Happy New Year everyone. I have about 20 minutes to write this out so hopefully my thoughts will be organized. Before I give my bullish prediction for 2012, I think it's good form to present my best bear case. I'd actually prefer a quiet year -- I'm certainly not among those rooting for WWIII and massive riots so metals become more expensive. (Will I lose even more cred in the PM blogosphere by admitting that I also find it hard to root against Bernanke? I dunno, maybe it's because the dude seems like a pretty cool guy to drink a beer with. He would've made a good wing man when he was younger) (though one of us would've had to shave, because that would be kind of weird). In all seriousness, the fiat world is unjust and I want to see it collpase from a sense of justice, but I'm aware it's not going to be beach towels and lollipops when it does and I doubt I'll be "happier."

It's hard to come up with a bear case from fundamentals alone (which of course doesn't mean there won't be big short term declines). All the reasons gold has popped since 1971 have not receded but gotten stronger. Just consider the need for low real interest rates and liquidity via money printing: is it weaker or stronger this year compared to others? On the other hand (and this is something few appreciate) exploding gold prices are more dangerous to current government power than nuclear bombs. In fact, here's a good article on how war and terrorism (in this case "The Many Benefits of 9/11) are actually big boons for the government elite. So, if this is indeed the year gold risks getting out of control, expect "wars on speculators" and 90% windfall taxes and all that crap, combined with all kinds of market bombing, rumors of mine nationalization, and other psy-ops tactics that will cause even the most confident gold bugs to fear God (in the form of our omnipotent Feddle Gummint). The past week was nothing.

Let me also add that the question of whether gold is overvalued relative to other goods right now is a legitimate one. This struck me when I bought a new car recently and realized I could've exchanged this marvel of modern technology for a number of gold coins I could hold in my coat pockets. Consider the thought experiment of being transported with a nice car to some ancient civilization with your pockets stuffed with American Eagles. The natives would've seen the coins and thought "Wow, what a fancy screw press exists in this Visitor's world!", whereas they'd see the car and give me their wives in exchange for clemency. (Strangely, silver seems better in this respect. You can't get a lap dance for $30 these days.)

Alright charts! With silver, to update my prospectus from last week, the 10 year treasury yield to silver ratio appears to have changed direction right on cue, despite silver having a very down week. This bodes well: with yields at 1.89, if we are indeed continuing the pattern by heading down, silver will have to explode, and soon.


Same chart, weekly:

And another bullish update: the 34-week and 55-week MAs are even closer to crossing: note how that has been unequivocally bullish in the past.

After the awful week for silver, I decided to indulge in an optimistic exercise. I tinkered with a chart from last week by trying to make the most bullish chart possible. In other words, let's say silver has bottomed this week (I give it 50% odds, though I see it going back into the thirties by February). Which chart in hindsight would make that appear expected? Here's what I came up with.

With respect to gold, the weekly chart is important. These trend lines are the only ones that fit every closing price since late 2008. I was watching it last week hoping we would finish above $1565, which at least is in line with the closing price from the 2008 bottom. And we did, so hopefully now we can slowly wend our way back into the black trend channel.

If you recall, back in early June, I posted a chart with the 144-day moving average, and seeing that it looked relatively linear, I extrapolated the price forward to Thanksgiving. It actually had overshot by that date, but the exercise was valid: note how the 144-day MA continues to move within +/- $25 of a straight line.

We're pretty much right back to a linear trend. That's what a "correction" means. Because the gold market is manipulated (only the extent is an open question), it's wise to worry only about long term averages and to not get too pessimistic so long as we're not too far from linear trends. (Of course a linear trend on a log chart is actually parabolic.) So let's extrapolate ahead another half year. I don't have time to do the calculations as precisely this time around, but the 144 day MA should be at ~$1900 by the end June, which means the actual price will move up even more.


Joe Jost said...

I look forward to your charts and unique TA. Thank you -- your effort is appreciated.

I think I know the answer, but could you describe how an exploding price of gold would is a threat to current government power? What I have thought is that this would lead to the perception that fiat value is diminishing which could cause the world to question whether the dollar is a safe currency. Such a loss in confidence could threaten the hegemony of the US. Is there more to it? I also know that if gold increases, oil will and other commodities will also increase, which will slow economic growth.

Thanks again.

Joe Jost said...

