This is called a cup formation. One of the most powerful chart formations is known as a cup with a handle. The handle is usually sideways action to the right of the chart (present price action) just before the price breaks out above the rim of the cup - the highest level reached on the chart, i.e. $500 per ounce."
"From this long-term chart, it is obvious that the price level of $500 is important if the gold bull is to stay intact. When the price breaks through this level, stage two will definitely be starting."
In November of 2005, we followed with the article The Charts Are Talking. Who's Listening? The focus of this article was on the chart pattern known as a cup with a handle.
We explained what the formation looked liked, how and why it forms as it does, and what it can mean in regards to forthcoming price action on the chart.
We provided several examples of gold chars that were presently showing cup and handle formations. Two we show below:
We stated in the conclusion to that article that:
"The precious metals markets have been tough of late. Last week they were forming a wedge patter that looked like it was a perfect set-up for a break out. What did the HUI do - it broke down. Then Friday of last week the precious metal stocks reversed course and broke out of their wedge pattern. Now on Monday and Tuesday they appear to have broken down again."
"The charts of the precious metal stocks are peppered with cup and handle formations that presently appear to be consolidating in the handle portion of their patterns - prior to breaking out to new highs: IF the patterns are completed and confirmed."
The precious metal stocks may well be talking.
Is anyone listening?
Subsequently in February of 2006, we wrote another article titled The Charts Are Talking: Is Anyone Listening?. This was a follow up to the original article. In this article, we provided some follow up charts to compare to the same charts in the first article to see what had occurred.
We stated at that time that:
"Below are the current and updated charts of the XAU and the HUI indexes for February 1, 2006, which show the recent breakout that has occurred. Notice that on November 17, 2005, the XAU was consolidating between 110 - 115, and today it closed above the 150 level."
"The HUI back in November was at the 230 to 240 levels, and today it closed over 340. The HUI has forged ahead with +40% gains in two months time. Many individual gold and silver stocks are showing even greater percentage gains."
We then added the observation that:
"However, some of the charts are also beginning to look parabolic, which often cannot be sustained, and warrants the better part of discretion, as opposed to valor."
The following charts were provided as examples:
In conclusion, we wrote:
"That is what disciplined traders do during rallies in bull markets: they sell into strength, and buy during weakness. This is how one prospers in a gold war. If further upside action occurs, we will continue to do the same with a minimum of one third, and a maximum of two thirds, of our trading portfolio.
That does not mean that a correction is going to start tomorrow, as once again, no one can predict the future. What it does mean is that to stay disciplined and focused, by selling into strength, and buying on weakness - that is what matters: money management and asset allocation."
Since mid-April, we have been warning that a significant correction in gold & silver and particularly in the precious metals stocks was becoming increasingly likely. Price levels were overbought. Silver and some pm stocks had gone parabolic.
In addition, there has not been a correction of an intermediate term nature since May of 2005. We also agree with Mike Bolser that the Fed appeared to be setting the commodity markets up for a bad fall in order to protect the bond market and in turn the real estate market.
Well, unfortunately such came to pass this past week. Commodities have been taking it on the chin and low and behold, the bond market is rallying. Who would have figured?
In our latest market wrap Week ending 5/12/2006 we had the following conclusion:
"We have no idea from what price level gold is going to correct from - in regards to an intermediate term correction of any significance.
However, it is closer than further away in our opinion. We have sold almost all of our precious metal stocks into the February highs; we may sell the rest depending on how far the market runs from here.
We are not buyers of either precious metal stocks or the physical at these levels, and we prefer to be sitting in possession of the physical rather than the stocks. Our physical holdings are not for sale. The reason we accumulate physical gold and silver is as a store of wealth - why would we want to exchange it for paper fiat debt-money that continually loses purchasing power and value.
Our game plan remains the same: buy the stocks on weakness during intermediate term corrections, and sell into strength during intermediate highs.
We then take the profits from the stocks and reinvestment them in the physical metal during the next intermediate term correction.
We are thus paying more and more for our physical position, however, it is more than offset by the increased profits in the stocks.
As Dennis Gartman's friend was fond of saying: "when they're yellin we're sellin, and when they're cryin we're buyin." Sounds good to us - and so it is.
We are very fond of the following words of wisdom - for several self-evident reasons:"
"Gold would have value if for no other reason than that
it enables a citizen to fashion his financial escape from the state."
[William F. Rickenbacker]
Gold Bull Intact
We are of the opinion that the gold bull is still intact and will remain intact. Corrections are healthy for the long-term sustainability of a bull market.
As the Chinese know by the use of the idiom for crisis and opportunity being one and the same - this correction will offer what may perhaps be the best buying opportunity of the gold bull yet.
So, what's the Fed scared of - gold the sovereign of sovereigns - the ever watchful sentinel of the Fed. When the Fed is at it's worst - gold shines brightest. As Sir Alan well knows:
"Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights."
THAT is why the Fed is scared stiff - and with good reason.