Gold 1500: Precious Metals Accelerate

March 25, 2010
March 24, 2010

GOLD 1500's first part presents my technical analysis, while the second pertains to basic, as well as less basic fundamental and political considerations.

As a result, the commentary pertaining to the 12 graphs below is a technical expression of the financial and political observations found in the following section.

TECHNICALS

The following technical analysis of gold, silver and the ratio between the two, illustrates co-directionality between all three investments.

However, the gains in the gold/silver ratio are often very positive during periods when gold is actually correcting. Gold, silver, and the ratio between them each provide different returns at different times, creating strategic portfolio opportunities.

The ratio serves as a technical indicator, and as an investment it has a volatility-neutralizing effect on a portfolio, even while increasing its exposure in gold (co-directionality).

The 3 sections of charts commence with the longest-dated graphs. Progressing through the chart analyses, the case is made for why and how the metal will achieve GOLD 1500 in 2010.

Chart #1
The 50-year quarterly gold chart reflects an advance that drove the metal from a lower single-digit figure, to the lower 600s at the beginning of the 80s, on a quarterly close-basis. Obviously, intra-day, gold exploded over $800, to mark Wave-1.

Thereafter, gold took 20 years to correct in Wave-2, which concluded in the $200 area this decade.

Technical estimates for the sizes of the coming waves, and their respective price levels, are based on the time and price data in this document. Every analysis contemplates the conclusion of a Grand Super Cycle, and the beginning of a new one.

First, the calculations (not shown) are based on very conservative Elliott measurements for bull markets, and considering the big picture, my conclusion is that this wave from $700 should not end until $2100, or so.

Yes, that's a broad range, but this includes applying some mean Elliott set of averages for movements in a bull market. The context is the Grand Super Cycle, which dates to the 1700s. It is in this context that the numbers cited here are used and incorporated.

Chart #2
The 30-year monthly gold chart below includes annotations for the end of a cyclical Wave-1, including a wave-1 of the unfolding Wave-3 explosion, toward $3500. As seen, I contemplate a wave-2 correction ending somewhere around $1000 in the spring.

The 5-wave advance of (larger) Wave-1 is evident, breaking down the first #1 (larger green).

Chart #3
A closer look at this past decade illustrates the 1200 level as a good area to complete Wave-1, as seen on chart #2.

Chart #3 is a 10-year weekly gold chart, where the low at $700 in the fourth-quarter of 2008 is the beginning of the smaller wave-1 advance in chart #2 above.

As the silver charts will show, identifying the low at $700 was made simpler by relating it to silver (below). Silver's correction of the decade's move was easier, technically.

Accumulation in gold, by the strongest holders in the world, masked ongoing corrections, which would have "otherwise" occurred at the same time as silver. It did occur, however.

Any selling pressure was being absorbed by these strong long-term holders of gold, who were too happy to oblige.

This is part of the same theme: The shift of wealth and power from West to East.

Please scroll to page 4.

Chart #4
From December 2009 to February 2010, the precious metals (PMs) and the Philly Gold & Silver Index (XAU) corrected in wave-A of an A-B-C correction, in Elliott wave terms.

Wave-B ended around $1,150 (see March 14, 2010 report at www.sidklein.com), perhaps in advance of the Dow completing its post-2008 rally (by around April 5). Often, gold leads the Dow, both in and out. I believe this is the case again.

Wave-C could complete with gold moving into a trading range through the spring, in the $980 - $1,080 zone.

This scenario portends a very bullish outcome that should take the metal to $1,500 this year. This makes sense for two reasons, and here I must digress:

Each time I forecasted a milestone since turning bullish at $280 in 2002, it took 6 - 12 months longer to get there. Last year, I forecast gold-2000 in 2010, en route to $3,500 (within an unfolding Wave-3 explosion). So, $1,500 is more likely, eh?

Also, the significance of the XAU, in the context of this report is to understand its coming decline, as being part of the same backdrop that later propels gold upward. It is a psychological matter.

