Taylor on us Dollar & Gold

December 17, 2002

US Dollar Index Chart provided courtesy of www.decisionpoint.com

The key to gold is the dollar because the dollar has been imposed on the global society as the world's reserve currency. As confidence is lost in the dollar, (considered to be the world's safest currency since World War II), people will instinctively move into gold, which unlike the dollar is an asset money. Unlike the paper dollar, gold has intrinsic value and thus is a much safer store of value and medium of exchange than is the dollar or any other paper or fiat money. So, as the dollar declines vis-à-vis other currencies, the price of gold rises in terms of dollars. Clearly the dollar index chart shown above is very bearish for the dollar and hence bullish for gold. The dollar has fallen below short and long term moving averages and it has broken its support line.

Following is an analysis of the dollar and gold markets at the end of this week by the legendary James Sinclair, who does understand and believe the gold manipulation charges of GATA. "The US dollar has taken a really awful appearance. A multiple Head & Shoulder breakdown is clear on the chart of the Continuous Contract Pit revealing a downside price objective of between .77 to .80 and that is if nothing really goes too wrong.

"Among other reason for this soft as hot butter appearance is:

  • The dollar market impact of significant and potential very costly US civil litigation against Saudi Arabian interests.
  • The dollar market impact of the Saudi reaction in terms of cooperation in the possible Iraq offensive.
  • The dollar market impact of the US making alternative arrangements for command posting and air operation rather than Saudi.
  • The dollar market impact of the introduction of the plans for the Malaysian Gold Dinar.
  • The dollar market impact of the discussions of the introduction of the new Group of six Arab Euro/gold Dinar lead now by Saudi Arabia.
  • The present level of the US current Account at 5% of GDP. Keep in mind that this is a two-fold index that considers not only the Current Account Balance position but also the GDP position. There the recent small improvement in the position of the current Account deficit did not improve this situation.
  • The unfunded cost of the potential US/Iraq war which is seen at a high of USD 1.7 Trillion including rebuilding, occupation and macro economic cost but competent authority.
  • The recent statement by Governor Bernanke of the US Federal Reserves system saying in answer to concerns over a reluctant economy " The have a printing press or its electronic equivalent which can print dollar at a very low cost".
  • A growing perception that the US Administration will revert to the Roosevelt methods for fighting reluctant economic conditions.
  • The perception that the Federal Reserve has signed on to finance the Iraq War while two administration personalities that did not are no longer with us.

"There are more reasons but the above should be satisfactory for now."


Chart provided courtesy of www.decisionpoint.com

Not surprisingly, the gold chart is the mirror image of the dollar chart. The price of gold is now substantially above its short and longer term moving averages and it surged through the resistance levels like a hot knife through butter. This is a very bullish chart for gold.

Below we are publishing more of James Sinclair's remarks on the fundamentals of the gold market as they appeared at www.Lemetropolecafe.com this morning. For those of you who may be new to our service "ESF" stands for the Exchange Stabalization Fund, which was set up during the Roosevelt Administration. It allows the President and U.S. Secretary of the Treasury to secretly and clandestinely manipulate the gold price (and other currency relationships) without telling ANYONE in the nation! Not even your Congressman is allowed to know. Just as Congressman Ron Paul who's attempts to gain answers into allegations of ESF gold market manipulations have been totally ignored by now retired Treasury Secretary O'Neil. Interestingly, Treasury Secretaries, Rubin, Summers and O'Neil have never themselves denied using the ESF to manipulate the market, but have instead always had underlings speak for them instead, perhaps so as to avoid possible legal problems in the future from their lies?

Was O'Neil's Departure bullish for Gold?

Does O'Neil's departure have anything to do with the surging in the price of gold last week? We wonder about that because until another Treasury Secretary takes office, there will be no one available to use the ESF to suppress gold. Is it a co-incidence that since the day O'Neil stepped out of his Treasury position that the price of gold has risen through its old resistance levels? And now, back to James

Sinclair's comments on the gold price once again.

Gold: Comex (manipulation central) Continuous Contract Pit "By the use of a set of parallels and setting first the up trend of the oversold up trend line, then moving the parallels up to the first high it was obvious exactly where the ESF would enter. See how one arrives at the potential high for a future day by forcing the trend line as a parallel. As soon as the Calvary came riding in the gold crowd yelled, "the Blue Coats are coming run away- run away" as the Knight of Knee did in the movie "Monty Python & the Holy Grail." To scatter the gold crowd only requires that one person hear one branch crack and the stampede to run away/ run away is on. Then slowly the Islamic Asian interest steps into the anonymous cash market and starts to pick up the pieces from the gold community's exit. Write this down somewhere because it is shortly going to be important to you. Translation of the paper gold market into a real gold physical bullion/paper gold bullion market is the only means of controlling the manipulation of the gold price.

"Gold acted extremely well today closing above the potential one-day head and shoulders formation that the ESF was trying to hammer out. Manipulators will paint charts for their own best interest. Did you think they would not?

"Gold is headed to $338 - $343 - $348, IMO, before or slightly after Christmas.

"Advise for those in the Community that trade 1/3 of their positions at TA correct points only:

"For those that did not sell at the $325, as I advised not to, I advise sale of 1/3-position as gold approaches $348."

