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Honest Money Gold and Silver Report: Market Wrap

Market Wrap

Week Ending 10/3/08

A note to all readers: starting in a few weeks the complete market wrap will no longer appear on this website. The full report will only be available on my website: Honest Money Gold & Silver Report (click link for access). There will be several new additions so check it out.

A shorter version of the full report will be available on this site. I appreciate all the support the last few years and I hope it continues into the future, especially during these difficult and trying times.

I'm not going to comment on the credit crisis or whatever one cares to call it, regular readers of this report know my position by now.

There has been more than enough commentary on the topic and to add insult to injury at this point would be a futile waste of time. Instead, here are a couple of charts that speak volumes:

Monetary Base

M2 Money Stock


In last week's report I mentioned that this level would most likely be tested by spring; little did I know it would be tested the very next week.

As I have said in previous reports: before all is said and done - I suspect the low at 775 will be tested. This is a secular bear market.

The transports are testing major support.

Interest Rates

The chart below shows how serious the Fed is at convincing the public not to save. During the recent "credit" crisis, t-bill rates dropped to 0.10%. Quite the incentive to save wouldn't you say?

It is a national disgrace that those in charge of our monetary system are doing everything in their power to discourage savings - the only true way to accumulate wealth. Savings is one of the few solutions to the present mess we find ourselves in.

We must produce more than we consume and save the excess. This will provide sound capital that is urgently needed. To simply create credit and debt out of thin air is nothing more than a prescription to kill the patient. The cure is worse than the disease.

The more bonds issued, the more credit extended. The more credit extended, the greater is our debt. Debt is the opposite of wealth. We must forego consumption and save. In 2007 we added 4.3 trillion of new debt. This is not the way to prosperity. It is the way of debt servitude.


Gold was down 55.30 (-6.22%) to close at $833.20. As often mentioned in this report, the $850 level is significant. It represents the high of the last gold bull decades ago.

It is important for gold to regain this level and to turn resistance back into support. The weekly chart shows the lower trend line being breached once more.


Silver looks like it may be trying to put in a double bottom; however, MACD is making a negative cross over. Silver has been weak compared to gold.

XAU Index

The XAU Index closed below its rising price channel. If the gold bull is to continue price must regain and close within the channel. Failure to do so would indicate a change in trend.

Part of the selling can be attributed to the weakness in the overall stock market; nonetheless, weakness is weakness for whatever the reason(s).


Up next is the Xau to gold ratio. The lower the reading the worse gold stocks are performing compared to physical gold.

Extreme readings below 1.75 are rare and in the past have marked significant bottoms. Confirmation is needed to the upside before venturing into the water.

Until the dust settles it may be best to be in cash and on the sidelines. The markets are very volatile right now and dangerous even for professional traders. Return of capital trumps return on capital at the present time.

The Great Depression

PM Questions

I have received a number of emails asking about gold and the gold stocks. The questions are generally the same:

  • Is the gold bull over?
  • Is the silver bull over?
  • Is gold "better" than silver?
  • Is the gold bull over for pm stocks?
  • Is physical better than gold & silver stocks?

I do not have the answers - I wish I did. The following is simply my opinion and there will be others that disagree, so take it all with a large dose of salt.

Gold Bull

The gold bull is not over in my opinion. It has been wounded but it is not yet down and out for the count. The $850 level is very important for it to regain.

As of now, I take last week's action as a testing of the recent low, which was to be expected. The markets are very volatile and a retest that normally takes weeks occurred in a few days.

So, we wait and see if gold can close back above the $850 level. The markets are running on pure adrenaline at this point - fear one day and greed the next. Every news heading or rumor takes its toll. This is a very schizophrenic market.

Consequently, day to day calls are impossible. Weekly direction is hard to discern. The market reacted negatively on Friday in response to the bailout plan.

Nonetheless, it may respond in kind this coming week; or it may go in the other direction - or one after the other. Expect quick and violent price action that makes little or no sense, as pure emotion rules the roost.

Silver Bull

The silver bull is in more doubt than gold. Silver has considerably underperformed gold so far this year. However, during most of the bull market silver outperformed.

Silver's trend depends on gold's. If gold continues up - silver will follow suit. In the early stages of the next move up gold will most likely outperform.

