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August 12, 2007

Honest Money Gold and Silver Report: Market Wrap
by Douglas V. Gnazzo

Market Wrap

Week Ending 8/10/07

Economy

The big event of the week was supposed to be the Fed's meeting and subsequent announcement on interest rate policy. There was some speculation for higher rates, while most thought they would stay the course; others were of the opinion that they should lower rates because of the growing problems in the subprime mortgage market.

The Fed stayed the course, at least in regards to interest rate policy, as 5.25 percent remained unchanged. Their post meeting statement indicated they were still most concerned with inflation moderating to more susceptible and sustainable levels, although the housing downturn was mentioned.

As the week unfolded, it became obvious that the subprime mortgage debacle had stepped up to the level of a contagion, as just about anything connected with it in any way, shape, or form was under attack; including mortgages rated higher than subprime, mortgage backed securities, asset backed securities, and collateralized debt obligations. All the derivatives of structured finance were now viewed as toxic waste to stay clear of, or else one became infected - by mere contact, or even through association. Perceptions had changed overnight.

The market is starting to figure out that the sophisticated derivatives of structured finance that were supposed to control and mitigate risk are doing just the opposite in real time live markets, as opposed to merely sitting unused and untried in a computer as an accounting tool during quiet markets that never test their ability to perform as stated.

These various derivatives are creating more risk - as they seize up, freeze up, and become illiquid. Not only do prices drop dramatically - some markets literally freeze up - there aren't any buyers with any liquidity to bid with.

In steps the lenders of last resort - the Central Banks, and one must admit, they did step up to the plate, however, it remains to be seen if throwing more fuel on the fire will put it out or not - I have my doubts. But they wasted no time and acted in unison, opening the credit spigots to all who needed a drink.

The first domino in the latest series of events was when BNP Paribas, the largest listed French bank, announced they had frozen $2.2 billion worth of funds hit by U.S. subprime mortgage problems. This in turn started to make some of the bigger players nervous that perhaps this subprime contagion could and would squeeze credit markets around the world. No one knows for sure because it has never been like this before, which is the point those few voices in the wilderness have been saying for years now, but no one wanted to listen - until now that is.

In steps the European Central Bank (ECB), injecting a large 94.8 billion euros into the European money markets to assuage any liquidity fears.

The Bank of Japan (BOJ) kicked 1 trillion yen into their monetary system, while Australia added $4.2 billion.

Not to be outdone, Bernanke and company first released a statement that the Fed would "facilitate the orderly functioning" of the markets, and the floodgates were thereby opened wide.

The New York Fed first bought $19 billion of mortgage-backed securities. This is different from how "normal" repurchase agreements (repo's) work. Normally a repo is done using U.S. Treasury paper that is exchanged - not mortgaged backed securities. By doing this the Fed monetized the mortgage debt it purchased with the $19 billion. The bank later did a second operation, purchasing another $16 billion worth (for a total $35 billion in monetized mortgage backed securities).

This is an animal of a different sort, one that rumors and sightings have been heard of, but now there is no doubt that it exists, and that it hovers over the markets. What must not be forgotten is that sometimes the cure can be worse than the disease. Hopefully this is not one of those times.

On Thursday the Fed injected another $24 billion into the money markets for a collective quick fix of $59 billion. A statement was also issued that the Fed's discount window remains open, as always, for those in need of money. The spigots were turned down, but are manned and primed - ready to go at a moments notice.

Hiroko Ota, Japan's minister of economic and fiscal policy summed things up quite succinctly when he said: "the effect of U.S. subprime loans is spreading to financial markets around the world... we need to carefully monitor how this will affect the economy." Yes, indeed we do.

Stocks

First up are some charts related to the subprime contagion, we will start with the financial sector.

The losses have been significant but remain off their lows. The fib retracement levels have been included as a rough blueprint of where corrections may run to. So far any corrections have been weak.

Next up is the homebuilder's index, which has felt the strain of the mortgage market's problems. Here too, price is off its low, however, the upside corrective action has been limited, at least so far.

Below are the retail holders that have felt the trickle down effect. Housing first slows up, the industries connected to housing slow up, and soon people in general are holding back on retail purchases.

For months now, I have commented on how it seemed strange that the world is supposedly experiencing a boom of business, yet the stocks of the banks that should be profiting from all this new business looks like someone threw them off a cliff.

Perhaps we know a bit more now than before. Apparently, many of us forgot to ask the question: is this being financed with money that was saved, or is it fueled by newly issued credit and debt? Is positive net worth being produced, or negative net worth?

The broker/dealer index is feeling the blight as well, which if you think about it, it too seems strange. Here we are in a world wide boom, our stock market has just made new ALL TIME HIGHS, and the broker/dealers are falling off a cliff. There's something I'm missing or somebody is missing.

