The Gold Bug: 2012

Wednesday, October 24, 2012

Triple Top in Gold?

By Scott Silva

10-24-12

Gold is amazing stuff. Gold has launched wars, destroyed and created whole societies. For thousands of years gold has been the trusted medium of exchange, and for hundreds of years had been the reserve currency of developed nations. Today, there is revived interest in gold. Central banks are net buyers of gold bullion, and more and more individuals are buying gold and silver bullion. That’s because gold has intrinsic value as money anywhere on the globe. Gold maintains its value as fiat currency is debased as central banks print Trillions more paper notes on the pretext of stimulating ailing economies. In fact, these robber-baron governments are implementing their secret agenda to monetize massive national debts, that is, paying interest (rarely principle) with paper currency of ever-diminishing value. Where are the RICO laws for that criminal practice?

Gold has been good for investors to own. Owning gold is an excellent way to diversify almost any portfolio. Hedge funds, banks, and other institutional investors have been buying gold, particularly in the last few years. The price of gold shows the bulls have been in control for years, pushing the price of gold up four-fold over the past ten years.

Some analysts see a triple top pattern in the weekly charts for gold. The triple top pattern typically marks a reversal. Since gold has been in a strong bullish trend for years now, a trend reversal would be strong and steep. The commodity bull cemetery is full of gravestones bearing the inscription, “killed by a triple top”. Are the charts telling us the price of gold is headed for a lethal fall? Has gold formed the bearish triple top that some analysts see? Or are there other technical signs that we can see from the charts that can help us decide to buy, sell or hold gold right now?

Well, we know from technical analysis that a triple top chart pattern is indeed a bearish pattern that typically marks a reversal. We can spot the pattern by its three successive peaks near major resistance, formed over time by successive moves up from the same support level. The three tops should be spaced roughly equally apart. Trading volume should show a declining trend over the three-peak formation period. The weekly basis chart for spot gold displays such features.

So should we sell gold now before its inevitable fall? Well, it might be more prudent to

determine if the bearish triple top pattern displays a break below its support level. At present, weekly price action is 200 points higher than the support level of 1527, so we would need to see a major decline from today’s price. If the price of gold does decline and drops below 1527, the measured move for this pattern shows gold could drop down to 1251. Ouch!

There is another pattern in the weekly gold chart worth considering. It is a large, long term bullish ascending triangle pattern that began to form way back in February. The ascending triangle pattern is a continuation pattern, which at breakout, can result in a powerful move up. We identified a smaller ascending triangle pattern in gold for readers of these pages (“Charting Gold, 8-14-12), which predicted the breakout from 1635 to 1724. The measured move calculated in the larger, longer term ascending triangle pattern if the gold price were to break above 1803 is 221 points, which would bring the bullish breakout target price to $2024/oz for spot gold.

Will gold break above 1803 on its way to 2024? We shall see. Price action is finding support at current levels, and 1803 is just 4% away from last week’s closing price of 1730.40.

The ascending triangle pattern is in the weekly basis chart for gold. There is yet another bullish pattern evident in the weekly chart, namely, the bullish cup and handle pattern. This is a powerful, long term formation that dates back to February. The bullish cup and handle pattern traces out the “cup” by the gradual price decline, then bottoming out, and then gradually returning to the “lip” of the cup. We can see this feature in the chart from February to September for spot gold. We can also discern the formation of the “handle” feature, which is the sideways to slightly declining price action. The measured move for the bullish cup and handle pattern is calculated by adding the value of the depth of the cup portion to the breakout level, which is the upper trend line of the handle feature. The measured move for spot gold in this pattern is 274, which would bring the price target to $2077/oz were gold to close above the 1803 on the weekly chart, the breakout level at the “lip”.

There is good potential for a more upward pressure on the gold price. The Fed meets again this week. Chairman Bernanke could announce he is expanding the scope of his monthly bond-buying program (QE Infinity) in response to yet more disappointing US economic data. More QE will likely push gold higher. Gold could also receive a boost from progress across the pond. If the EU gets closer to a solution to Spain and Italy’s debt troubles, the Euro would gain against the Dollar, which would send gold priced in Dollars higher. Also, renewed violence or the threat of violence in the Middle East or Africa would be reflected in higher gold prices. Finally, the US election outcome will impact the price of gold. A pro-growth president would put pressure on gold prices, as was the case under President Reagan. If the incumbent survives the election process, gold is likely to stay high in price, consistent with ultra-easy monetary policy and massive deficit spending.

So, we will be watching which way goeth gold in the short term, up 4% or down 11%, before the next big moves predicted by the charts take place. At present we do not expect gold to plummet from a bearish triple top pattern. The fundamentals support high gold prices for the foreseeable future. However, we shall stay vigilant as we tip toe past the triple top cemetery.

