Sunday, February 28, 2010
In a world gone mad with paper debt ticket orgies, maintaining the purchasing power of one's savings is difficult. The more debt-based currency entries that are created, the more each existing currency entry is diluted. The lag time and unevenness of the price distortions created by such a bizarre out-of-control monetary system hold the system together, as the sheeple, in aggregate, can't put two and two together. Everyone thought real estate was a great store of wealth a few years ago. Now, not so much.
Those who have put two and two together can never go back. Once you break through to the other side of the matrix, there's no ignoring what's happening before our eyes. The value of any currency units saved is being destroyed. Yes, it may take some time for this to be "officially" recognized and it may take time for the things we want to get more expensive, but the value destruction has already occurred.
The reality is that bubbles can collapse faster than currency value can, so that holding U.S. Dollars over the past few years has made one wealthier in real estate terms, as one can now buy a greater amount of real estate for the same number of debt tickets/currency units. Inflationism is everywhere in a fiat paper debt ticket system out of control, but it seeks out different asset classes during different parts of the longer term economic cycle.
When the traditional asset classes collapse, such as real estate and the stock markets, the rampant excess of previously created currency units flocks into different asset classes in a bid to preserve wealth and find safety. Some believe that safety is in the U.S. Dollar while others place their faith in Gold or other "hard"/tangible assets such as oil or copper.
But will Gold truly be a safe haven? What if the U.S. Dollar continues to "strengthen" and a strong deflation takes hold? The answer to that question lies in the government response to such a scenario. How do you think our government will respond to a rapidly strengthening U.S. Dollar? How did the U.S. government respond to such an event during the Great Fall Panic of 2008? How did all of the major economies of the world (i.e. Europe and America) respond to a deflationary collapse scenario in the 1930s?
If Gold goes to $1500/oz, what does this mean? We in America all think in terms of Dollars because that's what we use to pay for bread, clothes and shelter. But does Gold truly get more valuable? If so, why? How can the value of a piece of metal change assuming a relatively stable supply?
Gold is a mirror of the paper currency measuring stick. When times get hard in any country, governments reach for the same playbook they have been using since long before Roman times. Defiling the value of currency units causes asset prices to rise. Rising asset prices favor bankers holding debt instruments against those assets and favor governments who tax those assets based on their nominal value. Which asset classes rise when currency is debased in part depends on the state of the economy. Gold is generally a lousy investment when times are "good," plain and simple.
When a Kondratieff Winter (aka K-Wave Winter, secular credit contraction or economic depression) has begun, Gold is the go to asset. A secular credit contraction occurs once debt has overwhelmed the system. In this scenario, unlike the other parts of an economic cycle, no significant net aggregate benefit accrues to the economy by piling on further debt. An economic depression plays a role in cleansing an economic system of bad debt so that the slate can be wiped clean and the game can start all over again in the next generation/next cycle.
As sick as it sounds, this is a repetitive cycle of economic herd behavior. Bust follows boom like night follows day. Because the biggest cycles last at least a generation, it seems as though every other generation has to learn their economic lessons all over again. A stock and real estate mania led up to the 1930s secular credit contraction just like it did over the past decade in America and just as it preceded the Japanese bust that began in 1990 (continuing to this day in the case of Japan if you didn't know). Such cycles happen with or without a Gold money standard, although debt-backed paper money ensures the manic-depressive swings are wilder and more destructive. This is why the swings in the Dow to Gold ratio became more erratic once we gave control over our nation's money to a private corporation that is not a part of the government and has no reserves - I guess this is why we call them the federal reserve.
But the stability of the measuring stick also changes how far one can fall behind if one holds the wrong asset class. In other words, a debt-backed, out of control paper system means you better get it right in the investment casino or your savings will collapse in purchasing power awful fast. Look at the plot of the Gold price below, which covers the time period from 1973 thru the end of February, 2010 (chart copied from Goldprice.org):
Since the 1979-1980 Gold price "spike" American Gold investors talk about, which doesn't look like much when Gold is priced in Indian Rupees, Gold has gone up roughly ten fold in Rupee terms thru February 2010. That would put us at $8500/oz in Dollar terms if our Gold price chart were the same! And yet, we all know that the value of Gold is not significantly different between the two countries at the same point in time. The measuring stick is different. The currencies are of different value relative to one another and relative to Gold.
Here's the Gold price since 1973 priced in South African Rands (chart copied from Goldprice.org):
The value of our American currency measuring stick will be changing in different ways over the short and intermediate-term. But in the longer run, the value of our currency is going to be significantly lower. A squalid debtor who has lost the faith of the global economy (i.e. the United States) does not emerge on the other side of the debacle with a strengthening currency - at least if history has any value at all in predicting future outcomes.
For example, certain U.S. Dollar-based deflationists point to the strengthening U.S. Dollar that occurred during the 1930s and state that the Dollar will rise again during the current deflationary period. But we were a net creditor in the 1930s and are a squalid debtor during the current cycle. If we want to compare apples to apples, let's compare the America of today with the British economy of the 1930s. Want to guess how Gold fared using London Market prices once Britain, the heavily indebted senior economy of the world at the time, bailed on its Gold standard?
The following is copied from the Measuring Worth site and I did not attempt to verify the accuracy of these numbers, so caveat emptor (if anyone has access to chart(s) of the market price of Gold denominated in European currencies during the 1930s, please let me know!):
Year London Market Price
1925 £ 4.27
1926 £ 4.25
1927 £ 4.25
1928 £ 4.25
1929 £ 4.25
1930 £ 4.25
1931 £ 4.63
1932 £ 5.90
1933 £ 6.24
1934 £ 6.88
1935 £ 7.11
1936 £ 7.01
1937 £ 7.04
1938 £ 7.13
1939 £ 7.72
1940 £ 8.40
Couple this with a chart of the British Pound (stolen from Martin Armstrong) from the 1930s and you see the illusion clearly:
The British Pound collapsed in value when Britain left the Gold standard but then rebounded to new highs a few years later! This is deflation in action. However, despite the currency "index" moving higher, the Gold price continued to rise and outperformed the Pound by a massive margin when looking at the full depression "cycle." So, yes, the U.S. Dollar Index may fibrillate to and fro relative to other debt-backed paper tickets, but Gold will continue to rise and outperform the U.S. Dollar (short term swings aside) over the next few years.
And when that measuring stick known as our currency becomes noticeably "shorter," the economy will be so weak that stocks may or may not be able to reach significant nominal new highs, as with real estate. But Gold will protect people's savings during this portion of the cycle as people look to preserve what little they've got left and the speculative animal spirits continue to drain out of traditional asset class markets into the last bull market left standing: money itself.
Those who think Gold is no longer money think a 40 year reckless experiment can supplant common sense and thousands of years of collective wisdom. For even if we switch from a U.S. Dollar debt-based international monetary system to a new debt-based monetary system, Gold will continue to be the immutable measuring stick by which currencies are measured.
