Casus Belli

The words "not a casus belli" caught my eye yesterday. They appeared in a White House press release.

In plain English, what the press release appeared to be saying was that President Bush was anticipating the discovery by the UN Team of some weapons of mass destruction in Iraq, but that this would not be sufficient to cause the US to declare war.

At the time, it struck me as odd that this particular phraseology should be used. Today I understood that what the public was being fed was "political spin".

The following is a quote from an article which appeared in The Times Online on December 6th 2002. (Source: http://www.timesonline.co.uk/article/0,,3-504631,00.html)

"RELATIONS between Washington and the UN were under severe strain yesterday as the leading weapons inspector in Iraq hit back at US criticism of his team's work.

Demetrius Perricos, the Greek head of the team searching Iraq for chemical and biological weapons, strongly rejected American attempts to dictate the pace and style of inspections. Frustrated White House officials had marked the end of the first week of the new inspection regime, which has uncovered next to nothing, by calling for more intrusive inspections.

But Mr Perricos retorted: "The people who sent us here are the international community, the United Nations. We're not serving the US. We're not serving the UK. We're not serving any individual nation."

Breaching protocol, which dictates that UN officials should remain non-political, he also challenged the Bush Administration to share its intelligence if it wanted the inspectors to uncover banned weapons. Referring to the intelligence on Iraq amassed by the US, he said: "What we're getting and what President Bush may be getting is very different, to put it mildly."

During this past week ending Friday December 6th, the markets have been focusing on the fact that on Monday December 8th the UN Team is due to report formally, and were very skittish. The Dow Industrials failed to break to new highs - and a potential Dow Theory buy signal was thereby aborted - the Gold Price rose, and the Dollar fell.

Evidence that there was an "unseen hand" attempting to steady the markets - and thereby prevent a panic - is present in the following 15 minute charts (Source: ino.com)

Mid morning, the US$ literally "fell out of bed".

My guess (I have no evidence to support this) is that the driver of this occurrence was speculative positioning in anticipation of the week-end and of Monday's U.N. report.

Around the time that this happened, the Gold price started to rise (as would have been expected given that the two move contra-cyclically) and as can be seen from the chart below.

In looking at these charts, some interesting observations can be made:

• After the gold price peaked at $329.60, "the market" reacted downwards, and within around 45 minutes the price had fallen as low as around $324.50 (which was lower than when it first started to rise)
• Around 45 minutes after the US$ bottomed at 104.92. "the market" reacted upwards (at a similar time to the gold price reaction downwards), back to around 105.60 (but this level was not as high as when it first started to fall)
• The "Last trade" in gold was at $326.50, and yet the chart itself shows the last "bar" at under $326

Why is this latter fact of interest? Well, according to the following Kitco.com chart, the market closed at exactly $325.90 - with the last trade occurring after 2:28 pm.

The disparity in these two charts caused me to ratchet up the ino.com gold chart to one minute intervals, and guess what? The price actually fell from over $327/oz to under $326/oz (more than a dollar) in the very last minute of the trading day; and this was notwithstanding the fact that the US$ had been falling for the previous 30 minutes or so towards the close.

Of particular interest is that the level of $325.90 was low enough to have prevented the gold price from penetrating the down-trendline shown in the following DecisionPoint.com chart

The evidence is clear: The Gold Price was being managed down by an "unseen hand".

So what does all this mean?

Well, one approach could be to go purple in the face, and with veins bulging in my neck I could yell: "You see! You see! I told you so! The price is being manipulated! Gotcha, ya bastards!"

Another approach would be to interpret this evidence with a bit more circumspection.

If all we are focusing on is the revenue line in the Nation's Profit and Loss account then the US economy appears on the surface to be relatively robust. However, the reality is that the Balance Sheet of the Nation is in pretty poor shape - bordering on ugly given the level of debt, and also given the probable under-funding of the Pension Fund liabilities which do not appear on the Balance Sheet because they are only "contingent" liabilities.

Yes, we could argue that the "authorities" have been raping the Balance Sheet Reserves for years in order to artificially present a pretty picture on P&L account - and we would probably be right. But the fact is that the markets are at a very dangerous juncture and the authorities also appear to be (as evidenced by the above) attempting to avoid a crisis of confidence BY MANAGING THE PRECIOUS METALS' PRICES, and BY MANAGING THE INFORMATION THAT FLOWS INTO THE PUBLIC DOMAIN.

Our purple faces could eventually turn blue if we were to argue the ethics of this approach, and there is a high probability that the readers of this web site will find the very idea disgusting (as I do), given that most reader's values will probably be aligned with Biblical ethical values. After all, who the hell do these guys think they are that they can rape the Nation's savings in order to benefit/protect the vested interests of the lobby groups - all in the name of protecting the economy as a whole? Why do they think they have a God given right to behave in a way that encourages the unsuspecting and vulnerable public to build up dangerously high levels of personal debt, and/or which has the potential to lead the whole world into a war - for the same primary purpose of protecting these vested interests?