Responsible citizens and prudent investors protect themselves and their wealth against the ambitions of over-reaching government authority and debasement of the currency by owning gold. Gold is honest money. Investors from around the world benefit from timely market analysis on gold and silver and portfolio recommendations contained in The Gold Speculator investment newsletter, which is based on the principles of free markets, private property, sound money and Austrian School economics.

The question for you to consider is how are you going to protect yourself from the vagaries of the fiat money and economic uncertainty? We publish The Gold Speculator to help people make better decisions about their money. Our Model Conservative Portfolio has outperformed the DJIA and the S&P 500 by more than 3:1 over the last several years. Follow @TheGoldSpec Subscribe at our web site www.thegoldspeculatorllc.com with credit card or PayPal ($300/yr) or by sending your check for $290 ($10 cash discount) The Gold Speculator, 614 Nashua St. #142 Milford, NH 03055

www.thegoldspeculatorllc.com

editor@thegoldspeculatorllc.com

Tuesday, August 21, 2012

Breakout in Precious Metals

By Scott Silva

Editor, The Gold Speculator

8-21-12

Gold bugs are paying attention to the breakout in the gold and silver today. Could this be the breakout that propels the precious metals to new highs? Or is the bullish buying of the shiny metals a passing summer fling?

Some respected analysts characterize the current bullish interest in gold and silver, as well as the summer rally in stocks is invalid, citing the lack of trading volume, which “is the only way to confirm a bullish trend”. That opinion has led many to short stocks and some commodities. Others have elected to stay on the sidelines, satisfied to stash their capital in Treasurys.

Technical analysis sheds some light on the nature of traded assets. Readers of these pages last week (“Charting Gold”) saw our forecast of the potential breakout in gold based its bullish ascending triangle chart pattern. In that analysis, we identified the breakout level to be $1634/oz.

Soon after the New York open today, spot gold jumped to just over 1640, clearly above the trend line breakout level on high trading volume. To be considered a valid breakout, gold needs to close above 1634 over the next few trading sessions with volume above 110,000. The target price for a valid breakout from the bullish ascending triangle pattern in gold is 1725.

Ichimoku Kinko Hyo indicators show that the 1725 target price has been a strong support/resistance level in the past. We can see from the weekly basis chart the projected cloud is showing 1723.80 as resistance. We saw gold trades close to this level before the run up last August and for several weeks of sideways trading from April through May this year. Another significant feature on weekly chart below is the bullish cross of MACD oscillator. Several traders use MACD crosses to execute trades because it clearly identifies shifts in momentum. Whether or not MACD is used as a trigger for a trade, it is a useful measure for confirming other technical indicators, such as a bullish cross of Tenkan Sen from below the Kijun Sen, which remains intact since it appeared on the July 26 daily Ichimoku charts for gold.

Some traders rely on the TrendSpotter indicator, a popular computerized trend analysis available on most trading platforms and on Barchart.com. The indicator combines elements of wave theory, market momentum and volatility to display the general trend for a given traded asset. Traders read the TrendSpotter “dots” which are graphic codes for more technical analysis going on in the background by computer algorithms. A single dot above the price indicates resistance and a bearish trend. A dot below the price shows support and a bullish trend. When two dots appear, one above and one below the price, the trend is neutral indicating “hold”.

We can see that TrendSpotter dots have followed the upward trend in gold building from late July, and accelerating in the last three trading sessions including sessions.

The study at the bottom of the TrendSpotter chart is a momentum indicator, which shows relative price differences between the current price and the price 10 and 20 sessions ago. The waves above and below the zero line show bullish and bearish price momentum. The height (amplitude) of the wave signifies the strength of the momentum. These data are showing an accelerating bullish TrendSpotter trend for gold, with modest momentum at the moment.

There are a multitude of technical indicators and systems that support informed trading decisions. The important thing to remember about technical analysis is that it works. What works best for one trader or another comes down to personal preference. Ichimoku works well for us at The Gold Speculator. We use it as the basis for selecting gold and silver stocks and futures for the Model Conservative Portfolio (MCP). Ichimoku support and resistance levels tend to correlate closely to Fibonacci retracements, which we find to be very reliable forecasting tools when used in combination. We use Ichimoku along with some “trigger” indicators for our weekly recommendations for traders who trade more frequently across all markets using our Model Aggressive Portfolio (MAD), which returned 77.3% for the week ending 8-17-12. Recommendations for each risk profile are available online to subscribers.

Each set of these popular technical indicators are showing a new bullish trend is building for gold. These same technical analysis tools show that silver has broken out above resistance and may be on the way to new highs this year. Silver has the potential to make much greater percentage gains than gold over the next few months.

