Sunday pre-game 1/29/12

Dear readers, I have a long end-of-month post for you this week. I had actually planned on writing from Davos, where as part of the Screwtape crew I received a customary VIP pass. But as you might have heard, the damn place got run over by a blizzard, so Brian let us take his lear jet to San Felice del Benaco, where, on a delightful bird-watching jaunt between Brescia and Verona, we were recognized by some lovely fans who showed us the warm hospitality for which the Italians are justly renowned. (That's Kid Dynamite in the yellow speedos).

So special thanks go out to Brian, who on account of a talk he had to give at Davos, couldn't join us this week. I'd be remiss to omit that his speech ("From Banker to Blogger: a Shill's Journey") was, by all accounts, one of the high points of this year's convention. A poignantly honest account of his battles with sex addiction after joining JPM's lucrative "Remuneration for Misinformation" campaign, it featured such uproarious lines as when, in reply to an irate Jamie Dimon, who had accused him of blogging too infrequently, he shot back: "You scratch my back, sir, I'll snatch whores," a line greeted by boisterous, rip-roaring laughter in a standing-room only venue which included such luminaries as Gary Cohn, Richard Gnodde, Indra Nooyi, Carl-Henrik Svanberg, Terry Leahy, Saddam Hussein, and Bono.

The gold chart proves that events trump technicals. I expected a fight to get back into the 3 year +25% black channel, but the Fed announcement drove the gold price right back in there with hardly any resistance for an important weekly close. A consolidation in the channel would be a big deal. The center black line (which it's hit regularly over the past 3 years) will be at $2000 in a few months.

The daily chart over the same 3 year period shows similarly bullish price action. The "yellow zone" captures the low points of every single price correction since late 2008 (up until the surprising drop last December). The fact that gold shot right through that zone is important, as it had posed strong resistance over the past few weeks. I think it will stay above there.

Here's a chart with all the monthly closes for the past decade. Note that we didn't even hit the top of the narrow channel last August. Gold is now finishing the month right back in the center of the channel, which slopes upward at over 1.5% per month. Looking at this chart, I hope during the next big correction everyone has the good sense to avoid talking about "the death of a bull" unless gold at least finishes a month below its 21-month MA (purple, dotted line), which has happened only once (October 2008). That MA is now at $1476 and has just entered the grey channel again for the first time since 2008. (Of course, in October 2008, gold went far below the 21-month MA, hitting the 3-year MA, for the only monthly close out of the channel, and yet the bull was still very much alive. Perspective is important.)

Regular readers know I have occasionally pulled out the $GOLD:$USD chart, which appeared to have some predictive power for much of last year, though I have complained I don't quite understand how to interpret it. Well, while lounging by the infinity pool at an Italian spa after my man-facial and massage on Thursday, with two comely Ukrainians by my side whose names I have unfortunately forgotten, and noting that our time together seems to last longer with every trip, I had a eureka moment. See, like most of you, I keep my net worth in gold, and whenever I travel, I sell a gold brick or two for some spending cash, and then convert the dollars to the currency of the nation to which I travel. And that's exactly what the chart measures: purchasing power outside America over time when gold is converted first into dollars and then into foreign currency. The chart is notable for narrow channels with exactly the same slope (purple) which appear to last 3 years or so before a consolidation. More on this in a future post.

Moving on to silver, I cashed out of my trading account last week, proving the adage "discretion is the better part of failure." There was only one red day last week to rebuild my position, as seen on this chart (which shows that the pattern I recognized a few weeks ago is still active - see green boxes and blue lines):

I'm looking for some re-entry points at the green lines; the solid green line is actually an important long term trend line:

Finally on the weekly, daily candlestick, and daily close charts (respectively), the $36-$38 level continues to be exerting serious pull, as I mentioned last week.

What's the real premium for bulk silver purchases?

Strewth, cobber, the controversy surrounding premiums for bulk buys of silver continues to rumble on.

The basic premise was that the seriously wealthy would face huge premiums of up to 30% if they wanted to buy silver in large quantities. This figure is not as random as it might appear: it first started doing the rounds when Sprott's PSLV hit a premium of above 30% (peaking at 35% before his secondary offering on 18 January). In other words, such an extraordinary premium had to be justified in the silverogosphere by grounding it in fundamentals, viz. such an astonishing premium must imply a huge shortage in the silver supply.

This shoddy thinking reached its glorious nadir in Zero Hedge's abysmal pump of PSLV, as discussed here by Screwtape's Brian O'Flanogan; a number of commenters also waded in to patiently add to the debunking.

If that wasn't enough, Sprott's second issue caused the premium to collapse to 6%. This really should have been the death-knell for one of the most ludicrous of all the silver memes floating around on t'internet. I mean, if a premium of 35% implies a shortage, then presumably one of 6% implies a sudden glut in supply? Which would mean that Sprott's sudden large purchase of silver had somehow increased supply! It's enough to make one weep. This chart (courtesy of shows quite clearly just what a bad deal the holders of PSLV got in comparison with those of SLV:

But, one should never underestimate the resilience of silver religionistas memes. The facts never get in the way of a good bit of propaganda, even if all it takes is about five seconds' thinking to realise that the propaganda makes no sense at all. The great and the good of the silverogosphere continue to chant the new axiom that silver is unobtainable for less than a 30% premium when buying in bulk. The meme has legs, and all efforts to kill it at birth by the more rational parts of the community have failed.

I'm going to have one last go, before giving up. In recent private correspondence I was challenged to find ways of buying a million ounces of silver without incurring hefty premiums. So, I borrowed $34,000,000 from GM Jenkins (using the indentured slavery of my first born as security, as per his usual terms) and decided to do a bit of silver shopping. Here's what I found:

1. I could buy some silver futures contracts on the COMEX and stand for delivery. This way, I will get the silver at a spot price that I think will be a good price in the future (e.g. a few weeks ago, I could have easily picked up some futures for silver at $28 an ounce, which would have been a great deal; but even today, I could buy some futures at $34 an ounce quite cheaply). The costs associated with this will be the broker's contract fee and commission for the trade (a tiny fraction of a percent for such a large trade) and some storage or delivery costs once the contract is closed (again, this would be a tiny fraction of my $34 million order), plus some insurance. A bonus for conspiracy fans out there is that by doing this I'll be contributing to the collapse of the COMEX [/sarcasm].

