GOLD

LONG TERM

Before getting into the weekly commentary, some comments on the head and shoulder pattern.  I have had several readers who have pointed out reverse head and shoulder patterns in gold, one a long term and one of an intermediate term basis.  I believe there have been some experts that have shown the same pattern recently.  I had shown a long term gold chart in my commentary for the week ending 19 June 2008.  You can find it in the archives of many of these sites and it might better show the patterns discussed.  The long term reverse head and shoulder pattern, as suggested to me, has the shoulders on the left and right sides of this chart with the reverse head in the middle.  As for the intermediate term pattern, the left and right shoulders can be seen on the right side of the chart with the reverse head in the middle.  Unfortunately, I DO NOT subscribe to these being reverse head and shoulder patterns.  They are more legitimately potential double top patterns which I had talked about previously.

Head and shoulder patterns are trend reversal patterns and therefore for a reverse head and shoulder to be present (suggesting an upside break) you would have had to have had a bear market move leading into the pattern.  For a normal head and shoulder the lead in trend would have been a bull market trend.  In neither of these cases do we have a bear market leading into the formation of the pattern and therefore we DO NOT have a reverse head and shoulder pattern.

The long term P&F chart suggests that we are still in a bull market and some distance away from a reversal.  With the existing pattern that reversal would come if the move should go straight down to the $870 level breaking below the blue line and two previous lows.

As for the normal indicators, they too have still not reversed.  Although the price of gold is still some distance above a simple 200 day moving average line I use the weighted method which gives a more aggressive line.  The price of gold is still above this line but only barely.  The moving average line is, however, still in a positive slope.  The long term momentum indicator remains in its positive territory but is moving lower and is below its negative sloping trigger line.  The volume indicator has now crossed below its long term trigger line although the trigger remains in an upward slope.  So, what does all this mean?  It means that the long term rating remains BULLISH but is getting close to being down graded if the negative gold price trend continues much longer.

INTERMEDIATE TERM

In my last commentary the price of gold had just climbed above its intermediate term moving average line.  Unfortunately, it quickly reversed and broke below the line in a decisive manner and is now below its previous recent low and well on its way downward.  The momentum indicator has also moved into its negative zone and below its negative trigger line.  As for the volume indicator, it too is below its negative sloping trigger line.  All in all, the intermediate term rating is BEARISH.

SHORT TERM

The recent trend in the price of gold is easy to see on a short term chart.  Everything here is on the down side.  The action appears to be trapped inside a downward trending channel.  The price is below its negative sloping moving average line and the momentum is in its negative zone below its trigger line.  Both indicators have moved below recent lows.  The very short term moving average line remains below the short term line for confirmation of trend.  Everything points to a still BEARISH short term rating.

As for the immediate direction of least resistance, well the aggressive Stochastic Oscillator is giving us some hope for a reversal of short term trend, at least for a little while.  It is still in its oversold zone but has moved above its trigger line and might be heading to breach its oversold line.  Although this is not necessarily a sign of a reversal of trend it is a sign that the existing trend may be running out of steam and needs a reversal or at least a rest period (such as the period following June 15th).  I will go with the lateral trend as the one with least resistance for now.

What goes up the mostest comes down the fastest.  Silver just can’t seem to get its act together and continues to act a lot worse than gold lately.  While gold lost 1.8% of its price during this past week silver lost 5.5% of its price.  Although it is still acting slightly better than gold over the intermediate and long term, over the past short term the performance of silver puts it in spot 22 out of 24 off the components in the Precious Metals Indices Table.  Only the S&P Gold Index and the Merv’s Qual-Silver Index had a worse short term performance.

Since its recent top in early June the trend in silver price has been almost straight down.  It is heading towards a reasonable support just below the $12 level.  Should it hit $11.50 then most likely it will continue down to test the previous low at the $8.50 to $9.00 level.

Looking through the various indicators silver is now BEARISH for all three time periods.

Most precious metal (gold and silver) stocks took a deep hit this past week.  Average losses, based upon Index declines, were in the order of 6% to 10%.  This has put all stock Indices into the BEARISH camp on the short and intermediate term.  Many Indices have also gone BEARISH on the long term but there still are some hold outs like the Merv’s Gold & Silver 160 Index, the Penny Arcade Index and the Spec-Silver Index which still maintain their BULLISH long term ratings.  The Merv’s new Penny Arcade Index is probably holding up the best, especially when measured relative to its recent gains.  It is still up 402% from its Nov low even after a 21.5% decline from its early June high.