The charts are telling us it’s time to buy and hold gold and silver. Sometimes, a summer fling

can turn into “The One”.

www.thegoldspeculatorllc.com

editor@thegoldspeculatorllc.com

Tuesday, August 7, 2012

To QE or not to QE

By Scott Silva

Editor, The Gold Speculator

8-7-12

To QE or not to QE. That is the question. The markets waited for the Fed Chairman to announce it is time to jump in with another round of restorative stimulus, and had bid up nicely before Big Ben disappointed once again at the conclusion of last week’s FOMC meeting, stating,

“The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Hardly stimulating. The markets responded by selling off, but not as sharply as usual following a Bernanke punt. Traders held out hope that the ECB might do something bold. But alas, Mario Draghi seemed content to sit on the edge of the bed as well. Apparently, now is not the time for the central banks to begin a new bond-buying binge. The bankers must have insight other do not. Could it be that that they expect economic conditions to deteriorate further, or do they see signs of a sudden turnaround? Most analysts are pessimistic on the prospect that the Eurozone debt crisis can be contained. And many do not see the US recovery happening until a pro-growth president takes the oath of office.

The reason that the Fed policy has failed to stimulate the US economy is that monetary policy cannot stimulate demand. And despite what the Keynesians in charge of Washington believe, government spending does not create demand (except, or course for defense spending). Even if I accept the Keynesian approach, then also I must believe that the US is in JMK’s liquidity trap, that eerie nether region of extended ultra-low interest rates in which no amount of additional money produces any increase in output. Uncle Ben must secretly know that QE3 would ultimately fail, as did QE1 and QE2. And so too, his legacy as an effective Fed Chairman would never materialize.

One example of the failure of Washington central planning policy is the unemployment rate, which has now reached 15% (U-6 rate) for July. We have not had so many out-of-work citizens since the 1930’s. If defense funding sequestration occurs, there will be another 700,000 or so joining the jobless ranks. Despite what some may say, the private sector is not “doing fine”.

The US stock market seems to have discounted the feckless Fed, re-election campaign rhetoric, and the lousy July jobs number to closing above 13,000 last week and continuing its move up this week. The markets seem propelled by some special knowledge that there may be a bridge across the fiscal cliff. Could reason and responsibility succeed where rhetoric and redistribution has failed? We shall see. In the meantime, individuals must remain vigilant and protect themselves against attack by those who would steal their wealth and give it to others more “deserving”. Да, Comrade!

Many know that buying and owning gold is an excellent way of protecting wealth. Gold has been a recognized store of value for thousands of years. Gold has intrinsic value. Gold maintains its value especially in uncertain economic times. The price of gold increases when governments intervene in the credit markets and create more fiat currency than economies demand. This has been the case in the US and the EU for the last several years as central bankers have tripled the money supply through Quantitative Easing and other easy money measures.

Over the past five years, US central planners have distributed more than $4 Trillion of stimulus funding, raising the government share of GDP to 42.3% in 2009 from 35% in late 2007. The Federal spending binge includes add-ons to the agricultural and housing bills in 2007, the $600 per capita tax rebate in 2008, the TARP and Fannie Mae and Freddie Mac bailouts, "Cash for Clunkers," additional mortgage relief subsidies and the president’s $860 billion stimulus plan that promised to deliver unemployment rates below 6% by now.

Since the beginning of the Federal stimulus spending spree, US GDP has fallen 61% and the price of gold has increased 101%. The price of gold is likely to climb higher if Chairman Bernanke ignores his better angels and succumbs to another sip from the punchbowl.

And the price of gold is telling us now that odds are good that the Chairman will fall off the wagon, again, soon. Today, gold is trading above $1600/oz.

There are signs that gold will continue its upward trend for some time yet. Technical indicators for commodities in general are bullish. The CRB index is in an upward swing, climbing to 12% to over 561 since June. Many noted commodity traders are adding to their long positions. In particular, large speculators (the smart money) are accumulating gold. In the most recent Commitment of Traders (COT) report, Large Speculator bullish sentiment jumped 3 points to 79%. The large traders added 5,246 new long contracts and shed 7, 841 short positions on slightly lower open interest of 403,403 contracts. These professional traders are usually ahead of the herd. As subscribers to The Gold Speculator know, we are bullish on the precious metals.

What will happen to the price of gold if Helicopter Ben does not dump more bushels of greenbacks from the sky? Well, the price of gold will still rise. A major reason is the fact that money is seeping in to the economy from a massive store held as “excess reserves” by member banks of the Federal Reserve system. These funds are released into the economy when the banks lend or create new demand accounts. Normally, adding money into circulation stimulates economic activity. But we also know that increasing the supply of money when the demand for money is low, as is the case today at 1.5% GDP growth, leads to higher prices.

Of course, a new round of Fed bond-buying would be a massive dose; the last two rounds were woefully inadequate, according to the Keynesians in charge. “If only the stimulus were larger, say $1.5 Trillion or so, we would have come out of the woods by now.” Or, maybe $3 Trillion, as Paul Krugman has suggested.

