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Honest Money Gold and Silver Report: Market Wrap

Market Wrap

Week Ending 6/13/08


This week's report is going to focus on a seldom discussed possibility that may be starting to rear its ugly head - intermarket disassociation. For years, perhaps decades, the markets have exhibited certain relationships between one another.

Conventional analysis has always considered these intermarket relationships to be sacrosanct and unimpeachable. That may be starting to change - the operable word being: maybe; only time will tell.

It is something I would rather not see happen, and it may not be - but there is a chance it is; and if it is, it bears close watching, as its repercussions will be felt across the land - if it unfolds.

Intermarket Relationships

The two "main" markets that most investors focus on is the stock and bond market, although the Forex market is the largest in the world. In today's new world order, the derivative market is a powerful influence on all markets - this should not be taken lightly, nor causally dismissed.

The derivative market that is reported to the BIS (not all derivative positions are reported) is fast approaching 700 TRILLION dollars. To put that in perspective: the gross product of the world is 55 trillion. This means that there is almost 13 years of world production "bet" on paper derivatives. That is not an insignificant amount of leverage. Can you think: whirling dervish?

And "they" don't think there is a problem. Think again - if they are even thinking, which they probably are - meaning they are lying through their teeth. Either they are stupid or they lie or both; whoever "they" are.

What would cause such relationships to change? - Long term debt cycles.

Stocks & Bonds

Stocks and bonds have usually moved in unison. First, let's make sure we understand bonds. When interest rates rise, bond prices go down. Bond prices move inversely to interest rates (in the opposite direction). When interest rates go down, bond prices go up.

Conventional theory holds that when interest rates go down, it is good for the stock market, which responds by going up. So, in the past - bond prices and the stock market have tended to move in the same direction. This somewhat changed in the late 1990's.

Supposedly, during the late 1990's, the threat of deflation was in the air. Beginning in 2001, the Fed began to lower interest rates to "fight deflation". This continued on until 2008. The dollar fell from 120 to 70 - a loss of over 40%, which is a national disgrace of the highest order.

The question remains: was this lowering of interest rates, and debasement of the U.S. dollar, truly undertaken to fight deflation? First, let's define inflation: inflation is NOT the rise of prices, which is a result of inflation; be it the price of goods and services, or the prices of assets, such as real estate, stocks - or bonds.

Inflation is a monetary phenomenon; it is the rise in the supply of money relative to the demand for money; in relation to the supply and demand for the goods and services that money is exchanged for.

Monetary inflation first causes the debasement of the currency - the loss of value or purchasing power of the monetary unit. It is this loss of purchasing power that causes prices of things to go up, as it now takes more units of money (because of its loss of purchasing power) to buy the same amount of goods. This result is what some call price inflation.

Since the Federal Reserve was created in 1913 the U.S. dollar has lost 95% of its purchasing power - this is the cause of rising prices: the debasement and destruction of the value of the U.S. dollar by a ludicrous monetary policy perpetrated by a bunch of buffoons.

The Minneapolis Federal Reserve has an inflation calculator on its website http://minneapolisfed.org/research/data/us/calc/

It tells you what the cost of goods bought for $1 in any given year would cost you in any subsequent year you plug in. This tells you how much value or purchasing power the dollar has lost over that period of time. If it takes more than $1 to buy the same amount of goods - the dollar is losing value.

According to the calculator, $1 spent on goods in 1992 cost $1.28 in 2002. This means that the dollar lost 28% of its purchasing power from 1992 to 2002. From 1998 to 2002 the figure is $1.10, meaning the dollar lost 10% of its value in 4 years (1998-2002).

Now, this is according to the way the Fed is calculating the rate of inflation, which in my opinion is much higher than this, which if true, means the rate or loss of purchasing power is much greater. For the sake of the argument, I will go with the Fed's figures, which are self-incriminating on their own.

So, how could the Fed be fighting "deflation" if the dollar is losing purchasing power during the time it lowered interest rates? The dollar loses value because too much money is being created, not because deflation is occurring.

Besides, inflation and deflation are usually occurring simultaneously, as they are right now: real estate, the financial sector, mortgage related vehicles, are all deflating; while most commodities are inflating, along with the cost of health insurance and college tuition, etc.

The first chart up shows the past relation between interest rates on the 10 year Treasury note compared to the performance of the S&P 500. From 2000 to 2003 both interest rates fell and the stock market dropped, which means bonds and stocks moved in opposite directions.

Beginning in 2003 until 2006 interest rates went up, and bond prices went down. During the same time the stock market went up - in other words it moved in the opposite direction as the stock market. So far - bonds and stocks are moving inverse to one another.

Notice on the chart, however, that recently interest rates have been rising (#6), meaning that bond prices have been falling; yet the stock market has been falling as well.

Hence, the inverse relation between bond prices and stock prices may (may) be coming to an end. It bears watching, as it would usher in a nasty bear market in BOTH markets - not a pleasant thought.

The CPI just released and price inflation is starting to rise. According to the Minneapolis Fed's inflation calculator, the dollar is losing value or purchasing power year by year - worth less and less, and headed towards worthlessness; if something isn't done to stem the tide. The tide can be turned: http://www.honestmoneyreport.com/bookIntro.pdf

The next chart shows that 10 Year Treasury Yields (rates) may have put in a double bottom - the jury is still out, as further confirmation is needed. I have said for many months that any surprises in interest rates would be to the upside, and it looks that the surprise is here. Hopefully, I am wrong.

