Gold to Commodities - Back the Other Way

The ratio of the nominal Gold price to the nominal price of a basket of commodities (i.e. the "real" price of Gold as Bob Hoye calls it) is now oversold enough to cause a swing back the other way for several weeks. This should correspond with a nice swing higher in the Gold stock sector.

Here's a 1 year chart of the Gold price ($GOLD) divided by the $CCI commodities index (i.e. a $GOLD:$CCI ratio chart):



Again, I don't use this ratio as a trading signal, rather as a fundamental underpinning. I think in this case the fundamentals and Gold stock price indices will rise at the same time, as both are oversold and the $GOLD:$CCI ratio is already at multi-decade highs, so a small bump in this ratio should be all that's needed to vault the Gold sector higher as 2010 begins. I, for one, continue to believe it is going to be a MAJOR move higher in Gold stocks.

Happy New Year!

What's Really Holding Gold Stocks Back?

The answer, in my opinion, is the stock market. The stock market is doing too well. I think Gold stocks will really start to accelerate higher once the stock market starts to roll over. Before you tell me that I'm off my rocker, allow me to demonstrate the validity of this concept with actual historical data.

People think if the stock market goes down, then Gold stocks will also. It was true in 2008, so it must always be true, right? Actually, no. The opposite has been true during the current secular Gold stock bull market and is shown to be true over longer cycles during the past century. Here is a 10 year log scale chart of the $HUI Gold Bugs Mining Index divided by the S&P 500 Index (i.e. an $HUI:$SPX ratio chart):



Now, this Gold stocks to S&P 500 chart should be a wake-up call for Gold bulls who aren't aware of it. Because if Gold stocks can't outperform the S&P 500, then we should all just go join the paperbug party. I submit to you that three brief legs in the Gold stock bull are all that separates senior Gold stock indices from having the same performance as the S&P 500 over the past 10 years. Of course, those bullish impulse legs were legendary when set against the associated bear market declines of the S&P during those periods and have resulted in an 18 fold out performance of the $HUI to the S&P 500 over these past 10 years. I don't mean to downplay their significance by any means.

So, no, it's not as simple as "stock market goes down, Gold stocks go down." Far from it. And I am not bullish on the future prospects for the general stock markets for those didn't already know. I certainly had my a** handed to me trying to short the general markets earlier in the year and learned an expensive lesson in risk management, but that doesn't change the weak fundamentals underlying the economy that are continuing to play out and will eventually again be reflected in stock prices before this secular stock bear market is over.

Additionally, there is a fundamental underpinning to this relationship between "general stocks down, Gold stocks up." This link is in the "real" price of Gold or the nominal Gold price divided by the nominal price of a basket of commodities, a crude measure of Gold miner profitability. Here is a 10 year weekly log scale ratio chart of the Gold price ($GOLD) divided by a commodity basket/index ($CCI) set against the $HUI (at the bottom of the chart in linear scale) showing this relationship:



It doesn't seem a stretch to see a smallish further rise in the current $Gold:$CCI level after the recent quick plunge in this ratio. When the economy does poorly, most commodities (and stocks) do poorly. Gold tends to outperform other commodities during stock bear market legs, even if its nominal price drops. Notice it didn't take much of a Gold:CCI ratio move higher for leg "#2" labeled in the charts above to move Gold stocks higher because the initial surge from leg "#1" had already made for very bullish fundamentals - we are in the same situation now as the Gold:CCI ratio is at MULTI-DECADE HIGHS. Fundamentals support a further move higher in Gold stocks, the technical position of Gold and Gold stocks is a perfect low-risk buy set-up, and seasonal factors are positive thru to the March to May time frame. This is why I am now insanely bullish on Gold stocks. Well, that and the fact that I now have to talk my book because I am all in on the long side in my trading account...

On a final bullish note, did everyone see the red-headed step child of precious metals today (i.e. Palladium) and is this a vision of things to come in Gold?



Happy Holidays! Posting will be light to nonexistent for the next week or two.

Bullish Scenario Prediction

Now that I am fully invested in Gold stocks in my trading accounts, I am biased as all hell. You have been forewarned. I believe we are starting a "big one" here. I am talking about the start of a massive leg higher in Gold stocks and Gold. I believe Gold stocks will outperform Gold over the next several months.

In a typical move, the senior blue chip Gold stocks will lead the move, then the mid-caps and small cap stocks will follow. Every stock is different, but watching the senior blue chip stocks like Newmont, Barrick and Goldcorp is a good idea for Gold stock bulls whether or not you think these firms are good investments.

My take is that Newmont and Barrick, in particular, have already telegraphed their intentions for the intermediate term. First, here's a 15 month daily chart of Newmont Mining (ticker: NEM) thru today's close:



Barrick (ticker: ABX) is showing a similar pattern using the same type of 15 month daily candlestick chart thru today's close:



A similar appearance is present on the S&P TSX Global Gold Index, which is expected because this index is weighted toward larger cap firms like Newmont, Barrick and Goldcorp:



Template for what comes next? I think it's the late 2001 to spring 2002 run. Here's a chart of the $HUI Gold Bugs Mining Index around that time:



I think we're in for a massive bull run here in Gold stocks. And I think the charts are even more bullish for the senior Gold stock indices now than they were before the 2001-2002 run. Here's a 15 month chart of the GDX ETF to show you what I mean:



No flat correction this time. There is too much buying interest to allow a full correction. I think GDX is going to 90 at a minimum before the spring is over and I expect the psychologically important 100 number to come into play for this popular Gold stock ETF. I think Gold is going to a minimum of $1400/oz. during this time and $1500-$1750 is quite possible. If the next bull leg higher in Gold stocks has started as I am anticipating, I don't think there will be much time for rest along the way until we get to the end of January.

I am irrationally exuberant on Gold stocks and Gold right now. I am wildly bullish. I smell new all-time highs in Gold and Gold stocks and new secular lows for the Dow to Gold ratio dead ahead. I think this next move is going to get the public interested and start to prime this secular bull market for the mania stage, which HAS NOT STARTED YET.

Gold In the Hands of the Public

According to Adolf Hitler:

"Gold in the hands of the public is an enemy of the state."

I wonder what he meant by this? Was Hitler retarded? Did he have a childhood marred by parental beatings with Gold plated items? Why would he say such a thing?