This is why paper debt peddlers (i.e. central bankstaz and governments) hate Gold so much and will continue to fight its rise with misinformation, slander and market manipulation. But they will fail to stop Gold's rise, as they have throughout history. This is because Gold is more reliable than the paper promises of apparatchiks and will continue to be a measure of people's confidence in those paper promises long after the current cast of characters is gone. Those in charge know this (i.e. central bankstaz and their respective governments), which is why they own much of the world's Gold and list it on their balance sheets as money!
Holding real money means much more than nominal gains. In other words, it is not just about being able to buy more paper debt tickets with your Gold, it is about the increased purchasing power Gold will continue to have relative to stocks, bonds and real estate over the next few years. Paper debt tickets may buy more real estate and stocks in a few years than they can now, but there are no guarantees (the inflation-deflation debate ain't over!). However, it will take a greater number of paper debt tickets to buy the same amount of Gold in a few years and thus one's "true" savings will increase to a much greater extent by holding physical Gold rather than U.S. Dollar cash if deflation is where we are headed. The secular bull market in Gold is not over and won't be close to over until the Dow to Gold ratio reaches 2, and we may well go below 1 this cycle.
Friday, February 26, 2010
Looking for repetitive patterns, or fractals, in markets is something I enjoy. I know I need another hobby, but knowing what's happened in the past and what is possible based on historical precedents can help one to make speculative decisions and anticipate future movements. Sometimes it works, sometimes it doesn't...
I still think we are in for a VERY strong move in Gold mining stocks to the upside. I still believe a valid construct for analyzing what may come next is the 2001-2002 time frame. If so, we are on the threshold of that big move I am dreaming of as someone who is all in on both Gold and Gold stocks at this point (as well as a little silver and some silver miner exposure). Now hope don't make it so and isn't a very good investment strategy, to be sure. But the fundamentals are there and are as strong as they have been during this entire secular bull market based on the "real" price of Gold (i.e. Gold price divided by a basket of commodities).
Anyhoo, here's an 11 year weekly log scale chart of the $HUI Gold mining index divided by the price of Gold ($HUI:$GOLD) to show where I think we are:
I know it's a busy chart with too many marks on it and keep in mind that I am only a casual tinkerer when it comes to labeling price movements using Elliott Wave theory, but the implications are important if they are correct. Remember that the $HUI is an unhedged Gold stock index and it underperformed the price of Gold for FIVE YEARS before the capitulation lows in the $HUI:$GOLD ratio during the Great Fall Panic of 2008. After a 5 year bear market in the $HUI:$GOLD ratio, we are highly unlikely to see Gold stocks continue to underperform after only a one year bull market in this ratio. The real price of Gold tells us that the profitability of Gold miners is there on an operating margin basis. Though not all Gold miners will be in a position to cash in on this new margin expansion, others will and the sector as a whole should be set to benefit in a big way.
It is also important to remember that this stage of the Gold bull market, which has shifted from stealth to middle stage, will have even more power behind it. When big institutional money moves in (e.g., Soros, Paulson, Tudor Jones, Einhorn, Northwestern Mutual Life, China, India), this is bullish. It doesn't mean the trade is too crowded, it means the bull market is about to become easier to ride. And who will all these big investors sell to? They will sell to the public and the Gold permabulls, but not until the price of their investments is much higher than it is now. Do you really believe that Soros and Paulson are doubling down on their bullish bets at the exact top?
Only when there is widespread public participation can a mania or bubble occur. Think internet or housing bubbles. Selling your Gold jewelry at 20 cents on the dollar to pay the rent ain't a sign of a bubble, it is a sign that people are broke and desperate.
And don't forget that the final stage of a bubble can last for a year or more and entails a dramatic vertical spike of greater than 50% that dwarfs previous phases/up moves of the preceding bull market before the bubble pops. In other words, the 20% gain last fall in the Gold price is not even close to constituting a bubble dynamic in our "modern," unrestrained, fiat, debt-based monetary system. In the last secular Gold bull market, the final Gold price spike was 300% or so higher in ONE year (and silver was around 700%!!!). Now I understand that this cannot possibly happen again according to "experts" who told us Gold would never break out over $1000/oz. and now that it did the Gold price is about to collapse any second, but why would anyone care what these experts have to say?
I remain wildly bullish on all things precious and metal and think we are getting awfully close to a powerful breakout for both Gold and Gold stocks in U.S. Dollar terms. Of course, those who calculate prices in Euros are already enjoying historic secular new nominal highs in the price of Gold. New highs are coming for the Gold price in U.S. Dollar terms shortly in my opinion and I believe this will occur before the spring is over.
I believe Gold stocks will provide good leverage on the next multi-month move higher in the Gold price. I have already put my money where my electronic pen is, so I am as biased as can be. Once the Dow to Gold ratio gets to 2, I will be starting to sell my physical Gold. I plan on taking the proceeds from selling my physical Gold and buying Gold stocks (surprised?) for their final run, as Gold stocks should top out after the metal if the last two secular Gold bull markets are a good guide.
Gold stocks are historically significantly undervalued (see chart at the end of this post for proof) and a simple reversion to the mean should provide explosive profits in the Gold mining sector during 2010. I plan to be along for the ride.
Thursday, February 25, 2010
A replay of the general stocks down, Gold and Gold stocks up scenario that occurred during the 2000-2003 bear market in general stocks, the 1973-1974 bear market in stocks, and the 1929-1932 bear market in stocks. I think Gold stocks are going to rise while the general market declines. I think we are getting real close and I think the bottom is already in for the Gold price and general Gold stock indices.
I am thinking something like the chart below is what's in store. This chart is stolen from Frank Barbera with my scribbles on it:
For those who don't know, Homestake was a huge Gold mining company that was around for both the 1930s and 1970s Gold stock bull markets and its remnants are now part of Barrick Gold (ticker: ABX). Speaking of Homestake, perhaps something like this chart, stolen from Mr. Ian Gordon at the Longwave Group, may be coming:
I know, I know, Bloomberg sayz Gold and Gold stocks only do well during inflation and Gold stocks go the same direction as the general market. Except for the fact that some of the greatest historical bull moves in Gold secular bull markets over the past century have done exactly the opposite, including those from 2000-2003. I know, I know, markets never rhyme or repeat and the swinging pendulum of market history can't possibly work because it's general stocks for the long haul, duh.
You can put your money where you want, but I don't fear a return of the general stock bear market at all. Flea on a bull's back. It is Gold's time. Gold stocks will eventually start to outperform the Gold price on multiple consecutive days and even for weeks at a time, in a manner very similar to what Gold stock indices did today.
I don't think today's move in Newmont (ticker: NEM) was a one-day wonder, I think it is setting the tone for the next 2-4 week move higher. I don't like Newmont as an investment, but stodgy blue chip Gold miners often lead the move then slow down and lag as other faster growing Gold stocks come to life. Here's the last 3 weeks of action in NEM using a 15 minute intraday chart:
I am not saying that general stocks can't go higher - they can. But I smell a rhyme of some of the most successful Gold stock and Gold moves coming up and it don't matter one iota whether the stock market goes up or down. A stock market crash spares almost no stock, but a bear market in general stocks is irrelevant right now for the Gold bull market. Still stubbornly long and wildly bullish all things precious and metal.