As the move matures, silver's performance will pick up speed and make up for lost time. Large gains will occur in a relatively short amount of time.

Gold vs. Silver

Which is better - gold or silver? That is a very tough question, as one answer does not necessarily explain the many different scenarios that could take place.

Consequently, it is prudent to choose both metals according to individual preference as to how it will all play out - a most daunting if not impossible task.

I can easily see the pm bull ending with silver up a greater percent compared to gold. However, if I had to choose just one metal I would pick gold.

I can't see any scenario where silver would go up and gold would not. I can, however, see scenarios where gold could go up, but silver doesn't; or to a lesser degree. There may be more potential in silver, but there is less risk with gold. It is probably best to own both.

Physical vs. Stocks

This is the easiest of all the questions. Physical is preferable compared to the precious metal stocks, at least from a risk to reward perspective. When all is said and done, the stocks may very well go up more than physical; however, there is much more risk they may not go up, or that they continue to go down - far greater risk than for physical.

If the bear market in the overall stock market continues, the pm stocks will most likely go down with the rest of the market. If production costs keep accelerating for the miners, or civil and political unrest occurs in the host country, or if exchange rates are unfavorable, all these factors could contribute to diminishing value for pm stocks.

With the fundamentals being what they are, I am hard pressed to come up with a plausible scenario where physical gold will not continue to hold its purchasing power better than any of medium of exchange. Hence physical gold is safer than gold stocks and is the best insurance policy against currency debasement and financial disruptions.

Stock Watch

With volatility being as high as it is, I thought it would be a good idea to list different vehicles that allow one to play gold both to the upside and to the downside - physical and the stocks. This is not a recommendation to do either. It is simply a listing of the choices available in the marketplace.

Double Gold Long (DGP)

Double Gold Short

Short PM Stocks


As the monetary charts at the beginning of the report indicate, the name of the game is credit and debt. Last year (2007) $4.31 trillion of new debt was added to the books, while national income increased $608 billion. This means it took over $7 of new debt to produce $1 of national income. That is financial suicide. So far this year it is much worse.

The U.S. budget and trade deficits continue to expand. Debt levels keep growing. Savings is non-existent with negative real interest rates. Paulson claims we have a strong dollar policy.

I find it hard to believe that a sustained dollar rally can survive in such an environment. I find it hard to believe that gold will not rise under such conditions.

The bailout plan is going to drive U.S. government debt above 70% of gross domestic product, the most since 1954. This is unconscionable and should be unacceptable to any thinking human being.

The Fed increased currency swaps with foreign central banks by $330 billion to $620 billion. The Term Auction Facility, the Fed's emergency loan program, expanded from $300 billion to $450 billion.

Federal Reserve Credit exploded $254 billion to a record $1.38 trillion. Fed Credit has expanded $515 billion year-to-date or an annualized rate of 77%. That's some serious credit expansion.

M2 money supply (chart at beginning of report) increased $166 billion to $7.90 trillion. M2 has expanded $437 billion so far this year, an 8% gain.

Both the Libor rate of interest and the TED spread rose to record highs last week, indicating extreme stress in the money markets. It seems the banks don't trust one another's creditworthiness any longer - even for overnight loans. What do they know that we don't?

They know that the risk of not getting paid back on new loans is very high due to systemic risk of the entire monetary and financial system. It is not just a liquidity problem any longer - it is a solvency problem.

Fractional reserve banking guarantees that banks cannot possibly honor all their obligations in aggregate at the same time. At most the banks have 10% of all deposits held on reserve. If more depositors show up to withdraw their money than the banks have on reserves - the gig is up.

This is why the banks are presently so reluctant to loan money to one another - they don't want to get left holding the bag, as they know it's empty. The entire paper fiat system is illiquid and insolvent.

The Fed should be abolished and gold and silver money returned to its rightful place as the sovereign of sovereigns, as the Constitution mandates. Anything less will fix nothing.

The markets are in turmoil and volatility and emotions run amuck. It is best at such times to be in cash and gold - out of most other markets and on the sidelines waiting for the dust to settle and opportunities to present themselves. Return of capital trumps return on capital. Caveat Emptor.

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

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