As interest rates rise, bond prices fall, and the chart below illustrates that quite well. If that horizontal support line is broken below and turns into resistance - Katie bar the door: bonds and stocks will be going down.

Real Interest Rates

The "real" rate of interest is calculated by subtracting the rate of inflation from the Fed Funds Rate. Presently, the real rate of interest is NEGATIVE -2%. This means that interest rates are VERY low compared to inflation, which is conducive to causing further price or asset inflation. This would "tend" to indicate that the Fed or the market will raise rates - maybe.

Right now, the economy is not running on all four cylinders: the housing market is down and out; the auto industry is disrepair; and the financial sector has fallen off a cliff. Higher interest rates will exacerbate problems that are already at dangerous levels.

The Fed is stuck between the proverbial rock and a hard place - all of their own making. However, it is the people who pay the price - not the Fed governors.

Conventional theory says that as rates go up, it will provide support for the dollar. I say: maybe - maybe not. It all depends on what other nations do with their rates and currencies, and whether rates rise faster than the dollar loses purchasing power.

All paper fiat currencies are losing purchasing power, some faster than others. It is a game of musical chairs - of currency devaluation on a global level.

A time may soon be coming when the dollar, bonds, and the stock market are all headed down in a bear market. It is not a pretty thought, but possible. Forewarned is forearmed.

Next up is a chart comparing gold and the dollar. Once again, conventional theory says that if the dollar goes up - gold goes down.

Well, on the chart below from 2005 to 2006 rates went up and did gold. Perhaps the future inflation outlook or perception is more important than the present rate of "inflation".

Gold & Rates

The point to all this being that it is possible that some prior intermarket relationships are changing between: interest rates, bonds, the dollar, the stock market, and gold.

Next up is a chart comparing gold and the 10 Year Treasury Yield (rate). Conventional opinion says that when interest rates go down, bond prices go up, and gold goes up as well. However, the chart below shows that from 2003 to 2006 bond yields went up, while gold went up as well. Perhaps this time it is different.

Starting in mid-2007, interest fell into the first quarter of 2008, and gold moved inversely to new highs; so the "old" relationship kicked in. Notice at the far right end of the chart that although rates have gone up considerably, gold has not fallen anywhere near to the same degree.

Once again, it might not be a simple case of rates going up or down that correlates with rising gold prices, as it is real interest rates, not only in our country, but compared to other currencies; and the degree of debasement or loss of purchasing power of the various world currencies; that and the perception or expectations of future "inflation", which affect the U.S. dollar and gold prices.

Remember, ultimately the only thing that keeps ANY paper currency going is FAITH. Once faith is lost - the currency is doomed to the fate of all paper currencies - worthlessness; and history bears this out without exception.

This is why gold is in a bull market. Gold is the only real and honest money - it is no one's liability or debt.

Gold has been accepted as payment since time immemorial - at any place, at any time.

Gold is the sovereign of sovereigns. Gold goes where no mortal mans dares pass.

Yield Spread

As the chart below shows, from 2004 to 2006 the spread between the 10 year and 2 year note dropped precipitously.

Beginning in 2006, to the start of 2008, the spread widened considerably.

Now it has begun to contract once again: micromanagement in drag - sometimes known as market intervention.

Throwing conventional theory out the window once more, gold continued to rise throughout the time period, moving on to historical new highs.

Maybe it's true that you can't keep a good thing down no matter how hard you try.

Perhaps the good gets stronger the more bad that's thrown at it - a word to the weary would be rulers of the universe: it's not nice to tempt the three sisters of fate. Their mother is necessity.


Gold fell -25.90 to $873.10 or -2.88%. Below, the daily chart shows gold testing its lower support line. The bottom Bollinger band, the 200 ma, and horizontal support are all converging near the same level. STO & ROC are turning up - slowly.

The weekly chart shows about the same as the daily. Support is being tested. STO is still under a negative cross over, while ROC is turning up slightly. Further downside testing may still occur.


Silver is testing support. The chart has mixed signals. It could go either way.


A short term bounce may be coming, but I'm not betting on it right now.

Rather than looking at the GDX or HUI or any other index, I'm more concerned with how the individual stocks in my portfolio are performing. I own CEF below; as I believe it is well insulated from gold stock risk per se.

It represents physical silver and gold on deposit. Most likely it will get cheaper before the next intermediate term advance, which is fine with me.


DBA has finally broken out. It may test the break before moving higher. RSI is entering overbought territory. All the indicators are overbought, suggesting a pull back is likely. I sold half of my position on Friday.

Freeport McMoran Copper & Gold

I was fortunate to pick up FCX on Thursday of last week. It made a nice move on Friday.

It appears to be getting ready to break out. MACD made a positive cross over and RCI is turning up nicely.

Follow through and confirmation is still needed. Caveat Emptor.


Is Peru Copper finally bottoming - I've bet that it has.


I just took a first position in Goldcorp. It may be a bit early and is front running, but that's my way. That gap looks like it wants to fill and has my interest piqued.

Stillwater (platinum) - loved and now "hated", which means it's almost time to buy. I'm watching and waiting for the right set-up.


I've been in and out of PAL several times. It has been a good stock to me. I'm not too thrilled about that dead man's crossover of the 50 below the 200 ma. It may be forming a head and shoulders pattern with the right shoulder presently under construction - only time will tell. Watch horizontal resistance at 5.59.

Good luck. Good trading. Good health, and that's a wrap.

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