Wednesday, February 24, 2010
Simple. Default (refuse to pay/declare bankruptcy/re-negotiate debt) and/or debase/devalue the currency (a "subtler" form of default). Don't forget the end game when you're watching the daily squiggles. In the 1930s, contrary to what you will read if you study mainstream economic texts or the current paperbug clowns (a la Krugman), the federal reserve (which is not a part of the government and does not have any reserves) made heroic efforts to stop the deflationary slide. People argue that they didn't lower interest rates fast enough, print enough new debt, or turn some other economic knob at the right time.
OK, perhaps this is true. In fact, I'll say that it is true. Because central planning of an economy doesn't work well over time (ask Russia) and can't work even with a star quarterback at the helm (and Bernanke is no star, trust me). If we gave Paul Volcker the reigns right now, the same thing would occur that is going to occur under Bernanke's stewardship of our unconstitutional central bank. In our current fiat system, printing money means printing more debt. But more debt makes things worse in the current setting when debt cannot be paid back. Of course, this won't stop everyone "in charge" from trying.
More job programs that don't work, more "stimulus" that causes only a greater stupor, more wars that only serve to increase our enemies' strength at the expense of our own, more government control over the economy that ensures it will stay weaker for longer than it needs to, and more welfare for anyone deemed less fortunate than the average Joe. Forget common sense. It won't be back for awhile.
And when things are worse five years from now than they are today, the cause will again be misdiagnosed and economists will be "surprised" as "no one could have seen it coming." The blame will also be laid on those who are long gone and no longer beholden to "the people." But the final trump card will be available and will be used at some point during this cycle, make no mistake about it.
This trump card is currency destruction. There are those who say we cannot devalue our currency in the U.S. because we have no one to devalue against as the world's reserve currency. Those who say this cannot see the forest through the trees and won't until the game is already over. If what's left of the global free market will not devalue the U.S. Dollar despite reckless government policies designed to do just that, then the trump card gets played.
This trump card has been played for centuries, whether via abandonment of a Gold standard (a la every major global economy in the 1930s), an announced devaluation of paper currency (a la the recent actions in Venezuela and Vietnam), decreasing the metal content of coins (a la Roman times and the U.S. in the middle of the 20th century) or introducing an entirely new monetary system (a la the Euro). The only lesson Bernanke learned from the 1930s is to try to devalue the currency quicker and as fast as possible so a new cyclical false inflationary boom can begin sooner rather than later! The devaluation of the U.S. currency in 1934 (i.e. Gold peg changed from $20.67/oz to $35/oz) brought back a multi-year cycle of inflation without delay. Any consequences after a few years are handed to the next group of politicians, so why concern oneself with longer term analysis?
I suspect the bankstaz have no plans to go back to a Gold standard unless bloody riots force it upon them. I am not holding my breath for such an outcome, as the level of monetary ignorance among even educated and intelligent citizens of the world is generally higher than seems remotely possible to those who have crossed over to the other side of the matrix. This leaves three outcomes in my mind that are most likely, though there may well be others.
First is a super-sovereign currency a la the Euro, whether on a Western basis (i.e. something along the lines of the Amero but with a different name) or via something from the IMF. The second possibility is a coup by one or more of the emerging economies of the world, who could introduce a hard asset-backed currency in an act of economic warfare. Such a plan could help explain why China is the first country using a paper debt-backed monetary system in a long, long time (ever?) to openly encourage its citizens to buy silver and Gold.
Finally, there is the possibility of the paper masters of the world fostering a Gold bubble. As Soros said, the ultimate asset bubble is Gold. By encouraging Gold prices to go higher, the declining value of paper money is overtly exposed to market participants and can become self-sustaining. Of course, most Gold bulls believe that this will happen with or without government assistance and I agree. Governments cannot change the primary trend, but they can distort it and current distortions serve to slow the Gold bull market down rather than speed it up.
Regardless of which of these "solutions" are chosen, and none are fair or reasonable from the point of view of we ants of the world, a debt default thru repudiation or currency defilement will economically destroy those who hold their life savings in U.S. Dollars. Don't worry, though, mommy government will take care of you after the deed is done. And, no, this unilateral policy action will not be openly discussed, voted upon by the public or announced in advance.
Because of where we are in the economic cycle, stocks are likely to lag whatever inflationary jolt can be achieved by destroying the paper promises standing behind our transactional money. This is why Gold does well during a Kondratieff Winter. The lack of confidence in the economy and government behind it leaves few good investment choices. Prechter believes the reason Gold didn't tank in the 1930s (if I understand him correctly) is because Gold was linked to the U.S. Dollar. I think he has it backwards. The reason Gold didn't soar higher in the 1930s was because its price was fixed and thus Gold was not allowed to find its true market value.
The bearishness in the retail Gold crowd is palpable right now and misplaced in my opinion. No one can predict the short term with any consistency (though it is fun to try!). Sentiment and interest in the Gold patch are at indecipherable lows despite $1000 now acting as a floor for the Gold price instead of the ceiling. Now that a four digit Gold price is cemented in market participants' minds, the only important question is related to what number will be the first of those four digits when the secular Gold bull market comes to an end. I don't claim to know, but here's a hint: it ain't the number 1, although this may be the magic number for the Dow to Gold ratio when the Gold bull peaks.
Sunday, February 21, 2010
Silver is more volatile than Gold and riskier. It also provides a more substantial upside potential. Classic case of increasing risk to potentially increase reward. I hold some physical silver, but hold much more Gold. Silver can sometimes lag Gold substantially for decent periods of time and then rapidly play catch up. Because I believe we are on the cusp of an explosive run higher in all things precious and metal, I am growing more interested in looking at silver. See yesterday's post regarding the CEF:$GOLD ratio as well.
Gold miners tend to make big bull runs at the same time as silver, as Gold stocks are riskier than Gold and tend to thrive when speculative spirits are running high, so silver and Gold miners can at times be imperfect proxies for one another. My biggest Gold mining holding right now is the GDXJ junior Gold mining ETF. I use this as a way to help diversify away company-specific risk in the sector, since I am not a mining expert, and to get exposure to a basket of smaller cap Gold mining stocks. I use leverage on a portion of my GDXJ holdings via call options. I also hold several smaller Gold miners outright that may or may not be a part of GDXJ's holdings.
My physical metal is not for sale at anywhere near current prices, but I trade the miners, I don't hold them. I may regret this down the road, but I continue to look to trade most of my mining stocks rather than hold them. Anyway, I have been bullish on silver for a while now, after being erroneously bearish on silver last summer and early fall. The impressive breakout in Gold in the fall changed my mind. I thought deflation would get a chance to maul silver a little more, but now I am not so sure. Several trillion dollars in monopoly money debt can perhaps buy a little more time than I thought...
Those who claim that silver lagging Gold means the move in Gold is fake-out I think are wrong. I would like to show them exactly how wrong they may be.