Here’s an idea that might work. Take Paul Krugman’s $3Trillion number and rather than spending it on shovel-ready stimulus programs, spend it all on running the Federal government for a year, and declare a 1-year tax holiday for all US citizens and all US businesses. Now that would jump start the economy and end the jobless recession.

'Tis a consummation devoutly to be wished.

www.thegoldspeculatorllc.com

editor@thegoldspeculatorllc.com

Tuesday, July 31, 2012

Breakout in gold?

By Scott Silva

Editor, The Gold Speculator

7-31-12

Last week we examined the bullish symmetrical triangle pattern in gold and identified the potential breakout points in this time-tested technical indicator. We also looked at the Ichimoku Kinko Hyo indicators for gold to see if their trend and momentum signals confirmed the validity of the chart pattern. Were these indicators correct?

Well, time will tell, but there are signs that the price of gold has broken out from consolidation, and may be poised for a move up. Let’s see what’s been going on with gold.

Here is the symmetric triangle pattern we identified last week.

With it, we identified breakout prices of 1612 on the upside and 1559 on the downside. This week spot gold prices broke through 1612 on the upper trend line. So does that mean we are on our way up? As my market making Zen master always told me, “We’ll see.” His words never seemed to satisfy my need for proof of any premise.

Here’s a chart as of yesterday’s close.

Gold began its move up after the printing a hammer candlestick on July 24^th. After strong upward trading the next day, price action broke through the upper trend line on July 26^th, closing at 1614. The spot gold price continued higher last Friday. Trading volume was significantly higher during the bullish trading sessions.

As we know, symmetrical triangle patterns can signal continuation of the preceding trend, or a reversal. That’s why some regard symmetrical triangle patterns as neutral patterns. In the case of gold, continuation would mean a move to the upside. A reversal would indicate the start of an intermediate trend to the downside.

It is important then, to confirm the validity of any breakout. According to conventional analysts, such as Edwards and Magee, a breakout pattern is invalid unless accompanied by significant increase in trading volume. As indicated in the dark oval in the chart above, trading volume was significantly higher during the bullish trading sessions.

Well, wouldn’t that confirm we have a valid breakout? We’ll see, says the Zen Master. Here’s why. Yesterday’s volume was down. And, price action produced a solid hammer candlestick, indicating a tug-of-war between buyers and sellers that ended on the sell side. So the validity of the bullish breakout from the symmetric triangle pattern is not proved by volume beyond a shadow of a doubt.

Nothing in life, much less in trading commodities is certain. So we’ll stick to the preponderance of the evidence here. Again, we rely on the Ichimoku and other technical indicators to give us more evidence of what’s happening with gold.

It’s clear from the daily Ichimoku chart that gold has broken through resistance, and is now trading above the cloud. And the projected cloud has turned bullish (now shaded green). The Tenkan Sen made a bullish cross of the Kijun Sen from below on July 26^th. These are all bullish indicators. The Chikou Span (green line), has moved above price action, which is bullish, but is now in neutral territory (in the cloud). Were the Chikou Span to drift higher or sideways, then all Ichimoku indicators would signal a strong buy for gold. The separate MACD oscillator made a bullish cross ahead of the Tenkan Sen bullish cross, as is typical for the this “predictor” indicator. Support is now 1604, with first resistance at 1642, then 1665.

Edwards and Magee may prove right once again that increased volume confirms a breakout from a symmetric triangle pattern. I think price action provides the best confirmation. And we will see shortly if the price of gold can withstand another bout with the fantastic FOMC later this week.

www.thegoldspeculatorllc.com

editor@thegoldspeculatorllc.com

Tuesday, July 24, 2012

How Bad Can it Get?

By Scott Silva

Editor, The Gold Speculator

7-24-12

How Bad Can It Get?

Well, that’s the question that the central planners need to answer, but not one seems ready to admit the fact that the US economy is slowing down further despite the rosy outlook of presidential re-election cast of characters, which includes most of the media. Those stubborn facts remain: unemployment is climbing, not declining; consumer sales are down; corporate capital expenditure (CAPEX) is down; energy prices are headed up; food prices are headed up; real wages are down; housing prices are still down; real interest rates are negative; national debt is growing; and GDP is slowing.

So what’s the bad news? The bad news is we are hurdling toward the fiscal cliff, Thelma and Louise-style, with POTUS and Big Ben Bernanke holding hands in their blue ‘66 Thunderbird convertible as it plummets to the canyon floor below. The sad fact is there is a leadership vacuum in Washington, which prevents rational bipartisan decision-making regarding deficit reduction and spending priorities. If the debt limit fiasco of last August is any measure of dysfunction by the Federal government, then stand by for the real fireworks display as the Super Committee cuts kick in, the Bush tax cuts expire (for every taxpayer), and the Obamatax takes hold.