It's almost like we are swimming in uncharted waters with things swimming in the depths below us: big things - hungry things.

The next chart shows the S&P 500 testing its 200 dma. If everything is cool in paper fiat land than the index should be able to regain its 50 ma. That represents broken support that is now turned resistance until proven otherwise.

The chart below is a sentiment chart of the bullish consensus for investors in the S&P 500. The blue horizontal trend line represents support that has held since 2003. Highlighted in yellow is the most recent test, which so far has held.

If that support line gets broken, a significant trend change may be starting - as in bull to bear, although other markers with similar confirmations are needed as well.

Gold

Gold was down $2.80 on the week, closing at $681.60 (-0.41%). Its intraday high for the week was $688.10, and its low was $668.80.

It rallied up on Friday; however, the weekly close was not the highest daily close for the week - that occurred on Wed.'s close of $686.30.

There are many questions, and explanations, as to why with all the turmoil in the markets gold isn't up by more, which is a very legitimate and sensible question. I will give my personal opinion, which has been expressed by others with whom I agree, and it has been ridiculed by those who totally disagree. So, take it with a large dose of salt.

What's going on right now, and will be going on (and perhaps off) for some time to come, is liquidation. Things that are supposed to be money (money substitutes) are being called on to perform as such, and they are coming up short, with less than desirable results - sometimes with no results.

So many screwed up derivatives have been conjured up as another get rich scheme it is mind boggling. They are supposed to mitigate risk, when what they really do is create more risk, and systemic risk at that. All this paper crap they have invented doesn't really exist, as something substantive - that's why they're called derivatives, they are derived from some other source. Most simply represent the relation or ratio between certain other things - some of which are themselves derivatives.

The pricing of such financial instruments works well and good if all you are doing is pricing them and filing them away. Because the markets are running along smoothly there's no big deal.

Suddenly, however, something goes amiss in one particular segment of the market - somebody or something screws up, and money has to be raised to pay for it.

If the selling in turn causes others to have to unwind positions because of the changing prices of things they may be using to hedge risk with are now going down in price, and sometimes quite quickly - well things start getting messy pretty quickly.

Suddenly investors find that pricing something in a calm market where it isn't called on to meet its obligation(s) is one thing, while pricing them in a turbulent market is a horse of a different color. When called on to mitigate risk during a falling market, which also includes a falling price structure for the risk management instrument itself, suddenly such a market turns on itself and will liquidate anything it can. Things are NOT working as planned. Things are not working.

Gold is the most stable, solid, and liquid asset bar none. Because of this unique position, when the going gets tough, investors know they can ALWAYS find buyers for gold - ALWAYS.

They know that gold will ALWAYS be accepted as payment - ALWAYS. Hence, at the beginning of such liquidity crises, gold gets sold along with pretty much everything else. There will be a rising demand for it, but there is also a rising supply of it being sold into the market.

After the beginning stages of such liquidation, the demand for gold as the ultimate true safe haven and store of wealth, will far out weigh the supply coming into the market. Then gold shines brightest and moves up. That is at least what history has so far shown to be the case. Will it be different this time - I doubt it, but one never knows for sure.

So that's my two cents on the sovereign of sovereigns that dates back to the dawn of man - a most regal line of descent and performance, unequaled by any other.

There are a whole lot of charts coming up, so poor yourself whatever you pour yourself and sit back and enjoy. First up is the weekly gold chart.

Considering the events of the past few weeks the chart is holding up pretty well. It looks as though a positive MACD may be waiting in the wings, and histograms have receded back to zero.

STO remains headed up and positive, but we don't want to see it roll over on itself. The 65 ema remains inviolate, and overhead resistance is clearly marked. Remember, the central bankers injected $134 billion into the money markets last week, which is inflationary - period.

Next is the monthly gold chart. That 55% gain is taking some time to be digested. Think of how a python's digestive system works. Those big meals take awhile.

Next up is a bunch of charts comparing gold to many different other things. As the charts show, gold is out performing just about everything. Not much comment is needed, little will be made. Enjoy the eye candy.

Silver

Silver closed down .29 cents to $12.87 for a loss of -2.19%. Histograms are receding back to neutral, while a positive MACD Cross may be in the making. The 65 ema continues to hold.

Below is the daily silver chart. The bottom trend line continues to hold. However, so doesn't the upper trend line. Which way is she going to break is the question.

Next up is the weekly chart of the iShares Silver Trust. Notice at the bottom of the chart that MACD looks like it wants to cross and run.

Histograms are receding back towards zero. The 65 continues to hold, but it's getting mighty close.

Hui Index

As tough of a week as it was for most investments, including physical gold and bonds, the Hui Gold Bugs Index was up 6.29 points or +1.85%.

