The Need for Financial Reform as a Pre-requisite in the Recovery Process

Apparently I am not alone in concluding that significant financial reform, including the restructuring of the financial sector to serve, rather than to tax and depress, the real economy is a vital necessity and an integral part of the recovery process.

This is not to say that the BIS General Manager and I would agree on all the details of the program. But it does speak to the notion that the size and structure of the financial sector was a contributing cause of the financial collapse, rather than an innocent bystander to some improbable accident or act of God.

So if one believes this, that the financial sector had become an integral part of the problem, it becomes rather obvious to conclude that policies based on simplistic slogans like 'less debt' or 'more spending' alone are not going to be effective in changing a systemic distortion that was over twenty years in the making, involving an orgy of moral hazard, financial fraud, and regulatory capture that became the cornerstone of the developed nations' economies.

Indeed from my vantage point, it appears that the various policy proposals being discussed are indicative of special interest groups arguing over a dying man as they consider how best to strip the corpse.

My own concern is that the various parties, being in a feeding frenzy of self-interest, will ignore the warning signs of public dissatisfaction and fading confidence, until it is too late to pursue conventional methods of reforming the system.

"Let me conclude. The lingering structural deficiencies in the financial sector and the longer-term drawbacks of very expansionary macroeconomic policies continue to put enormous demands on our ability to steer the best course through hazardous terrain.

When markets and the public start to lose confidence, it is an illusion to suppose that delaying the adoption of the policies we know are needed would smooth the adjustment process. We cannot wait for the resumption of strong growth to begin the process of policy correction. In particular, delaying fiscal policy adjustment would only risk renewed financial volatility, market disruptions and funding stress. A much better strategy is to set out credible front-loaded actions for meaningful fiscal adjustment and for restructuring the financial system.

International cooperation is particularly important at the current difficult juncture, when confidence is fragile. In particular, finalising international agreements on regulatory reform on schedule will send the right signal - not only to financial markets but also to the public at large. The time has come to agree on major practical reforms to substantially increase the resilience of the financial industry. These reforms, combined with policies of fiscal adjustment and efforts to restructure the financial industry, will go a long way to putting the financial crisis behind us. We must seize this opportunity."

Jaime Caruana, General Manager of the BIS, on the occasion of the Bank's Annual General Meeting, Basel, 28 June 2010.

You may read the General Manager's entire speech here.

Gold Daily Chart and the Failure to Reform

Gold attempted to break out this morning hitting an intraday high around 1262, but was hit by concentrated selling designed to break the short term price trend. This is what is called a bear raid,

Each time gold attempts to break out, the shorts, in this case primarily the Wall Street banks and their associates, attempt to break the trend and push it lower. Each low is a little higher than the last, which is what gives the chart formation its shape of a rising triangle. As the energy behind the primary trend builds, the shorts must eventually give way and allow the price to rise, retreating to another line of resistance a bit higher.

Why is this happening? Why the preoccupation with gold and silver by the banks? Notice that gold and silver were exempted from proprietary trading restrictions for the big banks in the 'financial reform' legislation. The US government and its central bank view gold and silver as rivals to the US dollar, and 'the canary in the coal mine' that exposes their monetization efforts and threatens the Treasury bonds. It is characteristic of a culture that secretly abhors and dishonors the truth, paying lip service to whistleblowers while discouraging and ignoring them at every turn. "What is truth?" Whatever we permit to be discussed, whatever is published, and in the end, whatever we say it is.

There is a prevailing modern economic theory, probably best expressed in Larry Summer's paper on Gibson's Paradox, that by controlling the gold price one can favorably influence the interest rates paid on the long end of the yield curve. So as policy the US permits and even encourages the manipulation of key asset prices. Thus price manipulation of key commodities becomes a major plank in a program of 'extend and pretend.'

This to me typifies the policy errors and failures of Bernanke, Summers and Obama. They do not engage in honest discussion of the problems and genuine reform, preferring to attempt to band aid the problems, cut back room deals, and maintain the status quo to the extent that they feel the people will tolerate. They will be remembered in history as the high water mark in an era of corporatism, institutional dishonesty, and greed.

The parallels in the current situation with the Great Depression in the US are remarkable. FDR was a strong leader with a vision, and faced tremendous opposition to his reforms from a Republican minority and its appointees on the Supreme Court. He was considered a 'traitor to his class' and a champion of the common people.

Obama is also a traitor to 'his class,' all those who voted for change and reform which is what he had promised. But he lacks genuine leadership, vision, and moral courage, confusing leadership with empty words and gestures.

The Banks must be restrained, the financial system reformed, and the economy brought back into balance before there can be any sustained recovery.

Those well-to-do that promote cutbacks and austerity measures now without substantial reform merely wish to shift the burden to the many while feeding on the public's suffering. "Now that I've gotten mine, screw everyone else, to make mine all the sweeter." But when the shoe is on the other foot, they whine and cry and threaten until they gorge themselves on subsidies.

And those who promote stimulus without reform are merely seeking to maintain the status quo while transferring additional wealth to their own supporters and special interests, often in support of theories that they barely understand. Stimulus only serves to mitigate a slump, but cannot repair a systemic collapse.

"If you keep on gouging and devouring each other, watch out, you will be destroyed by each other. " Gal 5:13

No other forecast is necessary.

Net Asset Value of Certain Precious Metal Funds and Trusts

Note: About 30 minutes after I put this up, gold and silver were hit with concentrated selling designed to break the short term price trend in a very obvious bear raid.



You should be used to this by now. It will not change until the financial system is reformed. So do not hold your breath, or get angy or excited, at least as a trader. That is counterproductive. Instead use these pullbacks while the trend is intact.

Gold Daily Chart: The Cup and Handle Is Now Fully Formed; Longer Term Projections

As the 'handle' of the cup and handle chart formation formed, it slowly yielded enough points to finally place 'the lid' on the cup and hand, and firmly label the rims.

This allows us to set the minimum measuring objectives. There will probably be a run higher to about 1375, with the usual back and forth noise, after the breakout is achieved with a firm close above 1260 that sticks for a week.

Then we will experience the first major pullback, most likely back down to the 1330 level. And then the market will continue to rally up to the 1455 level.

I cannot furnish time frames for these moves at this time. But I suspect the move to 1375 will be fairly expeditious once the breakout is clearly accomplished.



All forecasts are estimates assuming some 'steady state background conditions. If the fundamental conditions of markets change, then the forecast must change to accommodate that.

As an aside, I can see where some chartists might try to feature the handle of this cup as a bearish rising or ascending wedge. This is a weaker interpretation given the greater substance of the cup and handle. It should also be remembered that bearish wedges only resolve lower about 50-60% of the time, and really are not safe to play until there is a clear breakdown. I have paid dearly to learn that lesson when trading stocks from the bear side.

Gold Weekly Chart



I think we can safely assume that the next 24 months will be extremely interesting.

Here is a very long term gold chart showing the entire inception at the end of the twenty year bear market.

The next leg which we are now entering projects to about 2180 - 2200 before we would expect to see a major protracted pullback.



I do not think that this bull market will be limited to only 'four legs,' which is just a bit of anthropomorphism, but I do strongly suspect that it will continue until about 2020. So we seem to have almost ten more years of upside ahead of us, and could be considered to be at the halfway point.

Gold has been gaining, on average about 70% every three years. So what is the end point?

Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but will the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.

Long term forecasts are fun, but there are so many exogenous variables that it is very hard to say what will happen even a few years out. Let's see how this breakout goes, and where we are at then end of this year first. The charts will inform us of any major trend changes. Charts provide perspective more than prediction.