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GOLD
& SILVER VS. SUBPRIME & DERIVATIVES Gold Gold surged up $19.30 to close at $806.80 for a 27 year high and a gain for the week of 2.45%.
RSI is in overbought territory with a reading of 78.04. MACD and the histograms are up strongly. The CCI indicator at the bottom of the chart is also flashing overbought. However, in strong bull markets prices can stay overbought and at much higher prices than normally. Gold is up 20% just in the last 6 months and over 30% for the year. So what is driving the price higher? Most likely a confluence of various factors: a rising price of oil; a rising commodities market in general; a falling dollar; and an inflation of fiat currencies worldwide that are continually debasing and losing purchasing power – to name but a few.
There may be one more run to the upside, however, a pullback is out there waiting. The daily chart below hints at such, as does the chart after it that compares the performance of gold to oil
Above is the daily chart of gold’s recent rising channel that shows the upper resistance level and the support level below. Below is a comparison of gold and oil, which have been moving along almost in tandem. This does not imply causality – simply correlation.
Following is a comparison of the price of gold to the price of oil. The gold to oil ratio has been falling steadily all year.
The monthly chart of gold below looks very strong with all indicators well into positive territory and flashing overbought warnings.
Next up is streetTRACKS Gold Trust. It too made a new all time high and RSI is well into overbought territory. MACD and histograms are very strong; however, note the volume has been declining on the rally. Perhaps the first hint.
Silver Below is the monthly chart of silver. It is rising quite strongly yet its indicator readings are not in overbought territory. RSI is below 70 at 63.16. MACD appears to be about ready to make a positive cross over and the histograms are declining back to zero. The chart looks good.
The weekly iShares Silver Trust (SLV) fund’s chart looks good as well. RSI has room to move higher if it wants to. MACD, histograms, volume, etc. do not look overdone at this point. Silver looks like it wants to run a bit.
Hui Index The Hui Gold Bugs Index had an excellent week, rising 18.79 points to a new weekly closing high price of 439.38 for a 4.47% gain. RSI is just bumping up into the overbought zone with room to move higher if it so chooses. Other indicators are extended and flashing caution.
GDX Market Vectors Gold Miners put in a big performance as did the entire precious metals complex. RSI has room to move higher but it looks like it may be flattening out.
MACD made a recent positive cross over and the histograms are not that far into positive territory with plenty of room to run if they want to; although they could be flattening out. Volume was down somewhat from the prior levels. The weekly GDX chart is below. It is a bit more extended than the daily chart above.
The monthly chart of the Xau shows the cup and handle formation break out.
Hui/Gold Ratio Still has not broken above overhead resistance, something it must do if a further sustainable advance is going to occur.
The Xau/Gold ratio chart (monthly) looks good as the upper trend line has been broken above. Next are the old high readings to be taken out.
Individual Stocks Hecla Mining Hecla Mining was added to the gold stock portfolio on Friday morning just shortly after the opening when the gold stocks came back for a short period before running on through the close. It gained almost 6% from our entry price on Friday. The 50 dma has just crossed back above the 200 ma and a positive MACD cross over with the histograms going positive just occurred as well. Also, the horizontal overhead resistance line has been broken above. RSI has plenty of room to run higher if it chooses to. This is one of the few pm stocks not yet over extended.
Taseko Mines Taseko Mines was also added to the portfolio on Friday morning. Like HL it is not over bought as of now. RSI has lots of room to run and the histograms are receding back towards zero with a possible positive MACD setting up.