Here's another Hitler quote on Gold:

Gold is not necessary. I have no interest in [G]old. We will build a solid state, without an ounce of [G]old behind it. Anyone who sells above the set prices, let him be marched off to a concentration camp. That's the bastion of money.

Such a hatred of a shiny metal seems irrational, doesn't it? Is a piece of metal that harms no one really an enemy of any government? Perhaps Gold represents something more important than bling bling. Perhaps Gold allows people to opt out of a system when that system no longer functions as advertised. The extreme lies and misinformation coming out of the highest levels of our government have become Orwellian in scope and character.

The United States now advocates "Wars" against military tactics instead of real enemies (i.e. The War on Terror) and against certain chemicals while profiting enormously from other chemicals (i.e. The War on Drugs). We are now told that our country must go further into debt to support Wall Street and banks or our economy will collapse. Our private, non-federal, for profit corporate central bank (i.e. the federal reserve) has now purchased over $1 trillion in distressed mortgage debt paper and placed it on the balance sheet that backs the U.S. Dollar because it is "needed" to prop up home prices even though 59% of Americans do not have mortgage debt.

In a situation that I consider along the same lines, we are told that the U.S. Mint cannot keep up with demand for Gold and silver coins. In 1999, due to the fear surrounding the so-called Y2K crisis that was going to cause a systemic meltdown, the U.S. Mint produced over 2 million 1 oz. Gold coins to meet demand. In 2008, the Mint produced less than 1 million 1 oz. coins and reported inability to keep up with demand. The same official story is being repeated this year with multiple shortages occurring due to "demand."

But is it inability or unwillingness to keep up with demand on the part of the U.S. Mint? Can't the U.S. Mint buy more Gold on the free market? Can't they find another manufacturer to get around their problems? Can't they extend a little effort to meet the public demand, since that is their mandate? Don't they actually make a profit by selling these coins? If they don't, can't they just raise premiums and keep up with demand and thus generate a little revenue for the public coffers (we all know the government could use the money...)?

Why is it that China is encouraging its citizens to buy Gold and silver and the corporately controlled U.S. media laughs at/ridicules Gold at every turn? Are we devolving into the same fascist state that Hitler sought to create? Isn't the definition of fascism the union of big business and government (i.e. Mussolini's "corporate state")?

Would anyone performing an honest assessment of what's wrong with America truly deny that corporate interests are now the main force driving government policy? Corporations seek to control government (i.e. Goldmun Sucks and JP Whore-gan) and government seeks to control corporations (i.e. Degenerated Motors [GM], AIG, Fannie, etc.). Does anyone deny that Goldman Sachs and JP Morgan have completely infiltrated the highest levels of the government to create policies benefiting Wall Street? Does anyone deny that the insurance companies and pharmaceutical companies are the main drafters of the health care bills floating through Congress? Does anyone deny that there are more private "gun for hire" (e.g., Blackwater) soldiers in Afghanistan than actual official U.S. military soldiers? Does anyone deny that pompous windbags like Barney Frank and Christopher Dodd are beholden to housing bubble interests due to heavy financial support from this industry including the Fannie and Freddie fascist frankensteins? Does anyone who reads history doubt, knowing that we already have an FBI and a CIA, that "Homeland Security" is a new government program taken directly from the Hitler playbook?

So, yes, I do believe that Gold is the enemy of the United States. When debt becomes unmanageable, it is destroyed through default and/or paid back in worthless dollars (i.e. deflation versus heavy inflation/hyperinflation). Capital flows in the fiat era, as Martin Armstrong has pointed out, may have a bigger say than in Gold standard monetary situations. This makes the inflation-deflation debate more nuanced than at first glance, as we are not in a closed, academic system consisting of rational behavior. The current regime of U.S. "czars" seeks to maintain a fiat grip on the world to maintain and aggrandize their power, reality and the best interests of the sheeple be damned. If U.S. citizens turn to Gold en masse, ain't the gig up at that point for the Dollar?

Thus, I believe "official" sources of Gold and silver will remain scarce. I also believe the futures markets based in the U.S. will continue to ignore market manipulation and heavily concentrated short positions that are the definition of manipulated markets when it comes to Gold and silver. In fact, I would argue that such a situation is ignored because it is government policy and is sanctioned by the highest levels of government. Keep in mind that Madoff could not have had his scam last as long as it did without the express blessing of the highest ranking members of the SEC, since "rank and file" SEC employees like Harry Markopolos saw Madoff's Ponzi scheme years in advance and rang the alarm bells repeatedly [EDIT: Markopolos was as an independent fraud investigator, not an SEC employee] but were intentionally ignored.

The last job of a central banksta is to tell the truth. Thus Bernanke sees the recession as being over, denied the housing bubble when others with an understanding of markets saw it as inevitable, and thinks it is appropriate to purchase private assets with counterfeited money (illegal, by the way) and put them on the balance sheet backing the U.S. Dollar. Widdle Timmy Geithner didn't pay his taxes even though he was elected as the Secretary of the U.S. Treasury. These and other examples while "extend and pretend" (to steal from Jim Sinclair) requires a willful suspension of traditional and rational accounting practices for every banking institution in the United States, so that we can all pretend banks are solvent when the truth is the opposite.

Now, I am not trying to pick on the U.S. government. We are the worst country except for all the others. I understand that in an anchorless global paper currency system that the least ugly currency wins and I understand that for brief periods this may be the U.S. Dollar. But Gold is the currency that will ultimately win. People who think Gold is no longer money also think Bernanke is going to get us out of this mess. I consider such thoughts to be religious in character, not rational. Gold is the antithesis of paper. A slick Wall Street brochure and "can't lose" sales pitch versus an immutable member of the periodic table of elements that doesn't try to sell anything. The pendulum swings both ways.

Investing in Gold is not a vote of confidence in the near-term future, for sure. However, investing in hype when the Wall Street promoters are broke and desperate ain't such a grand long-term plan. And, no, it is not the end of the world. If I thought it was, I would advise taking your Dollars and converting them into bullets and cigarettes. Gold and Gold stocks can thrive without a total collapse of the system, just like in the 1930s and 1970s (perhaps we are a dealing with a 40 year cycle, suggesting the 2010s are a time to be all Gold buggy and what not). Every asset class has its turn in the sun and the torch is being passed from U.S. government debt to Gold (stocks peaked in 2000 and haven't been the "choice" asset class for a decade).