I may have been able to answer my own question. I read these two GATA dispatches carefully, and I believe they reveal how a surging gold price will provide an alternative safe haven to bonds, whereas the bond (debt) market is the power center of government and is used for financial repression.

'Financial repression' is gold price suppression


Citing 'financial repression,' FT's Gillian Tett sounds like Jim Rickards and Rob Kirby

Some key points:

"Suppressing the gold price is a crucial piece of the "financial repression" cited here, as a rising gold price would advertise the theft perpetrated by government bonds paying a negative interest rate."

"Warburton wrote: "What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities, or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. Equally, they seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets."

GM Jenkins said...

Joe Jost, I remember you from back in the early days of Turd's blog ... glad you found us at Screwtape. Re: gold as kryptonite to centralized governmental power: there are so many ways to come to the same conclusion - which is testament to its truth, actually, since all facets of reality are connected while all falsehoods are dead ends. The GATA argument is as good as any.

I like to come at it from gold's symbolic power. If the prices of all goods start to skyrocket, a currency loses legitimacy. But out-of-control gold is the only good that can have that "illegitimizing" effect in isolation. Fiat replaced gold, so an invisible scale always lurks in the background: on one side is the "feeling" of value people experience when they handle gold, and on the other is their "feeling" of trust in the full faith and credit of the fiat issuer. That's why the demand for gold goes up when its price goes up. (It's funny that so many friends who scoff at my gold gospel emailed me in August saying, "you were right, how do i get into gold??" Of course, i told them not to buy at that point and to wait. Now that it has fallen 20%, they of course are no longer interested).

A tangential point: When the dollar became pure fiat in 1971, an honest government would have changed the appearance of the currency (I would've suggested something like these. Instead, they changed only the fine print on paper bills (removing mention of gold) and they debased the coins while keeping their appearances unchanged (including the nice touch of leaving the "ridges" on their sides, so no-one would be tempted to shave off the … zinc alloy). A subtle, unspoken fraud has occurred. It hovers over the government like Banquo's ghost.

GM Jenkins said...

On the same topic, here's "Ranting" Andy Hoffman's take on why even gold's best days appear to be capped at +2%:

"Gold CANNOT rise like ANY other commodity, such as crude oil which rose 4.5% or silver, which erased essentially ALL of 2011's 9% loss with a 7%+ gain in the first day of 2012.

And if you think I'm kidding, try to picture the media frenzy if GOLD were allowed to rise 7% in one day. Such movements occur with regularity in essentially ALL other commodities, not to mention insolvent bank stocks, but have not occurred ONCE in the 12-year gold bull. A 7% gold increase yesterday morning would have amounted to a $110/oz, bringing it to back to nearly $1,700/oz, causing every "black box algorithm" to turn positive, every fence-straddling, technical analysis reading newsletter writer to go long, and the media to proclaim inflation an emerging problem. In other words, the market is so fragile, it cannot handle even a DAY devoid of Cartel and PPT activity, although in time we will see just that, as they won't be able to hold back the dam forever."

Kid Dynamite said...

@GM - Bron and I looked at the data last year - after someone went on a viral tear about how the price of gold was capped daily. You can look at it yourself - that's the kind of thing the Screwtape crew is good at - but we each found that there was absolutely NOT an unusual negative bias to gold's daily price moves.

GM Jenkins said...

KD, which data did you and Bron use? I'd like to analyze this. IIRC Kitco has the raw daily data available (stockcharts.com doesn't), but it would also be interesting to look at hourly prices and such. Did either you or Bron post your findings? I wouldn't want to do the same analysis.

Kid Dynamite said...

GM - bron had the LBMA data for AM and PM fix - there was someone who wrote some nonsense about manipulation between the two. It was easily disproven in about 30 minutes of spreadsheet manipulation.

Whatever data you can get, as long as it's reliable, it won't be hard for you to analyze.

I'm not sure where to get the data in spreadsheet form - Bron had sent it to me.

a better project for you, Warren, and Jean'd'Arc - find out who is behind this disinformation campaign at ZH:


it's so violently wrong that it's embarrassing. It begs the question as to who is funding the misinformation. I heard someone say once that ZH's domain name was registered to one of Sprott's investment bankers... That's where you guys come in with your detective work.

Anonymous said...

@KD - I'll reply to your point about the ZH domain name here.