Witness a portion of the 1970s Gold run (chart stolen from sharelynx.com and defiled with my scribbling):
And here's what happened with silver in the 1970s (also courtesy of chartsrus.com):
Now, most who have studied the last precious metals bull market know what happened next: Gold went up 3-4 times from 1979 to 1980 and silver went up 9-10 fold, both reaching their peaks in early 1980. Now I am not saying we are on the threshold of "the" final move in this secular bull market. But I do believe silver may surprise many here, explode higher and outperform Gold. I wonder what the new uber-bearish Elliott Wave International wave count on silver would be if silver makes new highs this year?
Another example from more recent history can be found in the 2002-2003 time frame. Here's a daily Gold chart during the period of interest with my comments regarding the similarities to current conditions:
Now, during this time, silver did poorly. Here's the silver chart from the exact same time frame:
And, of course, my favorite game: "here's what came next." First, the Gold price:
Next, what came next in the silver price over the same period:
There's a good chance we are headed for a replay of this 2002-2004 scenario in my opinion. Gold's movement in this secular bull market has been much more methodical and gradual compared with the 1970s. The reason is simple: Gold has been "managed" this time around. Even Paul Volcker has openly admitted he failed to "control" Gold's rise in the 1970s and that this was a mistake. This is the lesson learned from the last Gold bull market! Not that paper money is unstable and unfair, not that deficits matter, but that the Gold price should be "managed." I laugh every time Volcker is trotted out as a messenger for reform and as a voice of "sanity" among the banksta community. Yes, in the land of the blind, I suppose the one-eyed man is king - but give me a break.
This quote of the month from Adrian Douglas (in another great GATA article exposing the market manipulation that is getting worse rather than better in the Gold and silver markets) matches my thoughts precisely:
"If the U.S. government has a budget of $3.8 trillion and supposedly governs a $10 trillion economy, yet five commercial banks control $198 trillion of derivatives, who do you think really runs the country?"
I remain bullish on all things shiny and precious, both for the intermediate term and the longer term.
I was doing some research on the Central Fund of Canada (ticker: CEF), which is a form of "paper" Gold and silver with a long track record and a much better counterparty risk profile than dangerous Gold ETFs like GLD. Now, CEF generally holds about 60% Gold and 40% silver, so it is not a "pure" Gold fund. I don't recommend paper Gold to anyone before they have established a physical position in Gold as an insurance policy that can always be cashed in when needed. I am not affiliated with nor am I recommending for or against CEF - you must due your own due diligence!
However, I discovered a potentially useful buy and sell signal in the precious metals markets using the premium/discount levels of CEF relative to the Gold price. There is no guarantee this will work in the future, but I found it fascinating and wanted to share it. It seems to actually work best with the silver price, but also works fairly well with Gold and the Gold mining indices.
There are times when CEF trades at a "premium" to the Gold price and times when it trades at a "discount" to the Gold price. When speculative juices and interest in the precious metals patch are running high, a premium tends to develop for silver relative to Gold (and CEF usually only holds around 60% Gold and the other 40% in silver). A lack of speculative interest in the precious metals sector tends to cause the opposite. In a way, then, this is a sort of silver:Gold ratio. However, there is also a component of "froth" or disinterest in the CEF built into this CEF:Gold ratio, as the fund can trade at a premium or discount to the NAV of the underlying metals held by this instrument. Other factors I haven't considered may also be important. Regardless of why it works, its record is impressive so far in this secular silver and Gold bull market.
As with most ratio charts or indicators, extreme measurements tend to have the most predictive value. Plotted below is an 8.5 year chart to encompass the entire silver bull market that began in late 2001. The blue area plot is the CEF divided by the Gold price (i.e. CEF:$GOLD ratio chart) and superimposed is a black linear price chart of silver ($SILVER).
And here's the CEF:$GOLD ratio chart (blue area plot) versus the $XAU Gold mining index (black linear plot) over the same time period:
Will the current signal, which is the 4th strongest of the ongoing secular silver bull market, be proven valid or will it fail here? Those who have read my rants lately know where I stand. I think we're set for another big bull run and I remain stubbornly bullish here. For more bullish data, look here. The breakout over $1000 was an historic psychological moment in the Gold secular bull market and the new psychological floor for the Gold price is $1000/oz.
People who say that silver has been lagging and thus the current Gold bull move is suspect don't understand silver at all and should be ignored. Silver makes big, fast moves at the end of a precious metals run and can play catch up quickly - VERY quickly. We haven't hit the CEF:$GOLD ratio levels that have ended previous big moves in silver or Gold. I think we will before this bull thrust completes.
After a breakout following an 18 month consolidation at and below the $1000/oz level, a 3 month rally of 20% in the Gold price ain't enough of a run. There's more to come in my opinion before a significant longer-term correction will occur. I predict new highs in Gold, Gold mining indices and silver before the spring is over. All surprises should be to the upside in the precious metals patch. Of course, I am all in on precious metals and mining shares from the long side and thus as biased as possible...
Saturday, February 20, 2010
This article on real estate delinquencies is typical garbage reporting from the Los Angeles Times. I am providing the link for the data, but more importantly for the tone of the reader comments below the article. A year ago, there were arguments back and forth in comments related to articles like these. Many were bulls who saw a buying opportunity. Some were real estate agents arguing that it was a good time to buy.
I think we have reached the threshold. We are now in the middle of the secular real estate bear market and the decline is about to accelerate. Capitulation is a long ways off, of course.
Housing is dead for a generation. It is a place to live, that's all. One or two generations from now, the game will repeat and residential real estate will again get frothy and speculation will be back in vogue. The housing price to Gold ratio is going to continue collapsing.
People know they've been had in the bubble areas of the U.S. and they are getting even the only way they know how: by defaulting. This adds to the stress in the real estate market caused by the people who can't afford to make their housing payment. Walking away is the new normal in bubble areas, particularly in California where creditors have a limited ability to recoup losses regardless of the debtor's capacity to pay and/or assets. Walking away from mortgage debt is now acceptable to a critical mass number of market participants.
The moral hazards introduced by Wall Street and da bankstaz over the past few years are coming home to roost.
One chart, one message. "Stocks bad, Gold good" is coming soon to a theater near you. The Dow to Gold ratio over the past year is forming a head and shoulders top that is getting set to break to the down side:
The correction in this ratio, which is in a secular bear market, has been almost a year in the making. I think we topped out in August but we haven't broken down yet.
Wednesday, February 17, 2010
Things are going to continue to get darker economically. Nothing has been solved but massive currency debasement has already occurred to try to stem the tide. The reason is simple. I forget where I stole this chart from and if anyone knows who is making this chart and keeps regularly updating it, please let me know so I can check their site periodically:
New debt is now a drag on the economy rather than a boost. This is a bizarre concept. Piling more debt on top of the old, rickety, sky-high debt pile currently in the economy now actually makes things worse. This is a deflationary trap that will require new approaches to stoke up true inflation in the economy.