Each one of these Federal bipartisan compromise measures will decimate jobs and grind growth to a standstill. A recent study concludes that the automatic spending cuts mandated in the Budget Control Act of 2011 affecting defense and non-defense discretionary spending in just the first year of implementation will reduce the nation’s GDP by $215 billion; decrease personal earnings of the workforce by $109.4 billion and cost the U.S. economy 2.14 million jobs.

That’s no way to stimulate the economy, which is exactly what Fed Chairman Bernanke told House and Senate Finance Committees last week. The Chairman’s remarks painted a pretty gloomy picture for US economic growth, and he repeatedly pointed to fiscal policy (outside his control) as a major culprit. The markets were hoping he would announce the start of QE3, but Big Ben could only reiterate that the “Fed stands ready to act…when conditions require…” Oh well, Ben and boys will have another chance to make the big announcement when the FOMC meets again Jul 29-Aug 1. Chances are the Wisemen will offer nothing earthshaking after their regular pow-wow.

The markets are searching for a reason to climb, but the threat of extended recession in the US, deepening recession in Europe and a slowdown in China all work against any sustained move. Sideways motion seems to be the trend. Something has to change before investors decide to pour capital into risk-on asset classes. Many are happy to stay in Treasurys and precious metals until there is some light ahead, which is why stocks have taken such a beating this year, and prices of T-Bonds and gold are maintaining their prices.

What are the technical indicators telling us about gold now? We can use technical pattern analysis and the more complete Ichimoku Kinko Hyo indicators to examine trading decisions for gold.

Gold has formed a symmetric triangle pattern evident on the daily basis chart. Symmetric triangle patterns typically form during a trend as a continuation pattern. The pattern contains at least two lower highs and two higher lows. When these points are connected, the lines converge as they are extended and the symmetrical triangle takes shape. The pattern shape appears as a contracting wedge, wide at the beginning and narrowing over time.

Symmetrical triangles can mark important trend reversals. They can also mark a continuation of the current trend. Whether signaling a continuation or a reversal, the direction of the next major move can only be determined after a valid breakout. A “breakout” of the pattern occurs when the closing price is above or below the narrowing pattern lines. Therefore, the breakout can be to the upside or the downside. Determining a valid breakout can be challenging; price action can return to the breakout point creating a false breakout. Increased trading volume concurrent to the breakout is a reliable confirmation indicator. Other useful confirming indicators include proof of a 3% move above the pattern line and the time-based rule, such as a sustained move over three days.

To determine the price target for a breakout from a symmetric triangle pattern, we can either measure the widest distance of the symmetrical triangle pattern and apply it to the breakout point, or we can draw a trend line parallel to the pattern's trend line that slopes (up or down) in the direction of the break. The extension of this line will mark a potential breakout price target.

Today, price action is between the pattern lines whose breakout values are 1612 on the upside and 1559 on the downside. If price action slides sideways from here, the breakout values converge, creating more opportunity for a breakout without a substantial change in price. For example, if we project sideways movement to August 16^th, then the breakout values narrow to 1598 and 1571. The depth of the triangle sets the price increment at 72 points.

The Ichimoku Kinko Hyo indicators confirm these support and resistance values of the symmetric triangle pattern above. The cloud or moku is the shaded area on the Ichimoku indicators chart below. The cloud depicts support and resistance levels and can be projected forward. For gold, the projected cloud is narrowing. Also, the projected cloud top is flat, which portend sideways movement. The support and resistance levels for the projected cloud out at August 17^th are 1598 and 1590.

The Ichimoku indicators tell us more about price gold than the triangle pattern. Ichimoku, the “one look equilibrium chart”, gives us not only support and resistance, but trends, momentum, and trend reversals in a single, coherent view of its five price-related indicators. Professional traders use Ichimoku indicators to trade currencies, futures, stocks and bonds successfully by tapping into to strong trends. There are well established rules for trading using Ichimoku Kinko Hyo, which we use at The Gold Speculator. Right now these indicators signal “hold” for those that own gold. These same indicators will tell us when the time is right to “Buy” or “Sell” to take full advantage of the new intermediate trend for gold.

So no matter how bad the economy gets, we can stay ahead of the pack by trading hard assets, such as gold.

www.thegoldspeculatorllc.com

editor@thegoldspeculatorllc.com

Tuesday, June 26, 2012

Greed is good.

By Scott Silva

Editor, The Gold Speculator

6-26-12

“Greed, for lack of a better word, is good.” So said Gordon Gekko, the iconic corporate raider in Oliver Stone’s cynical 1987 film Wall Street. Michael Douglas won an Academy Award for Best Actor for his role in the film, now a classic. In the film, Gekko is ultimately imprisoned for securities fraud after years of benefiting from insider trading. Today, many liberal legislators and left-wing politicians associate Wall Street traders and investment bankers with the criminal activities of Gordon Gekko, the fictional film character. Certainly the Occupy Wall Street protesters believe Wall Street is the seat of corporate greed and corruption. Some US Senators conflate securities fraud with speculation, frequently referring to Gordon Gekko, excess and greed in speeches designed to vilify speculators, who after all, “caused the financial meltdown” or, “caused $5.00/gal gasoline prices” with their wonton, unbridled greed.