Gold is a protector of wealth during periods of government insanity and instability. Our current regime in the U.S. has passed the point of no return. Bush was our Hitler and Obama is our Chavez. Democrat versus Republican is about as meaningful as blue versus red or purple versus green. The highest levels of our government are composed of corporate whores, so the only difference between candidates is which corporations own them. Obama the war president is the Nobel Peace prize winner. Orwell is doing cartwheels somewhere in the universe.

Our debt cannot be sustained so it won't be. Debt repudiation will occur via any combination of frank default and/or currency devaluation. Gold will protect one's savings during this situation, while the U.S. Dollar is unlikely to do so. I can't side with Prechter on this one. Commodities, government bonds, stocks and corporate bonds, in aggregate, require one to guess correctly on the inflation-deflation debate while Gold doesn't.

The Dow to Gold ratio will reach 2 (and may well go below 1) before this cycle is over. I get caught up in the short-term swings too often as someone interested in trading to augment long-term returns, but my physical Gold is not for sale at current prices. Gold is the best vote I can cast against a government out of control, since votes at the local booth, faxes, phone calls and letters to officials accomplish nothing. I have a feeling that my understanding of Gold and my zealous intention to spread its word will prove to be the most valuable civic duty I am able to provide in the midst of a now seemingly perpetually corrupt regime no longer interested in the ideals of a free people or the country's Constitution.

All In on Gold Stocks

Dry powder is now spent on the spike lower in Gold below $1080. I thought the bottom was in, but I was wrong (again). Just got all in on Gold stocks. Now holding long-term options on the new GDXJ junior mining ETF, Goldcorp (ticker: GG) and Royal Gold (ticker: RGLD) as well as a basket of individual junior Gold mining stocks. Yesterday was not too bad of a day for me because a few of my junior Gold miners had significant up days despite the down day for the price of Gold.

Here are a few examples thru yesterday's close demonstrating how well some stocks have held up thru this correction. Following are 12 day intraday 15 minute charts thru yesterday's close to show how well these miners have weathered the Gold correction, which started the same day these charts begin (December 4th). First up, Paramount Gold and Silver (ticker: PZG):



Next, Richmont Mines (ticker: RIC):



Great Basin Gold (ticker: GBG):



Northern Dynasty Minerals (ticker: NAK):



Lastly is Rainy River (ticker: RR.V), which I am not as happy about since I had liquidity issues on this one when I went to sell it. I still hold 5% of my shares in this one since they failed to sell at my limit price.

These stocks, which are all flat or up over the past 12 days, have helped me weather the Gold stock correction. I am also seeing a nice divergence between Goldcorp (ticker: GG) and the Gold price here. Following is a 4 day intraday 15 minute chart thru part of today's action to show it:



I wish I could get bearish here (sorry, Dacian), but I get more and more bullish as prices go down. I took profits and sold protective calls just before the plunge and now these profits (as well as money from my most recent paycheck) have all been re-deployed at lower prices. When I look at a weekly Gold chart I see 4 weekly red candles. That should be enough to end the Gold correction.

Did I Mention That I'm Insanely Bullish on Gold?

I think a lot of people are missing the significance of the Gold break out over $1000. This is now the floor for the price of Gold. The down side is very limited at this point and the upside potential is huge. It basically took Gold 18-19 months, or about a year and a half, to consolidate and build enough of a base to break through the $1000 ceiling and turn it into a floor. This is a big event and it got a lot of people to pay attention to Gold for the first time.

Of course, most of the attention, other than from Gold cheerleaders like me, is pooh-poohing the move or explaining why all of a sudden we are in a bubble and/or how the move is already over. Those who never saw it coming ain't qualified to tell us when it ends, but that doesn't seem to stop 'em. And yet, what asset classes besides Gold and short-term federal government debt (don't get me started on the latter...) are at all time highs? Do those doubting Gold here even understand why it's at all time highs?

The "wall of worry" in Gold is alive and well (present company excluded) and this is predicting a continuation of the Gold bull. Gold has dropped 10% and already people are looking for a collapse back down to $1000 or below, ignoring the longer-term technical and fundamental situation. The "big picture" is the break out above 1000-1030/oz., which was successfully re-tested and held. This is the new floor for Gold. Sub-$1000 Gold prices are unlikely to be seen again for the rest of this Gold bull market.

I think Gold is going to explode higher and finally pull the Gold stock indices to new highs. In fact, I think there is a great recent template for what may be coming for the Gold price. Here's the chart of interest - I have scratched out the name of the item and the years on the chart to pique your interest:



And, of course, here's what came next:



A recent template on a precious metal gone wild. Think it can't happen in Gold over the next few months? BWAHAHAHAHAHAHAHAAAAAAAAAAAH!

The Dollar Is Going Up - Get Out of Gold!

Certain old market adages just don't seem to go away and are perpetuated by novice investors who seek to find some meaning in markets and their interrelationships. Mainstream financial commentators are more than happy to repeat and regurgitate such claptrap endlessly, creating "rock solid" market wisdom.

"Dollar Up, Gold Down" or "Dollar Down, Gold Up" is a common one in the Gold investing community. This works until it doesn't. The funny thing is that THE MOST IMPORTANT BULL RUN IN THE LAST CENTURY FOR GOLD PROVES THIS ISN'T A GOOD WAY TO LOOK AT GOLD! I am not making this up. This is actual market history there for anyone to examine. But most instead steadfastly stick to simple phrases that cannot possibly capture the nuances of the complex human psychology that backs market behaviors.

Here is a chart including the most important and legendary move in Gold that every Gold bug has seen a picture of (stolen from chartsrus.com):



During the 1979 to 1980 parabolic run when Gold more than quadrupled in about a year, do you think the U.S. Dollar collapsed? Well, it obviously went down a lot, but we know it didn't collapse, right? Here's the chart of the rapid but not catastrophic collapse in the U.S. Dollar Index from 1978-1980 (again, stolen from chartsrus.com):



If only markets were so simple that basic phrases describing intermarket relationships could make you rich. Ahhh, we can dream can't we? So if you really want to get rich in Gold, I guess you should buy Gold when the Dollar is rising.

Those thinking that a rally in the U.S. Dollar Index, which is an abstract index comparing anchorless paper to anchorless paper, can stop the secular Gold bull market don't understand Gold or secular bull markets. Secular bull markets become self-perpetuating momentum machines that shrug off "bad" news and power higher anyway. The U.S. Dollar Index rose 50% between 1995 and 2000, but did that stop the secular general stock bull market or cause a collapse of the internet tulip mania? Absolutely not. The secular bull market in Gold will keep on going until we get to the public mania phase, after which it will collapse on its own weight, irrespective of the U.S. Dollar Index. I am betting this will happen after the Dow to Gold ratio gets to the 0.5 to 2 range.

