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Honest Money Gold and Silver Report: Market Wrap

Market Wrap

Week Ending 10/10/08

Note: The full market wrap will only be available at Honest Money Gold & Silver Report starting this November. A shortened version will appear here.

It was another wild week in the markets. Volatility was at levels seldom seen. Friday the market had an intraday spread of over 1000 points and was down 1900 points for the week. And this occurred after a $700 billion U.S. bailout plan followed by a coordinated reduction in interest rates by the U.S., U.K., Europe, Sweden, Canada and Switzerland - unprecedented action. All of which suggests that Mr. Market doesn't care too much for the "rescue" plan the wizards of finance have come up with.

Credit in the commercial paper market is starting to ease up a bit. Yields on one-day paper were down 0.57 percentage points to 1.78%. The money market is still showing signs of reluctance to extend credit, however. Libor, which stands for the London interbank offered rate was up 7 basis points to 4.82%.

Three-month T-bill rates dropped 34 basis points to 0.18%. Just last year the yield was 4.04%. The TED spread (difference between what banks and the Treasury pay to borrow money for three months) was up 464 basis points - a level not seen in over 20 years. No POMO's (permanent open market operations as opposed to repos - repurchase agreements) by the Fed to speak of. POMO's would signal serious underlying problems.


The stock market had another tough week, down about 18%. The market is oversold, but markets can remain oversold longer than one can remain solver: caveat emptor. Comments from Sept. 2007 in an article on Dow Theory seem appropriate:

The liquidity extracted from real estate saved the stock market from continuing down in what would have been one of the worst bear markets of all times, similar to the one Japan experienced. But the infusion has only put off the inevitable, it has not balanced the books for good - the reckoning still waits, and will not be denied. The market's rise from its lows in 2002 to its new all-time high in 2007 is not a new bull market - it is a record breaking extension of the bubble of all bubbles and nothing more.

It will not end nicely, the gnashing of teeth and the howling of wolves will be heard as the sheep are led to slaughter. Remember well that a shepherd oversees and protects his flock so that he may slaughter them and feed himself. Is he watching out for the sheep's best interest when he protects them from the wolves or his own?

The stock market is overvalued at best, and an empty shill at worst. It is one of the many asset bubbles present in the world, all fueled by excessive issuance of money, credit, and debt - conjured up by the many ways of structured finance, especially the liquidity extracted from the real estate market like blood from the victim of a vampire. The entire world is not in a global boom that can sustain - it is near the end of a wild drug induced orgy that will soon end in total exhaustion. The question is not if but when.

In last week's report it was stated: 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 above still applies; however, the market is oversold. It could test the lows presently, but a rally is likely - then a test of the lows. Will the lows hold? I'm not betting on it. If this is a secular bear market the lows will not hold - if being the operative word.

The chart below gives a quick look at what's been working and not working since the beginning of the year. Note that gold is up over 25%.


Gold was volatile once again - up big one day - down the next. When all was said and done it gained $25 for the week or about 3%. The spot price is sitting right at the critical $850.00 level.

The chart below (daily continuous contract) shows short term momentum waning. RSI has turned down and a negative MACD cross has occurred. The histograms are entering negative territory as well.

The weekly chart looks promising, however.

Price is sitting at the crucial $850 level (spot price). The weekly chart of the continuous contract shows support at $850 and resistance at $940. Price has been bouncing back and forth between these two levels. Whichever way price breaks will determine the next significant move. A break above $940 on a weekly basis will likely lead to a test of the recent all time highs.

MACD is curling up and looks like it is setting up for a positive cross over. Histograms are receding back towards zero. A couple of days of short term consolidation that holds near current levels may provide the platform for the next intermediate term move up, the operative word being "may".

Gold Point & Figure

Gold's point and figure chart is bullish with a price projection of $1160.00.

These price projections are rarely met, but the general direction is more often right than wrong. Nothing is written in stone, just another marker along the way.

Less than 1% of global assets are invested in the gold markets. This means that a mere 1% increase in the present funds allocated to gold would represent a doubling of investor demand (buying) moving into a very small cap gold market. In comparison, any major U.S. corporation's individual market cap dwarfs the entire gold market.


Silver has been underperforming. Until gold breaks out in an intermediate term advance it looks like silver is treading water at best. If gold hits new highs look for silver to make up for lost time.

The chart below shows silver testing its July 2007 low. About the only thing positive on the chart is that it is severely oversold.

Gold Stocks

It looks like the question as to how the gold stocks would fare during a bear market decline in the stock market has been answered: they have gone down with the rest of the market. From a high of 56 to a low of 26 the GDX is down over 50%. That is bear market territory.

Now it is a matter of: will the gold stocks be the first out of the gate when the general stock market decline ends; and from what level will the bottom occur? Both are tough questions to answer. Because I thought the lows were going to be tested before an intermediate term bottom was put in late this summer or fall, most gold stock holdings were sold prior to the decline. I did not, however, think the lows were going to be broken as they have been.

For most of the year trading in and out of the gold stocks versus holding has worked well. In the present environment even this is risky business. As luck would have it, last week KGC and RGLD were brought and then sold earlier this week. It does not pay to hang around. If there are profits - take the money and run.

As the long term chart of the XAU shows, price has broken below its rising price channel and has not been able to regain its lower trend line for a few weeks now. This indicates a change in trend and until such time that price can close back within the channel the trend is down.

The GDX point and figure chart is bearish with a downside target projection of 13. The index closed the week out at 26.34.