To shake the tree of over-confident gold bulls, a tree-shaking in the XAU to 120 - 140 would bring sentiment back toward healthier levels. Meanwhile, the gold correction will be "masked" again, as strong holders accumulate.

This creates a smoother advance in gold but dejection still sets in, as its trade is slower, while precious metals equity holders suffer. The XAU will be pressured by the broader market. When it's over, bulls will be predictably affected by the broad market, compounding the pain of a big per cent drop in the XAU.

Liquidity will be challenged as the market falls, causing indiscriminant selling; all taken with the absence of bullishness in gold will make investors miss an enormous opportunity at the bottom of the precious metals. (See special report due shortly, Junior Precious Metal Stocks vs. the XAU)

Chart #5
The 50-year silver chart includes the Hunt-brothers madness. Note that, like gold, the best move was at the end of the cycle. Simply, the best is always yet to come, if the cycle is not yet over.

I believe that the reason why the PMs have their best moves at the end of a cycle is because they are fear-driven, and fear is always greatest at the end of a market cycle.

Please scroll down.

Chart #6
The monthly 30-year silver chart includes a reverse shoulder-head-shoulder, where the left shoulder is in the mid-80's, the head taking place mid-90's, and the right shoulder in the 2000 period.

Further, a clean 5-wave advance concluded just above $20. Since the Wave-2 low was achieved, wave-1 completed and as the pursuant charts analyze, a wave-c remains to be completed to conclude wave-2.

Gold-700 coincided with silver at $9.00, as the latter reflected the metals' true wave count; the correct technical interpretations depend on the correct wave count. Gold's strength was obscuring the wave counts, which silver did not mask.

Further, silver is the guide to investing in the XAU, due to their similarities.

It is critical to note that the large wave-2 below (in green) might very well be wave-a of an a-b-c correction, where the minor wave-1 in blue is actually wave-b.

The upshot is simply that the correction could be deeper in time or price, taking silver below $12.00, as a result (an "a-b-c-flat", comprising wave-2.) This would allow for $9.00.

Shifting the count by a degree only pushes things out in time; it does no change anything for the long term. It delays gold's move to $2000. With a springboard accelerant at the low, the delay will have held gold back to provide gold $1500, in 2010.

The XAU would be kicking in, and the Dollar story will return to being completely favourable, while the stock market provides the pause in its debacle, to round out the ideal condition for the precious metals acceleration.

Chart #7
The 10-year weekly silver chart reflects the 5-wave advance more clearly, including it correction of the decade's move (see chart #5).

It is reasonable to expect that silver will hold the $12 - $14 area as part of a wave-2 correction. However, $9.00 becomes possible if silver is correcting in wave-c of 2, which is presumed to be complete above.

In other words, we would have seen an a-b-c decline that only marked wave A of 2, as opposed to the entire wave-2 correction. Either way, it's a matter of a last leg of decline being underway.

Regardless, it pays to wait, particularly with the XAU which emulates the silver chart, since those stocks are further impacted by the general equity market.

In getting ready for the next wave of eruption in gold, understand the silver move to over $20 as having been a mere Wave-1. Continuing in the complex, as follow-up to the March 14, 2010 report (online), an analysis of the XAU will reflect a similar reality as that of silver, in a few days.

Chart #8
The 1-year daily silver chart includes the above-contemplated (chart #6) a-b-c wave-2 interpretation and, as you can see by chart #8, I expect that wave-2 of the already-commenced wave-3 would hold the $12 area.

It should be noted that if wave-c of 2 is yet to complete, then the correction could be deeper, toward $9.00. To reiterate, that would be more akin to an "a-b-c-flat" correction.

Please scroll down.

Chart #9
The quarterly 50-year gold/silver spread chart (ratio) illustrates a very clear 5-wave Elliott advance, and since its bull market is coincident to the bull market in gold, we may conclude that the ratio's continued advance is corroboration for the metal's own multi-decade rally.