Now I realize that Prechter doesn't think inflation can be created in this environment and all attempts to inflate will fail, but Mr. Prechter assumes people will play by the rules. The current crew in charge is an amoral group fixated on ultimate wealth and power. They will rape your dog if there's money in it.
Just like in the 1930s and 1970s, the currency will be aggressively debased to keep the games going. In the 1930s, the U.S. watered down a decent Gold standard and turned it into a quasi-Gold standard after confiscating the Gold of private citizens. This devalued the currency by 69% overnight (Gold peg changed from $20.67/oz to $35/oz). Savers got screwed.
In the 1970s, the Gold standard was completely abandoned and rampant inflation ensued, with Gold going from $35/oz to $850/oz at its peak only 9 years later (a 24-fold increase). Savers and those on a fixed income or invested in government bonds got particularly screwed.
We stand on the threshold again. There is no way out of the current debt situation the U.S. is facing. We are not the only ones in trouble but people who think the PIGS are in big trouble and we are not don't understand what is happening. "We are the reserve currency," they say with an arrogant misunderstanding of what happens to an old, cocky prize fighter that insists on continuing to lead with his chin.
No, the U.S. is not a horrible country and no, it is not the end of the world. But it is the end of the line for those in economic denial that have a little money saved. The U.S. Dollar will be aggressively devalued over the next five years. I just don't know when or how it will occur. Will the "powers that be" stop fighting Gold and let it rise naturally as a way for all currencies globally to depreciate? Will the IMF or some other super sovereign entity become the world's central bank and everyone will devalue against the new one world currency?
I am an ant. I don't know. But I do know that the major currencies of the world will all be debased aggressively to allow the banksta debt masters to be at least partially paid back. Gold is the only currency that can't be debased by banksta or bureaucratic decree. Granted, they will continue to try to suppress the Gold price for a while. Consider today's announcement of the IMF selling more Gold.
Really think about this. If you're a Gold bull, you've known about the sale of this Gold by the IMF for months if not years. Why would an organization that can print up paper debt tickets out of thin air sell physical Gold to raise more debt tickets? Is it because they need the money? Of course not. It is designed to crush Gold and crush the spirits of Gold speculators. Gold is a competing currency that bankstaz and governments do NOT want you to be interested in.
If everyone turns to Gold, the Ponzi scheme collapses. If people refuse to accept paper debt tickets as money, then the game is up. But when bankstaz and governments are desperate to inflate and borrow more to pursue ridiculous schemes, Gold is actually the most conservative investment available.
There is already open discussion of seizing 401(k)s and other retirement funds from people and forcing it into government bonds. There is already an open door that allows money market redemptions to be frozen at will by private firms without government oversight. There is already a central banker who has publicly stated that Dollars can be created at almost no cost and dropped from helicopters if needed to spark inflation. When the job of those in charge is to lie constantly, don't expect any more direct hints before you get screwed out of your life savings. Yes, stocks can rise in nominal terms during an agressive inflation, but on an inflation-adjusted basis, stocks will decline (think Dow Jones Industrial Average from 2000-2007).
The deflationary collapse scenario can occur. No question. This is the irony of our situation. We ants have no control individually over monetary policy. Only collective rioting and bloodshed has a chance to free the country from the grips of banskta interests. If the federal reserve decides to stop issuing credit, the economy will collapse in a deflationary heap. If they decide to inflate at all costs, then we risk extremely aggressive inflation or possibly hyperinflation. We are on that razor's edge between the two.
Because the central banks must keep the sheeple calm, inflation is a more politically expedient option. Destroying the currency just a little more will kick the can down the road another year or so. It makes the most sense, since the bankstaz will benefit from an inflationary policy. Especially now that the federal reserve owns over a trillion dollars of mortgage debt. Of course, if inflation doesn't work, the fed will simply hand the debt over to the U.S. Treasury and allow the debt to explode on the government balance sheet. Remember, the federal reserve is a private, non-federal, for-profit corporation. Their interests are aligned with America only as long as it is profitable for them to be.
Now, where it gets tricky is in the confidence arena. The party line is that Gold does well during inflation and poorly during deflation. I think Gold does well when confidence in monetary policy and/or the government behind it is low. Deflation or inflation becomes a side argument. For example, even Prechter will tell you that deflation is everywhere right here and right now. So why is Gold kicking the U.S. Dollar's behind when it comes to overall returns since the beginning of the bear market that began in October of 2007? Oh, that's right, Gold is going to collapse any second and the Dollar is going to rocket higher to nose bleed levels.
Just like in 2008, right? Oh, wait, Gold corrected to the high 600s in the crash then was back at its all time highs around $1000 in February of 2009, during the most intense part of the deflationary panic in the stock market and this happened while the U.S. Dollar Index was still rising! Hmmmmmm.
The type of economic dead end we find ourselves in currently leads many to Gold. Say what you want about George Soros and John Paulson, I don't think many would consider them "dumb money" in the investing world. India is not and has never been "dumb money" when it comes to Gold and they think $1050/oz is a too-good-to-pass-up price for Gold.
Gold is an insurance policy. It is supra-sovereign wealth accepted in any major economy. No, you can't buy bread with Gold, but you can't buy bread with the Dow Jones or T-Bills either (first you have to cash in your investment, then you spend the money - silly paperbugs!). No, you can't eat Gold, but it is kinda shiny and purty to look at and T-Bills taste like crap anyway. Even if you don't want to hang out in a bunker, you can profit from physical Gold.
Paper Gold helps to suppress Gold's secular bull market and delay its advance. Physical Gold investment demand is what helps to drive the price higher. Paper Gold leaves one vulnerable to the exact counterparty risk one is trying to avoid by making a Gold investment.
In the final few years of a declining Dow to Gold ratio headed for 2 and possibly less than one, things get dark in a social and economic sense. The late 1970s and early to mid 1930s were not the happiest of times. However, both eventually led to an economic spring once the excesses of the previous era were (partially?) wrung out of the system. This time will be no different in the long run. But the secular Gold bull market has a long ways to go from current levels. A long way.
Monday, February 15, 2010
Me thinks so. Of course, Gold has already hit new record all-time nominal highs when priced in Euros. Did you see the Gold positive announcements related to this important event on bloomberg.com or the bullish pronouncements by Nadler over at kitco.com who now says Gold is better than all fiat currencies? Didn't think so...
The downward trend line that marks the current 2+ month correction in the U.S. Dollar-denominated Gold price has been broken (barely) tonight. Here's the early peek-a-boo above this important short-term trend line:
I remain bullish and still think $1350 before the spring is over is the BEARISH scenario for Gold. I think it's time for a big run. Have you seen the latest Commercial Trader category in the COT report for silver? Talk about an about face! We're talking almost 50% more bullish (on a net basis) for da big boyz than just 4 weeks ago.
I think the fireworks are about to start. Of course, I'm all in and biased as hell, but I think it's going to be a good spring for Gold and Gold stock bulls.