Central Bank Gold Buying and Game Theory

As the long term pendulum continues to swing towards Gold and away from paper, like it has many times before, central bankstaz are now getting in on the action. Every serious Gold investor is already aware that central banks are now net buyers of physical Gold. This is a critical tipping point in the almost decade old secular Gold bull market that is far from over.

On the one hand, you have the old guard American and British "powers that be" paperbugs that support the US Dollar fiat monetary standard. They know it, they control it, they profit from it. On the other hand, you have most of the rest of the world. When it comes to the Dollar, they acquiesce to it, they don't like it, and now that America is weak, they seek to dethrone it and make things more equitable.

Recently, an article came out discussing secret talks related to starting a new currency to deal in oil. It was immediately dismissed as psychopathic conspiracy wacko talk by multiple official sources. A few weeks later, of course, it turns out it was completely true. Here's a link to the article discussing it. Since “The US dollar has failed" and these oil producing countries "need to delink” from the Dollar (quotes from the article), they have decided to move ahead at a speed unexpected by those who denied such a thing was happening in the first place. Gotta keep the sheeple in the dark until the last minute, after all.

Let me clear about what this so called "Gulfo" (I bet a marketing firm was hired to come up with this awful name) means: the U.S. is going to lose its role as the reserve currency of the world and the international monetary system is going to undergo further major upheavals. The rest of the world (i.e. outside of the U.S. and UK) is already making preparations on how to conduct trade once the Dollar no longer functions in the role of reserve currency.

Now, why/how this is happening is open to speculation. In other words, such a plan would be a perfect part of the so-called banking cartel game to take over the world. First you support the creation of regional currencies, then you move to consolidate the regional currencies into a global currency. Regional currency blocks could overpower the weakened American Dollar, cause its collapse and force the U.S. into a regional currency (i.e., the "Amero" conspiracy theory). You can call it batpoop crazy talk if you want, or you can accept it as at least a possibility.

The alternative is simply free market-type chaos: different players gradually having a light bulb go off above their heads related to the now unsustainable path chosen by America and its bankstaz. Once the light bulb goes off that the game is up, you naturally would begin to prepare for a post-Americana monetary world. As an investor and speculator, it doesn't really matter why I believe these things are happening. The important point is that these events are happening.

Paper currency is a confidence game. Without Gold backing, why is one counterfeited paper debt note more valuable than another? The answer is confidence related to economic might, military might, the rule of law, political expediency/inertia and social mood. If people lose confidence in the Dollar and America further than they already have, the U.S. is in big trouble. Capital flows are a dagger that could pierce the hearts of Dollar-based deflationists like Prechter before the Dollar can see its meteoric rise into the heavens.

If the U.S. Dollar is not used to purchase oil, why is it needed to purchase or price any commodities that are not bought from the U.S.? If the U.S. cannot pay its debts except through more counterfeiting, why should countries send us their goods? Why should they lend us money? The Dollar-based deflation theory ignores capital flows. For in the absence of a Gold standard world, capital flight is the equivalent to a currency leaving the Gold standard as it causes the identical rapid monetary devaluation "event." Witness Britain in the 1930s, as the British Pound was the world's reserve currency going into the prior Kondratieff Winter/secular credit contraction/global economic depression (chart stolen from Martin Armstrong):



In the modern era, capital flight creates the same scenario for a currency as leaving the Gold standard used to do. The United States is so heavily reliant on external funding relative to the rest of the globe that a lack of willing global participation in its debt markets is a real possibility. Here's a chart stolen from the smart folks over at the GlobalEurope Anticipation Bulletin (GEAB), which they borrowed from Phoenix Project, to demonstrate this concept:



We have accelerated our debt offerings but we haven't proportionately accelerated our purchases of the rest of the world's goods to match the debt. Sounds like we are a dead beat customer to me! For now, it's quantitative easing filling the gap, also known as counterfeiting or playing chicken with the rest of the world. "Go ahead, make our day and punish our currency," the for-profit private federal reserve corporation says. As an aside, what could be better to turn their outrageous and illegal purchases of distressed real estate debt into a possible winner?

But beggar-thy-neighbor / "me too" policies means that other major countries (and minor ones, too) are trying to do the same thing. This "thing" (sometimes called "stimulation," "bailout," or "rescue") is currency destruction, pure and simple. This is why the US Dollar Index is not a good measure of purchasing power in an anchorless fiat paper currency world. Most people don't care how many Euros their Dollar can buy, they care how much food, gasoline and medicines they can buy with their Dollars.

Anyhoo, if the US Dollar loses its lynch pin status, what could possibly replace it? For those who say it can't happen, I would say it is now almost certain that the US Dollar is going to lose its reserve currency status at some point during this credit contraction, it is now really just a matter of timing and how it happens. I am a U.S. citizen and I do not consider this to be good news. But I deal in reality and I am grown up enough to handle the truth. Gold will protect people from this event when (not if) it happens. And if the government tries to block Gold ownership or Gold movement beyond the borders when it occurs, then one should be a true patriot and ignore the government. Such a currency event is not the end of the world, by the way, but it will catch a lot of people off guard, lower the American standard of living, and hurt those who trust the authorities to protect them.

More interesting to me than the fact that America will likely lose its monetary stranglehold over the globe during this Kondratieff Winter is the international game theory it introduces when it comes to Gold. I wish I could say that the sheeple won't accept another paper currency system to replace the current one, but I am not that optimistic. Regardless, when the deck re-shuffling occurs, who will come out on top?

If you are a central banksta, you have to hedge any bets or hunches you have. The struggle for monetary supremacy can create wars and serious trade conflicts, which are not always good for business (war can be, but it is risky if you finance the loser). Gold does not require a healthy economy to thrive, while all paper currencies are universally debased at the first sign of economic weakness.

China fired an amazing opening salvo by openly telling its citizens to buy silver and Gold, a first in the modern fiat world, and admitting that it has been buying quite a bit of Gold over the past few years. India jumped in and bought a chunk of the IMF's Gold to keep the game going. Russia tries to jawbone the market lower with false news of a sale then turns around and buys more Gold. Currency swap arrangements between Asia and other countries have already been hammered out to bypass the Dollar. And now some of the oil producers are starting a regional currency to use for oil sales, the confirmatory market signal of the end of U.S. Dollar hegemony.