2. I could buy and redeem SLV. Basically, this needs to be done in 'baskets' of 50,000 iShares. So my $34,000,000 will get me 1,031,553 iShares of SLV (before open of play on 29 January, silver is at $33.99 per ounce and SLV is at 32.96). So, let's say that I'll buy a round million iShares which will get me 20 baskets. The 'premium' will be what the iShares prospectus describes as 'applicable fees, taxes, expenses and charges'. One of these fees is $2000, which is neither here nor there if you're splashing out on $34 million of silver with GM's hard-earned cash. The rest adds up to just a few percent [if anyone can do this calculation more precisely, then I'll be grateful, and will add it to this post with an acknowledgement].

3. The Perth Mint is (at the time of publishing) selling silver 100-oz bars at 2.4% over spot (i.e. $34.65 as opposed to their last quoted silver spot price of $33.84 spot price) So, I'd need 10,000 of those. However, the Perth Mint Depository’s standard premium for 1000-oz bars is $0.20 per ounce over spot, which in practice would usually be stored in their vault. But for buyers of size (High Net Worth individuals), they will do “cash and carry” if requested and - for delivery to the USA by sea - an additional three to five cents over spot should cover freight. So purchase and delivery would come in at a rather tasty 0.74% premium. [Many thanks to Bron Suchecki of the Perth Mint for this information.] I'm sure every other major bullion seller around the world would also have similar fees and services for HNW clients and I wouldn't be surprised if there were some quantity discounts of list prices.

4. GoldMoney: If you don't trust the evil SLV, then perhaps you'll have more confidence in a White Knight in the form of James Turk. Here you can see GoldMoney's rates. Not surprisingly, the more you buy, the lower the rate. So a million dollars or more will get you a rather nice 'premium' of 1.99% for physical silver. And they'll deliver it to your house, if you like (although that will cost you a couple of percent extra).

I found about a million (well, half a dozen) other ways of getting my bulk purchase of silver for a low premium, but I don't want to labour the point...

So, to answer the exam question, 'what is the rate for bulk purchases of silver', it is between almost zero and 2%. That's quite a long way from 30%, I think you'll agree. Now, the die-hard cynics amongst you might say, 'well, that's all well and good in theory, but can you give an example of someone who has actually recently bought a large amount of silver without paying 30% premiums?'

Funny you should ask that. In fact, I know of a certain Mr E. Sprott of Toronto, Canada, who - according to the publicly available records of the PSLV Trust - has just bought 8 - 9 million ounces of silver (and rumour has it that he didn't even need to borrow the fiat off GM to do so...) I don't want to blatantly plagiarise someone else's work, so please check out Kid Dynamite's analysis, which shows quite clearly that Eric picked up his shiny stuff at very close to sp(r)ot(t) price.

Now this should come as no surprise. There are three incontestable facts about billionaires. The first is that they are very, very rich. The second is that they didn't get to be very, very rich by paying a 30% premium for something that they can get for almost no premium at all. And the third is that they tend to employ very smart, efficient people, who lose their jobs very quickly if they waste their employer's money.

So Sprott probably just got his people to buy his silver on the COMEX, at virtually no premium. Sprott cheerleaders on the silverogosphere then went around implying (again) that silver was in a shortage, and the premium-to-NAV proved this (even after it crashed).

It is, in fact, precisely this level of chutzpah which distinguishes filthy-rich billionaires from unpaid small-time bloggers whose eldest children are now condemned to spending the rest of their years darning GM Jenkin's socks...

So much trouble for a little tungsten…

I really have to vent about this article on Zero Hedge, a stunning examination of a 2008-published brochure on the gold vault of the Federal Reserve Bank of New York. While the article does note the age of the information, the piece is little more than a cheap jab at the vault, complete with this gem of a conclusion: “To think: so much trouble for a little tungsten…”. Repeat a lie often enough, people will start to believe it. But I suppose poking fun at a three-year old brochure really is the ticket for a slow news day - everyone is waiting for the next event (e.g. FOMC meetings) to move the metals price or is busy discussing how the indian-gold-for-iranian-oil is going to somehow trigger the next invasion of the middle east.

So this is a worthless post about a worthless post – attracted only by the opportunity for some recursion. After the euphoria passed, I realised that getting the scoop on ZH running a piece perpetuating a common metals misinformation meme was not actually that special, and I started to consider Charles Hugh Smith’s strategy of setting up a site dedicated to lol catz or something (surprised by my own design of distraction but might have something to do with the fact it’s rained here for nearly 5 days straight with another week to go making life a little crazy).

"Crazy !!!"

On the topic of intellect, here’s a quick mystery - Dr Peter Trzaska (one of our recent commenters) has spent 20 years in the metals industry and is currently making a living as a trader. There is no question that he is more intelligent than my good self. According to his blog (which bloomed briefly during October 2011 last year) he thinks Sprott is great and believes that silver is scarce. With all his knowledge, why does he think that? And why did he delete my comment that I left on his blog, enquiring into this? (which was not offensive – purely asked for his opinion because I was interested in what he had to say). I haven’t deleted your comments here Peter, that’s just not the way we work. I genuinely want to know why you think that silver is scarce, since all the evidence is against it.

Sunday pre-game, 1/22

Greetings, friends-

I continue to believe silver, not gold, will lead the metals over the next few months. So like last week, I've got just one gold chart for you … basically, gold has to get back into the black channel before I'll get excited (currently at exactly $1700).

Note, if gold hits the center of the channel again this year, that would be over $2000/oz. I think the correction that people would expect at $2000 already happened at $1900 (double top, in fact). My guess is, if gold hits the center black line this year, then $2250-2700 would rapidly follow (i.e. the top black line, depending on when it happens) . So if you believe, like I do, that your corrupt ruling class is deathly afraid of exploding gold, we probably shouldn't expect gold to enter back into the black channel without a fight.

