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I think the assumption that gold can be used as such a measuring stick for wealth is a good one. Since the supply of gold changes by only a negligible amount, its economic value is determined by demand only. Demand is based primarily on only two factors: 1.
The value of paper currencies (varies according to
monetary policy). In spite of the discussion of gold market manipulation, the extreme levels of optimism in most world stock markets is consistent with the gold market being quite rational and therefore, not manipulated at all. In effect, with the amount of stock market optimism at record levels, the “fear premium” of gold is practically zero. This is obvious by looking at the chart of emerging markets ETF, showing a rise of about 300% in less than 3-years. No fear there!
Within the conspiracy paper is a clear secular uptrend – the relationship between the price of the 30-year bond and the price of commodities in the CRB index. In effect this is a comparison of US paper to real stuff. However, unlike gold, the price of real stuff is dependent on worldwide economies and economic growth. So a case can be made that the clear secular uptrend since late 2001 shown in the chart below is a result of true economic growth and not a conspiracy of paper.
This may be true; yet, if gold is compared to the CRB index in a ratio chart, a distinctive and recently completed reverse head-and-shoulders pattern is visible. The former important resistance level of 1.6 was taken out decisively early this year. While previously the bull market in commodities was mostly a result of economic growth, of late it looks more like there is a conspiracy of paper going on. Remember, gold (true money) is a measuring stick for value.
While resistance levels on the 10-year Treasury note price have not been taken out yet, they are being threatened in the form of a descending right triangle. If this resistance level is broken decisively, the conspiracy of paper will be obvious to the crowd.
There’s some evidence to suggest that the secular trend of bond prices is now down and interest rates are headed up. Below is a long-term chart of the 10-year Treasury note yield. From 1960 through 1982 the secular trend in interest rates was up. Corrections against the secular trend were steep and of relatively minor duration. Similarly, since 1982, with the secular trend of interest rates down, corrections against the secular trend were also steep and of minor duration. However, since the spring of 2003, the interest rate trend has been up, but the angle of ascent has been shallow, and the duration of this uptrend is much greater than any of the previous counter trend rallies. The price of paper is going down, and loans of paper will require more interest paper to be paid back with the principal paper in the form of higher interest rates.
Is the conspiracy of paper only a US thing? Not at all! Below is a long term chart of the Euro versus true money. Note what the clear intermediate term technical trend illustrates.
Similarly, the Japanese Yen to Gold ratio suggests a conspiracy of paper. The weakening yen is a longer term trend than that of the Euro.
Such conspiracies of paper benefit financial institutions the most. The recent performance of the sector “foreign banks” ranks near the top of all 199 sectors tracked by Investors Business Daily (IBD). Returning to the negligible fear premium on gold and in today’s stock markets, the long term chart of a the small cap Russell 2000, shows an uncompleted terminal diagonal pattern complete with throw over. (See previous article.) A logical outcome would be a break of support of the 10-year note, a dramatic stock market reversal (as suggested by the terminal diagonal in a leading index), and a rise of the gold risk premium. It will then be obvious to the crowd that there is a conspiracy of paper.
Today’s Market Today’s article title came from the novel of the same name, a good read especially for those who find financial markets compelling. It takes place in early 17th century London. It was business as usual in the stock market as typified by the Google analyst’s meeting. No surprise that they are getting ready to do more great stuff that only they can execute. The real action today was in the bond, real money, and commodity markets. The 10-year note referenced above is now at a key inflection point whereby continuance of the short term up trend in rates will alert the crowd to the conspiracy of paper. The resistance on the 10-year note rate has not been broken yet; but it appears that it is now in a position where resistance can be broken. In the spring of ’04, the resistance was broken, but this was done after little basing and the resistance level of 4.65% was then quickly reclaimed. But, I submit that this time it is different. The next few trading days and weeks will be critical for the bond market. If the bond market breaks, this will be the beginning of the end for the conspiracy of paper.
Silver closed today over $10.00 for the first time since 1984, and this is bullish for real money and bearish for paper. And the Central Fund of Canada hit a 52-week high. For ready reference, here is my Elliott Wave view of the HUI. While there will be corrections along the way, a Wave III is where corrections are of short duration and minor magnitude and where the crowd is right.
If the conspiracy of paper is exposed to the crowd, it won’t be good for the stock market. Have a great evening. Martin Goldberg
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