Several central banksta participants need to buy as much as Gold as possible without causing panic or moving markets too much. Asian countries, including China, are under-invested in Gold relative to total reserves as are Brazil, Russia and India. If Gold is going to play a role in the new world monetary order, the BRIC nations need to buy quite a bit more.

When trust in paper breaks down, you want to own Gold as a basis for credibility if you are a central banksta. The more you own, the more credible you may end up being on the global stage when the new regime emerges. Hold enough Gold and people may offer you a seat at the bargaining table when the next scheme is hatched. Holding the paper reserves of almost any country right now is dangerous due to the uncertainty in the world right now. Fiat currency disruptions are going to get more intense. The Euro does not seem all that stable as a newbie on the currency block, especially since it hasn't been through a major test yet. The Japanese economy is the definition of a basket case. America is crumbling. If the world's largest three currencies are filled with uncertainty, where are you going to hide?

And if you have a secret desire to start the next currency regime, what better way to buy credibility than with a big pile of Gold behind you? As a country that is supposed to own quite a bit of Gold, how much would the U.S. be hurt by a high Gold price? In any event, the possibilities for the pending brave new world are enough to make a simple serf's head spin.

I do know that the majority of physical Gold holders right now are not exactly weak hands. Paper Gold holders are a fickle bunch, but those holding the actual shiny stuff in quantity will likely require quite the premium over current prices to part with it. So, up the price of Gold will go in fits and spurts as the big players scramble to turn in their paper for Gold at the best price possible. The first year of net central bank buying won't be the last, you can bet on that!

I'll leave the final word on banksta game theory to the bankstaz. Stick with Gold (and possibly Gold stocks if you have the stomach for it) for the rest of this cycle, which should continue at least until the Dow to Gold ratio hits 2 (and it may well go below 1 this cycle). We are currently at a strong and low-risk buying point for Gold (and many Gold stocks) in my opinion. Are you taking advantage of it?

Gold Bottom Is In

I think we have seen the bottom in Gold for this short-term correction. I could be wrong, of course, but I put my money where my electronic pen is and bought GDXJ May 25 calls today at the AM lows. I am now 95% invested in my speculative account with only a smidge of dry powder for next week.

I also took this opportunity to buy some more Gold bullion through Bullion Vault last night. Since I don't want these recent purchases or my core physical Gold and Gold stock holdings to lose money, I am now quite biased.

Here is a current 1 month intraday 60 minute candlestick chart of the GLD ETF thru part of today's action:



And here is the correction in Gold back in December of 2005, again using the GLD ETF as a proxy to allow me to do intraday charting (can't do intraday charting with spot Gold price using stockcharts.com):



The only commentary I have about these two charts: close enough for me. Back in 2005, Gold went up almost 50% between the late December 2005 lows shown in the chart above and the May 2006 top (i.e. $490 to $730). I have no concerns about the US Dollar Index. I have no concerns about the stock market. I am focused on the strongest global bull market in the world - Gold. It is Gold's time and I intend to be along for the ride. I think Gold stocks are getting ready to explode higher across the board whether general stock markets hold up or not (I think not, but we'll see).

The Illiquidity of Junior Gold Mining Stocks

I had a first hand experience in the thin liquidity that can occur in the junior Gold mining patch. I hold the junior Gold miner Rainy River Resources (ticker: RR.V) via a pink sheet OTC listing (ticker: RRFFF). This is done to get around having to deal directly with a foreign exchange. It's not something I recommend, it's just something I did.

Here's the 6 month daily chart for RR.V thru today's close:



I put my order in to sell my pink sheet OTC version of Rainy River stock (i.e. RRFFF) at a limit order of 3.50 after the close on 12/14/09 (Monday night). Within the first hour after the open on 12/16/09 (Wednesday), RR.V on the Venture Exchange popped to $4 a share, more than enough to trigger my order. Remember that the pink sheet OTC shares for Rainy River trade at a different price than the RR.V stock listing on the Toronto Venture Exchange due to currency differences between Canada and the U.S., as well as the "skim" of the market maker. However, at a $4 RR.V, the shares of RRFFF were up in the 3.70-3.75 range - far above my limit sell order of $3.50. I was kicking myself for setting the sale price so low and then chuckling at how ungrateful I was being for making a 60% profit in one month.

A few hours later, I logged into my brokerage account to check my new cash balance. I wanted to plan my next speculation using my newly earned winnings from the Rainy River trade. When I logged in, I found out that my Rainy River trade never executed. I made sure that my sell order was still active and was entered into the system correctly - it was on both counts. I saw that the volume was light in the RRFFF pink sheet listing for Rainy River that morning, but some sales in RRFFF had occurred well after the opening in the 3.60 to 3.75 level! I gave it another half hour. Still no sale. I had to go to work in a rush and didn't get a chance to check back until well after the market had closed for the day.

My order never executed that day even though it appeared as though every sale after the opening bell in RRFFF occurred above my 3.50 limit price. I was bummed. I called the broker the next day and they informed me of liquidity issues and being at the mercy of the market maker. I figured the stock was still strong and left my order alone. Today, it did not fill until several hours after the price again jumped above 3.50 for RRFFF and it only partially filled (90%) despite at least 20,000 shares in RRFFF trading today above my asking price.

This is a total racket and is just one of the many risks associated with investing in small cap stocks, especially pink sheet OTC listings. The same phenomenon occurs in thinly traded options and futures contracts. Bid-ask spreads get abnormally wide for illiquid issues and orders can take a long time to fill even when the listed price is at your asking price (whether buying or selling).

Speculating is hard enough without taking it on the chin because of such issues. I just wanted to let everyone know who doesn't that these are some of the extra risks in the small cap and/or illiquid share arenas (not unique to Gold miners by any stretch). Though I was aware of such issues before I committed a portion of my speculative capital to this trade, today was a harsh reminder of how the risks are not theoretical.

This execution fiasco was also made worse by the fact that Rainy River was my main positive holding today as a Gold investor other than the idle cash in my account rising in value relative to Gold stocks so that I can buy more. "Sea of red candlesticks" would be an apt description of a composite view of all my Gold stock holdings today. Unless a dramatic upward reversal in Gold and Gold stocks happens before the market opens, tomorrow will likely be another buying day for me. If GDXJ dips a little further tomorrow, I will be buying in volume. If not, I'll wait until next week.

