Gold : SURE DIE !

First let’s have a look at the gold price in 2006:

Now let’s have a look at the gold price in 2011:

Now let’s place the two charts next to each other, to see the similarities:

If this isn’t clear enough, have a look at the chart below, which lays one chart on top of the other:

The patterns were nearly identical -- and so was the huge drop that followed.

We can learn something from the past.

Don't catch the falling knife !

A Bigger Correction Underway?

To quote Charles Dickens, this week was the best of times, it was the worst of times.

This week Quaddafi was finally cast out, Dominique Strauss Kahn was cleared, Japan's credit rating was cut, Washington quaked and everyone waited with bated breath for the words from Jackson Hole, WY.

Oh, and I forgot to mention, gold skyrocketed to $1900 at the beginning of the week and then plunged in one of its worst days Wednesday when gold prices tumbled a whopping $95.80, or 5.1%, to settle at $1,765.50 an ounce -- the lowest level in a week. To keep things in proportion, gold started the year just above $1,400 an ounce.

Also this week SPDR Gold Trust's(GLD) total assets surpassed that of the SPDR S&P 500 ETF (SPY), making GLD the largest exchange-traded fund in the world for the first time. But also to keep things in proportion, the assets of the Gold Trust ETF are still trivial compared to the trillions held in equities and bonds. Four times as much money is held in Apple (AAPL) stock alone. Naturally, there are many other ways to own gold, but in general, this means that not that many people own gold despite all the hoopla.

The Federal Reserve is holding its annual symposium in Jackson Hole, WY, this weekend and all eyes are on Federal Reserve Chairman Ben Bernanke when he addresses the group today. It was at last year’s meeting that Bernanke hinted the Fed would start another round of asset purchases to stimulate the economy and about three months later the Fed announced the $600 billion bonds purchases, later dubbed QEII. And that, folks, was one of the contributing factors for gold hitting $1900 this week.

But it doesn’t really matter to gold what Ben Bernanke will say. If there's QE3, gold should go up in the long term. And if there's no QE3, gold still will go up. The higher inflation and weaker dollar that QE3 would likely cause would be positive for gold, which is known as an inflation hedge. No QE3 would mean a zero-rate policy may continue for more than a while (even longer than they already pledged), which is an ideal environment for gold to grow. A new round of quantitative easing is not likely to be met with approval from the emerging world, particularly China, or other large holders of U.S. Treasuries and U.S. dollar-denominated assets.

No matter what is said in Jackson Hole, there is no doubt that the US economy is in a deep hole. The uncertainty surrounding the U.S. deficit-reduction debate has fueled concern about a U.S. default, potential destruction of the U.S. dollar along with fears of a global recession or depression.

Those that argue that gold is overvalued from a long-term perspective are not looking at the right numbers. They ought to be looking at Europe's banks and at the amount of short-term obligations that are sitting on the U.S. Treasury's books.

The S & P chart see a local top signal from analysis of both volume and Fibonacci retracement levels. In addition, there are two reliable (with proven track record – as seen above) support and resistance factors in play: the 50-week and 200-week moving averages.

The SPY ETF just touched the 200-week moving average and a rally from here is likely. At this point we do not expect the 2008 plunge to repeat. However, even if that is going to be the case, then we would still likely see prices move higher -- perhaps towards the 50-week moving average before the decline continues.

In the S&P 500 Index chart this week, we have seen a decline to and a possible bottom at the 38.2% Fibonacci retracement level. This has been confirmed by the RSI indicator. Although we could still see a sideways trading pattern, the size and rapidness of the recent decline leads us to believe a bigger rally from here is more likely than not in the coming weeks.

Lower gold prices would likely be followed by lower silver prices, not because of the general stock market rally, but because of gold’s price decline. This would likely impact gold and silver mining stocks as well. Overall, the precious metals – stocks link has changed very little recently from a correlation perspective.

Although stocks could move either way from here, it is more likely that higher prices will be seen in the short term. The direction of the market beyond this time frame is uncertain. Based on the persistent negative correlation between the stock market and precious metals the expected short-term rally in stocks would likely have a negative impact on gold and silver.

Georgy-Boy Is Always Right?

On Wednesday August 10 the Chicago Mercantile Exchange ("CME") came out with an announcement that it would be raising margin rates on the purchase of futures contracts on gold. It reported that this was an effort on its part to cool off the price of gold, which has enjoyed a parabolic run since August 1. It also said that there would be more rate hikes to protect gold from becoming a bubble.

When I read this I laughed at the arrogance of the CME. There is only one reason that it wants to stop gold’s parabolic run: It simply doesn't have enough gold to fulfill the futures contracts that it has already sold. Let’s not forget that one futures contract is sold in lots of 5,000 ounces. That means if we use a proxy price of $2,000 an ounce, to make the math simple, we are talking about $10 million for one contract. Add to that the fact that the CME gets a fee of $50 an ounce above the spot price. So for every contract sold, it earns $250,000. Delivery and shipping are the buyers' concerns.