The ratio is accelerating into the very heart of the last major cycle's bull move. Remember too that the best moves occur in the latter phases of the bull moves (all 3 sets of charts).

The upshot of that is that my estimates for a target of 115 may be conservative.

The subsequent charts break down into easy to interpret wave counts along, along with accompanying gold-related commentary.

Please scroll to next page.

Chart #10
The following 30-year monthly ratio chart provides a clearer breakdown of the waves [though wave-1 (yellow) should be in the 1970s, as per the 50-year chart].

It shows the clear breakdown of Wave-4, which is shown in the 50-year chart. It also illustrates the wave count which will include the unfolding and explosive Wave-5 advance that began in the middle of this decade.

Therefore, we see that this relationship is off-cycle to gold itself, while doing best during periods when gold is actually correcting. This is so, despite co-directionality over longer periods.

For this reason, investing in the ratio expands one's gold exposure (due to co-directionality), while also having a neutralizing effect on a gold portfolio's volatility.

The wave count is "clean" and easy to read. As long as co-directionality does not break after decades, there is no doubt that gold is moving much higher. That wave 5 of a larger degree awaits the ratio, does not appear to be in doubt.

The subsequent charts are further broken down, to clearly illustrate that the acceleration into the major Wave-5 has begun. Wave-3 of 5 awaits. Such a move is the sharpest, in terms of speed.

Chart #11
The 10-year weekly chart speaks for itself, with a very bullish neckline support drawn-in at the 60 level.

The annotations include the bullish reverse shoulder-head-shoulder formation and wave count that provides a closer look at the advance off of the Wave-4 low, seen in the 30-year graph (chart #10).

When analyzing the numbers, one can see that the profit potential is substantial, thereby providing a superb augment to a gold portfolio. Again, the spread as a holding, further smoothes volatility in the gold portfolio, as well.

Please scroll down.

Chart #12
The 1-year daily chart of the ratio reflects my view that the neckline support of 60 has been raised to 64, with the recent explosion above 70.

After having identified the low in the ratio in the fourth-quarter, and again in January, another low is being identified now, in wave 2 of a now ongoing Wave-3 of 5 eruption to the upside, which will ultimately take the ratio to 115, or higher.

Note as well the supportive reverse shoulder-head-shoulder and uptrend line.

Please scroll down.

Before addressing some fundamentals, let me remind of the need to identify the easiest chart patterns to read, which serve as indicators for other and related charts, which may be more difficult to analyze.

To that end, please note my use of silver charts (especially as I have and will use it in relation to the XAU) but, most of all, my analytic and prognostic use of the gold/silver ratio.

The latter, as you see above, is consistent with a gold pull back (i.e. - the ratio's recent eruption coincided with gold's fourth-quarter decline).

To view the March 14, 2010 report: http://www.sidklein.com/comments/March%2014%202010%20SKGS%20interim%20report.pdf

BASIC FUNDAMENTALS (& the unusual financial/political event risk)

The basic theme at the heart of my post-2001 precious metals reports has been and remains a massive transfer of wealth and power from West to East.

China and India will continue to buy gold, and then name their financial, economic and political prices to the decadent West.

The West has depleted its own reserves, leaving these currencies to be soon remembered as yesterday's news. The PMs are further supported by money supplies that expand at rates upward of 10%, while PM availability increases by about 1% per year.

Please remember the 2010 upside correction in the USD is merely a retracement in the Yen, Euro and others.

This report jumped straight into the technical analysis of gold because, essentially, all of the fundamentals are known to we who belong to the Precious Cult. So, this report looks at the very basic fundamentals, along with some unusual considerations.

For those who wax intellectual and actually believe that the issue is one of deflation, and that such deflation affects ALL assets prices, a basic reality is overlooked, so here I consider the first "unusual" aspect:

Weimar wasn't the global reserve currency, while the US Greenback is.

With that, it is critical to grasp that matters often unfold according to orchestration, at the very times when it appears that the orchestrators have lost or are losing control.

(In Japan and the US, this has proved to all too often to have been the case, where the world's greatest insider traders reside.)