I remain rabidly bullish on Gold and Gold stocks and may well be back to 100% invested by next week.

Musical Chairs Means a Gold Explosion

The chaotic currents in the Gold market right now are palpable and exciting to me as someone who has been following Gold [relatively] patiently over the past several years. People like Nouriel Roubini and the shills at Bloomberg.com are irrelevant and should never be taken seriously when they speak of Gold. Their paperbug noise is entertaining distraction - good for an Orwellian chuckle, but nothing more.

I am talking about what big players are actually doing and what is actually happening in the Gold market. I am not talking about the spoken and written zealous fiat propaganda of the ignorant (i.e. low level staff journalists at corporate media outlets and paper system apologists/academics/zealots like Roubini and Krugman) and/or nefarious (central bankstaz and various high-level government officials). There is a groundswell building under Gold and I think it has volcanic-type potential. If another rush to safety occurs, I think we will see Gold act as the currency of last resort this time around instead of the U.S. Dollar.

The list of bullish factors for the Gold price are starting to pile up quickly. In no particular order, here is an incomplete list of fundamentally bullish developments over the past year in the Gold market:

* Arab states of the Gulf region have agreed to launch a regional currency modeled on the Euro. Quote from this relevant article: “The US dollar has failed. We need to delink.” This is ironically occurring at the same time that potential sovereign defaults from economically weaker countries like Greece threaten the viability of the Euro.

* Eric Sprott is launching a new Gold ETF (PHYS) to compete with the GLD ETF. GLD is a sketchy ETF tracking the price of Gold that was created to provide increased ammo for the paper Gold shorts (i.e. the big Wall Street firms like JP Morgan). If you are currently invested in the GLD ETF for the long haul (as opposed to short-term trading), I urge you to switch to Sprott's fund or another more reliable Gold-tracking paper instrument (and then, only after you have secured some physical Gold).

* David Einhorn, a hedge fund manager, sold his GLD shares and switched to buying physical Gold for his fund.

* Central banks are now net buyers of physical Gold.

* China is now openly promoting, encouraging and allowing its citizens to buy physical silver and Gold.

* Delays in taking physical delivery from the COMEX futures markets are now reportedly routine and stories continue to trickle in regarding offers for [generous] cash settlements instead of physical Gold delivery when delivery requests are made.

* U.S. Mint Gold coin manufacturing is more and more frequently being suspended due to "inability" to keep up with demand.

* Stodgy institutional money like the Northwestern Mutual Life Insurance Company is starting to diversify into Gold for the first time in decades.

Putting it all together, one could take this to mean that Gold is overdone and a top is near. I see it the opposite way. Being contrarian works at the extremes, not in the middle. Herding behavior has begun, is now strong, and the trend will be stronger and last longer than most think is possible or rational.

But there is an important theme underlying these bullish trends that differs from the first stage (i.e. the "stealth" phase, which is now behind us) of this ongoing secular Gold bull market. That trend is the demand for actual physical Gold (and silver), which creates a problem for the vested interests trying to steer the herd into paper Gold (aka fool's Gold) like the GLD ETF and the futures markets.

A game of musical chairs has begun. There aren't enough seats at the physical Gold table to accommodate the growing herd at anywhere near current price levels. An "event" of some type is certainly on the horizon, though I do not know when or how it will begin. How many paper claims on Gold exist relative to actual metal? How much has the fractional paper Gold system, which is designed to suppress the Gold price and make paper promissory notes seem just as valuable, extended itself?

Will it be the GLD ETF? Will it be the futures market? Will it simply be the drip, drip, drip of millions of individual global ants (i.e. retail investors) asking to buy a few more 1 ounce Gold coins for security? Will a second coming of the Hunt Brothers cause a panic (Paulson are you listening - switch to ACTUAL PHYSICAL GOLD, bro!)? Will it be yet another sovereign debt default? A national banking holiday in one or more major countries? The tension in the physical Gold markets is palpable right now for those paying attention.

The collapse of paper promises on a large scale is not a pretty event and it does not inspire confidence. Think of how fast things have changed for previously "stable" global entities like Iceland, Bear Stearns and Lehman Brothers. Our global monetary system is in trouble and the central bankstaz of the world know it. The self-preservation-minded oligarchs of the banking world know where to find safety in troubled times and it isn't in the anchorless currency debt notes they counterfeit on a daily basis. The hedgies and more aggressive institutional investors smell the blood in the water and have started moving in to profit from the carnage. I think things are about to get exciting in the Gold market.

When paper debt notes collapse, disintegrate, get marked to a non-existent market, and/or otherwise get rapidly devalued, those holding the paper will gladly exchange it for anything of tangible value. What happens when a critical mass of global participants starts to realize their paper claims on wealth, retirement and the good life are merely illusions?

In the 1930s secular credit contraction, the international monetary system broke down fairly rapidly. The Pound Sterling was the world's reserve currency at the time. Via an announcement that came without warning in 1931, the Gold standard that backed the Pound was suspended. Other countries rapidly followed suspension of their Gold standards over the next 2 years and global trade temporarily collapsed. The subsequent Gold rush that developed essentially shut down the U.S. banking system. If (When?) the music finally stops this time around, it's likely going to take multiples of the current $1125 price to get a one ounce seat at the physical Gold table.

Paper Currencies - Trampoline Jumping

Watching the national paper fiat currencies rising and falling relative to one another can be interesting, but it is misleading for many of those who take it seriously. When the U.S. Dollar Index is rising, Americans are gaining in their standard of living as it takes fewer dollars to buy things, right? Not necessarily

The currency pairs or currency indices that people follow simply measure one piece of paper versus another. If I created a calculators to televisions price ratio and called it a currency pair, there may be traders out there interested in guessing the next move in this ratio as a casino play. Traders trade. But is this a valuable metric of inflation, deflation or price strength? Only in a very limited sense. In other words, it is true that a rising U.S. Dollar Index means that the U.S. Dollar paper note can generally buy a greater number of paper Euro notes (at least given the way the U.S. Dollar Index is currently constructed).

The rise and fall of paper currency notes relative to one another in the current economic setting reminds me of a seesaw - one currency goes up, then it goes down while its pair currency does the opposite. One currency may rise a little more in net terms over a period of time or vice versa based on various factors.

