Week Ending 9/5/08
Another volatile week in the markets has passed. The S&P was down 40 points and appears headed to test its low for the year (1200). If the low doesn't hold another leg down will begin. It is not a question of if but when. The bear is rising from his den.
Bonds had a good week as interest rates fell. The Fed has painted themselves into a corner: they cannot protect the dollar without raising rates; and they cannot protect bonds without lowering rates. They're damned if they do and damned if they don't.
Our government raises revenue in one of two ways: they tax us or they issue (sell) debt (bonds). The Fed and the Treasury must keep the buyers of bonds buying - like our friends from China and Japan; otherwise the Feds will be looking for a new job. Their Janus-like position will change with the wind. So far our friends are smiling all the way to the bank.
Gold and other commodities had a tough week - again. The selling has been relentless as cries of deleveraging circle the globe - liquidity now is the name of the game. Whatever will fetch a price is gone in a blink as the next item goes up for bid. A fever pitch has been raised and now all wait anxiously for the fever to break. A cold damp chill hangs in the air.
The many moves in the markets have one thing in common: they are all counter-trend moves; and they are nearing the end of their recent direction.
The dollar is running up into significant resistance near 80 and should soon return to its long term trend down.
Likewise gold and oil are near long term support and should return to their long term bull markets.
The technical damage has been strong and a recovery will not happen overnight, but we are closer to the end than the beginning of the recent counter-trend moves. By the end of fall the markets will be aligned with their long term trends. Either such is the case or some major long term trends are in the process of changing. As of now the weight of the evidence points to the former.
We live in a system based on paper fiat debt-money. Our money is debt - debt that pays no interest, but debt nonetheless: Federal Reserve Notes are promises to pay, not payment. They are secured by U.S. Treasury Bonds, which are debt that pays interest.
So there is our system absurd as it is: interest bearing debt securing non-interest bearing debt - completely flying in the face of the Constitution that says that bills of credit are not to be accepted as legal tender amongst the states.
Such a system of promises for promises insures that the keepers of the temple must inflate or die: more and more money is needed to pay just the interest on the debt, let alone the debt itself.
A smell is in the air - a whiff of deflation hangs in the balance, enough of a scare to drive down rates so our friends make it to the bank with smiling faces - again. The chart below shows the back and forth moves of the bond market as it deftly picks its way amongst the carnage - hopping over one financial fiasco after another.
Notice the pattern of deflation scare followed by inflation orgy that keeps repeating, all within the overall long term trend of more and more debt, or what some call money - funny money, unlike gold and silver - honest money. The purveyors of debt do not care for honest money of gold and silver coin - if they did, it would be our money as the Constitution states.
But the bifurcation point waits - and when the point is breached there will be no turning back, chaos theory will take hold and the vibration released must play itself out - the seed that was planted long, long ago will sprout forth, its destiny within now unfurled without. Paper fiat debt-money knows only one destiny: self-destruction from its own seed within - death by hyperinflation.
Gold can be seen rising in price since 2001 even when interest rates were on the rise from mid 2003 - mid 2006. Notice the number of quick violent moves, in a short span of time; with interest rates going down than up, than back down, etc.
The word bankrupt comes from a "turning over of the tables", which is what looks like has been happening: the tables are turned - the pieces cleared from the table, and new pieces are set up to keep the game going.
In the upper right hand corner gold is going down in price (the recent correction) yet at the bottom right corner interest rates are also going down.
What gives? Could it be a scare to clear the tables to make room for another game? Or is a complete long term trend change occurring?
Before moving on to the precious metals, the following chart of the CRB caught my eye. Notice how the 2007 low (284.61) was lower than the 2006 low, yet the CRB went on to make new all-time highs. One never knows for sure. You lay your money down and you take your chances.
Oil is nearing its first fib retracement level of the entire move from 2002.
There isn't a heck of a lot to say about gold that hasn't already been said: it is either near the end of a count-trend correction or the beginning of a long term trend change. As of now the weight of the evidence points to the former as the most probable scenario. From the 7/11/08 market wrap:
It appears the gold bull is alive and well. One caveat: there still remains the possibility that an intermediate term low has not yet been completed. This does not mean a new low has to occur, although that is a possibility - it has more to do with time: the fact that more backing and filling is needed to build a stronger base.
As far as gold corrections go, this one has been short in the tooth, usually they take longer, but the time factor is not written in stone. The stronger and longer the base is in its formation - the larger and more sustainable is the next move up when it does occur. Intermediate term bottoms are a function of months of price action not weeks. On occasion the months can morph into a year's time and sometimes more.
None of the recent correction is a surprise to readers of this report, as it was discussed back in June and July. Gold's first fib level is fast approaching and should offer support; however, there is still the possibility that the 644 level is tested.
The gold stocks have been much weaker than physical gold. The following is from the 8/15/08 wrap regarding the GDX:
The weekly chart shows what may be a head and shoulders formation. I have shown this chart several times in past reports. Until the neckline is broken it is not a confirmed formation. The CMF indicator shows serious distribution and selling. Buying pressure is drying up and selling pressure is building.
The neckline may or may not be breached, but it appears as if it is going to be tested. If a breach is made it will be important to see what kind of volume is present. A surge in volume on a break would suggest more downside action is coming.
Later this summer or fall should see the beginning of the next intermediate term move up in the precious metals. Patience is needed when trying to ride a Brahma bull; they don't take kindly to being tamed, especially by strangers.
The neckline was broken confirming the head and shoulders top. On the chart that accompanied the above the previous low at 32.22 back in August of 2007 was shown as possibly being tested; and this week's close at 32.65 is close enough. The next three charts show just how close the GDX, HUI, and XAU have come in the past from testing (touching) their previous lows.
From the 8/1/08 wrap:
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.
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.
The above still stands: physical gold and silver are acting much stronger than the precious metal stocks. If the pm stocks fall much further without reversing direction, than a cyclical bear market could be developing.
It is still too early to make that call, but the potential does exist and to ignore it would be foolhardy; just as to act on it prematurely would be foolhardy.
The markets are either near the end of some powerful counter-trend corrections; or their long term trends are changing. The fundamentals call for the long term trends that are in place to remain in place.
With every passing day of the credit crisis, more and more evidence is presented that the paper fiat debt-money system is dysfunctional. There are ways out of this mess, but they must be taken soon, or they will fade into the shadows.
It is time we admit the error of our ways and return to gold and silver as honest weights and measures, as the Constitution mandates.
Good luck. Good trading. Good health, and that's a wrap.
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