Reversal Day
For Gold & Silver
Gold had a huge reversal day today (Wed. March 18). During the early trading hours gold was down well over $20 an ounce; it then reversed and closed up over $20 an ounce.
Gold's intraday trading range was more than 7%. As the chart below shows, today's price action completely engulfed several days of previous price action.
Volume soared today and price follows volume. What was behind today's big move?
Perhaps it was the Fed's announcement that they were buying $300 billion dollars worth of Treasury Bonds (debt).
As if this wasn't enough, the Fed also announced that it was expanding its balance sheet by over $1 TRILLION dollars to buy more toxic debt that no one else dares buy.
For months I have warned that this action by the Fed was likely, as it is the only thing the Fed knows how to do: print more paper money, thereby debasing the currency and destroying the purchasing power of the dollar in the process. Last week's report stated:
And then there are the recent Swiss actions:
The Swiss National Bank (SNB) announced this past week that it would buy corporate bonds in the marketplace and reduce interest rates.
The economic situation has deteriorated sharply since last December, and there is a risk of negative inflation over the next three years. Decisive action is thus called for, to forcefully relax monetary conditions.
This is known as "monetizing" debt: creating paper fiat debt-money (credit) to purchase (buy) bonds with.
Non-interest paying debt is exchanged for interest paying debt. The U.S. does the same thing when Federal Reserve Notes (non-interest paying debt) are exchanged for Treasury bonds (interesting paying debt).
The SNB also intervened in the currency markets, selling the Franc in an attempt to slow its recent rise of 7.6% in the past half year, which is a huge advance for a currency, especially in such a short time.
Over the past year the Swiss franc has advanced 6% versus the dollar and 11% compared to the euro.
The Swiss franc reacted to the bond monetization and currency intervention by falling 4.7% for the week. A weakening currency is believed to provide a helping hand to export trade.
Remember the little foray above regarding Japan: the land of the sinking sun? The last time a major industrialized nation intervened in the currency markets to try to weaken its currency was back in 2004 when the Bank of Japan (BOE) sold 35.20 TRILLION yen.
The yen reacted by gaining almost 6% against the dollar within the following year. Government intervention in foreign currency markets never has a lasting affect - short term: yes - long term: no.
Central bankers are in a race towards zero rate interest rates. A global devaluation of currencies is occurring. Purchasing power (wealth) is being destroyed. Some CB's are overtly monetizing debt. Look for more monetization to come - from an ever-growing number of central banks.
Such an increase in debt issuance is going to further debase already weakened currencies and cause inflation and perhaps the specter of hyperinflation to rear its ugly head.
There are those raising concerns that sovereign debt may be defaulted on - among them is China's Premier Wen Jiabao, who said:
"We have lent a huge amount of money to the United States. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China's assets."
"Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried."
If China or any other significant buyer of U.S. debt (Japan) announces that they will no longer buy U.S. debt if it is not denominated in a non-U.S. dollar currency, gold will skyrocket to heights unknown.
Of course, Washington felt compelled to answer, as White House Press Secretary Robert Gibbs stated:
"There's no safer investment in the world than in the United States."
Let's hope he is right (end of quote from last week's report).
Further to the above, in the same report I stated:
Besides the existent game of global currency devaluation that is being played out around the world, via zero bound interest rate policy, there is now the specter of bond monetization; whereby one shade of debt is exchanged for another: interest bearing debt for non-interest bearing debt. There will likely be other mutant strains bred from the toxic waste lands of derivatives gone bad - financial weapons of mass destruction.
Readers of the Honest Money Gold & Silver Report were not surprised by today's actions - they had been expecting it. It was not a question of if, but when?
The daily GLD chart below shows today's big move up. Notice that today's price action completely encompassed the past several days of trading.
Volume increased dramatically, which is a positive factor, as price generally follows volume. Overhead horizontal resistance needs to be broken through if the rally is to continue. Profit taking and consolidation would not be unusual after such a large move; neither would a continuation higher.
While gold was up strongly today, the U.S. dollar ETF (UUP) was down hard (over 3%).
What it noteworthy about this price action is that the dollar and gold had recently broken their long established inverse relationship; and had been tracking one another to the upside since the beginning of the year.
However, in last week's report I stated that many inter-market relationships appeared to be breaking down and I was not going to "rely" on them any longer.
Today's change with the dollar and gold reverting back to their old inverse relationship is a case in point. From last week's report:
Along these lines I think that many old school inter-market relationships are beginning to break down and or change.
As the paper monetary system gradually self-destructs, although a violent implosion cannot be ruled out, these breakdowns of inter-market dynamics will become more frequent and appear with greater intensity.
In the beginning these changes will come and go, as various nations and central banks implement monetary policy that temporarily papers over the cracks.
Today's market action reinforces this premise. Now we wait to see if the dollar and gold will continue to move opposite one another; or if they change again and track one another as they have since the beginning of the year.
Next up is a chart of last Friday's newest position added to the portfolio: Goldcorp (GG). We got a bit lucky as GG shot up over 10% today.
The chart below shows not only the big move up, but the huge expansion in volume; and a positive MACD crossover.
It remains to be seen if the gains hold. The chart suggests it will, but the market will have the final say - it always does.
A bit of profit taking and consolidation from here would not be a surprise. Neither would further upside action.
If the upper horizontal resistance trend line is broken above, a powerful move up could be in the making. A three day close (or weekly close) above 32.5 has the potential to hit $42.50.
Stop by the website and see why we are so bullish on gold that we are offering a free trial subscription and a money back guarantee to all new subscribers who sign up this week.
If gold does not hit $1100 dollars an ounce during 2009 your original subscription will be refunded in full. The free book and special reports are yours to keep regardless.
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
