Gold fundamentals still pointing towards $2000+ update
September 12, 2008
- US Debt escalating
- Market intervention beyond extremes
- Physical gold demand exploding
- Gold vs its own Historical Norm points to $2000+
What about you? Thrilled about the latest sell-off of your beloved gold shares? Thrilled about your junior mining stocks trading at rock bottom bear market levels? Thrilled about governments/media magic to spin an endless chain of bankruptcies into hyper bullish (dollar) events?
Well, in case you missed it we just witnessed the biggest, ugliest, fastest correction in gold and gold shares ever despite the fact that fundamentally nothing has changed regarding the bull run that took gold from its $250 low in 2001 to its recent high of $1030.
So what did reverse the gold bull trend then?
As pointed out In my piece “Gold – Fundamentals still pointing towards $2000+” the dollar started a miraculous rally in early July and kept on appreciating week after week with a stunning speed leaving most analysts clueless for the reason why. Now did the dollar rally so fast because the rest of the world became so excited about the endless chain of bankruptcies haunting the US? Never mind Bear Stearns blew up, the dollar rallies, never mind IndyMac blew up, the dollar rallies, never mind 11 other US banks blew up, the dollar rallies, never mind the two biggest mortgage banks (Fannie/Freddie) blew up, the dollar rallies, never mind the US has taken on an additional amount of debt overnight equal to what has been accumulated over the last 200 years, yet, the dollar rallies..This all makes sense to you? Well, not to me but then what the heck is going on?
The answer is simple:
The US has shown its financial muscles and orchestrated one of the biggest intervention of all time in order to restore confidence in the financial markets. How this was/is done is explained in detail by Bank of Montreal’s Don Coxe in his weekly web cast of September 06.
He explains how the Fed and Treasury in conjunction with the CFTC and SEC "RIGGED" the collapse in commodities and bounce in financials to purposely screw people who were making commodity bets and shorting financials. He states that this was categorically the most massive government intervention into the capital markets since the 1930’s when Roosevelt closed the banks
Jim Sinclair (JSMineset.com) says more or less the same:
A Level Of Market Intervention Never Before Seen
Jim Sinclair, September 09, 2008
· You are all being run by the largest intervention in the shortest time frame any market on the planet has ever seen
· Nothing has changed at all. In fact, it has become fundamentally and significantly WORSE
· Intervention has nothing to do with the markets. Only the precious few know it is about to happen. For the rest it comes out of nowhere
In my piece “Gold – Fundamentals still pointing towards $2000+” I quoted James Turk and his evidence of market intervention, the simple fact is that the idea of market intervention is getting more accepted day after day. Still there are many commentators out there who deny any kind of government intervention and are happy to label anyone talking about market intervention as a bunch of lunatics. A good examples concerns GATA. GATA has been ridiculed for years regarding their clarion calls about market intervention. The intervention nay sayers however fail miserably to explain why GATA would be wrong. Some argue that gold’s recent crash is just a mechanism of deleverage at work but unfortunately statements like these makes no sense at all. Can someone please explain why market participants who would like to deleverage their gold positions would chose to do so only during COMEX sessions at 10 AM EST most of the time? This brings me to GATA since they’ve reporting on this issue for years but still a very few have picked upon it. Furthermore GATA says most attacks on gold are telegraphed the day before through a sharp sell-off of the HUI.
A sharp HUI sell-off in the face of firm gold prices is followed most of the time by a brutal sell-off in gold the very next day. Coincidence you say? Forget it! It happened just too many times and no statistician on earth will tell you that free markets could operate that way.
Let me give you an example here and judge yourself:
On July 02, 2008 the HUI sold off by 15 pts despite gold going up by $2. LeMetropole contributor Adrian Douglas wrote to Bill Murphy:
The Cartel is so obvious and blatant in their illegal activities. The ECB rate announcement is due tomorrow and any increase will be dollar bearish. The US payroll data is also due. With gold making its way higher today but swimming with concrete boots on supplied courtesy of the Cartel, the HUI has turned massively negative even with the USDX about to make a new ALL time low! Could it be any more obvious that they will attempt a gold raid tomorrow probably commencing on ACCESS?
