Following the Trend

By Scott Silva

Editor,  The Gold Speculator

2-28-12

Gold and silver are headed higher propelled by a powerful bull trend. Gold is climbing on its way to new multiyear highs, buoyed by massive government intervention in the capital markets. We will see gold exceed its 2011 highs this year. Silver will also soar to new highs.

What is behind this bullish prediction? Can we pinpoint the cause and effect relationship to the rise in the precious metals? Is now the time to buy gold and silver?

The answers to these questions come with a firm understanding of the dynamics of the business cycle, and the power of market trends. As we know from Mises and Hayek, interest rates have a profound effect on capital investment. Left to the free market, interest rates are determined by the supply of credit (a proxy for the savings rate) and investors’ willingness to risk placing capital in the market (a proxy of the return on capital). And as we know from Adam Smith, because investors act in their own self-interest, capital is allocated in free markets very efficiently. Investors tend to put more capital in “winners” and are quick to cut the losses in “losers”.

But if free markets are so efficient, how can there be downturns in the economy, ranging from recession to depression?  The cause of most economic downturns has been manipulation in the markets, typically by government agencies that seek to “manage” one or more segments of the economy by controlling interest rates, prices or both. Governments use coercion under the color of law to achieve their ends. Government intervention distorts natural interest rates and spoils price discovery, which leads to malinvestment and market bubbles. Downturns and displacement occur when economic bubbles burst.

The Federal Reserve has been one of the chief market manipulators. By setting interest rates and controlling the availability of credit and money, the Fed distorts the natural demand for money and credit, which obscures purposeful capital investment and contaminates prices for labor and commodities, often with disastrous results. When the Fed feeds artificial credit into the economy by lowering interest rates, it spurs investments in projects that eventually fail. The high-tech and dot com and housing manias all were fueled by decades of easy Fed money and credit. In each case these artificially induced booms collapsed with massive loss of wealth and devastation of the general economy.  

The data support the theory of cause and effect. The dot come run up coincided with a money supply run up which began in 1995. The money supply slightly flattened in 1996 and then zoomed up again in 1997, peaking at a 15% increase in January of 1999. The rate of increase began to fall precipitously thereafter, which popped the dot com bubble. The housing bubble, created by easy money and social engineering in the 1990’s popped in 2007, creating the Great Recession. The Fed and the Treasury added an unprecedented $2.3 Trillion to the money supply in 2008-2010 in the name of economic stimulus. The Fed’s MZM money supply measured $907 Billion in 1980 and is reported to be $10.8 Trillion as of this month.  The MZM does not reflect the $16 Trillion in bailout loans the Fed provided to large US banks in 2008-2011.  There is no doubt that judgments of investors and entrepreneurs are distorted by massive injections of money and credit by the Federal Reserve.

So what does easy money and credit from the central bank have to do with the price of gold?  Well, every Dollar the central bank creates out of thin air debases the value of Dollars already in circulation. That is the nature of fiat currency. Because gold is priced in Dollars, it takes more Dollars to buy the same amount of gold with every new weaker paper Dollar printed. We have seen the price of gold climb along with the money supply, accelerating its climb in 2002 coincident with the fall in the Dollar.

We are now seeing technical breakouts in gold and silver. Last week, gold broke out of a bullish head-and-shoulders pattern dating back to November 2011. The price target from this pattern is just over $2000/oz.  Silver followed last week, with a breakout from its own bullish head-and-shoulders pattern indicating a return to its September 2011 highs.

The trend in precious metals is up from here. Now is the time to buy gold, silver and selected gold and silver stocks.

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 growing inflation?  We publish The Gold Speculator to help people make better decisions about their money. Our Model Conservative Portfolio has outperformed the Dow and the S&P 500 by more than 3:1. 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

Charting Gold

By Scott Silva

Editor,  The Gold Speculator

2-22-12

The charts are displaying new strength in gold and silver. We will see new highs in gold and silver this year. It’s not too late to buy the precious metals at bargain prices.

Technical analysis is a powerful tool for understanding the market for a traded good. Technical analysis employs time-tested techniques for predicting future price levels. The successful technical trader uses a combination of indicators to support the decision to take a long or short position in a given commodity. The planets are lining up in favor of another leg up in gold and silver. Let’s examine what the charts are telling us about gold today.

First, gold has broken out of a bullish falling wedge chart pattern dating back to September 2011.

The falling wedge pattern can be a continuation or a reversal pattern. It this case, it is a reversal pattern, signaling a reversal of an intermediate bearish trend. The falling wedge is a bullish pattern that begins wide at the top and narrows as prices gradually move lower. This price action forms an extended cone shape that slopes down as the reaction highs and reaction lows converge. The pattern is defined by the down-sloping upper resistance line and the lower, converging base support line.  The bullish breakout occurs when price action closes above the resistance line (upper descending tend line) with confirming volume. The point count for the pattern is calculated by adding the magnitude at the widest span to the price at breakout.

We can see the falling wedge reversal pattern in the daily basis chart for April COMEX gold above. The intermediate bearish trend began in early September 2011. The price at the break above the resistance line was 1674.40.  The point count is 321 which sets the price target at $1995/oz.  The breakout is confirmed by significant volume at the breakout day, January 25^th.

We can see the same breakout in gold using Ichimoku Kinko Hyo indicators.

