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TOXIC
WASTE VS. GOLD & SILVER The Wasteland The big event of the week was supposed to be the Fed’s meeting and subsequent announcement on interest rate policy. There was some speculation for higher rates, while most thought they would stay the course; others were of the opinion that they should lower rates because of the growing problems in the subprime mortgage market. The Fed stayed the course, at least in regards to interest rate policy, as 5.25 percent remained unchanged. Their post meeting statement indicated they were still most concerned with inflation moderating to more susceptible and sustainable levels, although the housing downturn was mentioned. As the week unfolded, it became obvious that the subprime mortgage debacle had stepped up to the level of a contagion, as just about anything connected with it in any way, shape, or form was under attack; including mortgages rated higher than subprime, mortgage backed securities, asset backed securities, and collateralized debt obligations. All the derivatives of structured finance were now viewed as toxic waste to stay clear of, or else one became infected – by mere contact, or even through association. Perceptions had changed overnight. The market is starting to figure out that the sophisticated derivatives of structured finance that were supposed to control and mitigate risk are doing just the opposite in real time live markets, as opposed to merely sitting unused and untried in a computer as an accounting tool during quiet markets that never test their ability to perform as stated. These various derivatives are creating more risk – as they seize up, freeze up, and become illiquid. Not only do prices drop dramatically – some markets literally freeze up – there aren’t any buyers with any liquidity to bid with. In steps the lenders of last resort – the Central Banks, and one must admit, they did step up to the plate, however, it remains to be seen if throwing more fuel on the fire will put it out or not – I have my doubts. But they wasted no time and acted in unison, opening the credit spigots to all who needed a drink. The first domino in the latest series of events was when BNP Paribas, the largest listed French bank, announced they had frozen $2.2 billion worth of funds hit by U.S. subprime mortgage problems. This in turn started to make some of the bigger players nervous that perhaps this subprime contagion could and would squeeze credit markets around the world. No one knows for sure because it has never been like this before, which is the point those few voices in the wilderness have been saying for years now, but no one wanted to listen – until now that is.
The Bank of Japan (BOJ) kicked 1 trillion yen into their monetary system, while Australia added $4.2 billion. Not to be outdone, Bernanke and company first released a statement that the Fed would “facilitate the orderly functioning” of the markets, and the floodgates were thereby opened wide. The New York Fed first bought $19 billion of mortgage-backed securities. This is different from how “normal” repurchase agreements (repo’s) work. Normally a repo is done using U.S. Treasury paper that is exchanged – not mortgaged backed securities. By doing this the Fed monetized the mortgage debt it purchased with the $19 billion. The bank later did a second operation, purchasing another $16 billion worth (for a total $35 billion in monetized mortgage backed securities). This is an animal of a different sort, one that rumors and sightings have been heard of, but now there is no doubt that it exists, and that it hovers over the markets. What must not be forgotten is that sometimes the cure can be worse than the disease. Hopefully this is not one of those times. On Thursday the Fed injected another $24 billion into the money markets for a collective quick fix of $59 billion. A statement was also issued that the Fed’s discount window remains open, as always, for those in need of money. The spigots were turned down, but are manned and primed – ready to go at a moments notice. Hiroko Ota, Japan’s minister of economic and fiscal policy summed things up quite succinctly when he said: “the effect of U.S. subprime loans is spreading to financial markets around the world… we need to carefully monitor how this will affect the economy.” Yes, indeed we do. Gold Gold was down $2.80 on the week, closing at $681.60 (-0.41%). Its intraday high for the week was $688.10, and its low was $668.80. It rallied up on Friday; however, the weekly close was not the highest daily close for the week – that occurred on Wed.’s close of $686.30. There are many questions, and explanations, as to why with all the turmoil in the markets gold isn’t up by more, which is a very legitimate and sensible question. I will give my personal opinion, which has been expressed by others with whom I agree, and it has been ridiculed by those who totally disagree. So, take it with a large dose of salt. What’s going on right now, and will be going on (and perhaps off) for some time to come, is liquidation. Things that are supposed to be money (money substitutes) are being called on to perform as such, and they are coming up short, with less than desirable results – sometimes with no results. So many screwed up derivatives have been conjured up as another get rich scheme it is mind boggling. They are supposed to mitigate risk, when what they really do is create more risk, and systemic risk at that. All this paper crap they have invented doesn’t really exist, as something substantive – that’s why they’re called derivatives, they are derived from some other source. Most simply represent the relation or ratio between certain other things – some of which are themselves derivatives.