Regarding silver, last week I noted a similarity between the big January 2011 correction and the one that capped off 2011 (see blue circles):

Well, silver actually went past my target: see the blue line I drew last week (note, same slope as last January). So, I actually went all cash (in my trading account) as the market closed on Friday. I don't plan on sitting this out long; I will phase back in on red days. However, I felt extra reason to be cautious after the 5% jump Friday, what with the State of the Union and options expiration coming up, plus the FOMC, which has provoked strong sell-offs over the past year whenever QE3 isn't explicitly announced.

I took the opportunity to draw from last week's trading profits to host a special welcome dinner at my house for Robert LeRoy Parker, who contributed a fine post this week.

On the long term weekly chart, two big bullish developments: silver has decisively broken through the falling wedge, and the 34-week MA and 55-week MA have crossed on schedule:

On the long term daily chart, I'll be keeping my eye on these two trend channels (dark, light blue); the $37.50 crossing point (within 2-3 weeks) seems to be exerting some pull.

One thing I'd like to do (actually its third on my list after picking up jazz dancing and learning how to ride a bicycle) is to come up with an objective measure of the strength and fidelity of a trend channel. The concept of finding long term trends in seemingly random short-term data is on the cutting edge of mathematical statistics, whereas your typical TA chartist will just draw 2 lines and call it a day. Thinking about it, the vertical distance between a channel (on a log chart) is a straightforward measure of "strength" -- i.e. your percent profit as the price moves from the bottom to the top of the channel in a bull market.

To measure the usefulness and fidelity of a trend channel, I suggest two parameters. First, a metric taking in account the number of times a channel has served as resistance/support (with some algorithmic penalty for overshoots). Second, the horizontal distance between the channel, measured in time. Given the assumption that price has to stay within the channel, horizontal distance is the maximum time you'd have to wait after buying at a top before you would break even (and vice versa in a bear market trend). So for example, a big reason why I keep turning back to my "yields paid in silver" chart:

is because of the tightness of the channel horizontally (the purple channel is ~9 months apart). For a counterexample, check out "yields priced in oil"

There's a similar 15 year (!) downtrend, proving that, priced in real goods, the government has been finding it steadily easier to borrow. Moreover, the "strength" of the channel is good (100% profit from bottom to top). However, the horizontal distance on this channel is ~4 years. This makes it far less useful -- except when we reach a boundary. Which we have.

Now here's a logical chain for you. Assumption 1: the downward trend channels in both the "10-yr yield:silver" and the "10-yr yield:oil" chart will continue to hold; Assumption 2: with looming war in Iran (and the believable recent OPEC consensus to floor oil at $100), oil won't go down significantly. Ergo, yields have to start going up. Ergo, silver has to start going up even faster than yields.

Of course, the assumptions need not hold. But note also on the lower part of the chart below that the 10-yr yield appears to have broken out of its green wedge.

We'll have a lot more info to gauge these bullish prognostications when the DOW finally falls from its recent frothy, low-volume upswing (its RSI is at 70). Will the PMs outperform?

Lord Gordon William Humphreys Richardson AKA Baron Richardson of Duntisbourne AKA Governor Richardson AKA ANOTHER

Note: The following is purely conjecture and is in no way meant to dishonor the memory of Lord Richardson who passed away in 2010.

Approximately one and a half years ago I came across the Thoughts! of ANOTHER. Up until that moment, I shared the "hard money socialist" views of many in the online precious metals community. I sincerely believed in the gold standard and even gave bimetallism consideration. However, if I may borrow from my friend Hedy Lamarr, since that moment my mind has been a raging torrent, flooded with rivulets of thought, cascading into a waterfall of creative alternatives. Essentially, I've become bizarro Steve Jobs:

FOFOA has stated that the words of Another (and FOA) are "the kind of inside information that never made it into the history books and still resides at the level of former Oil Ministers and National Security Advisors." That's pretty high on the pecking order. Kind of makes you wonder who they were, no? Well, this post will not delve into the subject matter of ANOTHER's thoughts or FOA's gold trail for that matter. However, it will in fact take their words nearly at face value, and from that perspective, I'll present my attempt to decipher their secret identities based on anecdotal and historical evidence. So, lets dive right in.

There are two clues as to ANOTHER's identity which significantly narrow the field of candidates. First and most important, ANOTHER was English. FOA told us so in his antepenultimate post. He was heated and anger driven in response to ORO's incoherent babble, or as FOA put it, the "words of a fool."

FOA:"I will say this for the record: Another is English and not Islamic!" -- Link

FOA's emotions got the best of him at that moment, and betrayed the location of ANOTHER's batcave, which may have ultimately influenced their final disappearance. In that same exchange, FOA reveals additional clues about himself, but I'll work back to that. The second important clue, and most obvious, is ANOTHER's clear connection with the Bank for International Settlements (BIS), and his personal knowledge of the top secret Saudi oil for gold trade.

The BIS is the clearing house for the central banks of the world. They deal in currency and gold, and operate out of this building in Basel, Switzerland:
Image taken from

According to Edward Jay Epstein's fascinating 1983 article in Harpers Magazine, the "unabashed purpose of [the BIS's] elite monthly meetings is to coordinate and, if possible, to control all the monetary activities in the industrialized world." They are run by a highly secretive group, mostly composed of European central bank governors. An example of BIS secrecy: "In 1944, following Czech accusations that the BIS was laundering gold that the Nazis had stolen from occupied Europe, the American government backed a resolution at the Bretton Woods Conference calling for the liquidation of the BIS. The naive idea was that the settlement and monetary clearing functions it provided could be taken over by the new International Monetary Fund." Sounds like America needed Michael Fassbender on the case instead of the IMF... Bottom line - this is where the Saudi trade was initiated.

Epstein describes the hierarchy of the BIS: "artfully concealed within the shell of an international bank, like a series of Chinese boxes one inside another, are the real groups and services the central bankers need - and pay to support." There is the board of directors, high level committees, and the ultimate "chinese box called the Group of Ten or simply the 'G-10'."