But what if that seesaw (or perhaps a trampoline with paper currency contestants trying to out jump each other?) is tightly tied to a 5,000 pound anchor that has just been tossed out of an airplane? Do these up and down movements of paper notes relative to each other actually have significant meaning relative to the downward plunge both are experiencing? The answer to this question, of course, depends on one's time horizon and goals.

This seesaw/trampoline analogy is not a minor matter of importance to me. For this is our current international monetary system and this system is hurtling towards disaster at a somewhat frightening pace. Whether the U.S. Dollar Index rises a few more percent before dropping again or not is not as important as realizing that the fundamental underpinnings of the U.S Dollar are being destroyed by the federal government and its non-federal, for profit, central bank corporation known as the federal reserve. Piling unpayable debt on top of unpayable debt just because one can is quintessential depravity. The consequences will not be minor. The maddening thing is that nearly every other major nation in the world is happy to follow suit and some are in an even worse financial position than the United States. How can this end well?

I started my economic educational journey with eyes wide shut and now find them open, aware and already jaundiced. From inflation to deflation to hyperinflation and back again, I now find these terms only vaguely helpful to describe what we have been and are going to continue to go through. No period in history is identical to its predecessor, despite the rhymes that make market and economic history relevant.

Some things history and my education to date have taught me:

*No currency system has survived intact for more than 40-50 years or so, whether Gold-backed or not. If Gold backed, the Gold backing will be revoked or watered down at the first sign of trouble. If not Gold backed, the currency will be debased into oblivion by those addicted to the magical printing/debt press. When currency "events" occur, Gold is a reliable way to protect your savings and come out ahead on the other side.

*A heavily over-indebted nation with no savings is not going to see its currency rise to astronomical new heights in some Prechterite deflationary miracle. The U.S. is a heavy debtor nation, not a creditor nation like it was in the 1930s and not a nation with savings like Japan in the 1990s. A brief short squeeze in the Dollar can occur, just like in 2008, but a sustained bull market in a severely damaged paper debt instrument that no longer holds the world's confidence (like, ummmm, the U.S. Dollar?) is unlikely. In fact, I would wager that such a scenario is about as likely right now as a sustained new secular bull market in subprime mortgage debt, which now [not] coincidentally backs the U.S. Dollar thanks to the policies of the private federal reserve corporation.

*Gold is a great hedge against government insanity and instability and we are in a secular cycle of government insanity and instability right now. Gold is not a simple asset class (as the ignorant commentators shouting "barbarous relic" would have you believe), it is not a consistent inflation or deflation hedge, and it is not just an anti-Dollar play.

*Every asset class has its day in the sun. It is Gold's turn in the sun and Gold's secular bull market is not close to being over. Sometimes bull markets go up just because they've been going up and the momentum and capital concentration begin to take over in a display of primal herding behavior that can persist for much longer than seems rational. We first need to see a visible public Gold rush/mania to match the preceding paper mania in internet stocks and real estate before this Gold bull is over. This means your paperbug, CNBC-watching neighbors, co-workers and/or friends with any money left to invest are comparing notes on where to buy physical Gold coins and bars (that's buying Gold, not selling Gold jewelry to pay the rent) and how to participate in junior Gold mining stock IPOs. I vividly remember a day in 1999, not long after I first started "investing," when a janitor where I used to work started talking to me about internet stocks after he noticed I was checking stock quotes online. We barely knew each other, but I sure felt envious of his stock picking prowess and he of mine by the time our ten minute conversation ended. I hope he made out better than I did once the internet bubble burst a few months later. Does anyone without an axe to grind against Gold really think we're at this type of mania stage right now? When a reality show called "Flip that Krugerrand" hits my local cable network, then I'll start getting worried.

*Gold brings out some very strange emotions in people - the extremes are represented by paperbugs and goldbugs. Emotions often get people (including me) into trouble when investing. Paperbugs will miss out on the Gold bull market until the very end stages as they bash Gold and try top calling on Gold unsuccessfully the whole way up. Goldbugs will lose much of their hard-earned profits by failing to realize that Gold will not be the "go to" asset class forever (I'm assuming the goal here is to make money rather than a political statement). If one doesn't sell high, then one may well take the round trip back to low again if history is a decent guide. At some point in the next decade, Gold will become expensive and stocks and real estate will become cheap (we're not likely to be close to this point until the Dow to Gold ratio hits 2).

*Gold mining is a hard, capital intensive business. Gold miners provide leverage to the price of Gold, but that leverage is not guaranteed, not consistent and it comes with added risk (i.e. leverage cuts both ways).

Those calling for the collapse of Gold here are the same ones who yelled from the rooftops last fall that Gold was no safe haven and the fall 2008 crash proved it because Gold sank in the chaos. Of course, no thoughtful comments were made by these same folks when Gold was back at $1000/oz in February of 2009 while the stock market slithered to even lower and essentially unthinkable depths. These folks also said Gold was only making new highs in U.S. Dollar terms early this fall when Gold began its breakout, ignoring the new highs in many major currencies for Gold in early 2009 and again a few weeks ago.

You can listen to these folks if you want, but I think we are at a strong buying point for Gold and most Gold mining stocks. I think Gold and major Gold stock indices are going to make new highs soon (likely before January is over, though I don't know exactly when). I am not focused on the paper debt notes moving up and down on their seesaws or trampolines, I am focused on the anchor pulling all these notes rapidly down towards the earth due to shattered confidence and irrational fiscal and monetary policies around the globe that even a 3rd grader knows are harmful. The decline in value of all paper debt instruments (i.e. all current national currencies and their derivatives) will cause a continued rise in Gold, as people will seek out the currency and wealth protector of last resort.

The Gold Bull Market Is Over

Gold had a great run, but its bubble has popped and the great bull market in Gold is over. Or so say the paperbugs. Inflation is nowhere in sight, so Gold can't go any higher. Gold pays no dividends and has no growth prospects, so it is silly that Gold has risen this high and now it will retreat far below $1000/oz to its "normal" level in the $250/oz range. Silly little trinket holders will be steamrolled.

Have I adequately summarized the typical paperbug arguments? Here's an article summarizing Nouriel Roubini's recent take on Gold and why it will do poorly. This is standard anti-Gold commentary and I think it will continue throughout this secular Gold bull until its final stage. Mr. Roubini is clearly out of his league when it comes to Gold.

