GOLD AND SILVER REPORT
Market Wrap Week Ending 06/08/2007
by Douglas V. Gnazzo
June 11, 2007

Does It Add Up

Since March of 2007 the Ten Year Yield has gone from 4.5% to 5.1%, which is not an insignificant amount. Interest rates are on the rise, and not just in the U.S. but around the world. 

Why are rates going up? Rates are the “cost” of money; hence the cost to “borrow” money is rising. To attract buyers of their bonds, the various world nations must offer a competitive rate of interest, compared one to another, or they will not attract enough buyers of their debt. 

The U.S. is the world’s largest debtor-nation; it needs to attract huge sums of money; it may be starting to feel the pinch. It is not attracting the global money flows it needs to fund its trade and current account deficits.

China, Japan and other Asian nations presently hold approximately $4.5 trillion in foreign exchange reserves.

Most of this total is held in US Treasuries and US Dollars. Lesser amounts of Agency debt are held. The till is full.

Just recently the Central Banks of Kuwait and Syria put the world on notice that they will no longer be pegging their currencies to the Dollar. 

Iran does not accept U.S. Dollars in payment. Some say the reason we went into Iraq was the same non-acceptance of U.S. Dollars for oil. More and more nations are starting to shy away from the U.S. Dollar.

The U.S. has a GDP of $US 13 trillion with liabilities of $US 70 trillion. The United States needs massive foreign inflows of money on a daily basis. 

They must either offer a competitive rate of interest to foreign buyers or the Fed must buy the bonds, which means further debasement of the currency. It’s called being stuck between a rock and a hard place. They are damned if they do, and damned if they don’t. As the song goes – God damn the pusher man. We wish them well; they are going to need it. 

And there may be yet more jumping off board to come. Bloomberg reports:

“The United Arab Emirates may be the next Middle Eastern country to stop pegging its exchange rate to the U.S. dollar, according to trading in currency forwards. The second-largest Arab economy may follow Syria and Kuwait, which both said in the past two weeks that they would dump the dollar peg to curb rising import costs and inflation. Middle East currencies have been dragged lower by declines in the dollar, pushing up the cost of imports from Europe and Asia.”

Bonds

Two-year government yields were up 3 bps to 5.0%. Five-year yields added a large 13 bps to 5.05%. 

Ten-year yields rocketed up 16 bps to 5.11% to an 11 month high. 

Long-bond yields were up a very significant 16 bps to 5.22%. 

The spread between the 2 year and the 10 year closed the week at 11 bps. This was the most positively sloped curve since May 2006. 

I have repeatedly said for months that any surprises in interest rates would be to the upside. This week they came through in spades. The Fed no longer has its coveted inverted yield curve, a definite conundrum to those who think the Fed is all powerful.

Why Rising Rates

Why are rates rising – it really is quite simple if one remembers why paper fiat debt-money does NOT work. The KEY is that paper fiat debt-money is just that: DEBT. 

You cannot pay off debt with debt. All paper fiat currencies are debt obligations. All they can be used for is to DISCHARGE debt, not pay off debt. 

In paper fiat land it is IMPOSSIBLE TO PAY OFF DEBT; and if you think about what the other side of the coin to this is – a pretty picture it does not paint.

So, the world is afloat on this huge sea of debt, debt that cannot be paid off – only serviced (the interest paid). More and more money/credit/debt has to continually be created to service the existing debt. 

The reason for this is because when the bankers create the money/credit/debt out of thin air that they loan you to say buy a house, they simply hit a couple of computer keys and viola – there’s the money right in your account. 

But where did it come from? It came from out of the thin air by the stroke of the computer keys. There is no money per se – it is all an illusion of double-entry bookkeeping. 

But when they created the money/credit/debt to loan you to buy the house, they didn’t create the money for you to pay the interest on the loan of the money they did not have, and does not exist, although they let you think it does; and they let you pay the interest on it, as if it exists.

Slave Labor

So where are you going to get the money to pay the interest payments with? That’s right – you’re going to work for it. You are going to exchange your energy and life’s labor for money. You then take that money and give it to the banker as interest on your loan.

The banker has created money out of thin air – money he did not have, and hence money that was not his to loan, money that did not even exist. 

Yet now he takes the profits from the sweat of your brow and your life’s energy focused as work – and takes it as payment for lending you nothing but a lie and an illusion. 