There is no way of knowing when this latest decline in the stocks will end.  We can guess, intelligently or otherwise, but no one REALLY knows.  One must assume that a decline, once established, will continue.  For this reason probably the best policy to protect one’s capital, is to start looking for exits in individual stocks.  When the turn around comes, tomorrow or next year, you will be sitting with cash to take advantage of the new move.  If you don’t exit from your losing stocks, and the decline continues, you do not get a second chance.  You could eventually break even on the next bull move but that may be 100’s of % points from where the stock might bottom out prior to a reversal.

In my view it is always better to err on the side of protecting your capital rather than to err on the side of an ego refusing to see the possibility of any major decline.

Well, that’s it for this week.

I am thinking to myself that I would love to get a piece of that luscious arbitrage action where I buy the gold and/or silver futures at a low price while simultaneously selling the same gold and/or silver bullion at a higher price, telling the buyers that they must pay in advance and then wait up to a few months for me deliver their gold and silver, pocketing a hell of a lot of money on the buy-sell spread and the interest the money earns until the futures contract matures so that I can take delivery and settle up, and then spend the rest of my life on a wild, hedonistic spree of spending, spending, spending!

Then, sadly, I remember that such a plan requires money, and I don’t have any money because I have already spent all my money thanks to inflation in prices killing me, thanks to the damned Federal Reserve and the demonic, loathsome Alan Greenspan who was its chairman from 1987 to 2006, and who is directly responsible for all our economic problems; and every time I think about it, I get more angry, and I want to scream, scream, scream in my Anguish And Outrage (AAO)!

I see that I have gotten off-track, and I apologize for starting off with an idea of how to make a lot of money by playing the huge, gaping, unbelievable arbitrage opportunity between gold and gold futures, but then let it degenerate into a personal attack on Alan Greenspan, ex-chairman of the Federal Reserve, whom I despise for what he has done to us, and who deserves some cruel punishment for it.

Yet, I’m the one at the police station being held for “creating a disturbance” just because I helpfully informed a group of Girl Scouts at the supermarket to, as security video reveals, “Hang it up, you stupid kids, as your entire future has been destroyed first by the Federal Reserve under Alan Greenspan creating too much money and credit for almost two decades, and now Ben Bernanke at the Fed and Henry Paulson at the Treasury have grossly exceeded even those insane monetary excesses by huge, huge multiples of that!

“And in a matter of weeks, too…all of which guarantees roaring inflation and all its miseries and horrible, screaming pain and suffering for everyone, so that now you, and your parents, and your brothers, and sisters, and aunts and uncles and cousins and all the ponies and everyone you love will all die horrible, lingering, painful deaths of starvation and disease, crying out in ceaseless agony! Ya ever sing any songs about THAT around the campfires, you little doomed morons?”

I was quite proud of myself that I had “gotten through” to them, as they all ran off, screaming in terror, just like I do when I hear about this stuff! “Congratulations, Mogambo!”, I thought to myself!

However, this is not about what you can and can’t say to children, as it turns out, but about education; and for some reason, John Embry of Sprott Asset Management has never earned his Junior Mogambo Ranger (JMR) merit badge in “Mogambo Educational Initiatives (MEI)”, and thus is also shocked and appalled at my teaching methods designed to make sure that little kids grow up having the correct information about the true nature of the Federal Reserve and the government.

Apparently leaving the education of the masses to me and not getting tied up in the clutches of a vengeful legal system, Mr. Embry is thus free to be both shocked at my behavior, and to concentrate on other things, like this glaring disparity between the futures contracts for gold and silver versus the market prices of gold and silver bullion; and he probably figures that there are lots of greedy little bastards like me out there who are looking to make a pile of money with this luscious arbitrage opportunity, which leads him to conclude that some holders of the December gold futures contracts may try to take delivery of enough contracts so that there will not be enough physical gold in the Comex warehouses to deliver! Rising demand and zero supply! Wow! What will that do to the price? Hahahaha!

