Gold Analysis, Real or False Breakout?

Commodities / Gold & Silver 2009 Oct 11, 2009 - 06:34 AM GMT

Best Financial Markets Analysis Article Gold has broken out above $1000 and everyone believes that it is headed towards $1500, $1200 being the immediate next target. Technically and otherwise, there has been lot of talk that Gold should be valued @ $2000 - $5000 range based on the real $$$ terms when compared to 1980's. However, if that were so easy, it would have already happened. Here are some of SB comments to the respective articles on the Internet.

Next stop $1500?

Here are some fundamental reasons why this target is realistic:

1. Once the $1,000.00 level for gold in U.S. dollars is history, there are no more barriers to the price.

2. The massive currency degradation occurring on a worldwide scale is unprecedented in history.

3. Central banks that formerly ‘capped’ the gold price by dumping gold have stopped selling, and some have turned to buying: The Russian Central Bank is reported to have purchased 300,000 ounces in August. The Chinese Central Bank has expressed an interest in buying the entire 403 tonnes of IMF gold that is up for sale. The Chinese bankers have indicated that they will buy gold ‘during any dips in price.’ Much of the gold on the books of some Central Banks has been leased out. It no longer exists except on the books at those banks. The gold at Fort Knox has not been audited since 1953. The threat of IMF gold coming on-stream caused barely a ripple in the gold price last week.

4. The Chinese government is encouraging its citizens to buy gold. This is a total reversal of the policy that formerly forbade its citizens to own gold. This policy is extremely bullish for gold, as an increasing number of Chinese banks and coin stores will be stocking up in order to have inventory. This inventory takes supply away from the market since it is replaced as soon as it is sold to retail customers.

5. The Chinese government is expressing its dissatisfaction with the U.S. administration for causing the U.S. dollar to drop due to the loose U.S. monetary policy, and for imposing a 25% tariff on Chinese tires. This anger on the part of Chinese officials will translate into increased dumping of U.S. Treasury bills and bonds and converting the proceeds into ‘real stuff’, such as gold and commodities.

6. The huge ‘net short’ position accumulated by the commercial traders and the two or three U.S. bullion banks will have to be covered. The vast majority of these contracts are now showing a loss and margin calls are mounting.

7. Once the gold price is firmly established above the 1000 level, the hedge funds that own most of the ‘net long’ positions on the Comex will likely add to their positions, using some of the margin money they have accumulated on the way up. This will put further pressure on the two or three bullion banks to ‘cut bait.’ At the moment the hedge funds have these banks over a barrel.

8. More and more investors are becoming aware of the fact that the GLD and SLV gold and silver ETFs probably do not have as much gold and silver backing them as they should have. There are no regular independent audits conducted on these two ETFs. The next chart in this essay supports this observation. This will cause investors to abandon those ETFs and opt for physical gold.

9. Monetary inflation continues worldwide at double-digit levels. Meanwhile the gold supply is limited to an annual increase of about 1.5%. ‘More money chasing fewer goods’ invariably causes those goods to rise in price.

10. Gold mines are a ‘depleting assets’. Each mine has a predictable mine life. Unless new deposits are found, every gold mine eventually faces extinction. According to mining experts, new deposits are not keeping up with the current rates of mine depletion. Production in South Africa has been steadily declining. Environmental concerns in many countries make the production of a gold mine expensive and very time consuming.

SB Analysis

1) Not really true. Since Gold is NOT a stock, there is NO real timeframe for it to confirm the breakout. Which means, unless Gold stays above 1000 for a significant amount of time AND with huge volume, it cannot be considered a breakout.

2) $$$ degradation doesn't really directly correlate to Gold valuation. If that were to happen, gold would have already been over $2000 by now within the last 1 year when over $3 trillion was printed.

3/4/5) Gold reserves, country-wise listing. These statements about China controlling Gold price is ridiculous. GLD, which is an ETF traded in the US has as much amount of Real GOLD reserves as entire China. That means, now GLD also can control the price of gold all over the world. Go figure... :-)

6) If you looked at the news that correlates to stock market rally, almost every other day in the last 7 months news stated that short covering rally is what is taking the markets higher. Which means, shorts have been covering for months, not just days. Gold in this case cannot just go up in a few days. Shorts are the most patient players when it comes to trading.

10) Another ridiculous statement. Did we figure this out today??? All natural resources are known to be depleting for years. That has no bearing on Gold going up today!!!