As of 1983, right around the time of the Saudi's secret deal, the G-10 was composed of eleven (go Alex Smith! We saw this coming when we drafted you #1!) members "representing the eight European central banks, the U.S. Fed, the Bank of Canada, and the Bank of Japan. It also has one unofficial member: the governor of the Saudi Arabian Monetary Authority." Wow! Epstein got the goods for this article. What separated membership in the ultimate Chinese box?

"The prime value, which also seems to demarcate the inner club from the rest of the BIS members, is the firm belief that central banks should act independently of their home governments."

This is not an easy position to hold for an Englishman says Epstein, as the "Bank of England is under the thumb of the British government." But nevertheless, one Englishman was still admitted to this group. "Lord Richardson [BoE governor 1973-1983] was accepted by the inner club because of his personal adherence to this defining principle. But his successor, Robin Leigh-Pemberton, lacking the years of business and personal contact, probably won't be admitted to the inner circle."

So there you have it. There was one Englishman in the inner circle, and it was Lord Gordon Richardson, the former head of the Bank of England. Richardson's role at the BIS is confirmed on their website here. He served as Vice Chairman of the Board of Directors twice! From 1985-1988 and again from 1991-1993. I'm pretty sure number 2 is a member of the inner circle.

Of course this doesn't prove anything. But there is some additional evidence that leans in the direction of Lord Richardson being ANOTHER. Here is a link to a speech Lord Richardson gave to the house of Lords in 1987. A lengthy excerpt:

"In thinking about the solution I find that it is helpful if one can look at how the imbalances began. In my view they began in the divergent policies taken on the one hand by the United States and on the other hand by the other major industrial countries in the 1980s. The United States went for monetary contraction and massive fiscal expansion; the other industrial countries went for monetary restraint with a parallel fiscal restraint. I believe that the root of the imbalances lies in that divergence.

The growth of demand in the United States in the 1980s compared with its growth in the other developed countries has been dramatic. Demand grew at something like twice the rate in the United States through the 1980s compared with the other developed countries, and imports into the United States expanded almost two-and-a-half-times as fast as imports into other countries.

In those circumstances the budget deficit appeared, a trade gap yawned wide open and the United States, in order to supply the deficiency of its own domestic savings, sucked in savings from the rest of the world, where it is fair to say they were available partly by reason of the constrained fiscal policies being pursued in those other countries. But the scale of that sucking in of savings was enormous and the imbalances are there clear to see for everybody and they are unsustainable.

It is clear that the United States cannot go on calling on the rest of the world's savings at that rate to supplement its own deficiencies. It is clear too that a massive disequilibrium between the industrial countries cannot form the base for sustained growth and stability in the world. Beyond that, the disequilibrium between the economies has meant that we have had a switchback in the dollar, first rising to unsustainable levels and then subsequently having the possibility emerging of a downward correction of an excessive kind unless the appropriate policy measures are taken.


But the fact is that the United States has basic problems, and those basic problems are excessive consumption and inadequate domestic savings. They have been borrowing more than they save and they have been spending more than they produce. As a matter of analysis, that has to be corrected through an intermediate time-scale. The domestic savings gap, which has been running at something like 100 billion dollars in recent quarters, has to be closed in that time-scale.

Speaking again analytically that can only happen if for an extended period of time domestic consumption in the United States is below domestic production. In order to allow the trade flows to rebalance themselves room must be made for exports. On the other side complementary measures must be taken, and in the surplus countries domestic consumption has now got to exceed for a period of time domestic production. That is the only way in which the balance can be re-established."

That sounds familiar. Could be ANOTHER. But what else might there be? How about age? We know that ANOTHER was elderly, given the way he often spoke about the freegold transition taking place in "your lifetime" rather than his own. Lord Richardson passed away at the age of 94. That would place him at 81 when ANOTHER started posting in 1997. It is reasonable to assume that an 81 year old may not be as concerned with jeopardizing his positioning at the international table by posting top secret information on the internet. We know that Richardson was a veteran of WWII.

FOA: This person does not know me or my associates. Indeed, most of us let blood for this country in a war long gone...You are not part of the same country I served!

FOA is referring to America here, but it is fair to say the Allies bled for each other. Is he implying ANOTHER served as well? Could be. There is some other information that I have dug up which shows Richardson voicing concern over gold, but I think I've made a reasonable case. The key element that is missing is the FOA connection. Who is FOA and how did he become so close a confidant to ANOTHER? This is where my theory may split with others. I understand that many believe FOA to be American, but I think this could be misdirection.

FOA signed off in his penultimate post as "Sir Douglas, Your Trail Guide." I don't know many Americans that refer to themselves as Sir, but that's neither here nor there. What is here and there, is the man who served as Secretary to Her Majesty's Treasury from 1974-1983 and UK Alternate Executive Director at the IMF from 1976 onward. One Sir Douglas Wass, born 1923, veteran of WWII, Princeton graduate, and distinguished British civil servant.

Coincidence? Maybe. But I wonder if the secretary of the treasury and the head of the central bank had much interaction over their coinciding ten year terms? Sir Douglas can still be found participating in lectures at the British Academy. He is 88. In 2008 he published a book titled "Decline to Fall: The Making of British Macro-Economic Policy and the 1976 IMF Crisis." Excerpts are available here.

I have yet to research Sir Douglas Wass' work more thoroughly.

So are Lord Gordon Richardson and Sir Douglas Wass ANOTHER and FOA? You tell me.


Special thanks to Screwtape Files for lending me the soapbox

Gold will hit an all-time high in days (updated) (again)

Yes, you read that right, and, no, I haven't been smoking the dried banana skins again. I am as close to certain as one can be that gold will in the very near future - perhaps in a matter of weeks or even days - make a brand new all-time high.

I can almost smell the scepticism through the inter-tubes. 'Where's GM, the real TA master?' I hear you cry. 'JdA doesn't do the analysis - get GM back.' Well, if you must know, GM is sadly indisposed, following a difficult conversation in which I requested permission to be unleashed on the charts, and he exhibited some initial reluctance.

Moving on swiftly (before he can bite through his binds), here are your charts. They all track the London gold fix for the past 12 months. As you can see, each makes quite a compelling case for gold hitting a brand new all-time high very, very soon:

UPDATE (21/1/2012): By the wonders of the internet, these charts will continue to update themselves automatically. So interested readers can check by from time to time to see how long it actually did take for gold to reach its new all-time high. The reference point for this article (and thus my call) is 19 January 2011. As you can already tell (as of 21/1/2012) it's not going especially well... Sigh...