Your hard work and labor is not an illusion – the real things it builds and creates are not illusions, but the man’s money is. 

It is a vile game the moneychangers’ play, which is why Christ forgave them not; and one that when weighed in the balance will be found to be wanting, and will extract a toll they cannot even begin to imagine. 

Because this profligate flood of debt exists, nations have to attract huge sums of money flows to fund or service their national debt. It is similar to a carnival show where a barker tries to get you to fall prey to his act before another entices you to theirs.

They need and want your money – your life’s work and energy, to help service the debt that they put around your neck like a yoke around a piece of chattel, so they can sit back and do nothing, while you labor for their livelihood – labor in their stead. 

The Circus

A nation must therefore attract hordes of carnival goers to buy their coupons for entry to the sideshow – the house of horrors in paper fiat land that knows no return – it only takes. 

Interest rates are on the rise for the same reason the barkers at the carnival shout louder and louder trying to outdo one another – trying to attract as many shills as they can to come and play their game, before another catches your eye, so they can separate you from your hard earned money. 

Why do you think they are so nice to you at a casino – giving you what you think are free drinks and food? Do you think they are serving you or themselves?

He who lends that which they do not have is a vile and evil creature, one that partakes in the bidding and rule of another, and who trades his soul for that which rots in the light of day and with the passage of time soon forgotten. 

Now there’s an explanation of rising interest rates not often told.

The first chart up is the 10 Year Treasury Yield. As you can see, it sliced through resistance like a hot knife through butter. 

Notice, however, how steep and fast the rise has been. It remains to be seen if what was resistance now becomes support. If it does – rising rates have come home to roost. 

Next we see a very long term trend line being broken above by just a wee bit. It too, remains to be seen if the rise continues and holds – or not.

Fed Foreign Holdings of Treasury Debt last week declined $3.9 billion to $1.955 trillion, which is a 26% annualized increase. Custodial holdings expanded $330 billion for a 20% year to date increase.

Gold

Gold closed down 26.60 to 650.30 (-3.93%). It was gold’s lowest weekly close in the last three months. First up is the daily chart:

Gold has once again broken down below the lower trend line of its channel. RSI has turned markedly down. MACD appears to be getting ready to make a negative Cross Over and the histograms have just broken below zero. All in all – not a good looking chart. 

As I said the last time it broke below its channel: for starters it needs to regain the channel. And it has its work cut out just to attain the high ground once again. 

Next is the weekly chart of gold. As stated in last week’s report, the 65 week moving average, along with the negative MACD Cross, and the not as of yet reached 20 oversold region on the STO, technically indicated that if gold wanted to fall, it had plenty of reasons and room to. And so it did. 

All the indicators still maintain their negative posture, suggesting more downside action may yet be coming. Maybe, maybe not. The 65 moving average should provide support as it has all during the gold bull. It is about $27 dollars below the weekly close. Gold has a good deal of work to do to turn bullish, and it will – it’s a question of when and from what level. Next is the monthly chart.

Last week I mentioned that gold was extended far above its 20 ema, which might mean it needed to consolidate/correct the overbought condition. It did – with a vengeance. 

The positive divergence in the STO of last week did nothing to prevent the hard fall during the week. The MACD negative cross is still in effect, and the histograms are negative. A bearish looking chart. 

Next up is the daily chart for streetracks gold etf (gld). A strong break below its lower trend line is clearly evident. A negative MACD cross appears to be setting up. 

Below are two point and figure charts. The first is for physical gold and the second is for streetracks gold etf (gld). 

The first chart for gold has a bearish price projection of 615.00. Interestingly, the second chart for GLD has a bullish price projection of 85, which is about 30% above its present price. 

Obviously, one of the two charts is going to be dead wrong. And who ever said the markets weren’t fascinating. 

The last two gold charts are comparisons between gold and the industrial metals, and the second is gold and West Texas Crude. 

Notice the first chart may be putting in a double bottom. If it does, it will mean that gold will be out performing the industrial metals, which is generally a bullish sign. However, remember that it is possible for both sectors to go down, and gold less so, which would indicate an out performance, but not one you would want to own, unless in a specifically hedged position. 

The second chart shows gold out performing oil since July of 2006. The lower trend line is presently being tested. If it holds a good rally may then ensue, as notice the three blue circles that may be indicating an inverse head and shoulders formation. 