Bottom Line

We at Stocksbuddy.com believe that Gold will consolidate if any and go down from here. This is NOT a real breakout. Real breakouts need conviction in the form of lot of volumes. Remember, Gold is NOT a stock and is not bound to easy manipulation as any other investment vehicle. US economy is clearly going through a lengthy Deflation, though media and other folks do NOT accept this fact and instead portray we are still in recession and actually getting out of it.

In a deflationary atmosphere, people don't spend as much and that is clearly visible through shrinking GDP worldwide and retail sales dropping each quarter. If common man doesn't spend as much, where and why is he/she going to buy gold. Gold price moves because of the following.

$$$ moving up/down, though not directly linked $$$ has lot of weightage on the price of Gold.

Demand from governments who shore up gold and increase their reserves as it is an asset that is used for hedging against inflation.

Demand from common mass/people.

$$$ cannot just go down forever. It either has already formed a bottom right now around 76 or it is going to soon, around this or 72 price levels. Meaning, if $$$ resumes its uptrend, Gold is bound to go down. After all, US cannot just leave $$$ to the wind. IMF is selling Gold and China intends to buy it. The equation is balanced out, so there is NO reason for Gold to go up here. Coming to demand from common public, it is already Going Down. So, unless we all are missing something here, Gold in deflationary atmosphere is only going to go down. Gold demand is expected to go down nearly 40% in India.

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Comments

George J. Parrish Jr.
12 Oct 09, 00:47

USD index

It is ridicules to rely on the USD index, which is simply a measure of the value of the dollar; itself a constantly inflated currency, against a basket of other constantly inflated currencies. Understand that all currencies are falling together in purchasing power against gold as they are inflated. The currency that falls at the slowest rate merely appears to be rising against other currencies. The currency index is at best an illusion and nothing more. As long as the amount of real gold coming into the market, which is an inflation process in itself, increases at a lesser rate than the inflation in the various currencies the gold price must rise so long as the demand for gold remains constant. The demand will remain constant so long as real interest rates are negative, which they are and will continue to be. It is not possible to raise interest rates above the rate of inflation because there would be no money available to pay the interest due on the debt without default. China and Russia have already broken ranks against the dollar-based system. They are no longer willing to increase dollar reserves. They do, however, intend to increase their gold reserves, either directly from internal production or from market sources or both.

Now we hear rumors of a wider revolt against the dollar by the Arab oil producers. This, in itself, even if only partly true signals the death of the dollar as a reserve currency. If the dollar, the greatest of all fiat currencies, cannot be accepted in exchange for oil who would want to accept it, or any fiat currency, for gold on international markets? Sure, the various governments could, at the domestic level, force fiat money upon their people, but this would end the dollar as a reserve currency, create a black market for gold, and reduce the function of all fiat currencies to that of mere tokens with no international value. Under these circumstances oil could only be exchanged in a barter-type manner, which would leave the US with two options: 1) get along without importing oil and collapse as a super power into a third-world country, or 2) go to war and take it from weaker countries, which would also invite the Russians and Chinese to do likewise and open the way for direct conflict with the US.

The fiat money system is nothing more than a confidence game. The objective of central bankers is to have the populaces use fiat money instead of gold as a standard unit of account for exchanges. One problem is that the governments cannot resist the impetus to spend more money than they take in from tax revenues. The other problem is that usury, which is the taking of interest and repugnant to some cultures, mandates a constant increase in the money supplied to facilitate trade, which is a product of labor. The biggest problem is that as the supply of money is increased at a rate greater than the increase in population the actual value or purchasing power of labor is constantly diminished. When the diminution in the value of labor is greater than the value needed to support the source of labor then the laborer or common worker begins to disappear. But the workers do not disappear all at once, many of them wise up and put pressure on their governments to do something about their pending demise, which always leads to some type of revolution. Under such circumstances the bankers are caught in the middle between a hungry populace and a desperate government. The usual reaction of the bankers, when in such unfavorable circumstances, is to conspire with political leaders and start limited conflicts and wars to distract the populace from the real cause of their problems.

War does have a way of creating a demand for a reserve currency, especially when a bombed out country needs to rebuild. It also helps to reduce the population at a faster pace by driving the starving unemployed masses into conflict which each other rather than into conflict with the bankers, but this process has to be controlled in the nuclear age or else everyone could lose; hence, the need to control who gets into the nuclear club. But this song, like that of the use of fiat money, which is concomitant with war, has been played one too many times. The needle is wearing out the record, the old song is losing its appeal, and the populace has wised up and is tired of the endless slaughter. When they fully realize and suffer exceedingly and in mass from the degrading power of fiat money they will demand something better, and in particular something better than the US dollar.

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