|
All
you worried goldbugs out there, repeat after me: Corrections happen.
Every bull market has lots of 5%-10% squiggles that look like the end of
the world to those who don’t understand, and like entry points to
those who do.
GoldMoney’s
James Turk devotes a page of his latest FreeMarket Gold
& Money Report to the proposition that the secular bull market in
precious metals (and the secular decline in the dollar) is alive and
well. Here’s some of what James had to say:
Both
gold and silver were hit hard this past week. It’s the same story we
have seen many times before. As gold climbed in price, we witnessed in
recent weeks the huge build-up of open interest on the Comex. The gold
cartel, which is a group of bullion banks acting under the direction of
the US government, was selling whatever paper promises (i.e., futures
contracts, which are simply paper representations of gold but not gold
itself) it felt were needed to try slowing and then capping gold’s
advance.
The weekly reports prepared by the Commodity Futures Trading Commission
clearly show this intervention. The CFTC reports all short positions
based on the size of the firms that hold them, and some large firms are
members of the gold cartel. So the huge jump in the short positions of
the large commercial firms reveals the gold cartel’s handiwork. After
throwing enough paper at the market, the gold cartel finally succeeded
in capping gold. They were unsuccessful in the $640s and $660s, but
after adding thousands of futures contracts that caused open interest to
balloon to new highs, the gold cartel stopped gold in the $680s.
Then the rout began. Gold dropped four days-in-a-row, losing $45 or 6.6%
in the process. Fortunately, there was no serious long-term technical
damage to gold’s chart – nor do I expect any in the days and weeks
ahead. Any reversal of gold’s major uptrend is unlikely because the
gold cartel is already covering short positions at these prices, which
will provide underlying support for gold. More importantly, the same
fundamental factors that have been driving gold higher for years remain
in place.
In
fact, the volatility in the stock market and growing nervousness about
asset quality of the banks and brokers involved with sub-prime mortgages
is another reason to own gold. Their deteriorating asset quality means
that a financial panic is becoming increasing likely, and could perhaps
be similar to any of those panics we saw in the 1980s as banks collapsed
because of imprudent loans.
The gold market doesn’t need a financial panic to climb higher. Gold
remains well below the price it would be trading if government-led gold
cartel wasn’t regularly intervening to keep gold as low as it can. But
we can take solace from the fact that gold is in a long-term uptrend,
clearly indicating that the gold cartel is losing the war.
Turning to the above gold chart, I draw attention again to the two red
circles that I have been mentioning in recent letters. But note that I
have also added two red rectangles to this chart. Note what happened to
gold back in 2005 after breaking out from the first red circle. It shot
up, and then went into a severe downdraft. It was another gold cartel
attack, but gold quickly reversed and continued within the major uptrend
then underway.
Will the same pattern repeat? No one of course knows, but readers of
these letters know that I always put a lot of emphasis on past results.
Markets often do repeat, etching out similar trading patterns on the
charts. So if history does repeat, we are at or near the low, and gold
will rocket higher from here. The gold cartel has probably taken gold as
low as they can on this move because it deals primarily in the paper
gold market. Right now the demand for physical gold is strong, and these
buyers don’t want paper promises from the gold cartel. They want
metal. The gold cartel only dishoards gold from central bank coffers
sparingly. They prefer to threaten dishoarding rather than actually do
it, because they recognize that their gold is essential, so they only
part with it reluctantly and infrequently. Consequently, the physical
gold demanded by buyers in China and elsewhere throughout the world has
to come from somewhere. It comes from people who already own it, but are
only willing to part with it at a higher price. So either dishoarded
central bank gold or higher prices are needed to keep the market in
balance, i.e., the price of physical gold consistent with the price of
paper gold.
Even though I have been and remain bullish, in the last letter I advised
not to “go out and bet the ranch” because the “gold
cartel has been out in force, trying to cap the gold price.” In
other words, I do not recommend using leverage if you choose to trade
gold (i.e., trying to profit from its price fluctuations, in contrast to
the long-term wealth accumulation strategy of buying gold month-in and
month-out). Leverage is dangerous, as we saw over the past four days. No
doubt there were a lot of margin calls issued, with the consequence that
there was much forced selling. But the capping by the gold cartel and
the subsequent rush for liquidity does not diminish gold’s long-term
prospects, a fact no doubt understood by the long-term accumulators of
physical metal who now find gold significantly cheaper than it was just
a short week ago.
Gold did not reach my $720 target by the end of February. But I expect
that we will see that price soon enough, probably within the next two
months.
© 2007 John Rubino
DollarCollapse.com | Financial
Sense Editorial Archive
John
Rubino is
the author of The
Coming Collapse of the Dollar (co-written with James Turk), How
to Profit From the Coming Real Estate Bust (Rodale, 2003), and Main Street, Not Wall Street (William Morrow, 1998). A former Wall
Street financial analyst and columnist with theStreet.com, he
currently writes for Fidelity Magazine and CFA Magazine He lives in Moscow,
Idaho. Contact by Email.
|