Summary The name of the game is inflation of the money/credit supply to feed and service the overwhelming debt service charges (interest payments, etc.). All the excess credit is sloshing around the world causing asset bubbles wherever it washes ashore. Our number one export is INFLATION. We are pawning our scourge off onto other nations. Dr. Marc Faber sums it up quite well: October 31 – Bloomberg (Cherian Thomas and Nipa Piboontanasawat): “India and China may be forced to further restrict bank lending as declining U.S. interest rates prompt investors to pump record cash into the world’s two fastest-growing economies. ‘If the U.S. cuts rates, it will have Asia’s blood on its hands,’ said Marc Faber… ‘The Fed is pursuing an easy monetary policy that is creating massive bubbles outside the U.S.’ The Fed’s actions threaten to spur inflation in India and China, where stocks have soared to records as a stampede of foreign money stokes share and property prices. Chinese and Indian shares have added $882 billion since the U.S. reduced rates on Sept. 18, almost a third of the $3 trillion gain in their combined market capitalization this year.” Listen to Dr. Faber – he knows from whence he speaks; and he does not pull any punches, nor bow like a political sycophant at the feet of his master. The stock market looks like an accident waiting for a time and place to happen. I disagree completely with those who are calling for a new bull market – if they haven’t since changed their mind. The mother of all bear markets is rustling in her lair after a long winter’s nap. The entire precious metals sector has been on a tear. Of the many choices available physical gold is the safest and most liquid option, especially when in your possession – not in another’s. It is very possible that one more move up may occur – or not. A correction of at least short term duration is out there waiting. Call it intuition, call it probability, call it contrarian thinking – call it what you will – it’s the way I see it. There are just too many asset classes presently over extended. Too many people are on the same side of the trade. Bonds seem to be following the path of least resistance, which at the present time appears to be yields to the downside and prices to the upside. The lower end of the yield curb is being lowered more than the long end. Although this may be perceived by many to be alms for the poor – do not count on it working as manna from heaven. The spread between Libor and 90 Day T-Bills is steadily widening. This is one of the three warning signals. The spread widens when the big market players become more risk adverse, which is not a good sign of things to come. Likewise, credit default insurance is getting more and more expensive, if it can even be had at whatever the cost. This too is not good. Another of the three warning signals of problems in the world markets is the yen and the euro/yen cross. The yen has been borrowed to facilitate waves upon waves of carry trades that are then used to buy higher yielding instruments or assets perceived to offer higher price appreciation potential. This is the infamous yen carry trade. It has been going on for years. It will take years for all these trades to eventually be unwound (settled). As they are unwound the yen will rally – so watch the yen, as it will be the canary in the mineshaft that tells when the noxious gas is present. When the yen rallies most world markets will sell off (one exception being the U.S. Treasury market for at least the initial period). The third warning signal to watch for is the Fed doing PERMANENT OPEN MARKET OPERATIONS (pomos). Generally the Fed does repurchase agreements (repos). It puts money into the system by buying Treasury Bonds, but the bonds are then repurchased by the dealers the Fed bought them from. So they are a type of loan. When the Fed starts doing permanent open market operations the money does not have to be paid back to the Fed – or the securities that the Fed purchased do not have to be repurchased by the primary dealers. This is when you will know there are serious problems in the financial markets, as the Fed will literally be giving billions away for free – or so it seems. If you talk to Midas he might explain it a bit differently. So there are three warning signals to watch for carefully, as they will give advance notice of financial problems.