Bill Murphy himself ended his daily MIDAS commentary that day (July 02) with:
The XAU lost 7.19 to 190.35 and the HUI was nailed for 15.26 to 443.39.
In the past when the HUI was bombed with gold and silver relatively firm, it meant The Gold Cartel was ready to bomb the gold and silver price the next day, especially on a day when important economic news is to be released.
Well, surprise surprise, guess what happened the very next day on July 03:
You may be the judge: Intervention or deleveraging of gold, silver, euro positions all in the same minute.
Please remember that gold goes down in more than 90% of all COMEX sessions, again, no statistician on earth will tell you that free markets should behave that way. (readers interested in a detailed description can read my 18 page piece ‘GOLD & GATA’ , chapter VI of the Gold Drivers Report 2005)
Please note the timing of the intervention on the charts above. It all starts at 9.57 AM EST. It happens over and over again. Fast forward to September 10. Surprise surprise:
So here it is, 10 AM seems to be a popular time for gold, silver and the Euro to be send to the cleaners indeed but sure enough it’s all about deleveraging right? Something that traders suddenly remember to do when the clock approaches 10 o’clock. Sure enough the Asian traders don’t feel the need for deleveraging their gold positions. Now why is that? It must be that the COMEX traders are much smarter right? Or maybe they just have a different agenda?
Again, this pattern is reported over and over by GATA and as its chairman Bill Murphy says:
You have to wonder how many times people can look at the exact same chart, with gold dropping at the same time, before they ask what the heck is going on? Free markets just don’t trade that same way over and over and over, no matter what the outside fundamental factors are.
So far about market intervention, the reasons for it are mentioned well above but what about the consequences? What will it do with the already exploding US government debt? What will it do with demand for physical gold? What does it all mean for the fundamental trends that started in 2001 (dollar bear, gold bull)?
US government debt escalating
In my piece “Gold – Fundamentals still pointing towards $2000+” I noted that the US just raised its debt ceiling to $10.5 trillion dollar so that they can take on another trillion dollars of debt (current reading= $9.6T)..Well, they might raise the debt ceiling sooner rather than later again due to the take over of Fannie/Freddie. There are different estimates out there of what the real costs of the Freddie/Fannie bail out will be. Some argue that it’ll only requires $20 - $30 billion dollars to keep things afloat, others mention $200 - $300 billion that would be required and others argue that the US effectively acquired another $5 trillion of debt since that’s the amount of mortgage debt they inherited from Fannie/Freddie. Don Rich of the Mises Institute estimates the real cost of a full bail out is not unlikely to reach $2.5 trillion:
The Real Cost of a Full Bailout
Don Rich – Mises Institute
A recent study from the Congressional Budget Office (CBO) has zero credibility. It pegged likely taxpayer losses in the Fannie Mae and Freddie Mac bailouts at $25 billion. For those with a sense of history, it is worth remembering that the S&L bailout had a $160 billion price tag. The numbers diverge so far from reality as to be laugh-out-loud funny. Funny, that is, except that the CBO estimate demonstrates a willful disconnect with the actual consequences of federal government actions.
As demonstrated below, the real cost of the bailouts will easily exceed $1.3 trillion. In fact, the real cost is likely to range between $1.3 trillion to $1.6 trillion, and is not unlikely to reach $2.5 trillion.
To put things in perspective, the US accumulated about $5 trillion dollar of public debt over the last 200 years. Now to suggest that taking on another $2.5 trillion debt is no big deal is laughable at best. Sure enough bail out exercises like these requires budgetary resources that only inflation can provide.
It won’t take much time for the investment world to wake up and see what consequences US government policies may have. The first signs are not encouraging:
Nationalization of Fannie, Freddie triggers defaults for derivatives
By Aline van Duyn in New York
September 8, 2008
One of the largest defaults in the history of the $62,000bn credit derivatives market has been triggered by the US government’s seizure of Fannie Mae and Freddie Mac, raising questions about how dealers will unwind billions of dollars worth of contracts.