Here we see spot gold on a daily basis with Ichimoku indicators. The January 25 breakout above resistance on higher volume is highlighted in the oval. Today’s chart shows all Ichimoku indicators are bullish for gold. Price action is above the cloud, which is bullish. The Tenkan Sen made a bullish cross (from below) the Kijun Sen back on January 17^th. The projected cloud is bullish (shaded green).  And the Chikou Span is well above price action and above the cloud, which is a strong bullish signal.

Silver is displaying similar bullish patterns and indicators. So are selected gold and silver stocks.

Now is the time to own gold and silver.

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 growing inflation?  We publish The Gold Speculator to help people make better decisions about their money. Our Model Conservative Portfolio has outperformed the Dow and the S&P 500 by more than 3:1. 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

Trading Above the Clouds

By Scott Silva

Editor,  The Gold Speculator

2-14-12

Technical analysis is replete with analytic tools, techniques and systems all designed to provide insight into the future price movement for a traded security. The technician relies on price and volume history to predict future outcomes. Can looking at the past be a reliable guide to divining the future? Can anyone drive a car by looking only at the review mirror? Amazingly, in trading securities, the answer is yes.

This is because the markets for stocks, bonds, commodities and virtually any traded good is driven by human behavior. In the search for profit, buyers and sellers act in their own self interest. The buyer always buys at a discount to his perception of the security’s value. Likewise, the seller always sells when he perceives value is realized, or his capital is better used elsewhere. When a transaction occurs, the buyer and the seller each believe they have struck a bargain at the mutually agreed sum. As Adam Smith instructs us, this is the magic of price in a free market.

So how does price history guide the investor? Well, it turns out that price movements develop distinctive patterns of human behavior in the markets. When a stock or commodity is considered undervalued, the buyers step in, bidding the price up. Likewise, when prospects for the commodity diminish, then sellers rule. It the dynamic pressure between sellers and buyers over time that creates the peaks and valleys we see depicted in the charts. Price history creates repeatable patterns. Understanding chart patterns is the key to predicting future price action.

You have seen in these pages before, I believe one of the best analytic tools for predicting future commodity prices is Ichimoku Kinko Hyo. It provides “equilibrium at a glance”- all we need to know about the state of the traded good as well as its likely future price. Let’s examine gold using Ichimoku Kinko Hyo, to see if we should buy sell or hold gold today.

Here is the Ichimoku chart for spot gold. Most trading platforms and chart services include this indicator set. I use the Thinkorswim trading platform from TD Ameritrade. It provides excellent technical analysis tools and Level II access to stock, option and commodity futures markets in a single, integrated platform.

We can see immediately that gold is in a bullish trend on the daily basis. The Ichimoku Kinko Hyo chart feature that signals the bullish state is price action above the cloud (“moku” in Japanese) represented by the pink and green shaded areas. (Conversely, if price action were below the cloud, the trend would be bearish). The cloud represents support and resistance levels. It is constructed by traces of two leading lines, known as the Senkou Span A, and the Senkou Span B. Together they form the complete view of longer-term support and resistance. One of the kumo's most unique aspects is its ability to provide a more reliable view of support and resistance than that provided by other charting systems. Rather than providing a single level for support and resistance, the kumo expands and contracts with historical price action to give a multi-dimensional view. Also, the kumo projects support and resistance levels into the future.  We can see the cloud is projected into the future, and that in early March, the cloud changes color form pink to green. This reversal is a bullish indicator. Without the cloud predicted cloud reversal, we would not make a long trade today. The projected cloud tells us that resistance level changes to 1710.89 (top of the projected green moku) and support is 1645.50.

The next set of Ichimoku indicators important to our trading decision is the relation of the Tenkan Sen (blue line) to the Kijun Sen (red line). These are trend lines, similar to short-term and longer-term moving averages. A strong buy signal occurs when the Tenkan Sen crosses above the Kijun Sen from below. A strong sell signal occurs when the Tenkan Sen crosses from above. We can see the Tenkan Sen made a bullish cross on January 17^th when gold opened at 1635.80. Together with the price action/kumo bullish indicator, the bullish projected kumo indicator, the bullish cross by the Tenkan Sen remains intact, so we are not prohibited from taking a long position as yet. We are close to deciding, however.

The last an perhaps the most important Ichimoku indicator we need to check is the Chikou Span (green line) in relation to price action and the kumo. The Chikou Span is current price projected back 26 periods. The Chikou Span gauges the strength of the current trend. The bullish trend is strong when the Chikou Span is above price action and above the cloud. The bearish trend is strong when the Chikou Span is below price action and below the cloud. The trend is neutral or week when the Chikou Span touches prices action or is in the cloud. We can see that the Chikou Span is above price action and above the cloud for gold, another bullish signal.

Together, the five Ichimoku indicators show gold to be in a bullish trend. Ichimoku trading rules all indicate it’s safe to enter a long position in gold today, or to hold a long position in a portfolio.

The Ichimoku indicators tell me it’s safe to buy silver at today’s prices as well.

Trading precious metals above the clouds using Ichimoku indicators is an excellent way to increase the value of your portfolio.

