Week Ending 8/15/08
Has Anything Changed
We are not a third of the way through the current credit crisis. The subprime debacle was the tip of the iceberg. Fannae Mae and Freddie Mac exposed a bit more. Guesstimates of the costs started at $1 trillion, now they are up to $2 trillion. I would not be surprised to see $3 trillion or more. Waiting for the next shoe to drop, and thinking it to be the last, is like Imelda Marcus running out of shoes.
The paper fiat money system is hugely overleveraged. How far the pendulum swings to one side, it must invariably swing to the other. Eventually, it finds its center balancing point. For thousands of years gold and silver have been the anchor that holds the pendulum in place.
Wealth is what one has saved: be it land, timber, crops, livestock, linens, gold and silver goods of any kind. Savings by foregoing consumption is the key to wealth accumulation. Debt is the opposite of savings and wealth accumulation. When credit is extended, debt is created. When money itself is debt nothing but debt is created.
Presently it takes six to seven dollars to produce one dollar of gross domestic product. This is financial and economic suicide for the many wealth for the elite few. It is a vile and pernicious thing that walks the earth in darkness.
Several years ago I wrote that derivatives would become a household term, unfortunately that has come to pass. Lingering in the shadows are credit derivatives we have yet to hear called by name. There are huge swings lurking ahead write-offs that will boggle the mind. Many shoes are waiting to drop.
The rise of the dollar versus the euro is not what many make it out to be. What is occurring is credit deleveraging by currency exchange rate ratios, a wealth transference mechanism well known to the moneychangers. Liquidity is being squeezed from whatever source will bleed. The dollar rising is not a sign of dollar strength it is a sign of euro weakness. The Euro was grossly overvalued; after all, it is paper fiat debt-money, as are all currencies.
At any given time, there are no "strong" paper currencies, such is a misnomer. There are those that are less weak, nothing more or less. Little talk is heard regarding the yen; or for that matter the Japanese stock market. How many times has the end of the bear market in Japan been prophesized to be over?
Election time is almost upon us. The barkers and pitchmen are plying their trade in full regalia. Colors are flying at full mast. No stone will be left unturned for their candidate to be the one the all-mighty and powerful Oz.
The leading roles are waiting final approval, but the cast of players are hard at work, building the stages, platforms, advertising campaigns, and other outwards signs of names and things to be branded into a blitzkrieg of mass psychology, as the public stares mesmerized by the court jesters.
How timely that the economy and markets have suddenly turned on a dime and are now headed in the politically correct direction. It would be hard to write a more favorable script. Call me doubtful I don't think it will last through fall. Once the elections are over shoes will start falling.
One of the greatest wheels of leverage in the present credit orgy is the Yen. Yen carry trades have been disproportionally huge, and have been built up for years. They will not and cannot be unwound in a few weeks or months time it will take years.
In the final analysis, the credit debacle can be dealt with in one of two ways: deflation or hyperinflation. The first wipes the slate clean so another game can begin. The latter ends the game, the way it was played, and that by which it was played.
As proof that the fundamentals have not changed and are actually getting worse, the following charts say more than mere words can begin to express.
Courtesy of Grandfather Economic Report
by Michael Hodges
In 2007, total debt hit 470% as a percent of national income. Is this how wealth is created or debt? Who will pay this debt off us, or our children and their children?
Isn't this leaving them a legacy of debt, which means we are bringing them into a life of pre-ordained debt servitude from which they have no escape or choice? Does this sound like freedom or slavery?
Debt increased $145,000 per person from 1957 to 2007. Presently, a household of 4 people has an accumulated debt approaching $600,000.00.
Not only is this digging a hole in which to bury ourselves, but our progeny for lifetimes to come as well. By whose design does this occur? Therein lays the answer.
Does this sound like the credit crisis is over or just beginning? Is this a prescription for a strong dollar; or gold and silver coin - according to honest weights and measures?
Courtesy of Grandfather Economic Report
by Michael Hodges
In 1954 a dollar of debt produced 54 cents of national income. In 2007 a dollar of debt produced 21 cents of national income. That is over a 60% drop and is not how the standard of living goes up regardless of what "they" tell you.
Notice when the household debt ratio really began to take off during the mid to late 1970's. Nixon closed the gold window in the early 70's. Coincidence knows no bounds.
Notice that once again, personal savings was doing find prior to the late 1970's. Suddenly things fell off a cliff. During 2007, savings actually went below negative -1%! An all-time low.
Is there a correlation between the savings rate and debt levels? Do these charts show a healthy and vibrant economy, or a sick and wounded economy?
Or, could it be the monetary system of paper fiat debt-money that is at the root of it all?
Is money the root of all evil or the love of dishonest money fostered upon an unwary and unsuspecting host? Therein lays the answer.
There has been an on-going debate whether excess speculation has fueled rises in certain assets and commodities. My opinion is that the last move up in all overbought markets was fueled by excess speculation and momentum. The violence and quickness of the recent corrections adds credence to this view.
It was the proverbial everyone heading for the exit at the same time. Only so many can fit through at once. Greed quickly turns to fear. Upward momentum becomes a downward cascading waterfall, as successively lower stop loss orders are hit. It is a self-fulfilling and self-reinforcing process. Black box computer programs add fuel to the already raging fire.
Gold was down about 9% for the week. Both a lower high and a lower low have been made so far. The final outcome has not yet been determined, however.
A lot of technical damage has been done damage that will take time to repair. First, a higher low needs to form then a close above the existing lower high.
