05 October 2011

Gold Daily and Silver Weekly Charts - Currency Wars - The European Overhang - YE $2,000?

"The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or Euro.

Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold."

China World News Journal, Shijie Xinwenbao, 04/28/2009

The market rallied today again on headline hopes of an orderly resolution to the Greek default.

There is likely to be a Greek debt default and restructuring. What the market does not yet understand is how it will be packaged and the extent of the damage to the debtholders, in particular some of the European banks.

According to Bloomberg the Europeans are running new bank stress tests based on a range of scenarios. I think the biggest variable is a haircut on the debt ranging from 21 to 50 percent.

What is a bit disappointing is that gold and silver continue to move with stocks, in the 'risk on risk off' trade. It would be better if gold were to rise as a risk aversion flight to safety trade. But of course there is quite a bit of perception management going on.

Non-farm payrolls coming up, and it may remind the markets of other risks. Be careful. The downtrend is not yet broken.

I tend to view 1540 to 1580 as key support for the gold futures based on the third chart.

Depending on how they wrap the rescue I am still thinking that a rally and some spikes will take gold back into a track to hit $2000 by year end. But let's not get ahead of ourselves.

Another low is possible at the supports indicated. And there is significant risk yet in the year end target. But once the ball gets rolling a $150 up day could break the usual pattern of capping rallies at 2%. The western central banks have used quite a bit of their reserves in this latest beat down of bullion.

And I still think the silver Comex market will resolve into a de facto default with forced cash settlements. I am not sure how they will justify this travesty. I think a case could be made that we are already there with so many deliveries being pushed into paper settlements with GLD and SLV.

But let's allow this to play out to the almost inevitable bitter end. There will be a story, and there will have to be some provision to head off an avalanche of litigation.