Gold: Chart Updates - Gold is a Counter Trade to Currency Risk

Although the gold bulls took a severe 'gut check' today, the cup and handle formation ultimately proved too powerful for the bears and bullion banks to break. It is an epic struggle, with much broader, perhaps even historic, implications than most of us can now realize, being too close to the event to see its true dimensions.



The weekly chart shows that gold is in a bull market. Anyone who does not acknowledge this, especially any metals analysts, are talking their books and private agendas. I can think of no other profession that allows for such blatant deceptions as the US financial sector.

The hysteria that accompanies every minor, albeit somewhat sharp, pullback in the price of gold borders on the ridiculous. It is often a 'psych job' by hedge funds, and unfortunately a mass of the deluded who simply do not understand currency markets and money. They think they do, but they don't, and in this case a little knowledge is a dangerous thing for their accounts.

Gold is a counter trade to currency risks. Monetary inflation is only one example of that risk. So the simplistic model is bewildered when gold rockets in the face of deflation caused by credit destruction and weak aggregate demand. What it fails to account for is the dramatic deterioration in the backing for the currency due to the corrosive decay of its underlying assets, the degraded ability to tax and service debt, and the actual assets held by the central bank.

And this is why at times some governments seek to control rival currencies such as gold. It is the economic equivalent of rolling back the odometer, or putting sawdust in the crankcase of a car which you wish to sell to the unsuspecting. It is a means to a control fraud, the deliberate hiding of the dilution of your currency to support a set of political and personal objectives. And this is why the citizenry, if they are wise, will insist on transparency in the metals markets and the asset holdings of their country.



The miners are doing reasonably well all things considered, but may not stand up well IF there is a sell off in the general equity markets.



You may as well hear it all now, because in the event of war, the truth will be the first victim.

US Equity Markets At a Key Juncture Ahead of Jobs Report and Holiday Weekend

SP 500 September Futures Daily Chart

At least a dead cat bounce after a drop such as this to key support. But heading into a holiday weekend with an important non-Farm Payrolls Report and wavering confidence, anything can happen after that.



The SP 500 Cash Weekly Chart give a better perspective on how important a test of support the market is facing.



VIX is approaching levels where one would either expect the market to stabilize and begin to recover its footing, or quickly break down and fall apart.



The Nasdaq Composite is in the same situation, so it is clearly a macroeconomic statement, and not something particular to one index.

Currency Wars: Jim Rickards on Financial Warfare

This is likely to be the spin:

The problem is not that an irresponsible Fed and a corrupt Congress ruined the US dollar through a failure in stewardship, crony capitalism, and a series of control frauds culminating in a financial collapse that caused great harm to other countries, particularly in Europe. The dollar is a 'victim' of the evil empire that is jealous of our success and who hates freedom. (Let me have some 'freedom dressing' on my sandwich, please.) Markets are only useful when they do what we wish them to do, when they support our agenda and serve our will to power. The rest of the world is required to obey our enlightened rule, and serve their proper roles in the New World Order."

I am not quite sure where Rickards is coming from on this, but read the entire paper and judge for yourselves. What seems ironic is that the US has been the dominant user of economic warfare, economic hitmen if you will, since WW II. For example, US Banks Financing Mexican Drug Cartels. This is in part the natural outcome of its being the clear financial superpower, supplanting the City of London and the British Empire of private corporations against which the US had itself rebelled successfully, an event which it will commemorate in a few days on 4 July. But it has also gotten much worse in the past twenty years because of the erosion of regulation and the capture and corruption of key political processes.

You should also be aware that one of the financials bestsellers in mainland China is a book, with a recently published sequel, titled 'Currency Wars.' The author is said to fall into the old memes of scheming international bankers, which has been used by some to issue a blanket condemnation and discredit his premise in the West. I confess I have not read it, since it is not available in translation. What is most important is that the book has a wide readership and influence in the Chinese intelligentsia.

"Worse even than the long, slow grind along the bottom described in the foregoing section is a sudden catastrophic collapse. In that context, the greatest threat to U.S. national security is the destruction of the U.S. dollar as an international medium of exchange. By destruction we do not mean total elimination but rather a devaluation of 50 percent or more versus broad-based indices of purchasing power for goods, services, and commodities and the dollar’s displacement globally by a more widely accepted medium.

The intention of Central Bank of Russia would be to cause a 50 percent overnight devaluation of the U.S. dollar and displace the U.S. dollar as the leading global reserve currency. The expected market value of gold resulting from this exchange offer is $4,000 per ounce, i.e., the market clearing price for gold as money on a one-for-one basis. Russia could begin buying gold “at the market” (i.e., perhaps $1,000 per ounce initially); however, over time its persistent buying would push gold-as-money to the clearing price of $4,000 per ounce. However, gold selling would stop long before Russia was out of cash as market participants came to realize that they preferred holding gold at the new higher dollar-denominated level. Gold will actually be constant, e.g., at one ounce = 25 barrels of oil; it is the dollar that depreciates.