There comes a point when the last cut in interest rates does more harm than good, and when the last soothing platitude becomes a transparent, bald-faced lie. There also comes a point when the last "political spin" statement makes you look like nothing more nor less than a blithering idiot.

Let's face it: When a politician sacrifices his/her integrity, and then tries to rationalise that he/she is being a Statesman-like pragmatist, he/she is really taking the first step down the slippery slope towards oblivion.

And it has been this sacrificing of their integrity by the authorities which has led them (and us all) to the parlous position where they are now having to "manage" the markets in order to avoid a financial catastrophe. And that's really why (in my opinion) the White House is screaming about the "heinous" Saddam Hussein who has been building/storing weapons of mass destruction, when the United Nations Investigation Team has actually found nothing of significance.

(This is not to say that Saddam Hussein is a "white light angel". It is merely putting into perspective that there are always two sides to a story, and it does NOT follow that because the ACCUSED behaves like vicious animal, the ACCUSER is therefore a white light angel)

So where does this leave those of us ordinary folk who merely wish to live quietly and in peace?

Well, if it is recognised that there is a titanic battle raging in the background between "market forces" as a whole, and the "authorities" who are attempting to prevent a financial catastrophe, then it also needs to be recognised that for the authorities to win, the economy will need to grow sufficiently to drive corporate profits to levels which will justify the currently still stratospheric P/E ratios. If the economy cannot grow sufficiently, then market forces will prevail, and we will have a downward adjustment in share prices - which could turn into a rout if it goes out of control.

Of course, this downward adjustment is likely to be mirrored by an upward adjustment (possibly explosion) in the gold price, and the charts are indeed pointing to an expectation of a breakout in the gold price.

However, as I have been attempting to illustrate in my most recent articles, there are several "non-confirmations" which point to a lack of certainty in the markets as to the eventual outcome, and all that can be said is that the markets are behaving "emotionally" at present.

For example, some skittish behaviour is apparent in the following bar chart of Newmont, which shows an upside gap (the price opened higher today than it closed yesterday)

My guess is that the cause of this gap was that some Funds Managers woke up this morning, focussed on the fact that the UN report is due on Monday, and placed buy orders "at market". ("Gee, if we're going to find ourselves at war on Monday we had better have some stock of the leading gold mines")

It should be noted that the price stopped short of the 200 day Moving Average, and that the RSI oscillator on the bar chart is approaching overbought territory. Further, as the Point and Figure Chart below shows, Newmont has not yet given a buy signal.

On the other hand, the $XAU as a whole in fact gave a buy signal two days ago as can be seen from the following chart (Source: DecisionPoint.com)

It could be argued that this breakout provides "evidence" that a break up in the gold price is being anticipated, and ordinarily this argument would be acceptable at face value.

However, because of the high stakes, it is by no means a foregone conclusion that the authorities are going to just give up with a whimper.

If we dig below the surface, we find that it is the more speculative counters, such as SSRI below that are giving buy signals within the XAU index, whilst the less speculative counters like NEM are not.

So, going full circle back to the first two paragraphs of this article:

If, on Monday, there is no "casus belli", and the world heaves a sigh of relief, the authorities will be presented with yet another opportunity to "dump" on the gold market, and the reader's attention is drawn to the gap on the $XAU chart at below 65 - which, according to charting theory, should be covered by a price pull back.

Of course, if the gap is covered, the price will once again fall WITHIN the triangle and could languish sideways for a while - as I have been foreshadowing in my previous few articles.

CONCLUSION

There should be no doubt in anyone's mind that the most likely outcome of the titanic battle being raged between the authorities and the market as a whole will be lost by the authorities, and that the gold price will - eventually - break up. However, because of the high stakes involved, it is also very likely that a lot of collateral financial damage is going to be done to naïve and unsuspecting investors who are focusing on "the immediately obvious".

It follows that this is not a market that anyone should attempt to trade. If you take a long position in Gold and/or Silver you should be prepared to hold this position in the face of volatility that seems very likely to manifest. It may also be that you will need to hold your position for some time before you start to see the anticipated results. Nevertheless, the evidence is sufficiently compelling to lead to the conclusion that there are profits to be made from investment in Precious Metals, and in Silver in particular (see previous articles).

Author's note: Personally, I prefer the idea of investing in Silver. If the authorities - through some convoluted miracle of mental gymnastics - somehow manage to pull this one off, then the economy will continue to grow, and the industrial demand for silver in particular will grow along with it. Of course, if they fail, then Silver will likely rise in price as it comes to be perceived, once again, as a Precious Metal.