Elliott Wave Theory (EWT) is one of many technical tools available when one is trying to "guesstimate" what the market will do next. Different practitioners see different things in the charts using the same technique, making it as much art as science (like all technical analysis). Robert Prechter is the name everyone associates with EWT and he is bearish on Gold, so most Gold bulls don't like him or EWT. He has been terribly wrong on Gold for a decade and his incorrectness on Gold is set to continue. Gold is going much higher from current levels and has already trounced the U.S. Dollar over the past decade.
Figuring out the bigger multi-decade cycles should be a major goal of retail investors. Buy at the dawn of a new secular bull and hold on until at or near the top of the secular peak 10-20 year later. Knowing that the 2000 top in stocks was a MAJOR SECULAR EVENT would have given you a huge advantage over other market participants. Easier said than done, of course.
Prechter saw and still sees a deflationary implosion that will take the U.S. Dollar to nosebleed levels (i.e. much higher from current levels) and he sees Gold going back down to lower lows below the 2008 fall panic lows. I think the US Dollar and all paper debt tickets will continue to deflate against Gold. Other Elliott Wavers such as Alf Field also agree that Gold is in a MAJOR secular bull market.
Tony Caldaro also believes Gold is in a secular bull market using EWT and has a current tentative price target of $3750 for the secular peak. In a recent post he summarizes where he thinks we are in a "big picture" sense - I think it is worth a read and admire his work. To quote arguments from this post against the Prechterite 1930s-type deflationary collapse scenario:
"There is very little protectionism now, no gold standard to limit an inflationary monetary policy, the world is much further along industrially and technically, plus currencies flow across borders in nano seconds.
In regard to currencies, during each of the last two commodity booms the USD was officially devalued. FDR did this in 1933 when he devalued the USD/Gold relationship from $20.67/oz to $35.00/oz. Then in 1971, Nixon took the USD off the gold standard completely. This suggests an official devaluation of the USD will likely occur before 2014. In addition, no need to tell you what will happen to gold and crude over the next few years. Gold and Crude made peaks in the 1940's and then again in 1980. The [fed] policy of quantitative easing will only add more fuel to the current commodity bull market."
I am increasingly inclined to agree with this viewpoint. I thought we were in for a deflationary collapse, but now I'm not so sure. There will be no restraint on new debt creation in the public sector until the public riots in the streets. I think the rioting will be much more likely if governments don't agree to take on more debt - this is the sad state of our collective economic ignorance. Of course, this by no means indicates the current secular stock bear market is over - far from it. But it means S&P 500 at the 500-600 level for "the" bottom instead of the 100-300 level.
A paper money system can be degraded ad infinitum until a new system is put in place to replace the old due to non-functionality. More debt at this point is highly destructive but that doesn't mean it won't be tried. Greece will be bailed out. Other "PIGS" will be bailed out as needed. US States will be bailed out. Japan will be bailed out. On and on. What is to stop us at this point? Who exactly is there to stop this economic madness? You think the majority of people are going to start listening to Ron Paul?! I am a huge Paul supporter by the way, so don't misunderstand this comment.
Gold will play relief valve in this madness. I have always believed that governments cannot stop or change the primary trend, but they do have the ability to destroy the currency. When priced in Gold, we have already experienced a major stock and housing collapse that more starkly unmasks the the nominal price drops in these asset classes. The Dow to Gold will reach 2 and may even go below 1 this cycle. I don't know how long it will take and I don't know at what price points for Gold or the Dow this will occur.
But I do know that Gold is a better investment than stocks, cash held in any paper currency, government bonds, or real estate. Commodities are a question mark to me given the weak economic environment we are in, but rampant speculation can keep commodities afloat during aggressive currency debasement even in the absence of economic need.
We will continue to live in interesting times, to be sure...
Sunday, February 14, 2010
Stumbled onto some good statistical trading data over at Trader's Narrative while doing a search on Gold sentiment info. I sensed a serious lack of bullishness in the Gold sector and wanted some data to confirm it. Data from the piece over at Trader's Narrative (aptly titled "Gold Sentiment: Dumb Money Rushes Out") confirm my hunch. The chart in their piece speaks strongly for a bottom and the following quote has me very excited:
"According to Elliott Wave, the 10 day moving average of the Daily Sentiment Index has fallen to just 20.1%... the DSI [Daily Sentiment Index 10 day moving average] has fallen below its levels last seen in November 2008."
This is INSANELY BULLISH. As a disclaimer, I haven't seen this Elliott Wave data myself (typical third-hand internet reporting...). Sentiment is more bearish in the Gold patch now than at the bottom of the Great Panic of 2008?! The infamous hedge fund manager Paulson can't raise enough global money to match the $250 million of his own money he's putting up? Small speculators (i.e. "dumb money") are more bullish on the U.S. Dollar than at any time in the last decade?!
And here's a 2 year daily Bullish Percentage chart on the $GDM (i.e. the index behind the GDX Gold mining ETF) thru Friday's close:
Lastly, courtesy of The Daily Gold, here's the put-to-call ratio chart for the GDX ETF:
Everything is in place for a good rally in the Gold patch. We'll see what happens...
Friday, February 12, 2010
Once you've looked at and studied many charts, pattern recognition begins to occur. This may be for better or worse. I find the language of charts intriguing. After all, they often are simply a catalog of human behavior.
People who say Gold is simply a manifestation of monetary inflation miss the boat. There is monetary inflation 95-99% of the time in a paper money system. And if it's a Gold standard, it will be restrained by common sense and/or critical thought for about a year. Then some minor crisis will hit. Then another. Then another. Next thing you know, your Gold is confiscated for the good of the state and then revalued higher to benefit the thief. Every monetary system will fail and succumb to inflation if history is a valid guide.
When a paper system begins and even in its middle to beginning-of-the-end phases, debt expansion seems to stoke the bullish fires of financial speculation. But when the final phases begin, Gold becomes a go-to asset. This is because paper promises are revealed for the uncollectable dust they have become. The scramble for economic survival forces one to hedge that paper with something reliable.
As excessive paper-backed debt takes a quantum-leap decline in value, Gold acts as a mirror and reflects the inverse value of paper debt tickets. Other asset classes can gain in nominal terms if an inflationary spiral occurs (rather than a deflationary implosion), but Gold shines in this final "Winter" K-Wave phase as a hedge against government insanity. It's a confidence thing. If you don't think the economy is going to grow, why not put your money in a cash position that can't be debased upon a whim?
If one could pinpoint an absolute best time to hold Gold, it would be when the monetary system one is living under approaches its final denouement. Of course, this is ironically the time when your government will do everything in its power to make sure it can extract additional revenue from you. How else can the government support the lifestyle to which it has grown accustomed?
Those who follow economic policy know that we have learned how to forget the future. We must stop all economic pain immediately and at ANY cost. Everyone working near or benefitting from the magical debt crank must be comfortable and is willing to deny reality. I mean, what? Do you want to go hide in a bunker and eat your Gold with crazies? Why not just buy a gun, drink the punch and speak in tongues to Jim Jones? If the world is ending, who cares about Gold?
