Gold, Equities & Crude Oil

More Major Moves Impending

by DeepCaster LLC, deepcaster.com | February 8, 2008

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“As to current conditions…non-borrowed reserves of U.S. depository institutions have turned negative for the first time since before the Great Depression”

Flash Update, February 5, 2008, shadowstats.com (Federal Reserve Statistical Release H.3 ‘Aggregate Reserves of Depository Institutions and the Monetary Base’)

We are indeed upon a most remarkable Inflection Point for the Precious Metals and Energy Sectors and the Equities Markets in general.

Why is this Inflection Point so unique? Many reasons including: increasing Volatility, increasing and unprecedented Systemic Threats, Major Fed and Market Moves, record Weakness and Risk in the Financial Sector and, potentially, Significant Trend Changes.

Indeed, Deepcaster expects the Impending Major Moves to reflect truly Watershed Changes in the economy, financial system, and market trends.

Just three weeks ago, in our Forecast for the Week Ending January 13, 2008, we said: “a major takedown of Gold, Silver and Crude Oil is imminent.” And so it has come to pass.

But, as we write, on February 8, 2008, Gold and Silver have spiked up while Crude (while spiking also) is still trending down.

So the question now is “Quo Vadis?” Where do we go from here?

First, consider interest rates. The United States Federal Reserve made two dramatic moves in late January, 2008, lowering official interest rates from 4.25% to 3%, nearly a 30% decline.

Of course, that punished savers by 30% and rewarded profligate Wall Street lenders and other speculators who made loans they should not have been making. It was, indeed, a bail out of sorts for the Big Boy Speculators. Yes, yet another one.

But what is remarkable is the relative Non-Effect of the rate cuts on the U.S. Dollar.

The two major indices of currencies strength relative to other currencies are Interest Rates and Purchasing Power Parity. Putting aside the parity issue for a moment, dropping interest rates by nearly 30% should have really hammered the U.S. Dollar. And especially considering there are other U.S. Dollar “hammers” at work, including the still increasing sub-prime financial crises, and the still-threatening credit market freeze-up which began in August, 2007.

Yet, even with M3 increasing at some 15% per year (shadowstats.com) the U.S. Dollar has steadfastly refused to move below 75 on the USDX in spite of all the hammering it has been taking. Indeed, on February 1, 2008, February 5, 2008, and again on February 7, 2008, the Dollar made major moves up while Gold was hammered (on February 1st and 5th) on the pretext, frankly, that South African Gold Miners energy troubles would be resolved.

In sum, even in spite of all the bad news since August, 2007, the U.S. Dollar has held its bottom at about 75. Moreover, as Gold and Silver were being hammered on February 1 and 5, 2008, so too was Crude severely on those days to the tune of a nearly $3 a barrel, and over $1, respectively. Could it be that we are, once again, witnessing Intervention by The Cartel of Central Bankers*?

Such Intervention would not surprise us. There were over $46 trillion in Foreign Exchange Derivatives Contracts available, as of June 2007, to manipulate the currency markets (see www.bis.org path: statistics, derivatives, Table 19 and Deepcaster’s January 2008 Letter: Market Intervention, Data Manipulation, Increasing Risks, The Cartel End Game and Latest Forecast at www.deepcaster.com).

Indeed, as Deepcaster has explained in detail in recent Alerts and Letters, there is fundamentally no improvement in the U.S. economy or financial markets since August, 2007. Indeed, general financial and economic conditions are worse. While one might expect Crude to be taken down in the current Recession, Gold and Silver are supposed to be Safe Havens! Is The Cartel* at work in Precious Metals too?

Before we respond, first consider the technical picture. In the very short term, that is to say in the next one or two weeks, Deepcaster’s forecast for a (slightly-more-likely-than-not) modest (at best) Equities rebound stands. (But as each day passes without a bounce the chances for a bounce diminish.) Equities indices have spiked below the bottom of their Bollinger Bands and should be bouncing. And a look at the MACD confirms that we ought to be in for a bounce. But Deepcaster expects bounces, if any, to be short-lived and weak. That is, for the Equities markets, for any longer term, say beyond two or three weeks at the most, the prospects for Equities look absolutely dismal.

Remember, we have a Dow Theory Primary-Trend-Down in effect. And that primary bearish trend was confirmed a few weeks ago by the Trannies drop. Recently only about 25% of the New York Stock Exchange securities were above their 200 week moving average - - not positive.