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. 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

By the Numbers

By Scott Silva

Editor,  The Gold Speculator

2-7-12

We all know that numbers don’t lie. Numbers are objective. There is nothing that numbers do except represent some value. In this sense, mathematics is pure, and therefore reliable and repeatable. Mathematics is one of the foundations of science. Physics is nature expressed in numbers. The world has come to respect numbers. From ancient weights and measurements, to architecture, chemistry, astronomy, agriculture, engineering, trade and commerce, and many other human endeavors, numbers provide universal understanding of every aspect our existence on the planet.

The Federal government, however, has trouble with some numbers. When numbers don’t represent its policy, agenda or campaign strategy, then the administration changes the numbers. They manipulate the numbers. They “smooth” the numbers. They ignore the offensive numbers. They even make up their own numbers. They outright lie about the numbers.

This is the case of the most recent US unemployment numbers.

Friday, the stock market jumped and gold declined on the release of January jobs and unemployment data from the US Labor Department’s Bureau of Labor Statistics (BLS). The government reported that 234,000 new jobs were added in January, bringing down the national unemployment rate to 8.3%.

This would be great news...if it were true. But the BLS is not reporting the actual unemployment rate. If the BLS reported truthfully, the headline unemployment rate would be 11% for January, much worse than the number reported, and certainly not a continuing upward trend. This is an intentional deception, motivated the  

administration's re-election campaign strategy.

 Here’s why the true unemployment rate is grossly understated. The January data does not account for 1.2 million qualified workers who dropped out of the job market last month. This is the largest monthly reduction in the available workforce by the dropout of  “discouraged” workers ever.  The labor participation rate declined to 63.7% in January, down from 65.7% when the president took office. Many qualified workers have simply quit looking for jobs. When the BLS ignores them, the U-3 unemployment rate appears to improve. The broader, U-6 measure of unemployment which includes the discouraged plus underemployed part-time workers is 15.1%.  Quite a difference. 

We have not seen US unemployment at these high rates since the Great Depression.

It is clear from the U-6 numbers that the employment situation is declining, not improving. It’s fair to say that based on the high unemployment rate, the administration’s economic policies have clearly failed. It’s no wonder that the economy continues to lag. US GDP growth is forecast to decline further in 2012. Clearly, the US has not turned the corner in its economic recovery. The BLS uses the “discouraged worker” data in a deceptive way in an attempt to paint a rosy picture of an improving economic recovery. This is not the first deceptive BLS report. The BLS has been understating unemployment since the president was inaugurated. So the BLS reports are fake-a snare and a delusion. The mainstream media picked up on the January bogus report as if it were real; stocks jumped and the president took immediate credit over the airways. What a travesty!

Well, not everyone is fooled by the bogus BLS report. Several knowledgeable sources have spoken out including the editorial staff of the Washington Times, FOX News and Larry Kudlow, to name a few. The Congressional Budget Office also sees things differently than the administration’s spin machine. The non-partisan CBO is forecasting unemployment at 8.3% for 2012 and 9.2% for 2013. That’s not a positive trend.

Bogus BLS unemployment reports affect the markets. They give an artificial boost to stocks, and impact gold and silver prices. Because the truth will eventually emerge, and because there remain fundamental risks in the European debt crisis and increasing threats to stability from Iran and Syria, gold and silver have not collapsed. In fact, the pullbacks in gold and silver present new buying opportunities.

Today, gold is telling us that it is not fooled by the bogus jobs report. Gold is headed up again, continuing its breakout from a bullish falling wedge chart pattern. There are several technical indicators that we see calling for gold to retest the $1900/oz level over the next few months.

The price of gold is one of the numbers we can appreciate.

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. 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

Golden Cross

By Scott Silva

Editor,  The Gold Speculator

1-31-12

Technical analysts define the “Golden Cross” as the chart feature that occurs when a security's short-term moving average (such as the 50-day simple moving average) breaks above its long-term moving average (such as the 200-day simple moving average) or resistance level.

Long term indicators carry are considered to have more weight, so crossing the longer-term average by short-term average price line is a significant indicator of a change in momentum.  The Golden Cross indicates a bull trend may be starting and is confirmed by higher trading volume. The long-term moving average becomes the new support level in the rising market after a Golden Cross.

The S&P 500 index is approaching a Golden Cross now. If it happens, some analysts will forecast a new bull market for stocks. And they will have the numbers on their side.

 The S&P 500 has produced 16 “golden crosses” since 1962, 75 percent of which were followed by positive returns in the next six months, with gains averaging 4.4 percent, according to historical studies. There were 26 instances in the past 50 years when the S&P 500’s short-term average crossed above the long-term measure. The data show the index rose 81 percent of the time with an average increase of 6.6 percent in the next six months.

We can also see the Golden Cross in the great bull market for gold.  The last occurrence of the 50/200 crossover can only be seen on the monthly basis chart. It occurred back in 2005. Since then, the price of gold on the spot market has moved up from $348/oz to $1734oz today, a 398% percent increase.

Investors who spotted the start of the great bull market in gold early on have done very well.

But what about now?  Is there more profit to be had in gold and the precious metals going forward?  Can I determine the best time to enter the market?  I say yes, and we can use the Golden Cross concept to pinpoint profitable trading opportunities.

Here’s how. We use technical analysis tools which are based on momentum, the best of which, in my opinion, is Ichimoku Kinko Hyo combined with MACD.  The Ichimoku Kinko Hyo is a well established technical trading system developed by Goichi Hosoda in the 1930’s. Today, it is used by almost every securities trader in Japan, Asia and a growing number in Europe and North America. The indicator can be found on most trading platforms. Ichimoku Kino Hyo translates from Japanese to mean “one glance equilibrium chart”. It gives the analyst, at once, the trend and momentum of the market, and a good forecast of future price action, as if he could see everything at an instant.

