The Gold Bug: August 2012

Tuesday, August 21, 2012

Breakout in Precious Metals

By Scott Silva

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”.

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 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.