Although the $1,600bn of debt issued by the troubled mortgage groups is regarded as safe after the US government’s move to take control of the companies, their move into "conservatorship" counts as the equivalent of a bankruptcy in the credit derivatives market.
Some may argue the US already passed the point of no return so how will this all end? Well, not good according to legendary investor Jim Rogers, he spells trouble ahead for the remainder of our lifetimes:
Jim Rogers: How the Federal Reserve Will Fail and the One Sector Every Investor Should Be In
Money Morning/The Money Map Report
VANCOUVER, B.C. - The U.S. financial crisis has cut so deep - and the government has taken on so much debt in misguided attempts to bail out such companies as Fannie Mae and Freddie Mac - that even larger financial shocks are still to come, global investing guru Jim Rogers said in an exclusive interview with Money Morning.
Indeed, the U.S. financial debacle is now so ingrained - and a so-called "Super Crash" so likely - that most Americans alive today won’t be around by the time the last of this credit-market mess is finally cleared away - if it ever is, Rogers said.
The end of this crisis "is a long way away," Rogers said. "In fact, it may not be in our lifetimes."
Former FED president Paul Volcker isn’t too optimistic either:
Volcker Says Finance System ‘Broken,' Losses May Rise
By Doug Alexander and Steve Matthews
Sept. 5 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker said the U.S. financial system, dependent upon securitization rather than traditional bank loans, is broken, and may contribute to the weakest expansion since the 1930s.
Earlier this year at the Economic Club of New York on the credit crises and related matters former Fed chairman Paul Volcker said the credit crisis is the “mother of all crises” and the modern financial system and has failed the test of the market-place.
When asked about the possibility of a dollar crisis, Mr. Volcker retorted, “Dollar crisis … you don’t have to predict it, you’re in it … Let me remind you that the dollar after all is a fiat currency backed only by the word and policies of our government, policies exemplified by an independent Central Bank committed to maintaining price stability.
And neither is Martin Hennecke of Tyche
Bailouts Will Push US into Depression: Manager
By CNBC.com, Sept 11, 2008
The end result of the global economic slowdown may be the U.S. announcing national bankruptcy as the government cannot afford the bailouts that it promised and the market will not bail out the government, Martin Hennecke, senior manager of private clients at Tyche, told CNBC on Thursday.
So how do foreigners respond to the US financial crisis?
Well, it seems that Russia won’t be of a big help:
Russia says may cut U.S. agencies holding further
Mon Sep 8, 2008 2:02pm EDT
By Yelena Fabrichnaya and Gleb Bryanski
MOSCOW (Reuters) - Russia's central bank has cut its holdings of U.S. agency debt to less than $60 billion this year and may reduce them further, its first deputy chairman, Alexei Ulyukayev, said on Monday.
China isn’t thrilled either:
China frets at US risk after Fannie/Freddie bailout
Monday September 8 2008
BEIJING, Sept 8 (Reuters) - The U.S. Treasury's takeover of Fannie Mae and Freddie Mac is good news in the short term for China, the biggest holder of the giant mortgage lenders' debt, but Beijing's huge U.S. exposure still poses a serious risk, a prominent government researcher said on Monday.
"China has bought a lot of asset-backed securities, and there might be short-term improvement in price," said He Fan, an economist with the Chinese Academy of Social Sciences. But, taking a longer view, he said the bailout posed a problem: if the Treasury issues new debt to fund the rescue, should China be a buyer or not?
So again, when could we expect the natural trends to resume (dollar bear/gold bull)? Sure enough no one knows but according to Jim Sinclair of JSMineset.com we could expect within weeks from now to see the acts of nationalization to become extremely gold positive and outrageously dollar negative:
Jim Sinclair’s Commentary
The children who believe that no problem is ever a problem are about to find out we are in the middle of the Mother of all financial problems. You can measure in weeks the maximum time this act of nationalization become extremely gold positive and outrageously dollar negative.
Regardless of the Titanic intervention, you can anticipate gold is going first to $1200 and then to $1650. The US dollar will trade at .62 and then .52 on the USDX.