"Silver: Continuous Contract Pit

"Silver is trying to make up its mind if it is an industrial metal or a precious metal. Well it is a precious metal and in time will perform ok. I am not sure, short of the market reincarnation of Bunker and Herbert, that silver is really going to do what some people expect. It will do well, maybe not terrific over the next 12 months.

Silver seems to love you and leave you. It has formed both a head and shoulders and a reverse head and shoulders. I am going to wager you that as gold approaches $348, silver approaches $5.40 but you can see from the picture it is not going to be easy."

MORE RICHARD RUSSELL ON GOLD

I thought I was finished writing about gold until I happened to notice Richard Russell's missive of today. Scanning down page one he starts to talk about gold. Richard's views on gold, which shows he thinks independently, is one more reason why I love this guy and commend you to consider subscribing to Dow Theory Letters newsletter. To sign up for his service go to: www.dowtheoryletters.com.

"Then there is Gary Shilling's column in Forbes. My friend Gary (he also produces delicious honey via his own bees) was one of the very first to warn of deflation. Gary talks about the sub-prime loans that are out, and he sees bankruptcies rising and the mountains of sub-prime loans running into increasing trouble, particularly in housing and autos. Actually, Gary sees world deflation, and if he's right (and I suspect he is) then the dirtiest word in the English and every other language is going to be DEBT.

"Which is one reason why gold is breaking out and gold shares are rising. You see, gold is the only money that isn't someone else's liability. Actually, I should smile when I say "the only money" because it's almost a lie to call a dollar or a euro or a yen "'money." These are simply "legal tender" pieces of paper that the central banks of the world insist are legal for the payments of all debts. "I've gone through this many times before, but it still makes my blood boil when I think that I can work my ass off and be paid in something that Greenie and the gang can generate by doing nothing at all.

"Maybe what we should do is get all the central bankers of the world together and force them to do some real work like digging up weeds on a road gang for minimum wage. Then they would know what real work is like -- but the catch is that we pay them with junk paper "money" which we produce in front of them on a Hewlett Packard printer. Then we'd see how they like working for nothing.

"Anyway, what I see now is the beginning of competitive devaluations with the dollar now breaking down, and the euro now selling well above par (par being the price of the dollar). As gold climbs, almost all paper currencies are being devalued. Which, of course, is why central bankers hate to see gold rising. I guess you could come up with a ratio -- gold rising divided by the rising blood pressure of the average central banker. The ratio might well be one-to-one.

"Turning to gold (I'm rambling now), the gold shares are starting to bring in some volume. Yesterday Newmont was on the NYSE most active list (I think it was number 20), and if I remember correctly 87 million shares changed hands. NEM is the world's largest producer of gold, and the company has top-flight management. It's a key stock which should be watched. "Newmont believes the price of gold is going higher, and for this reason it is actively getting rid of its hedge book (which it inherited when it took over the Normandy Mine out of Australia). Newmont said last month that it had reduced its forward sales by 928,000 ounces to 5.8 million ounces, and that it expects to reduce its hedge book by at least 279,000 ounces in the current quarter.

"Interestingly, according to the US mint, sales of Gold Eagle one-ounce coins has averaged 38,200 since July, more than triple the average of 11,920 ounces during the first six months of this year.

"By the way, a huge battle is going on behind the scenes in the gold area. The latest figures show that Commercials increased their gold short position from 109,000 to 128,000 while they reduced their long position from 41,000 to 37,000.

At the same time large speculators increased their long position from 48,000 contracts to 73,000 (wow!) while increasing their short position from 15,000 to 20,000. Those are huge changes. It seems clear that the Commercials are flooding the gold market with additional supply (shorts) while at the same time the big speculators have increased their long positions hugely.

"So watch for gold to get erratic and volatile. There's a mighty battle going on. Gold bulls should take their positions and not be leveraged (or margined) to the point where they will be easily knocked out of the game. I almost never go on margin in anything I buy. Even in a bull market, when you're on margin the odds are that the "smart boys" will get you, and you'll be sent home crying. I've almost never seen it to fail, and I've seen a lot of markets, and I've seen a lot of margined players pressed to the wall.

"I've said this many times but I'll repeat it. The hardest thing in investing is to load up at the beginning of a bull market, and then ride the bull to somewhere near the end. You can do it with a small position, but then you're not going to make that much. You can try with a large position, but after a while that position may get 'too hot for you to handle.'

"What's the best strategy? Take a medium-sized position that you can live with -- and then have faith in the primary trend. Somewhere ahead gold will go parabolic, and then what do we do? Do you sell real money for more paper? Do you just sit with your gold no matter what? Gold (and I'm probably talking about the metal) is probably something you should will to your kids. Why sell your gold? Why sell your diamonds? Why sell your Picassos and Modiglianis? They're intrinsic. They're true value. Keep 'em as long as there are counterfeiters who run the world's central banks (steady Russell, you're starting to go overboard)."

Comment on Newmont - I agree that Newmont is likely to become THE gold stock for America's mutual funds to own. The trouble is it still has a 5.8 million ounce hedge position. If gold goes "parabolic" in the short run, before Newmont gets this short position worked off, we worry that this company's earnings could suffer or worse yet, it could lose tons of money. Until Newmont gets most if not all of its hedged position worked off, we will stick with some of our other favorite producers like GoldCorp, Agnico-Eagle and Goldfields.

The California Gold Rush began on January 24, 1848 when gold was found by James W. Marshall at Sutter's Mill in Coloma.