17 January 2008

Gold flies pennants

Gold seems to be flying pennants over and over again. Take a look at Kitco's chart on the last five years.  This chart uses a linear scale, so the pennants are dead obvious, and one doesn't have to complain about log axes.

http://www.kitco.com/LFgif/au1825nyb.gif

We all remember how gold sailed up, nearly vertical, in April 2006. It peaked in May 2006, and slammed back down, to form a pennant around the $600 per ounce price. A nice clear Summer doldrums formation. In the Autumn of 2006, gold picked itself up, dusted itself off (gold dust metaphor here), and sailed up to $700 in early 2007.

And formed another pennant, this time with the tip flapping at $650 per ounce. Essentially, the Summer doldrums started early in 2007, and gold did not set any new records until the Autumn. Arguably, the pennant that I'm seeing pointed at $650 was just a continuation of a broader pennant with the flagpole back in May 2006.

In Autumn 2007, gold began breaking records again, and sailed up to $842 or so, and formed yet another pennant. This pennant was a very tight formation, which JP dubs "Patrick's Pennant" and, as Jim Turk writes on his GoldMoney commentary, a tight
pennant is a bullish indicator. That particular pennant's tip points right at $800 per ounce.

Earlier this month, gold formed a new high at $913, which in nominal dollars per ounce troy is the all-time high in world history. And, since the 15th of January 2008, gold is down, and, in my view, very likely forming yet another pennant.

What is with all these pennants? Well, there are two ways of looking at it. The interventionist model, popular with Gold Anti-Trust Action enthusiasts such as Ed Steer, is that the downward pressure on gold represents official government gold
sales, within or outside of established agreements, presumably to dissuade people from believing that inflation is huge, anthropogenic, and problematic. Under this theory, real gold from central bank reserves, or paper gold with no potential for
actual delivery, is being sold on the spot market to keep the price down. And, I gather, under this theory, reporting on how much gold the various central banks and national governments have is being mis-reported, with "deep storage" gold being
substituted for good delivery bars.

So, with all this gold, and all this power to pervert the markets, why aren't the central banks and the government winning? I believe the answer is that there continues to be tremendous demand for gold as money, owing to increasingly widespread concern about the economy. For example, over in Europe, this chart was recently published, along with analysis, at europe2020.org.
http://www.europe2020.org/IMG/jpg/Concentration_of_Commercial_Bank_Derivatives_30-09-2007.jpg

They seem to think that there is some difficulty implicit in having $155 trillion of notional-value derivatives held by the top seven commercial financial institutions in the USA. Certainly, that seems unhealthy compared to the other $3 trillion of assets held amongst another 929 banks.

Of conceivably greater importance, the assets of major banks like Citigroup are being written down in the billions of dollars. And major banks are posting major losses as the subprime mortgages blight their spreadsheets. Domestic loan volume is headed up, and USA banks are seeing deposits way, way down.
http://www.europe2020.org/IMG/jpg/Quarterly_Change_in_Domestic_Loans_vs_Domestic_Deposits_1998-2007.jpg

Now, I'm not going to shed a tear for any banker who goes out of business. I consider them all to be the worst sort of toadying creeps, using a license to print money, and thus steal from others using the mechanism of monetary inflation. But, bank runs and bank failures are coming, so gold and silver are popular. There is a vast underlying, unmet demand for gold and silver which keeps pushing the price up, month after month, year after year.

But, I wrote that there were two ways of looking at it, and there are. The second way to look at it denies the market interventions as effecting manipulation, which Craig Spencer suggests isn't even possible. In this scenario, entities with large gold holdings are simply liquidating their assets at higher and higher prices. Presumably they are investing in other assets, such as platinum. Or technology stocks.

Why do they have a lot of gold? Well, perhaps they stole it over the years, during the vast expeditions to loot China and east Asia from 1895 to 1945. Perhaps they have stolen gold from Americans, as FDR's administration did in 1933, a tradition
which carried on for another 40 years through the early part of the Ford administration. Or perhaps they have the gold from some quasi-legitimate means, such as licensed banking operations, which is legitimate only in the sense that licenses might be granted to steal, as Ian Fleming would have us suppose they are
granted to kill. That is to say, not legitimate in any natural law sense of the term.

Platinum certainly seems to be getting more expensive, in a nice five year channel seen here: http://www.kitco.com/LFgif/pt1825nys.gif

A five year chart on QQQQ which tracks the NASDAQ 100 is here:
http://chart.finance.yahoo.com/c/5y/q/qqqq
And shows a nice long term up trend. Oh, it is down a bit this month. Can't really sell technology to people who are losing their homes.