Deepcaster has Forecast that this little Equities bounce could result in the Dow moving as high as 12,850 (and now we believe it could go to 13,100 as a top, if that) within February. But after this possible February bounce hits its top, Deepcaster forecasts it will be “look out below.”

Further considering the Technicals, the VIX (Volatility Index) is looking to break out of a symmetrical triangle and to rise sharply. This likely means stocks will plunge beginning some time in late February or early March, at the latest.

The Fundamentals as well as the Technicals indicate the plunge should be a doozy. The Dow has now established a declining trend channel, and the S&P a bearish Ascending Wedge and a Bearish Head and Shoulders Top with a 1200 minimum downside target.

Likewise, technically, the Trannies have a downside target of around 3500. Perhaps worst of all, the U.S. Dollar has completed a long-term (i.e. over the last 15 years) bearish Head and Shoulders pattern.

Technically, in the long-term, the U.S. Dollar is doomed. Indeed, the U.S. Dollar has been de-valued by a third in just the past five years. Any short-term U.S. Dollar bounces will be short lived.

This Fed inspired U.S. Dollar Destruction Derby is dooming the American Middle Class.

So what of Gold and Silver bullion and shares? Gold has risen relentlessly since the end of 2001 from under $300 an ounce to nearly $950 an ounce. Recently it has ominously declined from the $950s and in the first full week in February dropped below the $900 an ounce level.

Fundamentally, Gold and Gold Shares should continue to move up. And technically they should as well, having broken out of a Symmetrical Triangle. Silver is similarly technically and fundamentally strong.

But a disturbing development occurred recently regarding the up-trending Gold shares. Short-term momentum studies of the HUI (the so-called Gold Bug’s Index) show short-term momentum for the shares are down. Likewise, Elliot wave studies show the immediate momentum for the HUI shares is also down. The price momentum for bullion has turned down also. Thus we have seen bullion and shares taken down in the first two days of the first full week of February.

Similarly for Crude Oil, although the long-term Fundamentals and Technicals are strong, short-term Crude Oil has suffered a pullback from nearly $100 down to around $88 a barrel, all as Deepcaster Forecast in mid-January.

So where does this leave us regarding the near future for the Precious Metals, Crude Oil or the Equities markets? Well, for sure it leaves us at a major Inflection Point about which we spoke initially.

Clearly, the Friday, February 1st and Tuesday, February 5, 2008 takedowns of Gold show The Cartel is still potent and very active.

Thus we must ask what will likely be the deciding factor for these Sectors in the months of February and March, 2008? Will the deciding factor be Intervention by The Cartel of Central Bankers or will Fundamentals and Technicals win out this time? Deepcaster provides his responses to the foregoing questions in his February 10, 2007 Alert posted at www.deepcaster.com.

In evaluating the current situation consider nearly $7 trillion in derivatives are potentially available for managing the Crude Oil markets and over $1 trillion is available for managing the Gold price (www.bis.org and Deepcaster’s January, 2008 Letter). And the over $140 billion (as of Feb. 7, 2008) Repo Pool is available to manage the levels of the Equities markets.

And, as President Bush’s reference (in his State of the Union Address) to the “North American Summit” to be held in New Orleans later this year shows, The Cartel is still pursuing its “End Game.”

In sum, it appears The Fed is bursting the credit and housing bubbles it created and paving the way for a deep hyperinflationary recession or depression as a prelude to their most unpleasant “End Game” (see Deepcaster’s June 2007 Letter entitled “Profiting from the Push to Denationalize Currencies and Deconstruct Nations” and our August 13, 2006 Alert entitled “Massive Financial-Geopolitical Scheme Not Reported by Big Media”).

If the rule that “The Biggest Player in the market makes The Market” holds, The Cartel’s over $7 trillion in Commodities Derivatives Contracts can determine the fate of the Crude Oil price and the over $1 trillion in Gold Derivatives Contracts can determine the Gold price. For Equities, likewise, the Repo Pool, and therefore the Dow and the Repo Pool, are in a declining trend. This means less support for the Dow.

But the Question of the Year is, will the increasingly strong Fundamentals for Gold and Crude Oil finally trump The Cartel Interventions? Or will The Cartel prevail once again?

Copyright © 2008 DeepCaster LLC
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