Silver

Silver closed down .70 cents for the week at 13.04 (-5.09%). As the daily chart below shows, silver sliced right through its lower trend line, however, notice that it has kept a higher short term low intact, while gold did not. 

RSI has turned down sharply. MACD looks like it may be about to put in a negative cross. 

Another bearish looking chart, at least for the short term. The first order of business is to regain its lower trend line. As I said last week, the chart looked better, but it still needed to hold its gains to confirm. Needless to say – it didn’t. There is much hard work ahead. 

The weekly chart is a bit better, but not by much. Silver is testing its lower trend line. MACD still has a negative cross to contend with. STO has gotten near to oversold, and has made a slight move up.

The monthly chart doesn’t look much better. MACD has a negative cross over and the histograms are negative. Silver is still far above its 20 ema, which means it does have room to move down if it so chooses.

SLV shares broke back below its upper trend line and its 50 dma as well. RSI has turned down hard. 

Histograms are still positive but shrinking, and a positive MACD is still holding. A higher short term low has so far held. Volume picked up on the downside – a definite negative.

The last two silver charts are the point and figure charts for silver and SLV, respectively. Both show very bullish price projections far above the current price.

Gold/Silver Ratio

The gold/silver ratio below still favors silver over gold, as it just barely remains below 50. 

Powerbrokers

Charting the Course

Precious Metal Stocks

The first three charts are point and figure charts of the Hui, Xau, and GDX. The first and last show bullish price projections, while the Xau has a bearish price outlook. 

Hui

The Hui had a very tough week, down 16.70 to 326.14 (-4.87%). It was its lowest close in two weeks – that’s right – two weeks, which brings a bit of intrigue to the table. 

First let’s look at what the chart shows. RSI is still showing a positive divergence. Positive MACD cross still in effect. Histograms are receding to zero. 

A series of higher lows are still in place and the lower trend line has not been broken.

Now for the intrigue. Two weeks ago on Friday the 25^th of May, the Hui closed at 322.25, almost 4 points below where it is now. At that time things did not look very promising, similar to the present situation. 

However, in four trading days it went up to 342.84, a gain of roughly 20 points or 6% in 4 days. Now in five trading days it has given back most of that gain. 

Just as the positive move up of two weeks ago needed to be confirmed, which it wasn’t; so too the present move down needs to be confirmed. Will it confirm or won’t it confirm – I wish I knew, but I don’t. Come this time next week we probably all will know the answer. 

Next up is the weekly chart of the Hui. The chart shows mixed signals. MACD is still holding a negative cross over.

Both RSI and STO are showing positive divergences. The lower trend line is being seriously tested. Next support comes at 311 and then 306.

A mixed bag that could easily go either way. We should know very soon.

The monthly chart of the GDX below still has the dominant indicator being the negative MACD Cross Over. Until that is resolved to the upside the road ahead will be difficult. 

Histograms are negative and expanding. RSI is slowly falling. A series of higher lows are still intact, and the index is well above its lower trend line. Once again – mixed signals. 

Next we have the monthly chart of the Hui, with Bollinger Bands overlaid. 

Notice how during the last intermediate term correction back in 2004-2005 the market traded in a range with the BB becoming closer together near the end of the correction. 

Presently the BB bands are narrowing, suggesting that a big move will be coming one way or the other. 

Hui/Gold

The ratio needs to break above the upper trend line of the pitchfork if a sustainable rally of any kind is to occur. 

Xau/Gold

Notice that STO is at an oversold reading and at a level from which all the other major bottoms occurred. 

Only the first bottom at the beginning of the bull came from a lower STO reading. All of the actual ratios have been lower, however. 

Gold/Hui Ratio

Essentially the same as the above but in reverse order. Has the ratio peaked – signaling a bottom – or will it have to go to the previous peaks of 5.21?

Summary

The world is floating on a sea of make-believe credit, money, and debt. What is referred to as the measure of progress – Gross Domestic Product (GDP) is an illusion. GDP should be renamed GCS for gross consumption spending, as that is what it is.

GDP merely represents the total amount of goods and services that we CONSUME or use. To consume or use them we have to PAY for them. The total GDP is simply the total COST we as a nation SPEND – to buy all the things we need and use, and then some. 

GDP is not necessarily a measure of progress. It definitely is not a measure of WEALTH. This is easily determined by noting that total consumer spending is increasing faster then both income and savings COMBINED. So, where is the money coming from to pay for all this stuff? 