Let us also not forget that last April the CME raised the margin rate on silver not once but five times to get silver to finally capitulate. The fact is that the CME does not have the physical gold to satisfy the futures contracts that have already been sold. Do you really think this will play out differently than it did with silver last April? Some may call it a bubble, but I do not agree.

George Soros, the hedge fund investor who called gold the ultimate bubble, has divested his portfolio of nearly his entire investment in gold, inciting many to fear that the price will very soon plummet, devaluing the specie-heavy portfolios of millions of investors. Whether you agree with him or not, attention must be paid to his movements. It can be very expensive to ignore the predictions of Soros.

For example, on September 16, 1992 (a date subsequently known as “Black Wednesday”), one of Soros' investment funds sold short more than $10 billion worth of pounds sterling, profiting from the British government's reluctance to adjust its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries. Defiantly, the UK withdrew from the European Exchange Rate Mechanism, triggering an unsettling devaluation of the pound. Not everyone was harmed by this plummet, however. George Soros earned over $1 billion in the ordeal. Consequently, he was described by the media as the man who broke the Bank of England. In 1997, the UK Treasury estimated the cost of Black Wednesday at 3.4 billion pounds. This latest move to take a position against gold may have similar repercussions around the globe.

Soros, the Hungarian-born financier, made the move to cut his holdings of gold only in the first quarter of 2011. As with most things this King Midas touches, the price per ounce of gold had skyrocketed during the period of his investment in it. While at the beginning of last year gold was trading at $1,100 an ounce, the trading price in 2011 has risen to as much $1,800.

The exact date of the dramatic divestment by Soros is unknown. It is known that the majority of those holdings are managed through the Soros Fund Management Company. Filings to the Securities and Exchange Commission (SEC), the American regulator, showed that he had sold 99% of his holding in the SPDR Gold Trust (GLD), an exchange-traded fund backed by gold bullion, by the end of March. The New York-based fund sold its entire holding in GLD, but Mr. Soros bought shares in two mining companies, Freeport-McMoRan Copper & Gold(FCX) and Goldcorp (GG).

Despite the potential for a devastating global impact of such a move by a highly influential individual, there are those on Wall Street praising the insight of Soros. Historically, as the precious metals rally ends, you will get transition toward related equities. Indeed, the gold mining stocks have lagged the underlying asset as people would rather hold gold and silver above the ground rather than these metals that are still in the ground.

As I write, it looks like Mr. Soros did not get this one right, and there are those not entirely convinced of his wisdom.

Filings to the SEC showed that Paulson & Co, the US hedge fund run by John Paulson, left its holding in GLD unchanged. It was reported in Bloomberg online that Hal Lehr, a commodity trader at Deutsche Bank, said he remains bullish on gold despite its current levels and believed it could reach $2,000 an ounce by year’s end. The report went on to say that gold ETF holdings fell by 3.3 percent in the first quarter of 2011, and there are reliable indications that some of that investment was used to purchase physical gold bullion.

As if there's not enough uncertainty, a worldwide devaluation of gold could create a ripple of financial insecurity. There can be no doubt that gold is viewed by a majority of the world as a very safe and trustworthy investment -- one that only increases in value. This sort of reasoned speculation has undoubtedly fueled the bullish ballooning of the price per ounce of the metal.

If the actions of Soros and other global power brokers have the effect of devaluing gold, then the legitimacy and appeal of the call of many to return to a gold standard for the value of paper currency or to abolish the Federal Reserve and other similar central banks around the world, will be similarly devalued.

Once the worth of both gold and paper currency is wiped out by the conspiring of financiers, globalists, multinational corporations, central bank boards, and other like-minded and influential moneyed interests, there will be nowhere to turn for an object of value. This complete obliteration of precious metals and paper currencies will leave those who create such catastrophes as the sole site of economic refuge for those cast headlong into the storm of boom and bust cycles and the devastation that comes in their wake.

One of the most toxic elements present in this pool of bitter water is a worthless money supply. The Federal Reserve creates this non-potable problem by engaging in a practice known euphemistically as "quantitative easing." It is a policy that plain-speaking people would call "printing worthless money."

There is no governor on the engine of the Federal Reserve's printing press, and the speed with which it can crank out reams of worthless paper money is dizzying. However, unlike paper money, gold cannot be manufactured and it is of finite quantity. While this bodes well for the eventual rebound of the price of gold (assuming that it soon begins to descend), there can be little expectation that those who benefit most from a world marketplace dependent on dollars and pounds will allow gold to supplant these currencies as the coin of the realm. From their point of view, access to that resource must be restricted and dependence on printed money must be perpetuated.