So, what should we expect for gold this year? I expect gold is going to set new records in nominal dollars, to $1500 or $2000 by the end of 2008. It might even exceed expectations and make new highs in inflation-adjusted dollars which, depending on how much you were willing to believe the lies published by government about inflation, would be anywhere from $2160 to $2500.

Of course, this expectation is basically made ceteris parebus, all other things being equal. But, other things are, frankly, going to perdition in a badly woven hand basket. As the housing crisis and mortgage crisis and banking crisis continues to spiral out of control, Fed chairman Bernanke promises to print more and more and more money. So, the nominal dollar value of gold is going to go up.

Given that I expect gold could reach $10,000 an ounce in the next two or three years, with a stock market not more than 3 ounces of gold, and possibly one ounce to buy the Dow Jones Industrials, what should you do, now?

Well, I think it would be wise to regard the current dip below $900 an ounce as a buying opportunity. People who bought in previous pennant formations at $550 in February 2006, or at $600 in September 2006, or at $650 in June 2007, or at $800
in December 2007 are likely glad they did so.

I do not believe we should expect prices like $550, $600, $650, or $800 per ounce troy for gold any time in the foreseeable future, given where the dollar is headed. Which means that gold below $900 is probably a good value right now.

If you believe that gold at $880 is a good value this year, then you should also believe that silver at $15.80 per ounce troy is also a good value. So, if you find gold at $880 to be expensive, given your means, you might do well to invest
in silver. It currently takes over 55 ounces of silver to buy one of gold. In the past, when gold and silver prices were spiking, the ratio in their prices has tended to fall, approaching values like 17 ounces silver to buy one of gold near the peak in January 1980. If that happens again, then now is a good time to buy silver, as well. The same ounces of silver you buy now are going to buy more gold as we near the peak.

Would you be wise to hold other currencies, instead? You can get currency accounts from my friend Frank Trotter over at Everbank.com. They'll happily convert your USA dollars to Canadian dollars, to Swiss francs, to British pounds, or to EU euros. And, such diversification might be wise.

But, I'll tell you, I think very highly of the analysis that Doug Casey has made on these matters. The USA dollar is an I owe you nothing. It is redeemable only for other paper dollars, or pot metal coins made of brass, cheap steel, or zinc. It happens that the penny and nickel coins are worth more as metal than they are at face value - so of course there is a recent ruling making it illegal to export them or melt them down for their bullion content.

But, as Doug points out, the European Union euro is a "who owes you nothing" because there are so many different central banks issuing euros, and so many governments involved, they can "pass the buck" of responsibility indefinitely. There's
no way of knowing whether inflation in France or Germany is going to be brought under control, but given the power of the labor unions in those places, the way to bet is "probably not." And there is no reason to suppose that Ireland or Estonia or
Spain are better off as euro-based economies, enjoying the inflation imposed by the deficit spending and bad monetary, fiscal, and trade policies of Italy, France, and Germany. It appears, to me, like a fairy ring of exceptionally perverse screwing, beggaring of neighbors, and whoever is holding euros at the end of the day is going to be less happy than he was last year.

Doug also has noted that Canada's central bank sold all of their gold reserves. So, the Canada dollar is backed by reserves of the USA dollar. If their war policy, trade policy, and fiscal policies are less inflationary, this year, than those of the USA, that's certainly no guarantee that the Canada dollar is going to hold its value.

Has it escaped your notice that the Swiss franc is no longer convertible to Swiss gold? Well, it is not. The voters there, in their wisdom, have opted join the rest of the world in repudiating gold.

And is England going to founder on its Northern Rock? Perhaps not, but there is still plenty of systemic risk in their banking sector. I would not be confident holding British pounds for very long.

So, gold and silver coins are good values, right now. And, you are probably better off buying them for physical delivery into your hot little hands, until you have a hundred or more ounces of gold and a few hundred ounces of silver in your actual direct control. I would not encourage you to put them in bank safety deposit boxes, because it is the safety of the bank, not your assets, that is protected - as we saw after the gold confiscations began in 1933.

If you have difficulty with gold and silver in your physical possession, if you have been denied effective tools for self defense in your jurisdiction, you may want to consider gold and silver in digital form. Digital warehouse receipts for gold and silver are available from many different vendors, such as e-gold, GoldMoney, Phoenix dollar, Pecunix, and c-gold (all dot com), stored in a stunning array of foreign countries, and in the USA. So, diversify your risk accordingly.

Regards,

Jim
http://vertoro.com/ -> where you can find gold and silver

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