The money is coming from where it always comes from – from nowhere, in the form of credit or debt. We as a nation are borrowing more and more – going into more and more debt – to pay for our consumption here and now in the present. 

In other words – GDP is being paid for or had by the issuance of DEBT. We are only able to buy all that stuff (GDP) if we borrow the money on credit which creates debt, debt that we then pay interest on: thus accepting a life of debt servitude.

GDP is not a sign of progress or wealth when done or had in this manner. It is a sign of backwardation – of a loss of wealth. Do we really own all that stuff, or does the banker own it, and we just own the debt that we service (pay the interest on)? 

GDP is a joke, an illusion – just like their make-believe money. Only one thing is real in paper fiat land – DEBT – and our labor that works it off.

Interest rates are going up. If they continue to do so, be prepared and expect the unexpected. Forewarned is forearmed. The writing is on the wall. And yes the dollar is burnt toast. For those that like their toast burnt – enjoy. 

The less debt one has the better off they are. The more gold they have the better off they are. Savings is key. To consume less then you produce is key. 

Real savings leads to real wealth – not excessive wealth, just real wealth – if saved outside their system of paper fiat debt-money. That’s why they are scared of gold – it is outside their system and power and control. 

Presently, the short term trend for gold is down, silver is questionable. It matters not, as such, if it further occurs, it will be but another opportunity to accumulate real wealth at lower prices. 

In regards to the precious metal stocks the picture is unclear. Most of the indicators on the standard charts have more negative indicators compared to positive ones. Yet the point and figure charts for silver, the Hui, and the GDX are all positive. The same is true for many of the individual gold and silver shares. 

The consensus view is very bearish on the gold and silver stocks. I’m not yet convinced. The consensus was overjoyed when gold was headed for $700, and most were talking of new all time highs; while a handful of others were selling into the strength. Which was the best move?

The last intermediate term low saw the gnashing of teeth and the wailing of anguish – yet it was the best time to buy – when the blood was running in the street. Was it better to run or to have stayed one’s ground?

Is now such a time? If it isn’t, it’s closer to being one then it is from not being one. It’s a bull market until it isn’t, as of now it is. 

Three weeks ago the market wrap included four most probable scenarios for the gold stocks. The first was that the price would test the highs and then retreat. Such has not come to pass.

The second most probable scenario was that price would fall and test the lows before embarking up to test the highs. Such appears to be what is presently occurring. 

The only other choice is that the market is headed down and will continue down, entering a bearish phase. That was the fourth and most unlikely scenario, and it remains in the same order. 

In last week’s market wrap I said that the gods had smiled on the gold stocks, at least for the time being; and that it remained to be seen their mood next week. The gods can be very fickle.

Well, the gods were not in a very good mood this past week, and they acted as fickle as one can be. It was also said that much work needed to be done to turn the charts completely bullish, before a sustainable rally could take place. As we have seen – such work and even more now remains to be done.

I still remain intermediate to long term bullish on the gold stocks, barring any meltdown of the overall stock market. I am of the opinion that before the year ends they will be much higher compared to now.

Invitation

Stop by our website and check out the complete market wrap, which covers most major markets, including stocks, bonds, currencies, commodities, energy, and specializing in the precious metals markets (51 page report). 

There is also a wide variety of information on gold and silver, not only from an investment point of view, but also from its unique position as being the mandated monetary system of our Constitution - Silver and Gold Coins, as in Honest Weights and Measures.

There are articles on many different aspects of finance and investing, as well as is a live bulletin board where you can discuss the markets with people from around the world. 

Links are available to the various central banks, the International Monetary Fund, World Bank, and the United Nations, with live currency and pm market charts, including a precious metals tickertape and many other resources too numerous to mention. 

Lastly, there is our gold stock portfolio that lists all personal trades, including purchases, sales, prices, and dates – on public display. Drop by and check it out. Good luck. Good trading. Good health. And that's a wrap.

CONTACT INFORMATION
Douglas V. Gnazzo
Honest Money Gold & Silver Report, LLC
Canton Center, CT USA
Email  |  Website

About the author: Douglas V. Gnazzo is CEO of New England Renovation LLC, a historical restoration contractor that specializes in restoring older buildings that are vintage historic landmarks. He writes for numerous websites and his work appears both here and abroad. Just recently he was honored by being chosen as a Foundation Scholar for the Foundation for the Advancement of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.