UPDATE (27/1/2012): I'm over-joyed. My first call on Screwtape, and it was a blinder. Gold did indeed just make an all-time high, just seven days from posting this article. For detailed info, please see the comment section. But please remember that JdA is NOT a soothsayer, a psychic or a witch...

Now, you might think that that's cheating. Or you might assume that the average Screwtape reader doesn't do a great deal of gold buying in Złotys or Forints. You'd be right on the latter point (although we are quite big in Sweden, apparently), but cheating this is not.

You see, most of the main arguments used by the 'gold is in a bubble' proponents of this world are based on the gold chart in US dollars. I won't reproduce that chart here, because you're all familiar with it. But it's certainly true that it can look a bit 'toppy' when viewed from certain angles (although anything but toppy when viewed from others, of course). However, TA - especially TA conducted in one currency only - is only part of the story. We also need to factor in events, and we also need to consider sentiment.

In other words, how are worldwide investors, big and small, viewing gold at the moment? Does gold still have its old magic? The charts above suggest to me that the answer is unquestionably, 'yes'. It's no coincidence that the four currencies I chose are all in trouble, for a range of reasons. And so Serbian, Hungarian, Polish and Czech investors who have bought gold have had their finances relatively protected over the last six months. For them, gold has acted exactly as it should - as a safe haven. And those who bought in earlier will have made a pretty healthy fiat profit thanks to their foresight. In case you're still questioning the 'gold to make new highs in days' title, I will point out that for each of these currencies gold only needs to increase in price by between 1.5 and 2.5% to do so. Considering the general worldwide momentum that is behind gold as it comes off its low, this does not seem to represent much of a challenge.

But I can't deny that these markets are not especially large. And these currencies are in more trouble than the dollar, the pound, or even the euro. My point is that the weakest (genuinely independent) currencies will have the flight to gold first, and these will be followed by the next weakest, etc. You might think that I have chosen deliberately obscure examples to hammer home my point. Well, bearing in mind that I said the Koruna, Złoty, Forint and Serbian Dinar only have to shift by 1.5 - 2.5% to reach new highs, how far does gold priced in some of the bigger boys have to move?

To make a brand new all-time high, the price of gold in Euros only needs to rise by around another 5.2%; in Swiss Francs, 4.5%; and in Norwegian Kroner, 4.3%. Perhaps surprisingly, the British Pound Sterling is doing better, as gold needs to rise 9.6% to make a new high. This reflects the fact that the GBP has become something of a shock safe haven in recent months, as investors have rapidly exited the Euro.

Now before anyone tries to point out that a lot of this is a function of currencies devaluing against the dollar, the currency in which gold is bought, I am fully aware of this. But my point is bigger than that: those who like gold as an investment often point out that it is an excellent hedge against currency devaluation. But this confidence has taken a knock in recent months, as the shine of gold's safe haven status has appeared to tarnish, and the dollar has emerged as the safe haven par excellence. What the above data show is that gold remains an excellent hedge against devaluation, and the fact that the devaluation is against the dollar rather than (as expected) against gold itself is neither here nor there if your money is in one currency and you have to buy your commodities in US dollars, as is the case for most of the world.

So what of the dollar itself? Well, the poor old USD (thanks to its strength) still has to lose another 15% to make a new all-time high in gold. US dollar sentiment appears to be declining, however (with the USDX falling from 81.8 to 80.15 in four trading days); this should make its gold price climb climb easier. And if US dollar sentiment really did fall quickly over the next month, then I admit that my prediction of brand new all-time highs in a range of other currencies may well be put off a little longer.

Bankster Shills

The thing I love the most about this blog is that the contributors are a collection of very different individuals, with very diverse views. I think it's fair to say that we're all generally bullish on the PMs, and that we have declared positions in gold and silver, but apart from that our only unifying trait is that we love debate, getting to the heart of the matter, and seeking to dispel myths and shoddy thinking as often as we can. If we see something we disagree with, we probe and challenge - including our fellow contributors' views.

Unfortunately, this approach has done little to endear ourselves to certain quarters of the PM community. Although that's a shame, it's perhaps understandable given that we're often a bit cheeky and polemic (or just good old-fashioned devil's advocates). However, what is less understandable is how a brand new PM meme has started doing the rounds: i.e. that the Screwtape Files is a fully paid-up psyops front for bullion banks.

The abuse in some parts of the blogosphere has been predictably banal and depressing, spiked by Brian O'Flanagan's recent question about the relationship between ZeroHedge and Sprott's PSLV. Here are a few of my favourite recent comments about Screwtape, taken from a number of sites, including ours (the asterisks are my addition, for those of a nervous disposition):

Tyberious: Those little piss ant, SLV, GLD, c*ck suckers[...]What the f*ck! They shall have no quarter here![...]I know these guys a paid shills for JPM, or whatever banks' d*ck they suck! Look nothing against homos, but these guys are whores! For all those that are new, these guys (KID D*CKINMYASS [sic], and butt buddies) pray on the ignorant and pretend that all is well, like there is no manipulation in the PM markets, that SLV and GLD actually have the metal they report to have and they attempt to spread misinformation and worst of all they f*cking do it for money!

PaidInFiat: Jeanne, eat a d*ck. How's that for an explanation? [and, later] Jeanne darc, gobble a donkey d*ck, you elf.

Silver Stacker: I don't doubt what you say, but I don't believe it either. It equates to me stating that the contributors to this blog like to suck each others d*cks and blow loads in each others faces.

Bay of Pigs: They are useless tools on gold or silver, IMO. Better off to ignore them. They have deadpanning gold and silver and supporting the MSM status quo since I can remember. They don't acknowledge anything being wrong/corrupted in the markets (especially the COMEX).

Green Lantern: That must be where the trolls go after they have finished flaming Turd on the main blog. I guess they need a place to wet their whistle also. From simply a journalistic point of view, did you notice that his entire blog is dedicated to flaming individuals/sites and point of views and rarely puts forth his own world views?