Well, call me an optimist (at least relative to the hardest-core segment of the Gold bull crowd), but I don't think the world is ending. I just think it's another cyclical transfer of wealth from the "financial" sector to the "tangible" sector. I think the people drinking the Kool-Aid are the ones asking the same types of questions at the end of the previous paragraph and I think they will be asking to buy your Gold from you when the price hits $2500-$3000/ounce. Trust is an oscillating pendulum swinging away from Wall Street for the time being. It is normal and natural for a decade or two of financial asset revulsion after such a vulgar display of power [yes, stolen from Pantera] by our financiers.
It is a secular credit contraction being fought by paper masters with a debt press firing on all cylinders. Deflationary reality meets paper tsunami of fiction. Indeed, fact can be more fleeting than fiction when all sanity has evaporated. Gold will continue to thrive during the pandemonium.
The entire mortgage market (what's left standing) has been transferred to the government balance sheet. Really? In which country, again?! There are active discussions of more countries being smacked (a la Iceland) by the wrecking ball of debt and leverage. Deflation is what should happen. That doesn't mean it will in a paper system that has abandoned all concern for consequences occurring more than a week from now.
The fundamental back drop for Gold is strong and the mania phase is ahead of us, not behind us. The "early adopter" phase has come to a close in this cycle, to be sure. But the final multi-month irrational exuberance that marks the ending phase(s) of a secular bull has not yet shown its purty face.
Longer-term bulls buy on weakness and hold. Certain chart signals can be helpful to those trying to time their buys using tea leaf reading (i.e. technical analysis). Here's one view of a potential Gold signal mechanism in its artistic/qualitative form:
The signal works like this: "When things pinch in, buy in." Ain't it simple and purty? Following is the signal in a more quantitative form. The signal is the COT report for Gold. No signal works all the time as anyone who follows markets knows, but look at the prior success of this pattern:
When the number of open contracts declines significantly (i.e. the chart-plotted lines of the number of open contracts for large specs and commercial traders move towards the zero line as well as each other), a significant bottom is typically established. The "weak," trend-following hands are flushed to establish a higher low as the bull powers ahead. As someone trying to follow those trends myself, I have a certain detached sense of calm about the intermediate and longer term that tempers any short-term frustration with the price of physical Gold. How about you? Do you think we're there yet or do we have more "wear you out" type bull action to go?
I speculate a little in Gold stocks and accumulate physical Gold. My physical Gold accumulation strategy has certainly been successful, my trading less consistently so. Gold stocks have not been particularly inspiring during the current short-term bounce. I expect further strength relative to the Gold price over the next week or two. Without it, I will become a "weak" hand in Gold stocks myself. I am as strong a hand as any when it comes to physical Gold - none of my Gold is being considered for sale until the Dow to Gold ratio hits 2.
Thursday, February 11, 2010
I am referring to the Vietnam currency, of course. Another 3% devaluation to fix the country's problems (read about it here). Of course, the devaluation was against the anchorless debt-backed U.S. Dollar, which makes it both doubly amusing and sad.
Gold imports were banned in 2008 in Vietnam. Then, it was announced a few months ago that Gold trading floors would all be shut down in Vietnam. What is the relationship between the currency issues and the Gold issues? Are these unrelated events, since Gold is just a shiny and intrinsically worthless commodity according to our fiat masters?
The Gold rush is contained until it can't be. Black market premiums for Gold in Vietnam are high, as people do what they have to when their economic viability is threatened by out of control governments. Price suppression is only the first weapon in the arsenal of heavy-handed governments.
All suppression schemes fail, but Gold investors must understand they are betting that the idiocracy fostered by paper regimes out of control will continue. Governments don't like the sheeple who are smart enough to figure out the end game. If such thoughts and Gold investments become contagious (and they will, believe me), they become much harder to control by covert means. Volker thought the lesson from the 1970s was to never let the Gold genie out of the bottle and things will be OK. But our central bankstaz and those of the Anglo world are fighting the rest of the globe (including non-Anglo central bankstaz) as well as their own citizens, a battle they cannot win at this point in the business cycle.
Gold will come out on top as it has for thousands of years. The ride will continue to be volatile, but it will also continue to be profitable as it has over the past decade. The secular bull in Gold is far from over and the biggest bull moves in the Gold price are ahead of us, not behind us.
Tuesday, February 9, 2010
I can't stop thinking about the set-up here to slaughter U.S. Dollar bulls. Look at this COT (Committment of Traders) chart for the U.S. Dollar Index, showing 15 years of price action as the major plot and the net position of "Commercial" traders of the past 15 years on the lower plot:
I think the overleveraged U.S. Dollar bulls are being led to at least a short-term slaughter here. We are approaching MAJOR resistance in the 80-82 range for the U.S. Dollar Index at a time when the people with the money and power to rig short-term market moves have THEIR LARGEST OVERT LEVERAGED SHORT POSITION ON THE U.S. DOLLAR IN 15 YEARS!
Notice the financial media spewing garbage about the PIGS in Europe bringing down the house. Watch as the news turns back to the problems in the U.S. right on cue over the next few weeks. People will scramble back into the Euro as everyone realizes it is oversold relative to the U.S. Dollar given the problems in California, New York and Illinois. All paper is suspect. The currency swings will get wilder as the international monetary system continues to break down. Gold will continue to get caught up in this volatility but will come out on top, ahead of all debt-based paper currencies as the dust attempts to settle over the next few years.
The deflationary forces in the economy are strong, which is U.S. Dollar supportive. However, the "commercial" bankstaz would rape kittens for a few extra bucks and will take the Dollar down to protect and make money off their shorts over the short term. Trust me, they can (and almost certainly will) do it.
Losing credibility is much easier than gaining it. Trust is fragile and takes time to grow. A secular credit contraction is a time of distrust. So much bad paper issued, it seems impossible in retrospect. That paper made the last bull market in real estate and its affiliated industries, particularly finance.
How much was that piece of property at the peak? The loan-to-value ratio was greater than 100% at the time of initial purchase? You mean no money down AND you walk away with cash at the closing? A 1% teaser rate? HELOCs for six figures only a year after you moved in using a "no-money down" mortgage?
And now all that paper is bad and stuffed deep into the bowels of the U.S. Government, which has been de facto running the mortgage industry by backing 90% of new mortgages over the last year. Right. This is a smart move - I don't know why the private sector doesn't do it any more. Because we cannot let the mortgage industry deflate. We must sustain an unsustainable bubble at all costs. Why, if you're nice or it's right around election time, we might just quintuple the tax credit for a new home purchase. Or, whatever - would you prefer some other resource-wasting scheme? Americans deserve to have artificially inflated home prices. It's for their own good!
At least the National Association of Realtors knows its real estate. We need to listen to their wisdom to find our way out of this mispricing problem in real estate. This problem's pull is powerful and exposes a lot of naked swimmers. It is also just a symptom of a larger syphilitic disease, that of credit excess. Ask the credit card companies. Or the auto loan companies. Or the home appliance loan companies.