But speculation in the commodities markets is not illegal. Nor is it immoral. In fact, speculation is integral to operation of free markets. There is a legitimate role for market speculation in efficient markets. Without market speculation, prices would be less stable and price discovery more difficult, making markets less efficient. For example, if there were no speculators in the pork bellies market, the market would consist of producers (hog farmers) and consumers (butchers, and those who prefer to carve up their meat themselves). With just two participants in the market, the market would be thinly traded, leading to large spreads between bid and asked, which distorts prices, and makes capital investment less efficient. As a market participant, the speculator adds liquidity (risks his own capital) and provided a competitive bid which narrows the spread, making the market more efficient for all participants. Because there are two sides to a speculative trade, either the long position holder or the short position holder will benefit from price changes over time.

Usually, speculation in a particular market has a dampening effect on price volatility, but there have been periods of “irrational exuberance” where prices are bid up in exponential fashion, creating a market bubble. Speculators may participate in the development of a market bubble, as they did in the real estate market boom of 2000-2008, but it takes more than speculation to cause a market bubble. In the case of the US real estate bubble that burst in 2008, decades of easy money and government intervention in the home mortgage industry via the Community Reinvestment Act laid the foundation for the irrational boom and its ultimate bust.

Recently, speculation has been blamed for high gasoline prices. “The oil speculators have bid up the price of oil, so you are now paying $5.00 per gallon at the pump!” complained a US Senator who proposes to ban speculators from trading oil futures. “Only producers and commercial consumers who need to hedge should be allowed to trade oil futures contracts,” say proponents of strict regulation of the oil futures markets; “Speculators are greedy, and greed is bad.” But studies show that oil prices have increased steadily since 2000, with commercial and non-commercial (speculators) holding net long into the extended bull market for oil. Even during the period of strict regulation and position limits on the commodities futures market, prior to the Commodities Futures Modernization Act, oil prices tended to climb higher year after year.

Although speculators have represented a growing percentage of open interest since 2003, the Commodities Futures Trading Commission (CFTC) concluded in its own investigation of the oil futures market that there is no evidence that the market was influenced by the trading behaviors of any large group of participants. In fact, CFTC chairman Walter Lukken told a committee of the U.S. House of Representatives in 2008 that CFTC analysis “did not find direct evidence that speculation was driving up (commodity) prices.” The fact is, global the oil market was tight, leading to the peak price of WTI at $147/bbl in mid 2008. The futures price was a prescient leading indicator.

If speculators did not cause the bubble in the oil market, what did? One explanation that makes sense is the weakening Dollar. Because oil futures settle in Dollars (or physical delivery), it takes more Dollars to buy a barrel of oil, for a given supply, when the Dollar is weak. Conversely, the stronger Dollar purchases more barrels per Dollar, driving down the price in the global market. The value of the Dollar has been trending down ever since the Federal Reserve has been printing more of the stuff in the name of US economic stimulus. It is the time-tested economic principle known as Gresham’s Law that bad money drives out good. Printing more money out of thin air debases the currency and devalues Dollars in circulation.

We can see the inverse relationship of oil (West Texas Intermediate, WTI) and the US Dollar Index (USD) in the chart below. WTI peaked just as the US Dollar bottomed in 2008 just as the Federal Reserve added the first $700 Billion of the $3 Trillion it would add to its balance sheet under its economic stimulus policy. The anticipated effect of spurring the economy into robust recovery has proved elusive. But there are unintended negative consequences of the Fed’s money printing spree, which include higher prices for commodities. As we know from Milton Freidman and the recently departed Anna Schwartz, may she rest in peace, inflation is always and everywhere a monetary phenomenon.

We also know that the price of gold reflects the strength of the Dollar. The Dollar’s drift from 2002 to 2008 helped propel the price of gold up over $1200/oz. Of course, there are other factors that contribute to gold’s rise. Gold is the traditional safe-haven asset that investors seek out in times of economic uncertainly, turmoil and war. Gold has intrinsic value, and it acts as a store of value. Unlike fiat currency, gold maintains its value and is recognized as viable collateral for transactions in markets around the world.

Today, oil prices have subsided a bit from the highs of over $110/bbl earlier this year. WTI is now trading down below $80/bbl with no added supply. Some analysts believe that the war premium has been wrung out of the price. Iran is no longer openly threatening to close the Strait of Hormuz. Maybe so, but the primary cause is softer demand. Double dip recession in Europe, a slowdown in China and the continuing slow-motion, no-growth, jobless recovery in the US has dampened demand for energy. And by the way, the Large Speculators have been cutting back their long positions on WTI and adding short positions; last week’s Commitment of Traders report showed bullish sentiment for oil has dropped to 63% down from 96% in February when WTI was trading near $110/bbl. No one seems to complain about speculators when prices go down.