The key to Ichimoku Kinko Hyo is crossovers. That is, four of the five components that comprise the system are comprised of short-term and long-term moving averages. Two establish support and resistance levels and are represented by the “cloud”, or moku. Two others (Tenkan Sen and Kijun Sen) establish trend. The fifth component, known as the Chikou Span, is not an average, but measures momentum.

Like the Golden Cross, crossovers by Ichimoku Kinko Hyo indicators signal changes in momentum. But the Ichimoku Kinko Hyo indicators provide much more information than the cross by a short-term simple moving average and a longer-term simple moving average. Ichimoku Kinko Hyo provides valuable trading information. It can tell the speculator when to enter the market with the best chance for profit.

So let’s examine the case for gold using Ichimoku Kinko Hyo and its trading discipline.

A look at the daily spot gold chart with 50/200-day moving average indicators shows no Golden Cross events over the last year.  Also, support and resistance levels are not evident. Price action suggests the long-term trend is bullish, but more recent price action shows some consolidation. There is little information here to support a decision to trade.

Now let’s see what Ichimoku Kinko Hyo says about spot gold.

There is much more information here. To the uninitiated, it may seem confusing. But to the skilled trader, it provides almost everything needed for profitable trading.

Here’s what I see from this single chart. There have been two high probability buy signals and one high probability sell signal over the last four months for spot gold. These correspond to crossovers of the Tenkan Sen (blue line) and the Kijun Sen (red line) moving averages. The trading rule is momentum turns bullish when the Tenkan Sen crosses the Kijun Sen from below.

We can see this buy signal with a bullish crossover on October 26th and another on January 17^th.

Likewise, momentum turns bearish when the Tenkan Sen crosses the Kijun Sen from above. This sell signal occurred on November 29^th.

High probability trading requires confirmation by other indictors. Ichimoku Kinko Hyo provides these by the Chikou Span (green line), and price action in relation to support and resistance levels, displayed by the cloud, or “moku” (shaded areas of the chart). There are trading rules associated with each of the five Ichimoku indicators. Trading volume and the MACD are two separate indicators that support the decision to trade. We can see that crossovers of the MACD tend to lead Ichimoku crossovers. The aggressive trader can act on MACD crossovers for timing trades. The conservative trader will use Ichimoku to trade into the meat of a momentum move.

Using the technical trading tools Ichimoku Kinko Hyo and MACD has produced excellent results in trading gold, silver and other commodities. These are golden crossovers that work.

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. 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

More QE on the Way

By Scott Silva

Editor,  The Gold Speculator

1-23-12

There is an old saying around Wall Street: “So goes January, so goes the year.” Many traders believe that if the stock market is up in January, then the stock market will finish for the year in the black. Actually, there is some truth to the old saying. Data collected on the S&P 500 over the 65 year period of 1940-2004 show that the broad market closed higher for the year 69% of the time when stocks were up in January. Well, that’s better than flipping a coin, but it is hardly a basis for a successful trading strategy.

Fortunes are made by selecting the best investment compared to others. We have seen, for example, in 2011, stocks fared poorly compared to precious metals, investors in Treasurys lost capital and real estate values continued to decline. Many investors simply gave up and retreated to cash, which turned out to be a losing proposition as inflation cut into purchasing power of every dollar stashed away.

But there seems to be a change in sentiment in the air now. Despite massive debt, political gridlock, numbing high unemployment and turmoil abroad, there are some faint signs of optimism. The manufacturing indices have ticked up a bit, productivity has improved and even wages have inched up a bit. Consumer confidence is improving, and corporate profits may bring good news as the earnings season unfolds.

Even the Fed appears to be more optimistic. Last week, the Fed signaled it would hold off on new bond buying (QE3) for now, even though it trimmed its estimates for GDP growth for the New Year.

But not everyone is so sanguine about Fed restraint. Most traders and some economists believe the Fed will step in with another round of Quantitative Easing (QE3) in the first half of 2012. This round would be huge, as much as $1 Trillion and targeted to support the ailing housing market. Under QE3, the Fed would purchase Mortgage Backed Securities (MBS), the derivative instruments that bundle thousands of home mortgages into a single, collateralized package. Many MBS’s were considered “toxic” assets because they contained subprime mortgages that defaulted, making them very difficult to price in secondary markets. When enough MBS’s failed to fetch a bid, mark-to-market rules rendered them worthless, which destroyed many bank balance sheets and created the financial meltdown of 2008.

The next FOMC meeting is scheduled for this week, but there is little chance that the Chairman will announce the new round of bond-buying. But listen for Bernanke to list the continuing woes of the housing market, and its drain on the economy and growth. Housing will be the new demon. And Ben will excise it with a Trillion dollar dose of his favorite restorative quantitative elixir.

But the Fed has already injected $2.9 Trillion into the banking system through expanded credit. The unprecedented credit expansion has failed to turn the ailing economy around. GDP is limping along at 2% or less. Unemployment remains at record highs. Capital is on strike, or out of the country. Adding another $1 Trillion to the Fed balance sheet is not likely to make a positive difference. The technical reason is we have been stuck in a liquidity trap, where no amount of additional easing is effective.

