The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, January 13th, 2009.
Perhaps the best analogy to explain the fundamental condition of gold is that it's like a beach ball being held under water, where at some point it will escape the clutches of its oppressor, springing it into the light of day for all to see its true worth. Even a child could understand such a condition when explained in terms of a beach ball. When it comes to the day-to-day trials and tribulations of gold however, it's not that simple unfortunately, because although gold is the oldest form of true money on the planet, it's also a political metal caught up in the biggest fiat currency / Ponzi scheme in the history of mankind.
It's the Ponzi scheme that even though Bernie Madoff has now made it fashionable to expose them, you will not hear talked about in the mainstream media. This is because 'The Creature From Jekyll Island' is still in control all these years later, given it's feeling its oats these days for sure. That is to say, the Fed, and it's counterparts around the world, are finally staring at the same end game dynamics as Madoff was seeing just a few weeks ago now, but because their game is much larger and complex, it's going to be with us for a little while longer yet.
Once the jig is up however, which will be when foreigners no longer support US debt / currency markets (a condition now taking hold), that's when the party for our fiat masters will be over, and when gold will volley out of the water into the air. In this respect, I must agree with Bill Murphy. Gold will not be allowed to rise anywhere near it's true fiat currency based values until it's forced on what's left of the ruling elite because it suits their needs at the time, implying little to no international trade will occur at some point in the foreseeable future unless contract values can be grounded in stable money. (i.e. gold-backed external currency units.)
How do we know gold is too low, suppressed by an authoritarian regime of central banks, and poised to vault higher at 'the right time'? Well for one thing, like a beach ball held too far under water for too long, its oppressors can't keep it down. Since the bull market in gold began in the year 2000 it's been up an unprecedented 8-years in a row, which by 'modern standards' is a record. Of course we don't have much to go on in this regard, because in terms of years falling within the Fed's reign, gold has only been trading 'freely' (whatever that means) since the early 70's, which is not much time to base historical precedent.
But that's not the only measure we have in this regard. We also have the fact just to reflect past 'inflation', which saw gold last peak in 1980, if measured in terms of the Consumer Price Index (CPI), it should be trading well north of $2,000 today. And that's if we measure inflation using the CPI, which is fundamentally incorrect because the proper definition of inflation is not measuring how much our self-serving bureaucrats think prices are rising, which is too low. No, inflation, by definition, is not properly defined in terms of resultant price increases, but in terms of monetary largesse, which John Williams, from Shadowstats.com, takes into account in his phantom measures, pointing to the fact gold should be trading north of $6,000 on this basis.
As you can see in the attached, James Turk examined this condition long ago, back in 2006, so we will not run through all the numbers here again today. However I would like to make one point crystal clear in terms of the analogy being used on these pages, and that is if John Williams is right, which we think is the case based on the weight of evidence (the currency printing is no secret), gold is being held far below the surface (that being fair market pricing based on just historic monetary largesse), never mind what Barack Obama has planned in terms of future currency printing. So on this basis, and in spite of bureaucratic rhetoric, it's easy to see something is wrong with gold pricing, implying it's being suppressed.
And it will most likely continue to be suppressed right up until the end of our present fiat currency era, where as mentioned above, it will not rise evenly, but be revalued higher when it needs to be in order to back covered currencies required to re-instill confidence within international trade. In this regard it should be noted process is already unfolding, as evidenced in the crash of the Baltic Dry Index (BDI), reflecting a collapse in global trade. Here, if this persists, in order to acquire foreign goods in the future, increasingly, suppliers will begin asking for guarantees of payment, which will need to include currency provisions in order to offset volatility risk.
Because this would be almost impossible within an increasingly destabilizing environment still operating within present fiat currency regimes, at some point exporters / suppliers will begin asking for payment in gold then, or a part thereof. So, if the ruling bureaucrats wish to keep their jobs, they will need to anchor stability in their respective currencies, which will also reflect ability to pay, and facilitate needed international trade. Of course for this to occur, in taking notes from our discussion above concerning the amounts of currency(s) floating around these days, gold would need to rise considerably, perhaps past what even John Williams envisions. Again then, this understanding further illustrates the amount of pressure underneath the gold price that will need to be released one day.
Given the powers that be do not see this need just yet however, because such measures would of course reflect their loss of control in the financial system, gold could continue to lose value in fiat currency terms as the velocity of money and economy continue to grind to a halt. Some people view this as deflation, which is of course incorrect, however in terms of effect it sure feels the same since you cannot protect your wealth anywhere, gold included, so one cannot blame people for thinking in these terms. And of course there's always the possibility that what we have right now morphs into the real McCoy. In this respect I will show you a chart in our next meeting that should scare the begeezes out of anybody who understands how such a process could possibly unfold.
In the meantime however, and remaining within the confines of present circumstances, the charts are suggesting gold has further to fall irrespective of the official reason one wants to conceptualize such an outcome within, which will likely surprise a good many people considering sentiment has never been more sympathetic to an opposite outcome. (See yesterday's comments in this regard as well.) Most people are white and blank thinkers you see, with few able to conceptualize gray, or, an entirely different coloring book for that matter. Be that as it may, as long as gold is not to be revalued higher by officialdom within a fortnight, the path of least resistance appears to be down if the stochastic breaks on the monthly plot below taken from the Chart Room have any predictive value. (See Figure 1)
Figure 1
And there's no good news for the bulls in the other indicators as well, which again, when combined with the bearish sentiment condition present in the market, caused us to pull the plug on further hopes of short-term gains yesterday. Here, I will not go over the condition of all indicators in the above as the annotations should be sufficient, however it should be pointed out that the RSI channel break test at 50ish is significant, because if it were to drop below the round number (50), the price of gold could plummet. Again, I will show you a chart later in the week that will help frame this risk, which is real I can assure you, where prices could start dropping across the board very soon, making it feel like deflation, if not developing into the real thing as a result of 'economic collapse'.
In terms of precious metals shares, and maintaining the technical review of today's presentation within the scope of monthly plots because they tend to filter out the noise found in dailies and weeklies, below we have an updated picture of the Amex Gold Bugs Index (HUI), which does a good job of laying out what to look for in coming days. Firstly, in terms of bullish outcomes, don't be surprised if channel resistance at 325 is tested at some point in coming days given sentiment for precious metals shares is nothing like that of bullion, generally becoming increasingly bearish of late, as reflected in rising open interest put / call ratios. (See Figures 12 and 13) We will have more to say on this below when discussing the Philadelphia Gold And Silver Index (XAU). (See Figure 2)
Figure 2
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Good investing all.