This would, of course, bust the whole “paper gold” and “paper silver” scam wide open on the commodities exchange, although Mr. Embry is quick to note that this would “prompt a claim of force majeure when the exchange cannot deliver enough real metal”, which is legalese butt-covering crap that says now that the crime has been uncovered, the commodity exchange negates the contracts, the guilty do not have to pay, nobody goes to jail or loses their jobs, and the investors get screwed out of the profits that they had coming to them.

The hapless investors thought they were going to get gold and silver at a low price, deliver it to buyers who have already paid for it, and everybody makes a fortune by when the price subsequently soars, thanks to governments around the world creating so incredibly much more money and credit so that governments can spend, spend, spend.

But now these investors get (probably at best!) their money back; and probably only then after years of legal wrangling where the lawyers end up with most of the money anyway! Hahahaha! Welcome to the full faith and credit of American markets! Hahaha!

If your nerves are on edge at the way I laugh so maniacally at such calamity, take comfort that gold will (theoretically, at least) soar when physical demand finally swamps physical supply, especially if the Europeans and Asians are serious about replacing the dollar as the world’s reserve currency with something else, as there is nothing else that will work.

One way or the other, for the last 4,500 years, gold has always preserved buying power, at least, while nothing else has, and sometimes gold was actually an investment opportunity because it was so under-priced. Like now! Whee! This investing stuff is easy!

Source: Gold, Faith and Credit

The most interesting news item recently was found on the cover of the Financial Times newspaper, where we learn that a guy named Lahde “made tens of millions of dollars from betting against the financial and property sectors during [the] past two years”, and he now wanted to thank “the low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA” who made it all possible for him to find enough suckers.

He noted that “These people who were often truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG (NYSE:AIG), Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the aristocracy,” he says, “only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.”

This goes along with an article in the St. Petersburg Times about Tom James, chairman and chief executive of Raymond, James Financial, who had “some tough words for the wizards of Washington, D.C. who oversaw the recent $700-billion bailout package”.

He reports that “The Brave And Wonderful Mogambo (BAWM) was right all along! Those government weenies are the biggest freaking morons you ever saw, and we as a country should be ashamed of ourselves for having elected such corrupt, half-witted, utter failures and congenital idiots!”

As you have probably guessed by now, he did not say those exact words, but he implied every syllable when he said, “Legislators were almost embarrassingly ignorant of how the financial system works”, which I figure explains how they don’t understand the linkage between their own Bad, Bad Performance (BBP) as legislators and the subsequent Bad, Bad Performance (BBP) of the economy, and he says that only 3 of 16 legislators that he talked to actually understood what was going on in the “credit crisis.” Less than 20%! Hahaha! We’re doomed!

Well, maybe these Congressional losers will understand the unfolding economic slowdown, as evidenced by the Baltic Dry Index, which is an index of the cost to transport stuff by cargo ship, and which has fallen precipitously, which seems very important to me, and to Junior Mogambo Ranger (JMR) Riccardo, too, who is also alarmed by this like – as I previously said – me.

It’s actually beyond scary, in a terrifying kind of “ain’t nobody buying nothing in a consumer economy” kind of way, which means that without the consumer buying stuff as his or her contribution to the famous statistic of “the consumer is 70% of the economy”, we are, in case you ain’t heard, freaking doomed if the consumer ain’t buying!

Well, maybe not all buying is drying up, as Ted Butler, silver market analyst, reports that in the last 10 months, “some 150 million ounces of silver can easily be documented to have been bought by investors. Undocumented purchases would add tens of millions more ounces.”

In fact, when you add it all up, “Investment demand for silver this year is running at a full 25% of world mine production and over 20% of total production (including recycling). This is a remarkable historical turnabout.”

Thus, it is easy to see why Mr. Butler is “bullish beyond belief for silver”, since this kind of demand means that “In silver, the documented 150 million ounces bought in the first ten months of this year is equal to 15% of all the silver bullion equivalent thought to exist!” Wow!

More than one-seventh of all the silver bullion “thought to exist” in the whole world was suddenly bought up in less than a year, and yet the price of silver has been pounded down to less than 10 bucks an ounce? No wonder I am so bullish on silver!

He also notes that the gold/silver ratio is at more than 80, which is “one of the biggest differences in history.”

And not only that, but since there are 4 to 5 billion ounces of gold in the world versus only 1 billion ounces of silver, that means that “the total dollar value of all the gold in the world is worth 300 to 400 times more than all the silver in the world (80 times 4 or 5)”.

