Week Ending 2/19/10
The following excerpt is from the latest full-length market wrap report, available only at the Honest Money Gold & Silver Report website. All major markets are covered: stocks, bonds, currencies, and commodities, with the focus on the precious metals.
Sovereign debt concerns are holding the markets hostage. Greece is not the only European nation under the microscope. Italy, Spain, Portugal and Ireland are all having similar fiscal problems. And this is just the tip of the iceberg. No country is immune from the toxic waste of paper fiat debt-money and the contagion it spreads.
Paper money was born with the seed of self-destruction within. This is why the Founding Fathers mandated that only gold and silver coin can pass as legal tender; and no bills of credit (promissory notes: i.e. Federal Reserve Notes). Our Constitution is quite clear on this issue.
Be that as it may, we still, by necessity, have to deal with the system of paper money at hand. Investors around the world are worried that the global financial system is grossly imbalanced. Several nations are looked upon as accidents waiting for a time and place to happen.
This is especially true in Europe at the present time. Hence, the euro has come under tremendous selling pressure, as the charts in the currency section show. The reasoning is that more Euros will be needed to fund the various national deficits, and the huge supply of debt that will be created thereby.
This is true for the United States, as well, which is why long term interest rates are rising (see bond section). China's investment in U.S. government securities dropped by $34.2 billion in December to $755.4 billion, as they become leery of the huge sums of debt the United States is selling to fund growing budget deficits. This was the largest decline on record. China's accumulation of U.S. currency available for Treasury purchases has also slowed. December showed only a $10 billion gain in reserves, compared with $61 billion in November.
Nonetheless, the dollar's preeminence will remain intact - for now, as the dollar is the most widely used currency in the world. It accounts for 86% of the foreign-exchange market, which is more than twice the euro's 37%. Its share of the international debt market is close to 40%. These are the perks that come with being the world's reserve currency. Thus the euro's fall has put a bid under the dollar, sustaining it at overbought levels.
This may have a bit more to run short term, but it is closer to its end than beginning (short term). The problem will be like a recurring nightmare, however - it will take time to go away; witness the euro's 50 day moving average crossover below its 200 day moving average, which reinforces that a sustained downtrend is present (chart in currency section).
At some point, there will be a short covering rally in the euro, as huge bets have been made against it. It will be quick and violent. When the tide turns, it will release the pressure that is supporting the dollar, and holding back stocks, commodities, and gold and silver.
It may not be tomorrow or next week, then again it may. The currency markets are moving on fear and greed at the moment; heightened by every report out of Europe. Gold has actually been holding up quite well considering, as it advanced in spite of the dollar's continued rally this week, as did stocks and commodities.
Below is a chart of the yen/euro cross. Currencies are either strong or weak compared to other currencies. What is presently taking place with the rally in the dollar isn't because the dollar is strong; it is because, at the moment, it is less weak than the euro.
Floating currencies of paper fiat debt-money are all weak, as they continually debase and lose purchasing power. At various times some are less weak than others - nothing more or less.
Globally there is a game of currency debasement going on, as sovereign nations try to defend foreign trade, without completely destroying their currency. It is a Sisyphean task for paper fiat debt-money and floating exchange rates. Only gold and silver coin, as honest weights and measures can accomplish such a herculean task.
The chart below shows the yen/euro cross falling off a cliff when the financial crisis erupted in full bloom. This was the unwinding of the yen carry trade. Now the dollar is zero interest rate bound, as we saw above on the 3 month T-bill chart (see bond section), placing itself as the new carry trade currency de jour.
Let's take a look at gold priced in various currencies. As mentioned earlier in the report, a currency is only strong or weak when compared to another currency: the euro versus the dollar, or the yen versus the pound.
Gold can be bought with any currency. The price is denominated in so many units of that currency: be it dollars, euros, pounds or yen. Recently, we have seen that the euro has been weak compared to the dollar. This means the purchasing power of the euro is falling, which in turn implies that the price of gold must be going up when priced in euros, as the chart below shows.
Let's take a look at what gold is doing in a few other currencies: the British Pound and the Japanese Yen.
Notice that in both pounds & yen, gold is near all-time highs. Gold is performing well denominated in ALL currencies. The dollar's recent strength against other currencies is why gold's price isn't making new highs when priced in dollars.
Gold trades as both a commodity and a currency. Ultimately, gold is the strongest currency in the world - it retains its purchasing power better than any paper fiat currency. But the elite moneychangers have tried their best to hide gold's true position as the sovereign of sovereigns from the common man.
Gold is honest money. It has been since time immemorial. It cannot simply be created by fiat - spoken into existence out of nothing, added to the ledger with the stroke of a pen. Gold has to be mined from the bowels of the earth. It is hard and dangerous work.