Ledbedder: Looks like the boys and girls at the other blog are green with (fake gold) envy.They think because they write "articulately" that they can fool some folks. Go right ahead, try. I honestly do not know anyone that can make an argument against the PM's not going higher over the next few years. Yes, 2011 wasn't their best, but look at the 10 years before that. Guess a decade isn't enough data to go on. That was my roughly written 2 cents as I didn't get a degree from Brown or HAAAAAAAAAAAAAAAvard. One last thing, look down your noses at us because we type swear words, who cares? Tell us you don't let out a good "F*CK" when you bang your shin on the coffee table. Liar.

SGS: Yeah. These morons, especially kid dynamite [sic] are part of a paid JP group to discredit us.

Anonymous: Screwtapefiles is just a front site run by the Bankers. Zero credibility there.

Anonymous: screwtape has zero credibility. The people authoring there have been exposed and countered many times before. It's a site of the banking shills, by the banking shills and for the gullible.

SGS: Dont come back here. You realize that I know who you are now. My tech seems shitty on the front end, no[t] so bad on the backend. You've been warned.

Lovely. What is very striking about such posts (and there are many more) is the level of visceral hatred for those who do not necessarily share their world view or - more importantly - the world view of their heroes. It is also hard not to pick up on a certain amount of deep-seated auto-erotic tension, which I imagine would be better released in a more amorous rather than aggressive way - but I'll leave that train of thought to the psychologists.

However, what is utterly conspicuous by its absence is any attempt to engage with the question at hand, to refute it through evidence, or to present a coherent counter-argument. Responses are limited to either "you're a c*ck sucker" or "you're a bankster shill".

Now that's a bizarre approach. Let's say for a moment (for the sake of argument) that they're right, and the only things we love in life are violent oral sex and getting fistfulls of dollars from JPM. How, exactly, does that refute the facts we have pointed out, or answered the questions we've posed? It's simply a diversionary tactic to avoid answering the difficult questions. So we are forced to ask: why would such diversionary tactics be used by certain elements of the PM blogosphere? If what they say is an open-and-shut case, why respond with abuse and allegations, rather than simply presenting their evidence and explaining their reasoning?

It is obvious to anyone who has ever read Screwtapes that we are not paid up Bankster Shills. We all give our time free to this site, despite us all having extremely busy day jobs and family lives. You will notice that there are no adverts on this site, and there is no donation button either. We make not one penny from this site by any means. We strive to hold the highest levels of integrity, and make full disclosures when necessary.

Sadly this cannot be said for other elements on the web. Some sites earn serious cash from their traffic, and others have direct links to those with a corporate interest in promoting precious metals. Not all sites - and I want to stress that. There are good guys out there. But suffice to say that the supposedly 'independent' content and advice peddled on certain PM sites is often as partisan and sponsored as that which emanates from certain parts of the MSM about which they scream foul on a daily basis. Corporate shills by any other name. I will expand on some of these themes in future posts.

Most of us are long the PMs, and most of us accept that there is a degree of manipulation in the PM markets. But we refuse to subscribe to the cartoon version of evil empires and wicked witches; a world of Zionist plots and farting bears. If a claim is made, such as Sprott's delivery problems or DSK's imprisonment at the hands of the Cartel, or a problematic gold bar in a vault, then we will investigate it. If we find it to be true, we say so. If we find it to be false, then we say that too.

This refusal to blindly accept all we're told, or to unthinkingly cheerlead the latest silver memes does not make us 'anti gold' or 'anti silver'. It does not make us 'perma bears'. And it certainly does not make us Bankster Shills. We value your comments, and we want you to challenge us (politely). If shown the evidence we will change our views on the spot.

We are beholden neither to the banks and Wall Street, nor to those with an interest in selling as many coins and bars as possible.

And it is that which makes us the most independent PM site on the web.

RSI & gold corrections

I like the momentum indicator RSI (Relative Strength Index) because it captures an important phenomenon of market psychology (and a phenomenon independent of "fundamentals"). An intuitive way I like to think about it is: "Over the past 3 weeks, who's been happier: bulls on the "up" days or bears on the "down" days?" In other words, the total number of up or down days out of the past 14 has no direct bearing on RSI; only the cumulative gains on the up/down days matter, whether those days be few or many. Thus, the slope of RSI over time gives you an idea of the changing relative happiness of bulls vs bears on their respective "happy" days.

Over the past 3 years, whenever gold has exceeded the "overbought" 70 RSI-level and then come down to near-oversold levels below 35 (see red line), its downward path has been capped to the upside by similarly-sloped trend lines (see black lines). Observe that every time the RSI has finally broken its black trend line to the upside, the closest "local" minimum preceding the breakout has coincided exactly with at an important price minimum, preceding a strong rally (see purple vertical dotted lines).

I'm watching the RSI. I'm confident the pattern will repeat, and gold is about to begin a strong rally. But, if the RSI does fall below the green trend line, be careful: that's another sign "things are different" now, and that patterns over the past 3 years may no longer be dependable.

Silver Stackers on Alert as Sophisticated Fakes Hit Market

As if physical silver stackers didn’t have enough to worry about these days, with Cartel manipulation and all, now we are seeing increasing reports of sophisticated fake silver coins and bars hitting the market. I recently went through a batch of about 1,000 Morgan Silver dollars and spotted about 30 fakes out of that batch. The fake Morgans were fairly easy to spot, all them were key date or Carson City issues and all were at least 5 grams underweight. Given how easy they were to indentify, it wasn't much of a concern.

However, the sophistication of the counterfeiters has been increasing in recent years and their shift in focus from high value numismatic coins to low value bullion is raising alarm bells throughout the industry. OzCopper has been doing some outstanding work acquiring some of these high quality fakes from China and exposing them on their website and on Youtube videos.

Their most recent video shows some fake silver Canadian Maple Leafs that they acquired for $2 each in China. The fakes are the best we have seen yet. The weight is only slightly under by about 0.5 grams, which wouldn’t be noticeable unless put on a scale. Furthermore, the details of the coins are quite good with the flaws being in the details of the leaf which wouldn’t be noticed on a quick inspection (be sure to visit OzCopper’s site for pictures of these details).