The US wants its currency debased into oblivion and, wishing to win wars in a non-military way, "free trade" deals have been at the heart of the US' capacity to own foreign property, the value of which expands as the Dollar declines.

Rome collapsed with its currency, but here its demise will have actually been part of the power grab. As well-known organized criminals have held, if you can't avoid the process, take charge of it.

The expansion of foreign asset valuations is of greatest interest to the ruling establishment and its members' own portfolio values.

As for the US economy, the currency's debasement also serves its trade goals. For me, this is the LESSER motive. While the commentary here could leapfrog into a discussion of the growing political/military risks, since we are not yet there, we will remain on the topic of GOLD 1500.

Still, it is a good point at which to recall to investors that the order of events in this cyclical phase of Kondratieff-Wave (K-Wave) destruction is: Financial, then economic, then military (war/political). 2010 is the entry into the phase of economic demise. That's right; we haven't even gotten going economically….yet.

However, I will leapfrog into the second special analysis, a possible wildcard, and it is a special event risk, which would/will spike gold hundreds of dollars, while simultaneously collapsing the stock market (and perhaps causing the YEN and Euro to drive upward).

Yes, this is also an event which could be the trigger for the divorce between the PM stocks and the broad equity indices:

THE CHINESE, THE CRIME of the CENTURY & PSYCHOLOGY
The Chinese and Indians will increasingly gain deserved financial influence, wresting it away from those whom they perceive to be attempting to cheat them, via the use of its monetary policies.

Indeed, this is the Chinese reaction in the news this week. It is for each person to opine on the situation but, either way, the battle-lines are being drawn, with ever-more firm entrenchment.

These are scary problems, along with the frightening overhangs in the market that range from well-known concerns such as unfunded pensions, the insurance companies, and sundry financial institutions.

However, the political problems and concerns that lie ahead are the ones that serve as the accelerant. Fear gathers with uncertainty, in a vicious circle.

The Crime of the Century
When the US pushed for the end of the gold standard, it created the occasion by which greater global economic control of property and resources could be gained, via the route of trade agreements that served to open the door to greater foreign control of domestic assets.

The gold standard included strict guidelines that forced domestic monetary policy to balance the balance of payments gap, thereby maintaining currencies at very stable levels.

The downside was that countries could not buy what it could not afford. Those who had more of the other's currency and could afford more suffered inflation, since monetary policy served to balance trade.

The downside was a positive, then, since it served to control both the financial and political ills and imbalances. Keynes-infested policies are growingly perceived abroad as instruments of imperialism. The plot thickens, too.

If a country could simply not compete or maintain a certain standard of material living, it simply couldn't. By allowing a country or individual the opportunity to do what credit could not ordinarily permit, it makes the debtor vulnerable to creditors, especially those of superior forceful means. That's where imperialist mistrust enters.

We know how financial chaos ushers in economic disaster. Here, let's consider how financial demise leads to political and military disasters, the greatest and most destabilizing fear known to the markets.

There is a school of thought that would believe that a country with all the gold would have financial monetary security. Would it, however?

Again, when the US went off the gold standard, it shifted the natural balance and healthy order of financial, economic and political evolutionary life, since balance (of payments, etc.) is fundamental to peace and stability, devoid of depressions and deflations. If superior military power can defend contracts according its interpretation, monetary and domestic sovereignty is compromised. This is perceived as a threat.

The Chinese have said so, and have added that they will not accept US court rulings, insofar as contracts are concerned. The have made reasoned arguments that US contracts are vague, confusing and so do not singularly serve the spirit of the contract.

Make no mistake of it. The Chinese short silver contracts negotiated with JP Morgan (to hedge mining) could prove to be the "test case", and the one that blows up. International tribunals would need to be involved, the Chinese have said, while they are scapegoated by a US government with its own heist in mind.

JPM would be declaring a force majeur and fail on the short silver deals. So, the Chinese action would not result in a massive short covering rally in silver but, rather, the opposite as the short position just disappears, with no more of an effort than what lawyers can contribute.

