Gold Daily and Silver Weekly Charts - Gold Tags the Handle Target of 30% - Germany's Gold

Last night gold broke down to tag our 30% correction objective (about 9 PM EST) which is just shy of 1710 spot, and then turned around and moved higher. Gold and silver were actually reasonably resilient most of today even as stocks moved lower led by the SP.

There was a rather interesting story in Der Spiegel today, reporting that a Federal Court has ordered the Bundesbank to undertake thorough audits of German gold, including the gold held in London and New York.  They may bring back 50 tonnes or so to verify it more closely.  Rechnungshof fordert Inventur der Goldreserven. Here is a translation courtesy of my friend Peter.

Der Spiegel
BundesbankRechnungshof demands inventory of the gold reserves
22 October 2012

Berlin - Germany's gold is safely kept in Central Bank vaults in Frankfurt am Main, New York, Paris and London. Apparently, nobody has verified that. The German General Accounting Office has now demanded a regular review and inventory of the huge gold reserves abroad by the Bundesbank.

The Auditors justified this in a report to the Budget Committee of the Bundestag on Monday citing the "high value of the gold reserves". The German gold reserves stored at other banks have never been audited by the Bundesbank itself, or by other independent auditors, that is, "physically tabulated and with their authenticity and weight verified." Indeed, numerous conspiracy theories abide on the topic -- the US gold reserves in Fort Knox were taken a long time ago.

The Bundesbank has, after the United States, the second largest gold reserves in the world. At the end of 2011 it was 3396 tons worth 133 billion euros. After the soaring of price of gold, it should be realistically even about 142 billion euros. The gold bars are kept by the Bundesbank in safes in Frankfurt am Main and three storage places abroad: at the US Federal Reserve (Fed) in New York, the French National Bank in Paris, and the Bank of England in London.

Bundesbank is retrieving tons of gold from New York

The Court of Auditors has to ascertain, on behalf of the Bundestag, whether the Bundesbank is precisely scrutinizing the gold it is storing abroad. It is controversial whether the practice by the Bundesbank for years is sufficient, to only rely on a written confirmation as to the gold bars by the foreign central banks.

The Court of Auditors therefore recommends that the Bundesbank negotiate a right to the physical examination of stocks with the three foreign banks. With the implementation of this recommendation the Bundesbank started according to the report. Also the bank has decided in the next three years to bring to Germany 50 tonnes of gold these from the Fed in New York, to make a detailed examination here. The report contains speculation in several passages. So is not clear from the paper, how much gold is exactly stored at which foreign Central Bank.

The bullion held at the Bundesbank headquarters consist of 82.857 bars, mostly stored in sealed containers with 50 bars each, which, according to the report, are kept in four separately sealed safes. A part of them (6183 ingot) are outsourced in the so-called gold Chamber being stored on open shelves in a separate safe. To secure the gold, according to the report: "The safes external shutter is double, the internal closures and the gold Chamber is under a triple lock. "

So what next? That's all anyone ever wants to know.

The handle target was touched in the overnight, but a few more tests to 'set it' would not be unlikely. And recall that a drop below that target is not a big deal, unless you are short term and highly leveraged, unless the spot price should happen to drop below the 50% correction level.

So let's see what happens.

SP 500 and NDX Futures Daily Charts

Stocks were wobbly after Catepillar came in with a weak revenue report, although that stock remarkably enough was up on the day.

Stocks reached a low in the early afternoon, led by the SP 500, and then rallied back to a gain on the day. Gold and the NDX never broke so there was the 'tell.'

So what next? Let's see how the debate goes tonight since some people seem wound up about that, and what new earnings reports this week may bring.

The Great Depression in Ten Pictures

Some of these slides are from my previous blog site, when I was considering some of the policy decisions and data from the first Great Depression in the US. This study was from 1999 to 2001. It was fully fleshed out in my mind by Bernanke's (in)famous essay of 2002, The Fed Has a Printing Press. That pretty much cleared the air for me on the future investment path for gold.

Although I do not list it here, you may also be interesting in the posting, Why the Feds Seized the Gold in 1933. The purpose was to devalue the dollar AND to use the proceeds to recapitalize the banks that were remaining after the FDR bank holiday.

Since the US is not on a gold standard now, the Fed has no need for the gold. It can expand its balance sheet with a few keyclicks, as long as that is their policy decision. Any wide scale confiscation of private property at this point would be purely gratuitous and rather unlikely, recent hysteria not-withstanding.

The plunge in the stock market was 90% into its trough.  The initial decline was made much worse by the austerity that Hoover and his Treasury Secretary Mellon pursued.   

This is a busy chart but it shows the interplay of several key metrics.  In particular, it shows the disaster that is austerity in response to a financial credit crisis such as we are seeing today.

This is the kind of result produced by austerity.  There is a lot of misery in this chart until 1933 when Roosevelt took a more modern approach combining monetary and fiscal actions.  The increase in unemployment in 1938 was a direct result of the premature tightening of the Fed as can be seen on their balance sheet slide a few charts below.

Roosevelt's policies got the American economy back on track.  It was a sound marriage of monetary and fiscal policy.   What made it sustainable was the financial reform, the settling of the banking system, and the emphasis on jobs and growth in the median wage.

The Fed kept expanding the balance sheet into the 1938 period when they prematurely drained reserves out of a fear of inflation and triggered another recession.  That was a clear policy error and can be seen as clear as a bell on this chart below.

Perhaps this chart is what gave Bernanke the idea for 'Operation Twist.'  If so, he is fighting the last war.

Look at those real interest rates.  No wonder the country almost ground to a standstill.  The Fed and the Hoover Administration, particularly Treasury Secretary Mellon, ought to have been ashamed of this policy error.   The action of Roosevelt in 1933 in breaking the dollar against gold and recapitalizing the banks after shutting down the weak ones, and substantial investigation and reforms, did the trick.

The Smoot-Hawley Tariff was enacted on 17 June 1930.  Exports had already been plunging before that because when demand goes slack in a deep recession both imports and exports tend to drop with demand.  I think some of the rhetoric surrounding the issue of global trade in this case is nonsense.  In the Great Depression tariffs did not matter because no one was really standing as the buyer of last resort.  And if the tariffs went into effect in the middle of 1930, they certainly did not have an untoward impact on imports relative to the plunge in exports, again due to prevailing economic conditions.  Notice that net exports remain largely flat throughout the period.   To state this more precisely, the negative effects of Smoot-Hawley are vastly overstated by globalist advocates.  

 

Here is what the real exports and imports figures looked like until 1939.  Again, it is economic recovery and aggregate demand that makes all the difference.   Until tariffs are outsized and predatory, one-sided if you will, they will have much less impact than real economic growth.  And do not overlook the currency devaluation of the dollar to gold in 1933.

Personal Consumption along with Government Program spending and the currency devaluation were obviously factors to the real recovery in GDP especially since it did not come from net exports.  As can be seen from other slides in this series the dip in GDP in 1938 was due to the Fed's draining reserves by increasing bank reserve requirements out of a misplaced fear of inflation.