For those who think the gold bull market is over please consider this:
Demand for physical gold is soaring to levels not seen in decades, is this what a bear market is all about? No, of course not, the low gold prices of today is just a result of plain intervention as described above. Yes, one could easily be demoralized by recent price action in gold but always keep in mind the big picture and forget about the (intervention) noise troubling your mind. Remember that gold supply is going down and will go down even faster since almost the entire junior mining sector has been slaughtered this year. Most of the juniors won’t be able to raise money in current environment so they are putting their exploration projects on hold. No exploration means no new deposits. Since 75% of all new discoveries are made by juniors it isn’t hard to understand that gold supply will go down coming years. Please remember that gold demand already exceeds supply by a 1000 tonnes a year and this will widen up even more not only by a decline in gold supply but by a tremendous increase in gold demand as well. Abu Dhabi for instance reported record high gold sales not seen in 30 years:
Gold sales in Abu Dhabi surge 300%
by Summer Said on Monday, 01 September 2008
Gold jewellery sales in Abu Dhabi soared 300 percent in volume and almost 250 percent in value in August from a year earlier after the metal dropped to nine-month lows, the emirate's industry group said on Monday.
"It was the best month the market has seen in almost 30 years and it compensated for any drops we have seen earlier this year," Abu Dhabi Gold and Jewellery Group Chairman Tushar Patni told Reuters.
"We had never expected that if gold fell below $800 an ounce we would see a 300 percent increase in volume and 250 percent in value, especially as many buyers are abroad on holiday."
Indian demand is on the rise as well:
Indian gold imports jump as lower prices fuel demand
2 Sep, 2008, 1340 hrs IST, REUTERS
NEW DELHI: India's gold imports in August jumped 45 percent from a year ago, the first annual rise this year, as lower prices and upcoming festivals drove demand in the world's leading consumer, a trade body chief said on Tuesday.
It seems that the month of September will show up a record import for gold since Indian ex-duty premiums are reported to be hugely above legal import point. ($15 Sept 10 AM, $12 Sept 10 PM). These premiums are completely unprecedented over the last 10 years so India’s imports of gold in September should be stunning. (source: LeMetropoleCafe)
So record high gold demand vs falling gold prices on COMEX. Finally it seems that not only GATA is seeing the discrepancy. Kinross CEO Tye Burt acknowledged at the Denver Gold Forum that it is hard to explain the difference between COMEX and physical demand today. Furthermore he mentioned that global mine production in gold has been in decline for the last nine or 10 years and that it won’t be stopping anytime soon. To him that’s symptomatic of an industry that is going to be in severe constraint in the not distant future:
Kinross CEO Burt fires up gold investors in DenverMineweb
Author: Dorothy Kosich
Posted: Thursday , 11 Sep 2008
Kinross President and CEO Tye Burt Wednesday proved to be a beacon of reason and optimism piercing through the gloom of a Denver Gold Forum wallowing in the depths of despondency due to depressing metals prices and a lack of financing for junior mining projects.
"This is the gold business. It is cyclical. The demand fundamentals are strong. The supply fundamentals have never been better for our metal."
"Global mine production in gold has been in decline for the last nine or 10 years," Burt said. "We don't see that stopping any time soon."
"To me that's symptomatic of an industry that is going to be in severe supply constraint in the not too distant future," Burt declared.
While it may be hard "to explain the difference between Comex and physical demand today," Burt asserted that "it isn't hard to look into the future and see a world of dramatically constrained gold production and gold supply."
So where to go from here? Should we buy into the gold market right now? Should we wait? What about the gold shares and especially the juniors?
Well, the simple thing is we have to wait until the dust has been settled. Many analysts are calling for $640 gold while others say the bottom must be near. Although I think myself the bottom must be near due to overwhelming physical demand we just have to wait until the down-trend has been breached to the upside coming weeks.
Regarding to the junior sector, the horror show continues and many juniors are trading at levels not seen since the beginning of this bull market in 2001. Does it mean the death of the juniors? Although most people would tend to believe that would be the case indeed one has to remember that we were there before in 2001/2002. Juniors were trading at penny levels coming down from multiple dollar levels the years before. In 2003 however many juniors caught tail wind and appreciated by 1000% or more in just a year. It’s all about perception. Yes, maybe new record highs in gold is needed to reenergize the junior market but the high quality ones will survive. I’m not saying here you should go out and start buying gold stocks like crazy but it should be prudent to keep an eye on the high quality ones since once this trend (current down-trend) reverses things can go really fast. Juniors sitting on huge proven resources will do well when gold prices are heading towards $2000+ coming years, the only question again remains which juniors will survive the current crunch..