The good thing is that although the fake Maples are fairly good, they are easily identified with close inspection. Nevertheless, investors dealing in physical silver must dramatically increase their diligence when buying physical and remain a step ahead of the increasingly sophisticated counterfeiters.

Silver and the bubble curve: where is the Smart Money heading? (Clue: it ain't silver...)

This post will make me about as popular as a fart in a spacesuit, I know. Certainly the PM blogosphere will react with a mix of mockery and vicious hatred. And even my esteemed fellow contributors at Screwtapes will probably run out of eyebrows to raise at what follows.

But I don’t care. There is so much nonsense talked about the PM markets on the web, and so many people are being unwittingly dragged into cult-like devotion to lumps of metal they think will make them millionaires, that I believe it’s becoming ever more important to present every possible side of the case.

So here’s an article about how silver is not the only fruit, and anyone whose sensibilities this offends can b(l)og off and instead read the latest spittle-flecked pant scrapings from SGS (which will no doubt be about Blythe destroying nuclear power plants in Japan at the request of Mossad, or – the new comment section favourite – aliens hoping to steal silver from the COMEX).

Bubble curves and the ‘Smart Money’

Most PM investors are familiar with this kind of
graph, not least because it is touted all over the place as a way of supporting the assertion that silver was not in a mania last year, and will not be in a mania if the price doubles (or triples) this year. Now is the time that the ‘Smart Money’ should enter, so we’re told.

This is not new: in April last year, the Blogosphere buy screams were deafening at $47, cautioning their readers against missing the boat to $250 – 500. The Smart Money should get in immediately they said. They’re beginning to say the same thing again, with silver at $29. Now don’t get me wrong: I doubt I could be more bullish on silver at the moment. I have a nice stash bought at $27 which I’m very much looking forward to selling at between $38 – 42. Claims that Screwtapes contributors are ‘perma bears’ couldn’t be further from the truth.

But the silver chart has nothing of the Smart Money about it. Real silver bears would say that actually we’re between the ‘Return to normal’ and ‘Fear’ stages. I personally don’t agree with this (QE, and its effects on commodity prices, the continuing push for a mania in the tiny community that is silver, and the fact that silver is not currently too far from its trend line suggest otherwise). However, at best – I mean, in the most positive possible interpretation – we are somewhere in the Mania phase.

I’ll repeat: this does not mean that silver won’t now rise (possibly quite dramatically) for the next few months. I think it will, and I hope to profit from it. But Smart Money it ain’t.

So where should Smart Money go now?

Imagine I’m a greedy investor (I am). I don’t want a x2 or (very optimistically) a x3 return from what’s left of the silver mania in 2012. I want a x10 or a x20. Like the clever swine who bought silver at $5 back in 2003. So where is the Smart Money going at the moment? First, let us examine the qualities which potential investments should have in order to be considered Smart Money.

1) The vehicle (stock, bond, commodity, whatever) should have been in a lull (i.e. stagnant) for a considerable period of time. Like gold was between 1998 and 2002 (range: around $270 - 350) or silver between 2000 and 2004 (range: $4 – 6).

2) It will thus have been written off by all pundits. The price gets so low that no-one will sell. But new buyers aren’t drawn in because of the perceived opportunity cost of having their money sat stagnant in a non-performing asset. Like silver in 2003.

3) The vehicle is, however, sound. In other words it is not a company facing bankruptcy or a commodity or good that no-one will ever need again. The business is still profitable (perhaps only just) or the country (referring to bonds, here) is still solvent (also perhaps only just). In the case of silver, it was always going to be valued for jewellery and industrial uses and by ‘eccentric’ retail investors, so there would always be some support to prevent the price dipping (much) further or – in the worst case scenario – to zero.

4) There are clear upside events on the horizon, which – once they take hold – will bring in new buyers, and potentially very quickly. Using gold as an example, we could have said that the Smart Money buying at $280 was anticipating currency devaluation, Middle East crises/oil shocks, whatever. The point is that although the Smart Money did not know the timescale, it knew (or hoped) it would happen. These people are now getting seriously paid (and, in some cases, doing the selling...)

So what assets are there currently floating around that look like they fit these criteria?

Enter stage left, the bank stocks

Boo, hiss, shame!, get out of town, you fully paid-up bankster shill...! We always knew you were a JPM hack...! I bet Blythe sticks [insert large object of choice] into your [insert orifice of choice] and you [insert degree of pleasure of choice] it.

Now that’s out of the way, let’s have an objective look at the situation. I’m going to use the example of Lloyds-TSB (LON:LLOY), simply because it’s a UK company so I’m familiar with it and the back story, and have some experience from trading it for a while. But I’ll make my disclosure right here: I’m long Lloyds-TSB (and RBS and a few other banks) and I hope to initiate new positions in the next few months. However, I receive no payment from, or have any kind of professional relationship with, any bank (which is a shame, because it would mean I could stop wasting my time blogging and finally land that foxy Brazilian lingerie model of which I’ve always dreamt).

Lloyds-TSB, like many banks, lost most of its value post-2008. In fact, it went from 591 BPC (British Pence) in 2007 to a low of 21.84 BPC in November 2011. In short, it has been in a period of decline/stagnation for over three years (criterion 1). Its chart sure looks like the Smart Money part of our bubble curve:

The overwhelming popular sentiment is that Lloyds-TSB (and I again stress, I could've picked many other banks here - the use of Lloyds-TSB is merely illustrative) is going nowhere, and that the shares will not recover. However, no-one's selling their shares because, frankly, if you had a position at 590 BPC, you’re unlikely to sell just because the price has shifted from 22 to 24 BPC in daily fluctuations. If you’ve held through all the trauma to date, you’re about as strong a hand as one can imagine (criterion 2).

Lloyds, however, is not bankrupt. Sure, they’re not the money-sucking machine that they once were, and they’ve had a few years of losses, but it looks like 2012 will be the first year since the crash that they declare a profit. Their customer base (on the high-street banking side) is as strong as it ever was, and their efforts to recapitalise have been successful. Their exposure to foreign debt is not great (and has, in any case, been insulated against by their recapitalisations and UK government protections). So, on criterion 3, it’s looking pretty good too.