The weekly chart below sports an ascending triangle that almost always resolves itself to the upside. RSI hit 50 and turned up, the overbought condition has been worked off, however, it remains to be seen if MACD is going to turn up as it needs to, along with STO, which although it shows the overbought pressure has been released - has it been released enough?

Below is a comparison between the S&P 500 and the Hui Index. Since June the Hui has been out performing the broader stock market.

The next chart is where the Hui needs to do a good amount of work, as in out performing physical gold on a steady sustainable basis. Until the upper trend line turns from resistance to support - a new bull phase in gold stocks cannot be had.

GDX Index

The GDX did not perform anywhere near the Hui Index, the resulting divergence being attributable to the stocks that comprise each index. As the holdings of the index go - so too does the index or fund.

The daily chart below does show a number of positive divergences and possible positive set ups. There still remains much work to be done, as the index is closer to its bottom trend line compared to its upper.

The monthly chart shows a well defined bullish trend that starts in the bottom left hand corner and rises to the top right hand corner. Price remains well above its bottom trend line. MACD and histograms need to turn back up. Only positive price action can do that - wishful thinking doesn't work in this game.

XAU

The Xau tracked the GDX last week, barely closing up for the week by a half of one percent. The daily chart below shows the powerful break out above overhead resistance back in July, and the subsequent break down back below the upper trend line.

At the bottom of the chart the Xau/Gold ratio is also testing its recent break out. I still favor a bullish resolution to the over one year long consolidation/correction.

The weekly chart is flashing mixed signals. Some indicators suggest down, others say up, while some say sideways. Overhead resistance is clearly defined. The series of higher lows is the dominant chart feature.

The monthly chart of the Xau is one of my favorite charts, as it's pretty as a picture; and the picture it depicts is one serious cup and a handle formation in the makings. The handle is being formed as we speak.

Next up is the Xau/Gold ratio chart. This particular one is the monthly chart comparison. When that blue down trending line is broken up and above, the next phase up in the bull will be under way. STO looks good.

Individual Stock Charts

Below are several gold or silver mining stocks. Most I own or have owned, while others are under consideration. The charts are pretty self-explanatory so I'll let them do the talking. A few of these charts look promising. Caveat Emptor.

Summary

There are those who have warned of the perfect storm coming, not just last year or the few years before, but back when you didn't buck the buck. I'm reminded of Dr. Franz Pick who said that bonds were notes of confiscation. I agree. I hope I'm wrong.

The world isn't going to end tomorrow or next week, life moves on and waits for no man. But a warning shot has been sent across the bow - unchartered waters lay ahead, and one best have a plan for dealing with the unexpected - before its happens, not during or after, as by then it is too late, life has already moved on. We either roll with the punches or we go down, the only other option is to hit back real hard and win, which might not be a bad idea.

I'm just going to come right out and say what I think may most likely happen. I do not know exactly when or to what degree, but I think I have a pretty good idea, at least good enough to try to come up with a plan - just in case.

First, debt in paper fiat land is a curse - a creature from hell who doesn't give a damn about you or yours. It should be sent back from whence it came, along with whatever bought it to our shores.

So the first problem is that there is no Honest Money. All money today is paper fiat debt-money - a tool of wealth transference. When the public debt is allowed to circulate as the currency of the realm - all those who get suckered into accepting the unacceptable are giving away their hard earned wealth, almost unknowingly - that is how deceptive a ploy paper fiat debt-money is.

When the law sanctions such by legal tender and other devices it means that there is no longer any way to literally pay off debt, as debt is money and money is debt. You cannot pay off debt with debt - that is simply the discharge of debt, not the payment thereof. There is a vast difference, and believe me - they who created this creature know the difference in all its various nuances and ramifications, which are legion.

Once the power to pay for anything has been taken away, the power to own anything goes with it, as they are two sides of the same coin - the coin of exchange or transfer of ownership of things - private property it is called.

The last year you could buy and pay and own anything was in 1933, prior to Roosevelt's confiscation of the people's gold and silver coin - their own private money and property was taken from them, in exchange for little green tax vouchers of paper debt obligations.

When a buyer and a seller could meet and exchange whatever, and the deal or bargain struck was also finished and completed without transferring any obligation onto another, then things were bought and sold, they were paid for. In paper fiat land money is debt and debt is money. All we do is transfer or discharge the debt onto another in a game of offset. It is a mugs game.

Because there are those that are insatiable, this form of confiscation wasn't enough, they had to have more. Now we have structured finance - derivatives they are called: asset-backed securities; mortgage backed securities; collateralized debt obligations; swaps for anything you can dream of - even if it doesn't exist.