Austrian economics gives the answer why. Fed intervention created a bubble in the housing market by artificially depressing interest rates. This encouraged malinvestment in housing assets by homeowners and speculators. Federal social engineering embodied in the Community Reinvestment Act, permitted unqualified applicants to receive taxpayer guaranteed mortgages, many of which ultimately defaulted. Government intervention in the markets is the cause, not the cure for our economic problems.

More QE would be welcomed by the Keynesians in Washington. More QE would pump up the stock market, particularly bank stocks. Higher stock prices give the impression that the US economy can’t be that bad, after all. But more QE means higher prices in general. More QE debases the Dollar and reduces purchasing power. More QE means more inflation.

More QE means there is more reason to guard against inflation and artificially inflated assets. To the prudent investor, more QE means buy more gold.

One indicator cuts through the conflicting themes that affect the markets and the economy: the price of gold. The gold price is telling us that we are not out of the woods yet, and that there are many risks facing the US economic recovery. Gold continues to move up in price. The gain in gold is telling us to expect more volatility in the equity markets and to expect more pain from the European debt crisis, and maybe a military showdown with Iran.

The bull market for gold has a long way to go yet.

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. 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

Eurobomb Ticking Down

By Scott Silva

Editor,  The Gold Speculator

1-17-12

When the ball dropped on New Year’s Eve, 2011 ended not with a bang, but with a soft ticking sound. Despite the fireworks and the merriment of joyous revelers ringing in the new year, a hidden clock continues its countdown. Tick, tick, tick. At the fateful hour, the bomb, buried deep under the global financial infrastructure will detonate, bringing down economies one after another.  If you listen, you can hear the tick, tick ticking right now.

It is the sound of European sovereign debt interest rates ticking up, the sure sign that the European debt crisis has not been contained by the new EU financial regime.

The forces of economic meltdown in the European welfare state simply overpower the last minute rescue measures by the ECB. Sooner or later Greece will default, then maybe Spain and Portugal. By then even Italy could succumb as its bonds also are rendered worthless as the bottom drops out of the debt market.

The bond market is showing several EMU countries are facing interest rates of 7% or more on their long term debt instruments, a level deemed unsustainable. 

The market is also signaling that the Greek default is imminent. The price of Credit Default Swaps on Greek sovereign notes is spiking.

The rating agencies recognize the coming financial storm in the Eurozone. Friday, Standard and Poor’s downgraded the credit ratings of nine of the seventeen Eurozone nations, including France and Austria to AA+.Monday, S&P downgraded the AAA rated European Financial Stability Fund (EFSF) one notch, based on the downgraded status of its major guarantors.

The major destabilizing force in Europe is the belief that the public sector is font of prosperity. Indeed, the European welfare state supports more than half of its citizens directly. The problem is, today there are fewer and fewer workers to tax and the costs of government supplied services continue to rise, particularly healthcare and retirement costs. In Italy, for example, Italian women have on average 1.2 children, putting the country's birth rate at 207th out of 221 countries. And, 20% of Italy’s 60 million citizens are 65 or older; they make expensive claims on state-paid pensions and other entitlements.  It’s a death spiral that cannot be solved by hiking tax rates or imposing strict austerity measures. In fact, these “cures” produce precisely the opposite effect by removing the incentives for productive economic growth. To make matters worse, the ECB debases the common currency with every bailout it hands out.

The question now is: “How do I protect my wealth against the coming economic storm?”  Many investors are moving out of European assets and into US Treasurys in an effort to preserve their capital. Is this a wise move?

But the facts show that there is a better safe haven available to investors. We can see that gold has outperformed Treasurys over the last few years, even as many investors fly to Treasurys in periods of risk-off trading. As we can see, Treasury prices have been much more volatile than gold prices over the last several years. Treasury prices have bounced up and down while gold has marched steadily higher since 2009.

 Today’s market is characterized by negative real interest rates for Treasurys. That is, Fed monetary policy has kept near-zero interest rates for bank-bank borrowing, which has driven the yield curve down to the point where the 10-year coupon rate (nominal yield) is 2% or so. The real interest rate accounts for inflation, which is reported to be 2.5%, which pushes the real rate into negative territory. The Fed policy distorts the market for money, which distorts the natural interest rate that reflects the demand for money. This type of distortion drives investors to other instruments in the search for yield.

The central bank also creates inflation by printing more and more paper money. More dollars chasing the same goods drives prices up. As we know from Uncle Milton, inflation is always and everywhere a monetary phenomenon.

But the Fed cannot print gold, so it is powerless to control its price directly, as it controls the value of paper money. Printing more fiat currency actually boosts the price of gold. Gold is a store of value. Paper money is not.

It should not surprise the prudent investor, then, that gold has outperformed dollar-denominated assets. Technical analysis of the gold charts now shows that gold is preparing for another major move. Will you be prepared to benefit from it?

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. 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

Golden Wall of Worry

By Scott Silva

Editor,  The Gold Speculator

1-10-12

It is often said that gold climbs the wall of worry. What the old saw means is that the price of gold tends to rise in the face of economic uncertainty or peril. History shows that for the most part, this has been true of gold, and to a lesser degree, silver. In 2011, gold shot up to test the $2000/oz mark and silver topped $50/oz. 2011 was certainly a volatile year for world economies.