Gold is also trading below $1600/oz. But more poor US economic data is coming for sure, and the Fed will jump in with more quantitative easing, adding more to its balance sheet which will further devalue the currency. So, in today’s market, take a page from Gordon Gekko’s playbook. Buy, buy, buy gold. Because, as we all know, “Greed is good.”

www.thegoldspeculatorllc.com

editor@thegoldspeculatorllc.com

Tuesday, June 12, 2012

Eurobomb Ticking Down, II

By Scott Silva

Editor, The Gold Speculator

6-5-12

Last January, we warned readers of these pages of the “Eurobomb Ticking Down”, which forecast financial chaos across the Eurozone would come as the result of continued deficit spending, massive accumulated sovereign debt and growth of entitlement program spending to unsustainable levels. http://www.kitco.com/ind/Silva/jan182012.html

Today, the G7 is holding emergency meetings to deal with the imminent collapse of Spanish sovereign debt in the bond markets, even as Germany considers funding a bailout package for Spain, or possibly changing its position in favor of the Eurobond solution to the regional banking crisis. As Papa Hemingway once observed, bankruptcy happens two ways, “Gradually, then suddenly.” Today, Treasury minister Cristobal Montoro said that at current borrowing costs financial markets were shut to Spain. If the bond market were suddenly no longer available to Spain as it struggles to refinance its debt, without restructuring, Spain’s financial system would collapse, pushing its battered economy further into recession, then likely, depression. Already, one in four is out of work in Spain. Yet the government is unwilling to accept terms of any EU rescue plan.

Greece is faring no better. Standard & Poor's announced today there is 1/3 chance that Greece will exit the Eurozone in the coming months, following the elections on June 17^th. The credit agency further stated a Greek exit would “seriously damage Greece's economy and fiscal position in the medium term and most likely lead to another Greek sovereign default.” Another Greek default would impact other Eurozone economies which would also face credit rating write- downs-- a vicious downward spiral.

The emergency conference call of G7 members today is not likely to result in immediate action. The G20 is scheduled to meet June 18-19, immediately following elections in Greece. A major topic will be the path to financial stability for the Eurozone. All G20 members, including the US and China have a stake in the summit outcome.

But the bond market is not shutting Spain out. At least not yet. Yields for Spanish 10-year notes are coming down in today’s trading. Apparently, the bond vigilantes did not get the Montoro memo. Although rates for Spanish 10-year note have risen steadily and approached the 7% danger zone leading up to the G7 meeting, yields declined 1.3 basis points to 6.4% in today’s trading. The market is discounting a coordinated effort by the ECB, EU and the IMF to stabilize the Eurozone and keep it intact. Last week, the EU offered to extend the deadline a year to 2014 for Spain to bring its deficit down to the EU limit of 3% of GDP. The Commission has also suggested that the ESM could provide direct funding to Spain, although that measure would require a change to the existing treaty and ratification by all 27 members. Even if these life-line measures were adopted, they may prove only to delay inevitable default.

Some near term relief may come from the ECB. Many analysts expect the ECB to cut its refi rate below its current 1% level within the next few weeks. A near-zero interest rate policy would ease pressure on those countries most in need of cheap refinancing. The ECB could also opt for another injection of liquidity into the entire region via long-term refinancing operations (LTROs), or some old fashioned bond-buying. But these steps would also firmly establish a liquidity trap in which no amount of added liquidity to the banking system provides marginal output. This is the problem with the Keynesian obsession with too much money. It is simply impossible to print your way to prosperity with more and more fiat currency. But that is precisely what progressive central bankers tend to do when facing an economic downturn. Apparently, the urge to ease is powerful and overwhelming.

But intervention fails. It has always failed. And it will always fail. Fed intervention failed to reverse the economic slide in the 1930’s. In fact, according to Friedman and Schwartz, Federal Reserve actions deepened and extended the Great Recession. Today, near-zero interest rate and quantitative easing by the US central bank has failed to reverse the economic slide of the Great Recession. And the ECB has failed to ignite any economic recovery in the Eurozone. For example, the leading European economies, Germany, France, Italy and Spain account for 77 per cent of total Eurozone GDP, but in the past four quarters, Germany posted average quarter-over-quarter growth of 0.3 per cent, yielding an annualized rate of expansion of just1.2%, while most of Europe remains in recession. France posted average quarterly growth of just 0.1 per cent in the year up to April, an annualized rate of expansion of just 0.4 per cent. France recorded zero quarterly growth in 1Q2012. Spain and Italy have been a drain. Spain is officially in recession with an average quarter-on-quarter decline of 0.1 per cent since the second quarter of 2011. Italy is in its third consecutive quarter of negative growth, with an average quarterly rate of minus 0.35 per cent over the year to April 1. Utterly underwhelming.