The GOLD/XAU ratio is at the highest reading since the start of the bull market back in 2001, suggesting a bottom may be close at hand.


We are in the ravages of a secular bear market, not just the stock market, but the markets in general; including the credit and money markets. This is unprecedented action. We are in unchartered waters. The unwinding of the Gordian knot of paper fiat debt-money is occurring.

Throwing more debt-money on a mountain of debt that is going up in flames is not going to solve anything; it is simply adding more fuel to the fire. What is needed is the return to sound money as advocated by Congressman Ron Paul - the return to gold and silver coin as mandated by the Constitution. The present monetary system is beyond repair, it needs to be replaced, regenerated - reconstituted.

See my book http://www.honestmoneyreport.com/bookIntro.pdf for details.

The stock market is oversold and could be approaching a rally - it is hard to say at this point, as the market is in the "falling knife" category. This weekend saw the G7 meet. With the global financial crisis growing exponentially one would think that our leaders would offer some sound policy measures to deal with the situation. Here is what they had to say:

The G7 agrees today that the current situation calls for urgent and exceptional action. We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth. We agree to:

  1. Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.

  2. Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.

  3. Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.

  4. Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.

  5. Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.

The actions should be taken in ways that protect taxpayers and avoid potentially damaging effects on other countries. We will use macroeconomic policy tools as necessary and appropriate. We strongly support the IMF's critical role in assisting countries affected by this turmoil. We will accelerate full implementation of the Financial Stability Forum recommendations and we are committed to the pressing need for reform of the financial system. We will strengthen further our cooperation and work with others to accomplish this plan.

Italy Responds

Italy's reply to the above communiqué sums it up quite succinctly:

ROME, Oct 10 (Reuters) - Italy will not sign a G7 draft statement as it stands because it does not contain strong enough commitments to address the global financial crisis, Economy Minister Giulio Tremonti said on Friday.

"We see a text that is written in the old style, as if nothing has happened. We are not going to sign that text," Tremonti said on Italian television from Washington.

"Or there is a new text with stronger commitments (otherwise Italy won't sign). We will try to convince them."

At least we now know how we got into this mess - we were led into it. Welcome to the New World Order: chaos out of order: black from white - just ask the ravens black from whence they've come.

I agree with the Italians, this is written in the old style - the Old World Order simply being passed off as the New World Order. The substance has not changed, only the faces of the messengers. As a wise old man once said: there is nothing new under the Sun: all is vanity; until night is no more.

The bear market has almost all asset classes in its grasp. One of the few left unscathed is physical gold, which is up 25% this year. Many ask why gold hasn't performed better during the recent turmoil.

Note that the gold stocks have performed dismally during this same time frame - down over 50%. This goes to the heart of the matter: the difference between paper and physical - the difference between receipts or promises to pay and payment.

This difference in performance also lends credence to why the bull market in gold is not over - because the bear market in all things paper is not over. The world's paper fiat-debt money system is just beginning to unwind.

Approximately $500 trillion dollars of paper derivatives are on the books of the Bank for International Settlements (BIS - or the central bank of all central banks - the clearing house in the sky if you will).

When these positions unwind it will unleash a tsunami of whirling dervishes that will push the system to the breaking point - to its bifurcation point, where run away vibration manifests and runs until it plays itself out.

This is why Congressman Ron Paul, FAME (Foundation for the Advancement of Monetary Education, Professor Fekete, GATA and other visionaries have been warning to do something NOW - before it's too late, before that point is breached and there's no coming back.

Write your representatives and tell them you want gold and silver money in circulation as the Constitution mandates, as Congressman Ron Paul has submitted legislation for.

There are many reasons why physical gold has not performed better with all the bad news. We will not waste time speculating on such, as a 25% return in the face of collapsing asset prices is enough to be thankful for. In a bear market he wins who loses the least.

The key word for the markets is volatility - in both directions: up and down. Violent drops will be followed by quick and sharp rallies. In such an environment investing will be difficult. Trading will be the order of the day and even that will be challenging. As soon as any profit shows itself take the money and run. Being in cash and gold and silver is the safest place for most but the hardened players. Having some pm and cash in hand is good insurance just in case.

We were fortunate to buy KCG and RGLD two weeks ago and even luckier to sell them earlier this week the day of the blow off to the top, as the next day they fell back down to earth. It was nothing more than pure luck. The only new position being held is CEF.

The overall stock market is oversold. Will it go lower from here or rally? I wish I knew - I don't. Odds say a rally of sorts should be coming: a short covering rally if nothing else. I am short the market versus Rydex Ursa and if a rally begins I will exit and look to reenter at higher levels. This is risky business, however; and best left to those familiar with it.

Right now the best action is probably to take no action except for safety precautions: pm's in hand, cash in hand, stock up on vital necessities, have excess cash reserves in Treasury Money Only T-Bill accounts or in T-Bills through Treasury Direct, have wire transfers on all your accounts, preferably to a gold bullion depository of your choice. These are insurance measures that just like fire insurance on your house you hope you never have to use. But if and when it's needed, it can be a lifesaver.

Lastly, we will get through this. We are the greatest nation on earth, as We the People constitute the nation. Our leaders and representatives are simply those we choose to lead and represent. If you do not like what they are doing, exercise your unalienable right to vote for who you want to lead us into the future, after all, it is your destiny.

You might want to take a look at the Constitution and use it as your guide: see who proposes to follow its straight course, as it is the keystone and foundation our nation was built upon. This nation was not formed by chance or accident, there is a great purpose at work - it is time we work it.

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

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