The brief version of the short silver story and China's part in it is that the potential clearly exists for defaults on agreements, along with the demonization of the Chinese who would be blamed for any fallout. It would not be the US banks.

As a supreme example, let us consider a nightmare scenario, where the US leader writes off the US debt with the stroke of a militarily supported pen, and then points to the redemption value of gold holdings, which are, as a per cent of today's price, in the lower single digits.

Eventually, this mega-heist and crime of the century is the ideal financial trigger to war.

PSYCHOLOGY
A point of panic could trigger widespread acceptance that gold is in a bull market which cannot be denied, as talk grows of the eventual need for a gold-based system. This is called "the point of recognition" (general widespread acceptance of the main trend).

Political fears need not even enter into it for now, but at that point of recognition, everyone in the market is in a profit situation. The resultant happiness feeds on itself, as the point of recognition coincides with the best fundamentals, thereby laying the basis that fear may embellish upon, and with respect to which may act as an accelerant.

Perhaps, the political/military fears here contemplated may have their biggest affect on gold prices in absolute terms in Wave-5, a bit later on. The animosity and banging of the drums that leads to war is getting bigger now, though.

Gold is the last refuge, benefiting further when it is disrespected contractually, forcing the hand of those who possess it, to "defend" it. One thing is for certain, history can at last judge Keynesian economics (not that it couldn't before), for being the simplistic, trivial and destructive excuse of an idea that it is.

How did anyone believe that conscious acts of volition lack "freedom", while allowing greed to run amok (as it could be expected to) is reasonable?

Who's the genius who believed that if one allows a domestic but unrestrained animal to have potential access to all of the food in the house, that it would be anything less than gluttonous?

The only ant-acid will be gold, just as it is the only response to monetary failure.

The Animosity (upon which fear may feed)
To embellish the above, I mention here something that went largely unnoticed:

When Iraq was no longer an item that required support, turning attention to others, the US government ran an ad on television only for about a week, as the Bush administration's State Department was perhaps being seen as too obvious.

The ad was for the US Air Forces' quiet, unmanned spy plane. To boast of the Air Force's prowess and capacity, the narrator's text included cautioning that (paraphrase), "You never know who are among us and who may wish to harm us!" The simultaneous image was that of Chinese people walking in the streets.

Separately, and reaching further into the past, the US once "accidently" bombed a Chinese embassy. The US has been perceived to have committed acts of aggression, where they dared the victim to react and expose itself as incapable of an effective response.

Accepting power politics, when such a scenario is perceived to be the case, the Chinese culturally gravitate toward an attitude of eating anger cold. Simply, memories are long.

I have provided points of view from which to better judge whether the Chinese would be feeling justified in their reactions, as they are now. One must decide for oneself to what extent the political and financial risks are real, when there are opposed interests, with equal will to defend those interests. Hence, I have provided Chinese-favourable points of view to consider.

CONCLUSION
This unfolding phase falls against a backdrop of destructive economic and political consequences, as the financial market and world at-large, spins toward disaster and to The Depression to End All Depressions.

From the concerns regarding financial institutions, to the political effects of those political efforts designed to defend one's perceived justified interests, there is much to fear. Fear supports the gold market. The fear will not wane.

A fundamentalist quoted to me once: "And no one shall have money."

Please accept that as my brief, yet sincere, summary/comment on the monetary, financial, political and military state of affairs today. Whether you are an investor or historian, please note.

Gold, the one and only true currency, is heading to $1500 this year, en route to $3500, my target for this Wave-3 advance. The metal will correct from the lower 2000's, before moving higher, I believe.

With gold being the ultimate and eventual replacement to all fiat currency, the gold stocks will have exploded, in my view, after the initial major correction in the stock markets, as per the 1930s experience. Gold will have time for $1500 this year.

The PM stocks, as measured by the XAU, will soar in a Wave-3 of its own to dramatic new highs (see report due shortly).

Sid Klein

 

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In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."