I have listed the safety precautions that all should have in place regarding their financial affairs. You can access the information in past markets wraps that are all in the archives on the front homepage. It would be prudent to have these in place. It doesn’t cost anything except a bit of time and effort and it could make a world of difference – between financial disaster and remaining unscathed. Now I want to address just what appears to be starting – the incipient stages of the unraveling of the credit system of paper fiat debt-money the elite international bankers have forced upon the world; and which now has an insatiable lust and need – for endless tomes of credit upon which it feeds without pity. The subprime debacle is but the tip of the iceberg to come. The subprime mortgage defaults obviously present problems that will cause further problems – all of which must be dealt with in one way or the other. These problems are not in and of themselves large enough to take the system down. However, the subprime market is part of what has come to be known as structured finance: mortgage backed securities (MBS’s), asset backed securities, special investment vehicles (SIV’s), and collateral debt obligations (CDO’s), credit default swaps, etc. Structured financing is kind of like financial engineering, where different plans or models or systems are designed to fulfill a specific function – the basic function being to provide more credit while trying to hedge or mitigate risk, which is not the easiest undertaking to say the least, especially in paper fiat land where money is debt and debt is money. Let’s take as an example collateralized debt obligations. They were engineered upon the basic premise that housing prices ALWAYS gain in value on average 4 to 5% per year. The first thing to point out and to note is that this is an ASSUMPTION that is not proven or guaranteed. Always sounds very reminiscent of forever, which only occurs in fairy tales. It is further ASSUMED that if housing prices are always going to gain 4 to 5% per year then the cash flows generated will provide support for the structured debt. The higher the risk the more interest is paid – the greater the cash flow, at least in theory. Thus AAA assets are ASSUMED to be backed by cash flows to be generated by lower rated debt that pays higher rates as various groupings of differently rated obligations are packaged together – structured if you will. As with all things – this works fine as long as it works fine, but it is all hinged on one ASSUMPTION that if it does not occur will destroy the whole STRUCTURE built upon it: that the price of housing ALWAYS goes up by 4 to 5%. If house prices suddenly stop going up and instead they go down – the entire model that the structure is built and based upon collapses. This is what we are starting to see happening in the housing market and the mortgage markets. It is not a pretty sight, and once it starts it probably will not be able to be stopped. It will simply have to play itself out as does a runaway vibration. Unfortunately, it doesn’t end there and it actually gets worse. As stated above – subprime and special investment vehicles pale in comparison to the size of the collateralized debt obligation (CDO) market, however, the CDO market pales in comparison to the over-the-counter derivatives market, especially the credit default swaps market. Below is a table from the Bank of International Settlements that lists the total notional value of outstanding over-the-counter (OTC) derivative positions by category and instrument. We are interested in the column that is headed by Dec. 2006, as this details the total positions listed at the end of the 2006 year. Notice the first line that has the heading to the top of the far left hand column that says: Total contracts. Follow that across to the column under the heading Dec. 2006. You will see: 415,183 as the entry. That is $415 TRILLION dollars of total derivative contracts. That is big enough to take the whole system down. To put that number in perspective – the GDP of the entire world is $55 trillion, so that number represents 8 years of the world’s output. Think about that real hard. Now go back to the top of the left hand column where it reads total contracts. Go down 7 lines directly beneath that heading and you will come to: Interest Rate Swaps. Follow that line over to the column for Dec. 2006 and you will come to: 229,780. That is the entry for $229 TRILLION of interest rate swap derivative positions. That is large enough to take the system down. Now go back to the top of the left hand column again where it reads total contracts. Go down 17 lines directly beneath that heading and you will come to: Credit Default Swaps. Follow that line over to the column beneath Dec. 2006 and you will come to: 28,838. That entry is for $28 TRILLION of credit default swaps. That is large enough to take the system down. For some perspective – the United State’s GDP is about $12 trillion dollars. This means there are credit default swap derivatives priced at the same value as 2 years of our entire country’s entire gross domestic product.
[chart courtesy of BIS] Houston – I think we have a problem – copy? Houston, do you copy? No reply – out to lunch or just plain out. So now you have a better understanding of why Congressman Ron Paul, who is running for President, and needs your support and vote, should be elected: because he wants to abolish the Federal Reserve and the whole rotten system of paper fiat debt-money that it is based on, and to return to the hard currency of gold and silver coin our Constitution mandates. Think about it – real hard – for a real long time. Listen to that voice within – it will guide you in the right direction – in the direction of freedom and liberty for you and your children and their children – for all the children to come. If not for yourself – do it for them. See the market indicator table on the front home page and on the bulletin board page. There were two new positions added to the gold stock portfolio: 1 unit of Hecla Mining (HL), and 1 unit of Taseko Mines (TGB). Note that a correction in the pm sector is still considered to be close at hand – irrespective of the two new positions. 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.
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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. |