[An aside: There are always those who will say that the Western banking model is dead, and that the shares will go to zero. Maybe they’re right. But my response to this is that if the UK’s largest banks go bust, then we’ll be so royally [insert expletive] that the best we can hope for is a life of trading acorns and eating our grandmothers and less-favoured children. Good luck buying tinned bacon with your silver in such circumstances: all that awaits a genuine apocalyptic financial meltdown in the US/Europe is death, destruction and chaos. Your PMs will either stay in your possession for approximately a femtosecond or live out their days buried in whatever forest in Montana or Wales you left them. Regardless, the loss of your investment in banking shares will be the least of your problems.]

Now, back to reality, 2012 is likely to see a dividend paid (again, for the first time since 2008) by Lloyds-TSB. And, as mentioned above, its first profit announcement since 2008. Even more important is the fact that the UK government has a 43% stake in the company, at an average of 74 BPC per share acquired during the part-nationalisation. This actually came about not directly because of the 2008 crash, but rather because Lloyds was heavily arm-twisted into bailing out the doomed HBOS during the crash. In any case, the UK government wants its money back. Further, it has to get its money back, as the UK faces decades of austerity if its investments in Lloyds-TSB and RBS don’t pay out. This part should appeal to those who implicate TPTB in every financial machination: the British government has a massive interest in doing whatever it takes to get the share price of Lloyds-TSB at least back up to 74 BPC. Otherwise, ‘good-bye’ ministerial cars and Yes, Prime Minister, and ‘hello’ back bench obscurity. What would you bet on? I rest the case for criterion 4.

Are we at the end of the Smart Money phase for bank stocks?

The night is always darkest before the dawn breaks, goes the old cliché. Continuing with the example of Lloyds-TSB, last year was very dark indeed. The Euro crisis hit it hard, as did the threat of extra regulation and the temporary loss of its chief executive, António Horta-Osório. All of this pushed its share price down to what feels like a bottom of 21.84 BPC. Tellingly, trading in this particular bank stock has since been exceptionally volume-heavy: investors are piling in. It’s risen nearly 50% since then (from 21.83 to 29.97; cf. silver’s move of $32 – $26 – $29 during the same period), and shows no sign of abatement even in the face of potentially very bad news. On Friday, when the news of France’s downgrade was announced, it dipped in line with the rest of the FTSE, and then surged on new buying to finish nearly 3% up on the day.

Why should this be? My theory – and I accept that it is only a theory – is that we are nearing the end of a Smart Money phase in some bank stocks. Those banks that remain profitable and relatively insulated against further risks, and for which most risk has already been priced in, seem to have very little further downside and a hell of a lot of upside. For silver to make a x10 return, it needs to go to $300 an ounce. For Lloyds-TSB to do the same, it needs to go to 220 BPC a share.

It all comes down to which you think is more likely in the next three – five years: $300 silver to achieve six times its best ever price, or Lloyds to claw its way back to one-third of its pre-2008 price. I know there are many who read this site who would say, “that’s easy – silver every time”. Fine. I have silver too, and will be happy with that. But a good investor is a hedged investor, and is also a realistic one. And, for now, I expect TPTB to look after their own interests and restore value to their directors’ shares far more quickly than they will enable silver investors to reap massive rewards.

FULL DISCLOSURE: Long LON:LLOY and LON:RBS and physical silver and physical gold. New positions in each of these are likely to be taken throughout 2012.

Metals musings, 1/13

Silver's where it's at right now. In my view, if we're going to see the metals break out of their 4 month slump, silver will lead the way. So, I have just one gold chart, the weekly.

The trend lines on this chart connect every closing price since 2008. There looks to be a symmetry in the recent action with the 2008 bottom.

I said on Christmas that the silver bottom would be in within 4 weeks. We will enter the fourth week on Tuesday, and I have no reason to change my forecast. I had calculated that in the coming week the 34- and 55-week MAs would cross, and that should indeed happen, with bullish ramifications, if historical patterns have any weight.

On the above weekly chart, it also looks like we broke out of the falling wedge. Barely, I'll admit, as an emphatic breakout was prevented yet again with a few very sudden, violent, high-volume, last-minute bear raids. This has been the case almost without exception since Labor Day. Still, my gut tells me that if the lower grey dotted line of the wedge was going to be tested, this would've been the week, and it wasn't; while the finish today +25 cents in closing hours was important. I think we're headed to $36 over the next few weeks.

I missed the breakout Monday, but I used the daily chart from last week to get in today *right* at the bottom ($29.45), which hopefully will be the final low before a strong ascent (see case 1, brown arrow). But, I'm not celebrating just yet, as there are 2 other strong possibilities that I consider more likely than others and that I want to be prepared for: Case 2 (see green arrow), in which we test the bottom of the light blue channel again, and it functions as support, confirming that the black down channel has been "trumped" by the longer term up channel; or Case 3 (see red arrow), in which we fall through the light blue channel, suggesting to me that the $26 red/green horizontal support line will also fail this time, and we will fall at least to the bottom of the downtrending black channel at $25. Don't get too aggressive!

I'm encouraged, though, partly because of the tell-tale 10-year treasury:silver ratio charts. The ratio seems to be falling like clockwork after denoting yet another bottom:

Weekly version:

I'm also partially encouraged because the price action over the past few weeks has strongly resembled the pre-explosion bottom of 11 months ago:

Finally, the gold:silver ratio chart I posted on Christmas:

It sustained a day of damage during the low-volume late December crash, but looks to be back on track.

Of course with looming events such as war with Iran (and possibly WWIII shortly thereafter) it feels kind of foolish to look at charts at all. Truth be told, as big a fan as I am of the metals, I'm afraid that our ruling elite fears and detests gold hoarders with such intensity, even more than they do serial killers and pedophiles, that it's hard for me to feel too encouraged that PM investments will ever be allowed to pay off in a really big way. But, so long as studying chart patterns continues to pay off for me, I'll keep studying them and sharing my ideas with you. Have a nice weekend, everybody.