Another important concept is the idea of setting the global price by using the marginal price. Russia does not have to buy all the gold in the world. It just has to buy the marginal ounce and credibly stand ready to buy more. At that point, all of the gold in the world will reprice automatically to the level offered by the highest bidder, i.e., Russia.

Basically, the mechanism is to switch the numeraire from dollars to gold; then things start to look different and the dollar looks like just another repudiated currency as happened in Weimar and Zimbabwe. Russia's paper losses on its dollar securities are more than compensated for by (a) getting paid in gold for its oil, (b) the increase in the value of its gold holdings (in dollars), and (c) watching the dollar collapse worldwide."

Jim Rickards, Economics and Financial Attacks

Robert Rubin Runs Obama, SP 500 Futures, and Gold

The June Non-Farm Payrolls Report will be released on Friday, July 2. Tomorrow June 30 is the end of the quarter.

The 234th anniversary of the US Declaration of Independence is this weekend.

"I am well aware of the toil and blood and treasure it will cost us to maintain this declaration, and support and defend these states. Yet through all the gloom I see the rays of ravishing light and glory. I can see that the end is worth all the means. This is our day of deliverance." John Adams

The equity market feels somewhat artificial, if not contrived. Indeed, I think we are in a period of intensified disinformation running ahead of the fog of war, whether it is between countries, or classes, or both. It is customary to neutralize pre-emptively the moral standing of the friends and allies of something which you intend to attack and destroy.



Bear raids were coming hot and heavy as Gold attempted to break out through overhead resistance. HSBC was spreading talk of Central Bank selling of bullion that did not seem to be apparent in the physical market. As you know, HSBC is one of the banks most heavily short the paper metals markets.



Chris Whalen of the highly respected Institutional Risk Analyst sees Robert Rubin as still pulling the strings in US financial policy and is virtually running the economic policy in the Obama Administration from behind the scenes, through surrogates.

"t comes as a surprise to many people that, despite the fiasco at Citigroup (C) and his role in causing the subprime mess (See "The Subprime Three: Rubin, Summers and Greenspan," The Institutional Risk Analyst, April 28, 2008), Rubin remains inside the circle at the White House. Nearly two decades after first migrating to Washington, he apparently is still calling the shots of U.S. financial and economic policy with the full support of President Barrack Obama. Working through his favorite marionettes, Treasury Secretary Tim Geithner and Economic Policy Czar Larry Summers, most recently Rubin managed the defense of Wall Street following the great crisis. No matter what Secretary Geithner says or when he says it in public, you can be sure that those utterances have the full knowledge and approval of his handler Larry Summers and their common political owner and sponsor, Robert Rubin.

A modern day colossus, Rubin effortlessly bestrides the worlds of political and finance, and mostly without leaving a trail of slime that often betrays the average political operator. Rubin stood at the right hand of Alan Greenspan on the famous February 1999 Time cover entitled: "The Committee to Save the World." Not an entrepreneur like Pierpont Morgan, Rubin is a mixture of banker, politician and global technocrat, a super fixer of sorts, but with a proper sense for public-private partnership. Case in point: The famous letter from Rubin to Goldman Sachs clients when he first went to the Clinton White House saying that just because he was in Washington didn't mean he wouldn't be looking after them...

The end result of financial reform is inconvenience for the financial services industry and more expense for the taxpayer and the consumer. But it should be noted that, once again, Wall Street has managed to blunt the worst effects of public anger at the industry's collective malfeasance. The banks can now start to focus their financial firepower on winning back hearts and minds on Capitol Hill. All it takes is money.

Notwithstanding anything said or done by the Congress this year, operating through trained surrogates such as Geithner, Summers and others, Robert Rubin is still pulling the economic and financial strings in Washington. The fact that there is a Democrat in the White House almost does not seem to matter. President Obama arguably has a subordinate position to Rubin because of considerations of money. If you differ, then ask yourself if Barack Obama could seek the presidency in 2012 without the support of Bob Rubin and the folks at Goldman Sachs. Case closed.

For America's creditors and allies, the key question is whether the Democrats around Rubin are willing to embrace fiscal discipline at a time when deflation in the US is accelerating. That roaring sound you hear is the approaching waterfall of the double dip. With the US at the moment eschewing anything remotely like fiscal restraint and the rest of the world going in the opposite direction, to us the next crisis probably involves U.S. interest rates and the dollar.

Judging by Rubin's performance in the past, when he talked first of a strong dollar, then a weak dollar policy, and fudged the issue regarding fiscal deficits, we could be in for quite a ride. But at some point the Obama Administration should acknowledge that this particular former CEO of Goldman Sachs is still driving the policy bus. If the Republicans are in control of the Congress come next January, maybe they should subpoena Rubin to appear periodically. At least then we all can hear directly to the person who is actually making national economic policy."