Because the keepers of the mint cannot create gold at their whim, as they can with paper money, they prefer paper money, which they can control the supply of. Not so with gold. Gold is their master - the sovereign of sovereigns.
It keeps the King and his men under wraps, by not allowing them to needlessly expand the money supply, and hence debase the currency of the realm. This is why Kings and Queens and central banks abhor gold as money: it keeps them honest and in line.
And this is why they try so hard to hinder the common man from knowing the truth that gold is honest money and the cure for the sickness paper money engenders.
Gold should not be priced in dollar bills or Federal Reserve Notes. Our Constitution states that only gold and silver coin can pass as legal tender; and that no bills of credit can so pass.
Yet what do we have today: Federal Reserve Notes or bills of credit (promissory notes) and no gold and silver currency. And they have the audacity to price gold in paper money, saying it is worth so many dollar bills. It is turning the system upside down and inside out: gold and silver by weight and weight alone are constitutional money.
Paper money was closer to real money when it was backed by gold, but even that was far removed from what the Constitution states is money. The point being is don't get fooled by the system that prices gold in paper dollar terms - that is not how it is supposed to be. It is an illusion of the highest order and completely against the Constitution - the supreme law of the land.
Money is only good for one thing: to purchase things with. The greater the purchasing power of money, the sounder it is. It is not the quantity of money that is most important - it is the quality, its purchasing power that determines one's well-being.
The cure for the financial crisis the world finds itself in is to institute a sound system of gold and silver money, as Congressman Ron Paul and others speak of - all in keeping with the Constitution.
It is not as hard as the elite would have you think. For those interested in reading about it, see my book: Honest Money, or visit my website and read the series entitled: Is America Broke, which is posted on the homepage for all to read.
In last week's report I said:
On Friday the gold stocks were hit pretty hard in the morning, but they came back to recoup most of their losses. Some actually closed up on the day. Considering the amount of bad news, I thought the action was encouraging, hinting at a short term rally.
The daily chart shows support at 40 holding, with resistance above around 45-46. MACD has made a positive crossover and the histograms have turned positive as well. CCI has moved from oversold to positive territory, suggesting further upside is likely.
The gold stocks did rally, up 1.43% for the week, with the GDX index closing at 44.57. Several of the stocks on the stock watch list had substantial gains over the last two weeks, so I sold most of my new positions on Thursday, as noted in the email alert sent out that day (IAG 9.8%, NEM 5.5%, GOLD 6.7%, and APC 6.4%).
Below is the daily GDX chart, with a set of Fibonacci retracement levels overlaid. Price (44.57) is presently testing horizontal resistance going back to Sept. Just above (46) is more significant overhead resistance at the 38% Fib level.
MACD is still under a positive crossover and looks strong as of now. The histograms have receded a notch or two. CCI has broken above +100, which is a good sign. It must be watched for a break back below +100, which would be bearish, as evidenced by the vertical blue lines on the chart.
Both Thursday's and Friday's candlesticks were shooting stars, which suggests resistance has been encountered, and that a trend reversal may be coming. As with any signal, it needs to be confirmed by subsequent downside price action. Notice that the candles have long upper shadows (thin black line) extending up from their bodies. This means that during the day prices shot up, but by the end of the day price gave up most of its gains, and closed significantly lower than the intra-day highs. In other words: buying pressure weakened.
The signals are mixed and the pm stocks could go either way from here. Remember: for the gold stocks to perform well, it is necessary for the stock market and the price of gold to be rising, at least for any kind of sustainable rally. Perhaps gold will decouple from the dollar and the euro, but I find that unlikely at this time. Technically, the CCI index is the best signal: all is fine unless it falls below +100.
The weekly chart shows GDX bumping up into overhead resistance marked by the bottom trend line of its rising price channel. The index has broken out and below its channel. It is imperative for GDX to regain its rising price channel.
MACD is still under a negative crossover with both moving averages pointing down. The slope has flattened ever so slightly, and could be hinting at a curve up and a possible crossover to come. But that is mere speculation.
The blue vertical lines on the above chart connect oversold STO readings with CCI readings moving from oversold to above -100. When followed by a positive MACD crossover, these indicator set-ups are good signals for rallies to the upside.
The monthly chart on the other hand shows just the opposite - crossovers to the downside followed by corrections. This suggests that a major move up in the gold stocks is not imminent.
There is not one example on the chart of STO breaking below 80 and not correcting thereafter. This doesn't mean it can't happen - just that it isn't likely to according to past performances.
In today's turbulent times of financial crisis gold and silver are more important than ever. Many analysts are saying that the precious metal and commodity bull market may be over. Can one be over without the other? Might neither be over? What other possibilities are there?
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Good Luck. Good Trading. Good Health. And that's a Wrap.