When prolonged, massive debt expansion turns to contraction, price-extended assets fueled by the boom crumble. Housing is done. Kaput. The psychology change is entering its middle phase. Trust in the "home as wealth and investment" concept is leaving and it will take a generation to come back.
Using the government till to combat such a situation assumes resources that don't truly exist. This is a massive undertaking. It will fail. And the more "stimulus" that is wasted in trying to stop what must occur (a bubble bursting), the more credibility and confidence will decline in the currency/debt.
Part of this cycle is about the current central planners and financiers losing credibility. As unpayable debt from the private sector is transferred to sovereign government balance sheets, where are the governments going to get the money to pay these debts? They can only take it from their citizens, whether through currency debasement and/or taxation. If we don't come up with the money through taxes, a more direct confiscation (i.e. your 401(k)/IRA) may be needed. Otherwise, they might break our knee caps!
Gold is good money going into hiding. Gold will survive this financial storm with its value significantly enhanced relative to other asset classes. Gold loves monetary extremes. I can promise we are headed for more of these. Gold senses when the monetary system is losing credibility. Precious metals are the most likely asset bubble to develop over the next speculative cycle. Their bubble will be fueled by the monetary blast(s) accompanying any one or more of a number of potential targets in the next few years that can't be adequately funded with current tax revenues:
+ Fannie Mae and Freddie Mac (no, I mean AGAIN!!!)
+ State bankruptcies
+ Social Security
+ Pensions (government employee pensions in particular)
+ "Stimulus/job creation/infrastructure improvements"
+ Continuing, expanding or starting a war
+ "New" health care plan
+ Medicare (yes, health care again...)
The Dow to Gold ratio will likely reach 2 and could go below 1 this cycle. That's a big move in this ratio given a current level above 9. Many more people will lose faith in debt paper and move into Gold. Gold's biggest move in this ongoing secular bull market of almost a decade lies ahead, not behind.
Sunday, February 7, 2010
Public and private debt will be printed up out of thin air and used to replace the bad private and public debt plaguing the financial world. As the insanity progresses, more and more will turn to Gold. Whether we are headed for an implosion that is deflationary, inflationary, or both, confidence in our current financial system will become mortally wounded. This is why the Dow to Gold ratio will reach 2 and may even go below 1 this cycle. It's a confidence cycle as well as an economic cycle.
More bailouts are coming. More private debt will be switched to sovereign/public debt. If sovereigns can't take on more debt, which they obviously and unfortunately can, then super-sovereigns like the IMF and European Union central bank will mint new debt and pile more debt on top of old. This will continue ad nauseam with several blips along the way.
Because currency devaluations are difficult to achieve for governments that are all fighting to debase against each other, Gold will be the relief valve. Currencies will be devalued relative to Gold. In the 1930s, to fight the deflationary economic collapse brought on by a popped debt bubble, countries just left the Gold standard. The U.S. devalued its Gold standard into a watered-down, quasi-Gold standard and thus became the least ugly currency since it didn't entirely abandon Gold.
In the current ridiculous anchorless paper system, devaluations against Gold are a little less obvious because there are no longer any Gold standard promises to break. But without a doubt, further devaluations of paper debt tickets relative to Gold will continue as they have over the past 9 years. Governments will become a friend of Gold. It may seem hard to believe for Gold bulls, but central banks becoming net buyers of Gold over this past year is only the first step.
Ben Bernanke is a student of the last economic depression and has seen with his own eyes the inflationary jolt a currency devaluation against Gold can have. Gold no longer needs to be confiscated to be re-valued, since the sheeple have bought into the paper fiat world hook, line and sinker. Simply swap out paper Gold tickets (i.e. futures contracts, the GLD ETF, Gold certificates from pooled accounts) for debt tickets (i.e. paper currency units) and pay the paper Gold ticket holders a premium so they feel good about the deal because they make a profit. Now that you are done shorting Gold and silver and you hold a large position in actual physical metal, talk the precious metals up every day on CNBC and whip the herd into a frenzy. Never mind those kooky Gold and silver bugs that actually hold physical metal in the U.S., as they are too small a percentage of the population to worry about and they tend to be heavily armed.
Think about fiat masters buying instead of selling Gold. They are sending a not-so-subtle signal that the number of debt tickets (i.e. currency units) required to purchase Gold is going to go higher. This is not a one-time phenomenon. The Chinese, who seem to be able to muster a longer-term view than many other advanced economies, are encouraging their citizens to buy Gold and silver. This is unprecedented in a "modern" paper fiat world where Gold is ridiculed and denigrated on a continuous basis.
But Gold won't seem so ridiculous if desperate inflationary policies fail to take root and the next leg of the financial asset price decline gets into gear. For inflation benefits the bankers as long as it doesn't morph into a hyperinflation. Deflation is a scary beast for bankstaz, so they fight it tooth and nail with the only tool they have: more money/debt creation. What benefits the bankers will become policy, as governments and the majority of people who vote for them are more than happy to take on more sovereign debt. Since governments have no intention of ever paying the money back, why can't they just keep borrowing more and more despite the detrimental effect this will have? Of course, there is a mathematical limit in theory to what can be done, but I think we're going to test those limits this cycle.
A rising Gold price has been traditionally seen as a threat to the credibility of the current U.S. Dollar regime. But when inflation is desperately needed by those seeking to maintain nominal asset prices and/or their elected offices, Gold will become a friend. And even if it does not become a friend to those with their dirty little fingers reaching for the magic debt printing presses, Gold will become a safe haven of choice for an increasing percentage of the global herd. It doesn't take a genius to recognize an economic and monetary train gone off the tracks. Several thousand years of accumulated human experience and Gold wisdom won't be cast aside based on a 40 year global fiat experiment. Money has not evolved more over the past 200 years than humans have, trust me.
I am looking for an increasing number of highly publicized large Gold purchases by various central banks. For this is the stage when beggar-thy-neighbor policies will fail, the currency fluctuations will get more violent, and Gold will be seen as an ideal solution to achieve massive currency devaluation and stave off the deflationary debt collapse from completing. Whether it works or not remains to be seen, but Gold will enjoy large gains from current levels because of these pending "solutions" and the loss of confidence that will accompany them. This is not a happy message, but it can be a prosperous one if you are prepared.
As strange as it seems, the world's central bank pushers and their junkie government customers are going to become big Gold bulls before this mess is over. The following 1 year chart of the Greek stock market is a reminder of how fast the tide can turn in the current environment:
If you think the S&P 500 can't do the same thing, you are living in a fantasy world. Gold will not collapse. Gold didn't collapse in the Great Panic of 2008 (correction, yes, collapse no) and was back at $1000/ounce by February '09, at a time when stocks were in free-fall mode. This relative strength is but a taste of what's to come. Until the Dow to Gold ratio hits 2 or less, general stocks will continue to be a lousy investment. Buying Gold now while it is in a bottoming process is a way to play it safe and ride out the storm. Our first lost decade in stocks almost over. Don't get caught in the second lost decade that is dead ahead with a "buy and hold" general stock strategy.