Political unrest in northern Africa and the Middle East toppled governments in Egypt and Libya, and the sovereign debt crisis in Europe came to head, forcing out Prime Ministers in Greece and Italy, threatening the survival of the Euro as a currency. In the US, the $15 Trillion US debt and continued deficit spending threatened to bring the government to a halt more than once, as ideologues in Washington played politics. The government did not shut down, but the nation’s sovereign credit rating was downgraded for the first time in its history.

Economic uncertainty continues into the New Year. The sovereign debt crisis has not been solved in Europe or the US. The EU now has a plan for new fiscal regime, but it is far from implementing a workable solution. Now there are signs that the plan could collapse over terms of the Greek bailout. Investors are balking over the earlier 50% haircut on Greek notes and a new revised plan in which bondholders receive only 35% of capital stretched out to 30 years. Closing the deal is an essential part of the 130-billion-euro ($165 billion) bailout package from European partners and the International Monetary Fund (IMF). Without an agreement from bondholders, which include hedge funds, Athens faces the threat of a debt default in March.

Italy and Spain are vulnerable and could fall if the Greece defaults. The bond market is giving us the sign. Italy's 10-year government bond is yielding 7.13%, 5.25 points over the German bund. Italy is planning to sell €440 billion ($561.67 billion) in government bonds and Treasury bills in 2012, but higher borrowing costs will stress its fiancés beyond the breaking point.  The ECB has stepped in to purchase some Italian bonds, but the central bank cannot bail out Italy’s $1.9 Trillion in outstanding liabilities.

Italy has passed balanced budget legislation and is now implementing several austerity measures, but austerity can be a double edged sword. Austerity, combined with massive debt, tends to stifle economic growth. Investors shun credit risk, which drives yields up. In addition to cutting spending, the government raises taxes to close budget gaps.  Higher taxes drive off investment capital, the engine of private sector growth.

Recession across the Eurozone may be here already. The Greek economy is now in its fifth straight year of contraction. EU data released Friday showed that unemployment in the Eurozone hit a new high and consumer spending declined in November. In Germany, the largest producer in the Eurozone, industrial orders fell 4.8% in November, nearly reversing October's 5% gain.  Some industry estimates show that Eurozone gross domestic product fell by 1.75% in the last three months of 2011, at an annualized rate. The EU will publish official numbers in February, but forecasters expect continued contraction in the first quarter of 2012. Economists traditionally define recession as two consecutive quarters of economic contraction.

The Markit PMI index measures manufacturing output for the Eurozone. The index shows that manufacturing output in the Eurozone contracted in December, but at a slightly lower rate than the November 2011 contraction.The purchasing managers index for the 17-nation euro zone's manufacturing sector rose in December from a 28-month low the previous month but still signaled a further contraction in activity, The Markit manufacturing PMI rose to 46.9 in December from 46.4 in November, confirming an earlier, preliminary estimate. A reading of less than 50 indicates a contraction in activity, while a figure of more than 50 signals expansion.

A Eurozone recession would make it more difficult for vulnerable countries to recover from their debt problems. Also, a recession in the Eurozone would impact the US recovery. The EU and the US economies account together for about half the entire world GDP and for nearly a third of world trade flows. Slowing demand in the EU would impact US export sales, an important component to US growth.

A 2012 recession in the Eurozone would be a large brick in the wall of worry. But as we have seen, economic shocks can come from unexpected quarters, at any time. No one expected the Arab Spring. And no one could predict the natural disaster that struck in Japan last year. Today we are seeing some worrisome developments in Iran that have the potential of upsetting the balance of power in the Middle East, and the price of oil.

Given the slow growth/negative economic growth scenario, it’s no wonder that prudent investors turn to gold. Gold gained 10.1% in 2011 extending its eleventh consecutive annual gain since the bull market began in 2001. Gold has gained 17% a year, on average, since 2001, making it one of the highest performing asset classes for investors over the last decade.

Gold is outperforming because it is sound money. As government debt continues to explode in Eurozone and in the US, governments print more paper money. Recent disclosures of the US Federal Reserve operations during the financial meltdown of 2009 show the Fed issued over $16 Trillion to bail out US and foreign banks. The ECB has issued more than $3 Trillion in Euros so far. These massive increases in the money supply are beginning to translate into higher commodity and producer prices. Printing more paper money reduces its purchasing power because paper currency has no intrinsic value and is not a store of value. Gold, on the other hand has proven to be a store of value for thousands of years precisely because it has intrinsic value.

We can expect gold to outperform other asset classes in 2012.

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. 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

Spreading the Risk

By Scott Silva

Editor,  The Gold Speculator

12-12-11

The sovereign debt crisis in Europe has caused leaders there to adopt a new collective policy that would link members under a strict fiscal structure which may be called the European Fiscal Union. Like the European Monetary Union, which established the Euro as the common currency, the EFU would establish common liability for member state fiscal conditions. Under the terms of a new EU treaty, each member state would be required to meet debt/GDP ratio limits and other financial stress tests in order to access bailout funds provided by a larger European Financial Stability Fund. Using leverage, the EFSF could grow to 1 Trillion Euro. The IMF and the ECB are additional sources of bailout capital, although the ECB has been hesitant to lend to failing countries without other collateral or backing.

As of Friday, 27 nations pledged to join the new treaty arrangement. The United Kingdom has declined to participate in the wider fiscal union.