The World According to Robert Rubin, Chris Whalen, IRA

One has to wonder, of course, who is running economic policy for the Republicans? It seems to be more of a case of competing crime families, than a simple good vs. evil.

If Rubin does indeed run Obama, the question remains, who runs Rubin, and where do his loyalties lie? Whom does he serve?

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.

Why Are the Miners Underperforming The Metal?

Occasionally a reader asks, "Why are the miners lagging the performance of gold?"

My standard reply is that the mining stocks are both stocks and a store and source of the underlying bullion which is the basis of their business.

Past regression analysis which I had done a few years ago indicated that it was about a 50 - 50 split. Over time, an 'average' mining company will correlate roughly 50% to the SP 500 and 50% to the metal which is its predominant business. The lags due to anticipation and expectations are taken care of in the size your sample.

Just to do a quick check, since these things do sometimes change over time, I ran a quick comparison of the GDX Mining Index, GLD as a proxy for gold, and the SP 500.

I think the results since mid 2008 shown below seem to indicate that the miners, on average, are still a rough split between a stock and a store of wealth, with bullion exerting a bit more pull than in the past. This is probably an effect of the underperformance of the financials, and their heavy influence in the SP index. I would caution against using this in place of a genuine regression analysis. But its close enough to make the point that the mining stocks are, to some significant degree, a stock.



Note: Please read what I have said before snapping off a quick comment objecting to it on the basis of the stellar performance of your favorite junior or senior mining company.

I have done very excruciatingly details multivariate regression analysis of the price of bullion itself. and have published the results in the past on my 'old site' the Crossroads Cafe. That correlation does change. Perhaps I will find the time to take out the big spreadsheets and run them again.

Not So Much Deflation as the Decay of Value: SP 500 Futures and Gold Daily Charts Updated at Market Close

Wash and rinse. Best way to get that stubborn money out of the public through fees, commissions, and of course front running for those perfect trading profits at the faux banks.


Chart Updated at Market Close

Now that option expiration is over gold is back to where it was a week ago, trying to break out of its large cup and handle formation. Silver is on the cusp of activating a massive and bullish multi-year chart formation of its own. It is an open question whether gold or silver will lead the way.

But I have to say that the CFTC is a disgrace. Eventually they will clean up their markets, but the foot dragging and dissembling is a mark against them. Chairman Gary Gensler knows better, but he is a Goldman alumnus, so what else would we expect? There are always many frustrated people in every organization trying to do a good job, so we should not paint them all with the same brush. The boss sets the tone, and Gensler's tone seems to be the status quo and crony capitalism. But that is the overall flavor of the Obama economic team.


Chart Updated at Market Close

Most people have a profound misunderstanding about the function that gold, and to a somewhat lesser extent silver, perform in the currency markets and wealth preservation trade.

The meme is that gold is a hedge against inflation. Over the past 100 years or so in particular, the greatest threat to the US dollar, and indeed to most currencies, has been inflation, which is the debasement of the value of a currency through printing or expanding supply faster than real growth in productive economic activity.

But was it really inflation that drove the gold hedge, or something more properly called 'currency risk.' Inflation through expansion of supply is just one facet of currency risk.

The risk today is not a gradual inflation through an overexpansion of the broad money supply, but something insidiously different, not seen since the last Great Depression. It is the risk of the default and devaluation, and the erosion of the assets backing the currency itself, which is not yet showing up in the conventional inflation figures.

What backs the US currency? Often referred to simply as 'the full faith and credit of the government,' it is the ability to collect taxes and service the debt with real returns, and of course and importantly the Fed's and the Treasury's balance sheets. I should have to say no more about this to anyone who has been following recent developments. The erosion of the ability of the government to produce revenue by taxing real income, and the rapidly declining quality of the assets held by the Fed, are obvious. Yes the US dollar may look good when compared some of the other wretched alternatives, but that appearance is like the portrait of Dorian Gray, not capturing the rapid decline in its own worth and well being.

So perhaps this will prove to be some help to those who are expecting debt deterioration and monetary deflation to deliver to them a stronger dollar and stable wealth. They fail to notice that this did NOT happen in the 1930's, and in fact quite the opposite occurred. I am now *hoping* for stagflation as an outcome because it seems better than the alternatives where the US and Europe now appear to be heading.

Yes, it can do so in the short term, particularly if you own the world's reserve currency, and that largely an illusion. But the decay is there for any who care to see it, and the rush to gold by the smarter money is also there to see, for those who will not willfully blind themselves to it.

There is nothing more disheartening than to watch otherwise good people fighting the last war, or perhaps most properly the wrong war, painfully unaware that their tactics and assumptions are misconstrued and self-defeating, and that they are committed to following 'leaders' who are articulate, persuasive, often very loud, and wrong.