All this toxic waste of mutated debt-money is starting to come home to roost, as what goes around, comes around. The central banks are doing what central banks do: they are creating and throwing more credit and money at the fire, hoping to put it out. All one needs to do is to go down to the nearest heroin clinic and you will see how well that approach works.

One thing you can count on and that is that they will continue to do what they do: in the case of central bankers it is to create more credit and debt - period, case closed. This means the dollar bill will continue to lose purchasing power, which in turn means our standard of living will continue to go down.

It may not be next week, or next month, or even next year - but something wicked this way comes - that you can be sure of. Its names are legion; we'll just call it some thing. All of this debt is going to implode. When it does, in my opinion the central bankers will create and throw more debt-money and credit at it. It is all they can do under the system they have chosen. But Honest Money of Gold & Silver coin per the Constitution can heal the sick, make the lame walk, and the old smile for their grandchildren and themselves. Let the good times roll. Don't accept the unacceptable. Vote for Ron Paul for President.

The fear of deflation and having their positions completely discredited will force the central bankers hand and the implosion will become an explosion. The winds of time will sow the seeds of hyperinflation, which because of today's mutated seed, genetic fertilizers, and polluted soil, will grow out of control. It hints to be a bumper crop of mutated miscreants.

As of now I think things will be alright for awhile - it is impossible to say for how long. It could still take years. Or it could happen much sooner. Chaos theory is a bit hard to predict the future with - it simply states that once the bifurcation point is breached, the event runs until there is no energy left - until it has all been dissipated and released.

The events of the past few weeks are simply the early tremors or warnings of that which will come. Hopefully I am dead wrong and none of this comes to pass. Just in case there are precautions or forms of insurance one can have.

Having some gold and or silver is a good idea, as they are the most acceptable means of money known to man. They are accepted in exchange anytime - anywhere - by anyone.

Place any "money" that you are holding in a Treasury Bill Only Money Market Fund (do not even accept other government obligations such as the GSE's, only T-Bills), otherwise you don't know what the money market fund has its funds invested in.

Usually they are in many different types of investments, especially commercial paper. Unless you know, you don't know what they are into. What they are into - you are into. If any of the paper goes bad to a significant degree - so too will the money market, which means so too will your money in the money market. This is why all money market funds disclaim or disavow any guarantee that the one dollar per share price will always be kept intact.

Wire redemption options that are in place now and work can't possibly hurt. This allows you to wire funds from wherever you have accounts to one another, and or to your local bank. If set up properly and done correctly these funds are transferred the same day.

One step beyond the above is to have all accounts "wired" to a gold depository, whereby one can place any or all of their holdings into gold or silver. You then have the choice of having it stored in a vault in our country, out of the country, or taking physical possession of it; or any combination of the three.

To take the three to four steps above will not cost you a penny, all it will cost is a few hours of your time. You will then have the insurance that if you need to or want to, you can have your money in Treasury bills, wired to any location you choose, wired into gold and silver in any location you choose; and all on the very same day you pick up the phone and do it. It can't seem to hurt, and it sure could help if help is ever called for.

Invitation

Stop by our website and check out the complete market wrap, which covers most major markets, including stocks, bonds, currencies, commodities, and energy, with the emphasis on the precious metal markets, both physical and stocks.

There is a lot of information on gold and silver, not only from an investment point of view, but also from its position as being the mandated monetary system of our Constitution - Silver and Gold Coins as in Honest Weights and Measures.

On the main homepage are papers and articles by some of the best out there to be had. There are audio and videos on banking, the Constitution, and cutting edge news of serious interest. Many articles are archived, while others are linked.

Live time quotes on gold and silver and precious metal stocks are available, including charts for most world currencies and futures. Links to the World Bank, central banks, international monetary fund, the United Nations, and much more are offered.

There is also a live bulletin board where you can discuss the markets with people from around the world and many other resources too numerous to list.

Our gold stock portfolio with all buy and sell orders is posted in the public domain for viewing. See which stocks we own, have sold, and bought most recently.

Drop by and check it out. Good luck. Good trading. Good health. And that's a wrap.

If we can build the above - we sure as hell can return to Honest Money and fix the monetary and financial system of our country - and make sure there are no homeless, or sick who need care, or those starving to make ends meet. If we can build the above, we can do anything - if we choose to want to do it.

Vote for Congressman Ron Paul for President - Vote for a Return to the
Constitution of the United States of America
Vote for freedom, liberty, and the pursuit of happiness
Vote for the future of your grandchildren

Come visit our new website: Honest Money Gold & Silver Report

And read the Open Letter to Congress

Douglas V. Gnazzo
Honest Money Gold & Silver Report

Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous websites, and his work appears both here and abroad. Just recently, he was honored by being chosen as a Foundation Scholar for the Foundation of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly, Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

Douglas V. Gnazzo © 2005 - 2008
All Rights Reserved Without Prejudice

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