Initially, the developments across the pond were good news for the markets. The Dow rallied nearly 200 points Friday, and the Euro gained against the Dollar. Gold and silver benefited as well Friday, but are giving up gains as the markets slump in early trading today.

But the devil is in the details. All 17 nations that use the Euro agreed to sign a treaty that allows a central European authority closer oversight of their budgets. Nine other EU nations are considering it. A new treaty could take three months to negotiate and may require referendums in countries such as Ireland. While the nine non-euro-zone countries said they would join the new fiscal union, there were quickly notes of caution from some corners, including the Czech Republic and Hungary.

Meanwhile the debt bombs in Italy and Spain are ticking. Active ECB support will be vital in the coming days with markets doubting the strength of Europe's financial firewalls to protect vulnerable economies such as Italy and Spain, which have to roll over hundreds of billions of Euros in debt next year. European leaders did agree to loan the International Monetary Fund €200 billion ($267.7 billion) to help struggling euro-zone countries and launch a €500 billion European Stability Mechanism by July 2012. The ECB has yet to commit more than 20 billion Euros to failing clients at any one time, and is reluctant to risk the much larger transactions required to stabilize debt-heavy governments.  One reason is that ECB funding may be a disincentive for countries to follow through with austerity measures. Free money is easy to spend, and given the chance, governments usually do.

Without access to new funding under tight fiscal controls, Europe may slip once again into a deep recession, which would hurt US economic growth as well. The stakes are high for Europe to get it right quickly.

 So we can expect the markets to remain highly volatile as events unfold in Europe. Today’s market action, for example shows gold and the Euro are under pressure.  The price of gold is telling us the grand EU fiscal cannon is too small to succeed.  Investors are choosing to sell their risk holdings in favor of cash. Some investors are turning to gold as a source of capital, in some cases to meet margin calls. Gold has been the only asset class that has performed with double digit gains this year while stocks and other commodities have barely kept above water. 

And it’s not just investors that are skeptical. Standard & Poor's reiterated its warning that downgrades of Eurozone nations are a possibility while Moody's Investors Service said the new fiscal agreement offered "few new measures" and it still expects to reassess its credit ratings of the European sovereigns.

Europe is not the only economy facing a debt crisis and possibly another recession. We need only to observe our own policymakers to see what lies ahead.

Federal Reserve Policy

The Federal Reserve meets Tuesday for its regular two-day Federal Open Market Committee (FOMC) meeting. That means Wednesday we will hear from Chairman Ben on the latest status and outlook of the US economy. There has been some talk that the Fed is considering reviving the practice of publicizing its internal projections of interest rate and inflation forecasts in an effort to better “communicate” to the public. The Fed dropped this practice in 2007 because it was considered largely ineffective. And besides, it proved once again that, as Yogi observed, “Predictions are hard, especially about the future.”

Expectations are that the Fed will continue to keep interest rates at 0.0 -.25%, and despite some calls for additional stimulus, no new massive bond buying will be initiated—just yet. Chicago Fed president Charlie Evans is calling for more stimulus now. “There is simply too much at stake for us to be excessively complacent while the economy is in such dire shape,” Evans said in his December 5th speech in Muncie, Indiana. “It is imperative to undertake action now.”

Chairman Ben has come to realize that the US remains in a liquidity trap, that helpless condition wherein injecting additional cash into the money supply has no positive effect on GDP growth. Even Paul Krugman knows that interest rates simply cannot get lower than zero.

Notwithstanding, QE3 would go a long way to boost Wall Street. And we have heard some preparatory statements from some Fed governors on the merits of additional quantitative easing, as long as inflation remains “in check”.

Would that the Chairman realize that economic prosperity does not stem from monetary intervention.

We know now that Federal Reserve policy has failed. Massive intervention has resulted in higher prices, growing inflation and persistent unemployment near Great Depression levels. The Dollar buys less and less. Real wages are declining. Government data show over the past decade, real private-sector wage growth has bottomed at 4%, just below the 5% increase from 1929 to 1939.

Economic recovery requires real wage growth. More disposable income helps create demand for goods and services. Increased demand causes businesses to expand, which means more production and usually more employment.

But that simple calculus is lost on the central planners. Instead, Washington believes that government spending creates demand. But government spends the tax dollars it first takes out of the economy in order to distribute funds to “better uses”. Robbing Peter to pay Paul.

What we need is fundamental change. This will only come when the majority of citizens realize that Keynesian economics is not the path to prosperity and that the principles of free markets, private property and sound money should and by right, ought to be embraced.

Until then, one must rely on individual choice to guard against oppressive monetary policy. Sound money is the answer.

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 gained 66.7% in 2010, and 55% for 1Q2011. 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

What's Driving Gold

By Scott Silva

Editor,  The Gold Speculator

11-14-11

Eurozone Driving the Markets

There is no doubt that the European sovereign debt crisis is a major factor driving the global markets lately. The imminent Greek default and the loss of confidence that Italy can avoid contagion and its own severe debt crisis has toppled both governments and set the stronger Eurozone nations on a path to socialized bailouts and eventual monetization (printing trillions more Euros). These actions may forestall immediate catastrophe but also create other serious economic problems, such as inflation, recession or both (stagflation) across the Continent.

The Eurozone crisis pushed global equity markets up and down in triple digit waves,

as drama played out first in Greece with the resignation of Prime Minister George Papandreou, and then the ouster of Italy’s Silvio Berlusconi, who resigned over the weekend.