So what does the continuing saga of the Eurozone debt crisis mean for investors? Well, for one thing, the markets will remain volatile for some time yet. There will be more gnashing of teeth as European welfare state economies contend the realities of long term unsustainable deficit spending and oppressive tax regimes. The options for countries with 150% debt/GDP become fewer and worse. The central planners will resort to ever more debasement of the currency at the expense of individual purchasing power and increased demand. Weaker demand in Europe for American exports will dampen the sluggish (and jobless) US recovery. Funds will flow out of the Euro and out of stocks and into “safer” assets and currencies such as the Dollar, the Swissy and gold.

We can see that the concerns over the Euro crisis and also concerns over an uptick in the latest US unemployment rate have caused the ‘Fear Index” for stocks to jump. The “Fear Index” is the CBOE Market Volatility index, which trades by the symbol VIX. The VIX is quoted in percentage points and translates to the expected movement in the S&P 500 index over the upcoming 30-day period, which is then annualized. The VIX has an inverse relationship to stock prices. That is, when the VIX trades up, stocks tend to decline. The higher the VIX climbs, the lower go stocks. The VIX is indicating we are in for some more volatile times in stocks.

We can also see that gold has outperformed the S&P 500, and is less volatile than the broad stock index. Recent volatility has erased earlier gains of the S&P 500. The VIX is portending rougher weather ahead for stocks. At the same time, gold has regained some luster. Gold will climb higher if the ECB decides to resume its bond-buying program.

So where will the smart money go as the European debt crisis plays out? The smart money will buy gold. Gold is a store of value. Gold benefits from government intervention in the credit markets. Gold increases in value as new fiat money is printed. Gold appreciates in times of economic uncertainty. At today’s prices, gold is a bargain.

www.thegoldspeculatorllc.com

editor@thegoldspeculatorllc.com

Tuesday, May 22, 2012

Another Hike for Gold

By Scott Silva

Editor, The Gold Speculator

5-22-12

Things may be looking up for gold bugs. The sellers are gone, and the bargain hunters have returned. Is this the reversal gold bugs have been waiting for? Or is it a short term bounce only to be followed by another leg down? Technical analysis says we may be seeing the beginning of another powerful upswing for the precious metals and gold and silver stocks.

Gold and silver stocks have been under pressure over the last several weeks. But we now are seeing signs of a bullish reversal. A look at the technical indicators for the HUI gold stock index gives us the first hint. The indicators we will examine here are Ichimoku Kinko Hyo, candlestick analysis and Moving Average Convergence/Divergence (MACD). Taken together, these technical indicators provide a degree of corroborated information from which to trade.

So let’s look what these three technical indicators are telling us about the HUI. We can see from the daily basis chart that on May 16^th, the HUI halted its slide begun earlier this month, and has traded up in the last several sessions. Price action on May 16^th produced a doji candlestick. The doji typically marks a reversal in an established trend. The doji candlestick has a long shadow and a small body, which traces out the push and pull between buyers and sellers, and reflects the fact that neither buyers nor sellers dominated the day’s trading. We can see that the May 16^th doji in fact marked a bullish reversal at the 376.86 level. The long white candle on May 17^th and following sessions pushed the HUI up to 412 or so.

The next set of indicators to examine is Ichimoku trend and momentum. Today, most Ichimoku indicators are bearish, but there are some bullish signs. Price action is below the cloud, which is bearish. The projected cloud is bearish (shaded pink) with Span A below Span B. And the Chikou Span (green trace) is below price action and the below the cloud, which is a bearish signal. Yesterday, price action climbed briefly above the Kijun Sen (red trace), which is a bullish sign. The Chikou Span, the momentum indictor, has made a move up, and could climb up to the breakout area covering the 420-470 price levels. In this area, the Chikou Span would be above price action, which would be a strong bullish indicator. From there, price action could break above the cloud at 444, the projected resistance level. By then, the projected cloud would be bullish as well.

The near term dynamic displayed by the MACD shows that the breakout scenario may in play already. The MACD shows the HUI to be oversold, with an index bottoming out at -20.0 on May 16^th, then making a bullish crossover on May 21^st.

Aggressive traders use MACD crossover signals to buy and sell. More conservative traders are happy to wait for the trend to develop fully, as indicated by all five Ichimoku indicators before committing capital. There are trading rules and strategies that combine Ichimoku with other technical indicators that work well in volatile markets. Aggressive and conservative investors alike can benefit from technical analysis of gold and gold silver stocks. Our analysis of the HUI is telling us we may be seeing blue skies for gold and silver stocks soon.