The current debt crisis in Europe is an example of how the price of gold can benefit from a currency’s shortfall. The millions upon millions of dollars owed by Greece, Ireland, Portugal, and others in the eurozone devalues paper currency while artificially (perhaps) propelling the price of gold into the stratosphere.

That said, there is a good chance that any effort to sell off holdings in the precious metal by George Soros and others may convince others to dump their own investments in gold rather than run the risk of being found on the outside of the trade looking in.

In fact I’m sure this is exactly what that cagey Soros is betting on.

Double Dip Or Another Great Depression!

“I did a careful study of the action of the great post-crash rally that occurred during late 1929 into early 1930. The rally was a beauty, stirring up more excitement and volume than did the advances in 1928 to the 1929 top.” - Richard Russell.

You can imagine that market participants during the spectacular advance into April 1930 were convinced that it was resurgence, a revival of the powerful 1921-1929 bull market. Speculators clamored back into the market, thinking it was great opportunity -- they weren’t going to be left standing at the station as the train took off for another great decade of gains.

Truth be told, records shows the economy had actually topped out in late 1928, fading throughout 1929. The market was running on empty. The economy continued to deteriorate as the market roared ahead from late 1929 into April 1930. Just like the market roared ahead into April 2011 as the economy deteriorated?

But then like a bolt out of the blue, the market and the economy came back into correlation and stocks turned down decisively. Just like they turned down decisively in July 2011 as Rosy Scenario divorced Mr. Economy and the fundamental figures could no longer be painted pretty.
With the ending of QE2, the tape could no longer be painted.

With the debt ceiling debate raging, perhaps the funds were no longer easily available for the Plunge Protection Team. Isn’t it special that one day after a debt deal is reached, and funds can be found for The Working Group without the scrutiny of political subterfuge that stocks stage a big reversal? Just happenstance I’m sure. My daddy taught me cynicism well.

Who knows if a double dip will really turn into the Greater Depression. But what is remarkable is that back then the dollar was strong, the US was a creditor nation. Now the dollar and US debt debacle are laughing stocks. Yet most of the jaw jackals, pundits, and financial personalities are sharpening their pencils and ‘calling’ the most likely objective of where the pullback will end and when the next great buying opportunity will arrive.

What if they are all wrong? What if the leg down into the March 2009 low was a big Wave 1, the advance into May 2011 was a big Wave 2, and the stiletto-like angle of attack to the downside since July 2011 is the beginning of a menacing Wave 3?

Few if any are calling for a decline to below 666 S&P. Those that entertain the idea are boys that cry wolf. They are taken serious by few, the financially frail -- those who have fought with and struggled against monster moves in leading names like hyperventilating Faye Rays in the grip of King Kong.

What if?

What if the guns of QE2 are unholstered and the market walks up to Ben Bernanke like Dirty Harry:“I know what you’re thinking. Did he fire six shots or only five? Well, to tell you the truth, in all this excitement I kind of lost track myself. But being as this is a .44 Magnum, the most powerful handgun in the world, and would blow your head clean off, you’ve got to ask yourself one question: do I feel lucky? Well, do ya, punk?”

You feelin’ lucky, Ben?

What if the 4-year or Fibonacci fractal of 1440 degrees from the big top in July 2007 is exerting its influence. What if the pattern of the big spread double bottoms in 2007 that led to a crash when they were broken is repeating here and now with the big double bottoms in 2011 having just broken? Of course, just as the sign of the Bear was flashed in 2008 on the double bottom break, the market backtested the breakdown point. That’s on the monthly charts and the market slid substantially before that backtest played out into May 2008. Be that as it may, a mini-fractal of that pattern could play out now with the S&P backtesting 1260/1264 or even 1280, satisfying a backtest of the broken angle up from March 2009.

What if?

In April 1930, market participants believed the crash was a one-off. They assumed lightening doesn’t strike twice. Sound familiar?

Conclusion:

Tuesday was 90 calendar days from a high which often defines a turning point. As it turned out, Tuesday proved to be a closing low -- for this particular losing streak anyway. On Wednesday the market opened up, implying there was more work to do on the downside. The market proceeded to roll over on top of Tuesday’s flushout with the S&P finally arresting momentum at 1234.

The range from the 1011 low in July 2010 to the 1371 high in May 2011 was 360 points. A Fibonacci .382 retrace of the range is 1234. The closing low so far occurred on August 2nd, 90 days from May 2nd.

However, since 1264 (270 degrees down from high) was broken with authority, the S&P should satisfy a 360 degree move down from the high which equates to 1227. This would accomplish a full backtest of last November’s high (that occurred on November 5th and 1227 ties to November 5th, so these square outs of time and price are worth paying attention to).