The bond market had forecast the Italian capitulation, as we identified in the last issue of The Gold Speculator. The bond vigilantes attacked the Italian 10-year note, driving its yield to over 7%, the signal used by many that the end had arrived. Portugal required bailout funds when its bond yield hit 7%, a full 4 points above the German Bund.

The new governments in Greece and Italy are expected to pass and implement severe austerity measures in return for debt relief from the new European Financial Stability Facility, the co-investment fund that is soliciting investors to establish a 1 Trillion Euro firewall to stem contagion in the Eurozone, the ECB and the IMF.

And there’s the rub. Greeks have already begun to riot to protest deep cuts to entitlement benefits. Italian citizens may also turn to the streets and shut down essential services in a general strike. Italy is now forced to cut programs that support much of the population at the same time that economic growth is stalling. It’s a classic death spiral. It is unclear that any amount of debt restructuring can fix the fundamental problem for the dying social welfare state.

US markets seem fixated on the travails of the Eurozone debt crisis. The fact is, US banks have relatively little direct exposure to Italian debt, with $47 billion in exposure, compared, for example, to France's $416.4 billion.  But larger U.S. banks may be carrying vastly more indirect risk from struggling European economies as a result of the credit default swaps, or CDS. U.S. banks are holding almost three times as much as their $181 billion in direct lending to the five countries at the end of June, according to the most recent data available from BIS. Adding CDS raises the total US bank risk to $767 billion, an amount reminiscent of the mortgage backed securities meltdown.

One outcome resulting from continued uncertainty in Eurozone is the flight to safety.

We can see this in the price of gold, which has moved up to challenge the $1800/oz level.

US Debt Policy and the Markets

Fear of Eurozone debt contagion is not the only factor driving the markets. There is also a major event looming for the US economy, namely the showdown of the Super Committee. With the deadline to craft the $1.5 Trillion debt reduction deal now nine days away, there seems to be little progress by the select lawmakers. In fact, the talks broke down when Democrats walked out this last week after ignoring the latest Republican proposal. The US budget battle is likely to reach center stage once again over the next ten days. An impasse will roil the markets once more.

The credit agencies may act before the Super Committee does. Many analysts believe a further downgrade of US sovereign debt is probable. Rather than taking the lead at this critical juncture, the president is taking a trip to Hawaii and Asia. It is becoming more apparent that the Administration would rather there is no deal; another example of the “do nothing opposition”.  There was a time in this country when our leaders put needs of the country before politics. Those were the days…

So fasten your seat belt. We’re in for a bumpy ride. The stock market will remain highly volatile with daily triple digit swings. The bond market offers no escape. Treasury prices are bid up as funds flow out of Europe and equities into “safe” US notes, despite negative real interest rates for the instruments, and bid down when investors flood back into higher yielding stocks. Each trade represents a loss of capital (as well as a tax event).

It’s no wonder that prudent investors are once again turning to gold as the true safe-haven trade.

Fed to the Rescue?

It is inevitable that the Federal Reserve will implement more Quantitative Easing in a last ditch attempt to jump start the ailing US economy. Chairman Ben as much as said so in remarks this week before a military audience in Texas when he pointed out the economy could “tolerate a little more inflation.”  He was referring to the ancient belief held by Keynesians that there is a trade-off between inflation and employment, as embodied in the Phillips Curve. The theory, which dates back to 1958, states higher employment comes at the expense of higher inflation. No one would argue that 9% unemployment today is trivial.  The true measure (U-6) is 16.2% as of October. To the contrary, the Fed chief called the US unemployment a “national crisis.”  Likewise, the Chairman characterized 2% inflation as “tame.” So, given the Fed’s mandate to support full employment, it could easily justify creating a bit more inflation by printing more money, as it did under QE1 and QE2. Using the calculus of the Phillips Curve, implementing QE3 at about $1 Trillion would bring unemployment down to 6% or so.

The problem with that logic is that QE1 and QE2 failed to create net new jobs over that last three years. The other problem is the Phillips Curve theory fails in general to account for the coincidence of high inflation and high unemployment, as occurred in the 1970s’ stagflation under Carter.

But facts have never dissuaded the Chairman from pursuing his preferred political policy. Besides, QE3 would be good for Wall Street.

Inflation and the Money Supply

We know from Nobel Laureate Milton Freidman that inflation always and everywhere a monetary phenomenon. We also know that commodity prices are a good proxy for inflation. That is higher commodity prices reflect higher inflation. So we can examine the Commodity Price Index in comparison to the money supply for correlation.

We see that after the meltdown of 2008, commodity prices have climbed higher propelled by QE1 beginning in 2009 and later in 2010 by QE2.  Commodity prices started to decline when the end of QE2 was announced earlier this year.

We also see that the Fed increased the Monetary Base dramatically, adding nearly $2 Trillion to the Fed balance sheet by purchasing bonds under QE1 and QE2. QE3 (and QE4 and QE5) will push inflation to record levels.

So how will the debt crises in Europe and the US affect the price of gold?  Gold will continue to climb in price as investors seek relative safety from volatile markets and a hedge against devaluation of fiat currencies such as the Euro and the Dollar through continued central bank intervention.

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 gained 66.7% in 2010, and 55% for 1Q2011. 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