As of yet, it is premature to pass judgment that the gold bull is over. The bull market started from $255. From there it rose to $1033.90. That is an advance of $778.90.
Similar corrections have happened twice before during the gold bull. We are not in uncharted waters. A break below 550 that cannot be retaken would signal the end of the present bull market.
However, even if that were to occur could that be the end of a cyclical bull market within a larger secular bull market? Stranger things have happened. For now we watch and wait.
Short term the precious metals are oversold and a rebound is likely. However, such would be a short term affair. It is the retest of the lows that is most important (once the low is established).
The next chart shows the fib retracement levels. I would not be surprised to see the first fib retracement level tested, as we are almost there.
It would not be unusual to see the second tested, although I don't think that will be the case (as of now based on what has gone before).
Next up is the same chart with horizontal support and three ma lines. It appears that 730 may be tested. As of now I believe that $730 will hold, but $644 is possible.
The next chart is taken from a report I wrote back in 2005. At the time gold had not yet broken above $500 per ounce. The quote below the chart explains the cyclical/secular theme.
Chart Courtesy of Kitco
The chart below is the price of gold from 1985 to 2005. Notice to the far left of the chart the highest price, which was back in January of 1988, at approximately $500 per ounce.
Now look to the far right of the chart. You can see the price is approaching the $500 level again for the first time in twenty years.
The close above $500 was a very big event one that took 20 years to occur. That milestone marks a long term change in trend.
The correction that has occurred so far pales in comparison. A long term trend reversal has not yet occurred as of now that is mere speculation. It may happen or it may be starting to happen, but that cannot yet be definitively determined time will tell.
Silver had a tough week, falling over 15% and testing its 50% retracement level. The good news is that it is oversold short term and a positive divergence appears both in the RSI indicator and the MACD indicator.
Caution is warranted, however, as silver has already fallen to its 50% retracement level. Its next fib level is about $2 dollars lower. It should bottom between these two price levels.
The Hui had a tough week as well. It lost -5.58%. This is a significant amount, however, it was considerably less than physical gold (-9%).
Gold stocks are severely oversold compared to physical, so gold's larger fall for the week is not surprising.
Positive divergence has appeared in both the RSI and the histogram indicators. However, the dominant chart feature is the break of the head & shoulders formation. The positive divergences may lead to a short term oversold bounce.
Gold stocks have been hammered down more than gold, which makes sense, as they have risen much higher than gold. Gold was up approximately 300% from low to high. The gold stocks increased 1300% during the same time frame. The next chart shows gold's long term trend intact.
From the 8/1/08 wrap (2 weeks ago)
The dominant chart feature is the negative crossover of the 50 ma below the 200 ma. A lot of technical damage has been done and it will take some time and backing and filling to repair.
The May low is being tested and may not hold, as MACD has not yet begun to recede back towards zero and CMF has once again gone negative, indicating that buying power has dried up and selling pressure is building.
The weekly chart shows the GDX testing significant long term support. Price has already broken below the 50 ma and is sitting at its 100 ma.
Between the 100 and the 200 ma there is a lot of support that goes back almost 2 years in time. It should provide a good buffer.
One scenario that keeps coming to mind is that the support zone is breached multiple times, which eats up a lot of support and time, but ultimately holds and turns the tide.
MACD was receding back towards zero but then bounced back further into negative territory. Buying power as measured by the CMF indicator has dried up and is now turning negative, showing distribution is picking up.
The weight of the evidence still points down.
In the above report it was mentioned that the present correction was only six months old, which is very short compared to previous intermediate term corrections; and thus suggested that more time would be needed. This clearly has become the case.
The break of a twenty year resistance level suggests that a secular bull market is occurring. The bottom line is that the long term trend of the gold bull is intact.
If the long term trend does get violated then the question becomes: is the present correction the end of a cyclical bull market within a larger secular bull market; and the beginning of a cyclical bear within the larger secular bull? There are other possibilities as well. These appear to be the most probable if the long term trend is violated.
Physical gold and silver have been stronger as of late and will remain safer than the precious metal stocks. The stocks offer more leverage, however, and can appreciate for much larger gains.
As of now it appears that the precious metals will remain in both a cyclical and a secular bull market. The gold stocks are questionable. They may be entering upon a cyclical bear within the larger secular bull. This has not yet been determined.
One thing that is certain is that the fundamentals for gold have not changed, if anything they have become stronger. Real interest rates argue and call for higher gold prices. The excess global paper fiat money creation calls for higher gold prices.
All world currencies are paper debt instruments backed by other paper debt instruments and as such call for higher gold prices. But remember the fact that gold is priced in dollar bills: Federal Reserve Notes that are backed by U.S. Treasury Bonds is an illusion of the highest order.
Read the Constitution and you will find that our money is gold and silver coin not paper bills of credit, which are in fact disallowed by the Constitution. Nor does the Constitution approve of a Federal Reserve Gold Certificate Ratio. Such a system would fix nothing.
Gold and silver are the ultimate form of money, providing historical evidence and a proven track record dating back thousands of years not paper money backed by the precious metals. We may be about to see a very large paradigm shift occur where gold and silver are no longer viewed just as an asset or commodity, but as the only true form of money.
Gold and silver are the only forms of money that retain purchasing power and function as a store of wealth. The sounding is growing louder. The sounding is the force behind gold's secular bull market. Gold is the Sovereign of Sovereigns and will not be denied.
Good luck. Good trading. Good health, and that's a wrap.
Come visit our website: Honest Money Gold & Silver Report
New Book Now Available - Honest Money