In dollars and cents, the dollar value of all the gold in the world is about $4 trillion, while the value of all the silver in the world is but a laughably low $10 billion! Where do YOU think the most profit potential lies? Me, too! Hey! This investing stuff is easy! Whee!

Source: A Bull in a Silver Shop

David Galland says profit taking by institutional investors has ‘trampled’ metal prices. But the deepening crisis on Wall Street, geopolitical tensions and a traditional September bounce could send gold soaring back towards $1,000 an ounce. David says this could “happen literally almost overnight.”

Here’s a no-brainer long-term investment strategy to stick to: buy and hold resources now.

This from The Daily Reckoning:

As we take a longer view on the precious metals here at Casey Research, I’m not much for commenting on current market gyrations or the various sub-themes that regularly emerge in the blogs.

First and foremost, as to the purported discrepancy between the price of gold on commodities exchanges and that of physical gold, in my view, any real discrepancy would be jumped on by the arbitragers so fast, it might even break the land-sound barrier.

As for the shortage of gold and silver bullion products, we would attribute this to a couple of factors. The first is that there has been some poor planning on the part of the mints. Secondly, the poor planning is likely due to a failure to appreciate how many people are coming to the conclusion that it is better to own at least some precious metals, instead of holding only the unbacked paper of governments.

As for gold’s recent steep fall in the face of the clear signs of physical demand, it seems clear that this was largely caused by gold traders taking profits. At every step up in this bull market, the precious metals have been stuck, for months at a time even, in trading ranges… the bottom of which evokes buying and the top of which triggers selling.

It is always worth keeping in mind that the defining feature of commodities exchanges is the leverage the instruments that trade on these exchanges offer. Consequently, the traders who call those exchanges home are able to marshal considerable juice in their quest for a new Lexus with 16-way driver seat features and custom leather interior.

The salient point is that while those of us who believe in the values offered by gold and silver like to think of them as “substantial” markets, when it comes to futures markets, they are like a gnat on the tail of an elephant. To make the point, consider that the cash value of foreign-currency contracts traded globally each 24-hour period is on the order of $3.2 trillion. By comparison, over the same 24-hour period, on average, $26 billion worth of gold trades hands. For silver, the number is even smaller, just $4.5 billion.

All of which is to say that (a) these are markets that can be “pushed around” by the traders, and (b) when a large number of traders shift into “take profits” mode, the price of the metals can be trampled.

The long and short of it is that range trading will go on for awhile, until something occurs in the psychology of the market that shifts the majority into the long side… at which point the upper end of the trend is decisively broken and the range is reset to a higher level. It is my contention that the top of the range for gold is now $1,000, and we could see it continue to test that level, then fall back, for some time. But really, who can say? It could happen literally almost overnight.

Shifting to a somewhat nearer-term perspective, however, it is worth looking at the chart from Seasons of Gold, the archived article from the April 2006 edition of the International Speculator.

While the chart hasn’t been updated lately, the data used is so long-term – 30 years – that updating it wouldn’t have changed anything by any noticeable amount.

Viewing the chart, it doesn’t take a lot of imagination to assemble a scenario whereby the continued strong investment demand for physical gold meets the traditional strength of the Indian wedding season buying that contributes so much to the historical pick-up in gold prices in September.

Toss in the effective nationalization of Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM), putting the U.S. taxpayer as the guarantor of last resort on fully half of the mortgages in the nation…and mix in some of the ripe geopolitical apples now falling from tall trees, or the imminent realization that oil isn’t going back to $50 or that the inflation phenomenon is not temporary, and we could see a big bump in the gold price over the next couple of months.

Time to go long in the futures market? Well, on that topic, all I can say is, tread carefully…and use as little margin as possible just now.

That’s because, as wild as things have been in pretty much all the markets, we haven’t seen anything yet. If there is one thing you can take to the bank, it is that, in the months just ahead, the volatility of virtually all markets is going to go ballistic. For the attentive trader, that can mean big, and repeated, opportunities for profit. But for the casual trader, high volatility can lead to quick loss making.

Sticking to a longer-term perspective – buying and holding and, if resources allow, buying more on the dips – is the way to go.

Source: Whither Gold?