NOTE: We will be covering coming weeks through our GoldDrivers Report some companies that are likely to benefit most once this correction is over. (For Premium members only – special discount membership offer click HERE)
In my piece “Gold – Fundamentals still pointing towards $2000+” I ended up by announcing to publish the charts this week which puts gold in perspective to its own historical norm, CRB, Oil, Inflation etc.. Due to the lengths of this article however I will discuss only three of them, the remaining charts is for chart members only.
Gold & Historical Norm
- DOW/GOLD ratio
- Gold vs its own long term average
- Gold vs Oil
When gold (and most commodities) came crashing down from a high of $730 to $540 in just a few weeks time (2006) many experts declared the end of the precious metals (and commodity) bull run (sounds familiar right?) But based on what? Bull markets usually tend to end up in new ‘REAL’ all time high territories. Believe it or not but gold is nowhere near historic highs these days, no matter what the 'experts' want you to believe. In order to trade in record high territories based in 2008 dollars we should see gold trading above $2000,- these days.
Mind boggling numbers? Well, take a peek at the charts below and judge yourself:
Dow Gold Ratio
The DOW/GOLD chart is a powerful tool in order to determine major turnarounds. It's simple, when the DOW/GOLD chart tops you buy gold, when the DOW/GOLD chart bottoms you buy equities. Once you've established your position you can ride the wave up or down for at least a decade. The DOW/GOLD chart flashed a 'buy' for Gold again in the year 2000 and indeed 8 years later Gold is already 200% off its lows since then. The DOW/GOLD chart tells you to hold on to your Gold until a new bottom has arrived in the 1 - 5 area. Well, if it were all that simple why don't we hear that much about it ?
Well, as said before the DOW/GOLD chart isn't useful at all in order to predict yearly price movements. It could very well be that next year will show a higher reading than this year instead of an expected lower reading thereby losing confidence as being a reliable indicator. Unfortunately that's the same analogy as denying that higher temperatures will arrive in summer based on a single day temperature drop in spring. The problem is that the DOW/GOLD cycle has a wave length that's so big that we humans have a hard time to figure out where to position ourselves into this cycle. Nevertheless many veteran analysts such as Richard Russell and John Hathaway do refer to this cycle. Indeed history does suggest that the DOW/GOLD ratio bottoms periodically in the 1 - 5 range. The Dow/Gold ratio topped in 2000 far above 40 and is heading down now (current reading at 13.8). If the DOW/GOLD ratio can live up to its expectations than we can expect a new DOW/GOLD bottom shortly after the end of this decade.
Gold vs its own long term average
Another favorite bear tune concerned ‘record’ high gold prices ($1000+) which would be a characteristic of gold’s exhausted bull run. They argued that gold had reached all time record highs which should be taken as a warning sign. Well, nothing could be further from the truth since bull markets tend to end by making new ‘REAL’ highs and needless to say gold is trading nowhere near new ‘REAL’ highs these days. In order to do so gold should be trading above $2000 levels. The chart below tells it all!
History shows a strong correlation between gold and oil. One ounce of gold typically used to buy 16 barrels of oil but today this ratio has dropped to extreme low levels below 8. From an historic perspective (gold vs oil) gold should be trading above $1500 levels these days. The chart below speaks for itself.
Remaining charts for members only.
- Idea of recent market intervention becomes more accepted
- Market intervention won’t reverse a primary trend, only delays the inevitable
- Strange discrepancy between COMEX and physical gold demand becomes undeniable
- Bull markets usually end up in making new ‘REAL’ all time highs
- Gold has nowhere reached new ‘REAL’ all time highs
- Supply/demand fundamentals for gold are extremely bullish
- Gold will likely be trading above $2000 within a few years
Next week: Gold/HUI anomalies beyond extremes
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