People don't understand Gold and what it means in this environment. It means safety and wealth preservation. It means a vote of no confidence in the economy and its financial leadership. Yes, there is a speculative side that creates the swings in price that are a part of every bull market. The wall of worry and hatred of Gold is intact in the mainstream - thank goodness!

I believe Gold is a strong buy in the low $1100s. Many others think the opposite. This is what makes a market. Buying at these levels is not buying low - that was at $300/ounce. But there really are no better alternatives for those who aren't expert traders ready to jump into every squiggle higher and lower in the various asset classes. There are no other clearly intact asset class bull markets out there except in U.S. debt (and once you get to a zero interest rate, what exactly is the upside potential?). Stocks are going to continue to be a terrible investment in Gold terms, as they have been over the last decade. Real estate is likely toast for a generation (now that was a real bubble!). Corporate bonds are on par with stocks. Commodities are a question mark in many people's minds (including my own).

But Gold is the currency of last resort. Central banks hold it on their balance sheets as a monetary asset because they understand what they have taught their sheeple to forget. When trust evaporates, paper currencies can become mere meaningless abstractions of history much like Enron and Lehman Brothers did. What was perceived as unflappable turned to dust almost overnight for those not paying close attention. China is not encouraging its citizens to buy Gold and silver because they want their citizens to lose money and China has a say in what ultimately happens to the Dollar. India is not and never has been dumb money when it comes to the price of Gold and they think it is a good deal at over $1000/oz.

Hedge funds are rushing into Gold. Stodgy institutional money is bellying up to the bar because everyone else is doing it. These latter "big money" players build positions (and herd-like consensus) over time, not in one fell swoop. We are in the middle to the beginning of the end stage in this secular Gold bull market. However, the greatest speculative gains in the shortest periods of time occur towards the end of a secular bull. These gains are dead ahead in my opinion, though volatility also will likely increase as a way to shake riders off the bull's back. This Gold and Gold stock bull will eventually overshoot its fundamentals to the upside but we are not even close to that point yet.

When I look at a Gold price chart, I see a strong buying point here and now. Not later, not a few bucks lower, but right here and right now at today's levels. Not getting fancy, just technical analysis 101 for those looking to re-enter the strongest bull market in the world. Following is a 3 year daily candlestick chart of the price of Gold in U.S. Dollars ($GOLD):



Seasonal data suggests we are at a good point for a bottom, we are back at the 50 day moving average, Gold is the strongest asset class bull market in the world, and the big institutional money is starting to pile into the trade. The trend is your friend and there are no Gold bubbles anywhere in sight. For the record, I don't trade Gold - I own it. But I do trade Gold stocks and I have been buying them these past few days. If a further dip in price occurs in the stocks I like, I will buy more.

Until the Dow to Gold ratio approaches 2 (and we may well go below 1 this cycle), the Gold bull market is not over in my opinion. And right now, we're not even close to the end.

The U.S. Dollar Rally and Gold

The "Dollar Up, Gold Down" crowd is predicting a collapse in the Gold price now that the U.S. Dollar has finally begun to have a little rally. Here's a 2 year daily chart to show the action in the U.S. Dollar Index ($USD) using a candlestick plot thru Friday's close:



The only thing that is surprising to me on this Dollar rally is how long it took to develop. I thought it was going to start this summer. Gold bulls need to remember that it is not just the U.S. Dollar that is in trouble. Those calling for the imminent collapse of the Dollar need to remember that the British Pound would be much more likely to collapse first. For all paper currencies are sinking right now at different rates. This is the usual state of affairs in an anchorless currency system.

The difference is that this is the first time such a dangerous experiment is being tried on a global basis. The other issue is the reserve currency status of the U.S. Dollar, which gives it an advantage over other currencies. As a Gold bull, I don't fear a Dollar rally and as someone who gets paid in Dollars, it doesn't bother me at all! We could easily reach the 200 day moving average on this rally and it wouldn't stop the Gold bull at all.

I believe Gold will go through whatever correction it was going to have anyway above its new $1000/oz. floor. The U.S. Dollar Index is a measure of value relative to other paper currencies. To say the Dollar can't rally some against the Pound, the Yen or the Euro is silly in my opinion. But all of these currencies are falling relative to Gold and will continue to do so until the secular Gold bull market is over. To say that Gold can't rise while the U.S. Dollar is rising is to ignore many relevant historical periods even during the past few years.

I don't think going long the U.S. Dollar for a scalp trade or hedge against one's Gold holdings is unreasonable, but I don't trade currencies personally and I already get paid and transact in U.S. Dollars (i.e. my long Dollar position is rather high because I live and work in the U.S.).

Gold is doing what all bull markets do - taking a rest to re-charge and get ready for the next leg higher. Gold can rise when the Dollar does. Gold can rise when the stock market is rising, flat or falling. Central banks are now net buyers of physical Gold (first time in decades). Do you think central banks are the dumb money in the markets or do you think maybe they know what's coming next since they are the ultimate insiders? I am greedy at current Gold price levels, not fearful.

I think 2010 is going to be a bonanza-grade year for Gold and Gold stocks. Many traders and investors don't like corrections - they can be boring, create uncertainty and/or fear and require patience. For me, every correction is an opportunity to continue accumulating. Many Gold stocks held up well late last week. I even had a nice upside surprise on Rainy River (ticker: RR.V), which I am going to hold onto despite its overbought status here:



Other junior Gold miner charts that look good to me also seem to be ignoring the Gold price action fairly well over the past 1-2 weeks. I am not advocating these stocks, though I do own all of them and some I have been accumulating more at current levels:

Paramount Gold and Silver (ticker: PZG):



Tanzanian Royalty (ticker: TRE):



Great Basin Gold (ticker: GBG):



Richmont Mines (ticker: RIC):



These are all stocks that have handled the Gold price correction "calmly" (or ignored the Gold correction altogether) are not even close to being overbought (and some are oversold) and are at good buy points technically right now. This allows not only a good entry point, but also makes it easy to set a stop loss point to minimize risk. I am not a mining expert and cannot reliably comment on the fundamentals for any of these companies. But these are just a few examples of great-looking junior Gold stock charts that I think are set to break out to the upside sooner rather than later.

I remain wildly and rabidly bullish on the Gold patch at current levels, even though this Gold and Gold stock correction may require further time and price to complete (not sure and there are no guarantees when speculating on the short term).