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I have just had a very interesting telephone discussion with Bill Murphy of GATA. The reason for the call was I have noticed that gold has acted strangely and weakly when normally gold bullish news comes out. I use macro economic analysis for my gold market studies. My usual macro conclusions would have indicated much stronger gold bullish reactions to this news. This indicates to me that there are big changes brewing for macro economics, via the signals I see from gold’s recent behavior- i.e. its not acting bullish when it is supposed to… Gold’s weird recent activity I will get into the discussion Murphy and I had in a moment. But first, let’s comment on some of the weird gold behavior of recent weeks. First, in the ups and downs of the Lebanon war gold has acted very atypically. The latest example was this Monday, right after the news that the war entered a UN brokered cease fire. Many metals writers have stated that there is about a $30 bullish premium on gold’s price because of that war. I and others have expected any significant resolution to Lebanon to drop gold quite a bit. On Monday, gold barely reacted at all… Of course, the present ceasefire in Lebanon might be very tenuous. But Murphy and I have some ideas about gold’s recent atypical behavior, which we will get into. In fact, many gold writers have expressed strong quandaries as to why gold is not over $700 as of last Friday, before the ceasefire. Also, at that time there was bad news out on the oil front, with BP having to shut down the US Alaska pipeline for months for repairs. Also the terror news in Britain Friday barely affected gold at all... Gold has barely reacted to bullish news, even as oil has gone up last week, the Lebanon war ongoing, and the BP Alaska oil troubles, and the latest Airline terror. Now the latest oil questions have cooled a little, with BP stating they may be able to keep half of the Alaska oil flowing while repairs are made. Also, clearly, the oil front is slightly cooler because of the Lebanese cease fire. But gold remains barely down as well this Tuesday. Again, this is atypical. Gold anticipating a US and Japanese stock decline? One possible reason for gold’s atypical behavior may be it is anticipating a big US stock drop, which naturally would draw in Japan and the EU. Looking a little further, the latest US inflation numbers are improving. The PPI is very low and even down this week. US interest rates are pausing at this time. But Bernanke has virtually zero leeway between further rate increases to fight inflation or incurring a serious US recession. SO, gold would find controlled inflation in the US at least neutral to bearish if Bernanke can pull off a controlled cooling (soft landing) of the US economy and get control of inflation here. Japan and the EU region are both experiencing stronger inflation. The EU particularly is probably going to raise again soon. The usual US interest rate advantage vs them of from 1.5% to 3% might soften some, and this would be USD bearish somewhat. That would be gold bullish if interest rates only are considered, and the US does not raise any more. But there are other overriding factors, which will bring me to the main topic of the public article. Markets about to liquidate? If US financial markets (stocks particularly) were to liquidate anything like many foreign markets this year (50% drops in Middle East, large drops in Japan, and many others) we could look at the US stock market dropping 20% at least. I have written for several weeks about the fact that financial markets are showing very flat behavior, and there are lots of reasons to say the world economy is on the brink of a big slowdown. If the US housing bubble were to burst severely, obviously since half of all new US employment of the last 4 years was housing related, and since home cash outs in the US have been running at about $800 billion a year recently, the US economy would stop or even crash rapidly. Frankly, if you agree with the sentiment that stock markets anticipate economic slowdowns, and that the US housing bubble is already well underway in a decline, then we can say:
Of course, they are probably very wary of what Plunge Protection Teams in the US and Japan would do to prevent this. So, I am sure they are not totally free to just jump in shorting US stocks, even though such an event is called for now….I guess the only thing we can say for sure is… ‘well see’ because there has not been super big PPT teams all ready to go until only recent years. Nevertheless, big stock drops are due. Here is a good news article about the bad technical situation for the US stock market at this time: By Ambrose Evans-Pritchard (Filed: 14/08/2006) A clutch of Wall Street's top technical analysts have turned starkly bearish on the US equity markets, predicting a fall of up to 20pc in main indices over coming months. The chartists are issuing ominous warnings about the Dow Jones industrials and the broader S&P 500 index, despite their relative resilience through the May-June global rout and through the monetary tightening of the US Federal Reserve. Louise Yamada Technical Research Advisers warned that the market was exhibiting all the signs of a slow-motion breakdown. "This is not a healthy rally," said managing director Ronald Daino. "We're seeing 'black holes' where stocks are hammered on slightly disappointing earnings. The last time we saw anything comparable was in late 1999 and early 2000 before the bubble burst." http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/08/14/cnwall14.xml What would gold say about possible stock drops? Big stock drops are very deflationary. A lot of money is lost in these things and people and companies really pull back spending. That can be a very downward force on gold ultimately, unless there is a currency crisis at the same time. Also, a big US stock drop (probably to include Japan) would be a currency boost to the US and the Yen as people flee to cash domestically. So if the USD and other currencies strengthen, then gold would find this somewhat suppressive. That could be the initial reaction. Here is a key point: The fact that gold has not reacted very bullishly to normally bullish macro economic and political developments in the last 6 weeks indicates to me that gold is anticipating a major economic pullback, stock declines in the US, Japan and the EU, and a strengthening of the USD. All these are deflationary. I think this is