Suddenly, however, something goes amiss in one particular segment of the market – somebody or something screws up, and money has to be raised to pay for it. If the selling in turn causes others to have to unwind positions because of the changing prices of things they may be using to hedge risk with are now going down in price, and sometimes quite quickly – well things start getting messy pretty quickly. Suddenly investors find that pricing something in a calm market where it isn’t called on to meet its obligation(s) is one thing, while pricing them in a turbulent market is a horse of a different color. When called on to mitigate risk during a falling market, which also includes a falling price structure for the risk management instrument itself, suddenly such a market turns on itself and will liquidate anything it can. Things are NOT working as planned. Things are not working. Gold is the most stable, solid, and liquid asset bar none. Because of this unique position, when the going gets tough, investors know they can ALWAYS find buyers for gold – ALWAYS. They know that gold will ALWAYS be accepted as payment – ALWAYS. Hence, at the beginning of such liquidity crises, gold gets sold along with pretty much everything else. There will be a rising demand for it, but there is also a rising supply of it being sold into the market. After the beginning stages of such liquidation, the demand for gold as the ultimate true safe haven and store of wealth, will far out weigh the supply coming into the market. Then gold shines brightest and moves up. That is at least what history has so far shown to be the case. Will it be different this time – I doubt it, but one never knows for sure.
Considering the events of the past few weeks the chart is holding up pretty well. It looks as though a positive MACD may be waiting in the wings, and histograms have receded back to zero. STO remains headed up and positive, but we don’t want to see it roll over on itself. The 65 ema remains inviolate, and overhead resistance is clearly marked. Remember, the central bankers injected $134 billion into the money markets last week, which is inflationary – period. Next is the monthly gold chart. That 55% gain is taking some time to be digested. Think of how a python’s digestive system works. Those big meals take awhile.
Silver Silver closed down .29 cents to $12.87 for a loss of -2.19%. Histograms are receding back to neutral, while a positive MACD Cross may be in the making. The 65 ema continues to hold.
Below is the daily silver chart. The bottom trend line continues to hold. However, so doesn’t the upper trend line. Which way is she going to break is the question.
Hui Index As tough of a week as it was for most investments, including physical gold and bonds, the Hui Gold Bugs Index was up 6.29 points or +1.85%. The weekly chart below sports an ascending triangle that almost always resolves itself to the upside. RSI hit 50 and turned up, the overbought condition has been worked off, however, it remains to be seen if MACD is going to turn up as it needs to, along with STO, which although it shows the overbought pressure has been released – has it been released enough?
The next chart is where the Hui needs to do a good amount of work, as in out performing physical gold on a steady sustainable basis. Until the upper trend line turns from resistance to support – a new bull phase in gold stocks cannot be had.
GDX Index The GDX did not perform anywhere near the Hui Index, the resulting divergence being attributable to the stocks that comprise each index. As the holdings of the index go – so too does the index or fund. The daily chart below does show a number of positive divergences and possible positive set ups. There still remains much work to be done, as the index is closer to its bottom trend line compared to its upper.
The monthly chart shows a well defined bullish trend that starts in the bottom left hand corner and rises to the top right hand corner. Price remains well above its bottom trend line. MACD and histograms need to turn back up. Only positive price action can do that – wishful thinking doesn’t work in this game.
XAU The Xau tracked the GDX last week, barely closing up for the week by a half of one percent. The daily chart below shows the powerful break out above overhead resistance back in July, and the subsequent break down back below the upper trend line. At the bottom of the chart the Xau/Gold ratio is also testing its recent break out. I still favor a bullish resolution to the over one year long consolidation/correction.
The weekly chart is flashing mixed signals. Some indicators suggest down, others say up, while some say sideways. Overhead resistance is clearly defined. The series of higher lows is the dominant chart feature.
The monthly chart of the Xau is one of my favorite charts, as it’s pretty as a picture; and the picture it depicts is one serious cup and a handle formation in the makings. The handle is being formed as we speak.
Invitation Stop by our website and check out the complete market wrap, which covers most major markets, including stocks, bonds, currencies, commodities, and energy, with the emphasis on the precious metal markets, both physical and stocks. There is a lot of information on gold and silver, not only from an investment point of view, but also from its position as being the mandated monetary system of our Constitution - Silver and Gold Coins as in Honest Weights and Measures. On the main homepage are papers and articles by some of the best out there to be had. There are audio and videos on banking, the Constitution, and cutting edge news of serious interest. Many articles are archived, while others are linked. Live time quotes on gold and silver and precious metal stocks are available, including charts for most world currencies and futures. Links to the World Bank, central banks, international monetary fund, the United Nations, and much more are offered. There is also a live bulletin board where you can discuss the markets with people from around the world and many other resources too numerous to list. Our gold stock portfolio with all buy and sell orders is posted in the public domain for viewing. See which stocks we own, have sold, and bought most recently. Drop by and check it out. Good luck. Good trading. Good health. And that's a wrap.
If we can build the above – we sure as hell can return to Honest Money and fix the monetary and financial system of our country – and make sure there are no homeless, or sick who need care, or those starving to make ends meet. If we can build the above, we can do anything – if we choose to want to do it. Vote
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INFORMATION 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. |
In
steps the European Central Bank (ECB), injecting a large 94.8 billion euros
into the European money markets to assuage any liquidity
fears. 
The
pricing of such financial instruments works well and good if all you are
doing is pricing them and filing them away. Because the markets are
running along smoothly there’s no big deal. 