a key answer for why gold has shown weakness from a macro economic perspective. The fact is the US is definitely poised for a big economic slowdown. My discussion with Bill Murphy There is another take on this gold situation. That is that gold manipulators have a very heavy hand in the gold markets right now. I.E. that they are forcing gold to act in an atypical way to normally gold bullish economic news. In effect, the idea is the gold manipulators are telling speculators not to ‘play’ in the gold sand box or they will get sand kicked in their faces. Now I know that there is debate about how much influence a gold manipulating cartel can have. I personally believe in gold manipulation, but have had the view that it can be done within the context of general market moves only. Gold cannot be totally suppressed without an unlimited supply of bullion to sell. (not just futures) Murphy and I came to a conclusion that it is possible that there is super heavy handed gold manipulation at this particular juncture because there is becoming less and less bullion to dump to suppress the price. Therefore- a panic that the gold price could just be about to get out of hand. If they don’t act very heavy handed now, it will get beyond their control. Hence gold is heavily manipulated down on bullish news. This would fit with the rather steady gold price this week in the context of easing oil prices, an easing Mid East war situation, and an easing Alaska oil situation. Gold should have dropped even $20 at least as of Tuesday, but what might have happened is short covering by the gold manipulators! Hence, gold does not drop even on gold bearish news as the shorts cover and build ammunition for the next round. Gold is only down to 624 now -down only about 6 bucks from Friday. The gold manipulation scenario does fit this situation. This idea also fits well as an explanation of why gold has reacted so atypically in the last 6 weeks. First, gold has barely reacted bullishly when normal developments like Middle East war and oil troubles have arisen. One possible explanation is that gold bullion is dumped on the news, and gold held down. In other words, even though the gold manipulators may have less actual physical bullion to sell, they are determined to keep gold down to present the idea that US inflation is really not as much as an issue as it might be. In other words, an act of desperation to shore the USD. I surmise that holders of gold can be found who will go ahead and sell the bullion with sweet quid pro quo deals, made possibly initially in dollars, but within the day some prime real asset is exchanged at the end of the day for a fantastic price. It is possible that a lot of bullion can be liberated in such a manner. (secret super lucrative back deals of gold bullion for prices far higher than on the real market, but done in quid pro quo deals that essentially are USD invisible- basically a barter) the gold is then sold on the USD gold physical market. The problem with this method is that there are only going to be so many quid pro quo deals make able. Eventually, even that source will dry up. Much of this atypical gold activity is since Paulson became US Treasury secretary. Thinking along the lines of Murphy, Paulson, being from Goldman Sachs, may be well able to really manipulate gold at the margins. In other words, if he is inclined to manipulate gold’s price his present office sure adds some horsepower! He is US treasury secretary, and can have free run with the PPT, which incidentally states that it will intervene in any financial market at will, and that includes gold particularly. I can easily see a situation where someone with the omnipresent power of the US PPT can make USD invisible gold trades and find gold to sell physically on the market – to a point. As a matter of fact, the PPT is not even trying to hide its activities, rather, they make no comment on excellent public articles like that by Sprott (or Texas Hedge I don’t remember exactly) a year ago of the huge scope of their actions. According to Murphy, the PPT is not even trying to be hidden any more, rather, we both agree that there appears to be a ‘message’ to speculators that they will not be allowed to ‘play’ in certain markets. Like gold……hence the atypical gold market behavior and news articles such as this one: By Ciara Linnane Last Update: 9:20 AM ET Aug 10, 2006
If I was to make a summary of this view, it is that there is now a war of nerves between the US and Japanese PPTs and the stock markets overall that want to drop, and are due to drop merely from technical reasons. Probably the speculators (hedge funds) are the most trigger happy. The gold market is market ‘zero’ because the value of the USD is quite a critical issue to the US and its trade partners. So, then we have two views that I presented for gold’s recent atypical reactions to bearish and even bullish forces. One, a macroeconomic view that gold is anticipating large stock market drops in the US, Japan, and the EU, where normally bullish gold news is basically ignored, and gold seems to bias downward. The other, is a view that the USD and gold manipulators are getting very uptight, are using every resource in their quiver to induce atypical gold reactions to market news to discourage any long term bull speculators. The biggest possible resource of the manipulator camp could be Paulson, a former Goldman Sachs banker, who now heads the US treasury no less. The PrudentSquirrel newsletter is my gold and economic commentary. It is macro economic study of gold and precious metals. My subscribers repeatedly tell me they appreciate that focus, and have subscribed for that reason. Stop by and have a look. © 2006
Christopher Laird The Prudent Squirrel newsletter is one of the very few macro economic gold newsletters. Although I don’t seek to make gold forecasts per se, occasionally I do. My last three were: Two weeks notice to newsletter readers of the $150 drop in gold several months ago. Several weeks notice before the $30 to $50 drop in gold right after the BOJ raised their interest rates .25%. One day’s notice before gold dropped from 635 to 601 based on the article Gold Showing Weakness. Even though these were short-term gold bearish estimations, I am a 100% long term gold bull. The main focus of the Prudent Squirrel newsletter is financial survival if there should be a USD collapse or great depression. Stop by and have a look. CONTACT
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