Political Metals

Adrian Ash, 13 Oct ’11

-

“When you own gold you’re fighting every central bank in the world”. Jim Rickards

To a great extend, that holds true for silver as well. This week, holders of Political Metals lost a battle, but certainly not the war. Measured against the USD, gold and silver are worth less compared to a week ago by 9.6% and 26.3% respectively.

It all started with Ben Bernanke’s statement, following the 2-day FOMC meeting, stating the obvious - that “there are significant downside risks to the economic outlook, including strains in global financial markets”. His antidote was a plan to purchase $400 billion of long-term Treasury bonds and to sell an equivalent amount of short-term debt. More commonly referred to as “Operation Twist 2″, this plan seeks to further reduce long term interest rates, after having pledged to hold short term rates practically at zero until 2013.

That announcement, made in the backdrop of the Eurozone debt crisis and news of slower growth in China, sent global stocks and commodity markets into a waterfall decline. This set up was ideal for the bullion banks who have massive gold and silver short positions. All they needed to do was to pull the trigger, and that’s exactly what they did on Thursday. Silver was pushed down sharply through its key 50 and 200 day moving averages, triggering an avalanche of tech funds selling the following day.

Going for the final kill of the week, news of yet another margin hike by CME (gold by 21%, silver by 16%) leaked into the market towards the end of Friday’s trading day. That further fuelled the selling, pushing silver briefly below $30 before closing at $31.08 - down 26.3% for the week.

In other markets this week, the Dow suffered its biggest loss since 2008. In four days U.S. stocks lost $1.1 trillion in value.  The MSCI all-country world share index (tracking thousands of stocks from developed and emerging countries) recorded its second worst quarter in 23 years and the 30-year bond rates dropped 55bps - the biggest move since the 1987 Black Monday.

So there you have it, Dr. Ben Bernanke, bullion banks & CME working together in perfect harmony. I don’t believe for a moment that the resulting market turmoil was any surprise to Bernanke. Despite saying that gold is not money, he’s smarter than most people made him out to be. After all, he achieved an SAT score of 1590 out of 1600, graduated from Harvard and has a PhD in economics from MIT. Contrary to its statutory mandate of foster maximum employment and price stability, this market turmoil I believe is a piece of precision engineering to achieve some larger agenda. This round is yours, congratulations Ben!

This engineered global markets take down could be part of the deflationary phase that Mike Maloney talked about, which is a prelude to the hyper-inflation phase. They have to assist the bullion banks cover their shorts and bring the Political Metals price down to a lower base before starting the next round of QE or equivalent. Marc Faber told ThomsonReuters that “if the S&P drops to around 900-950, we’ll get QE3 for sure”.

Four ways to view the developments over the past week

If you’re reading this blog, you’re not a professional or a day trader, possibly someone already invested in gold or silver, someone holding some Political Metals (I distinguish between investing & holding here) or someone in the process of researching the matter. As non professional traders, we have to look through and not at the turmoil unfolding before us. All of the bloody carnage above are on “paper” or bits on silicon - illusionary financial derivatives of something tangible (like gold and silver) or derivatives of something totally virtual and non-physical (like interest rates, bonds, debts, CDS, etc). Real or imaginary, they are all derivatives backed by nothing more than a promise or lies of a third party.

Unfortunately, in so far as gold & silver is concerned, the outcome of the imaginary paper price wars above gets applied to the physical world. Price discovery currently comes from the paper derivatives market. Banks and multi billion dollar hedge funds throwing thousands of futures contracts or bets at each other (most of which are done through computerised High Frequency Trading algorithms) determine the price of the coin or bar you pick up at your local bullion dealers. Until such time when this absurd situation of the tail wagging the dog changes, I suggest 4 possible ways for you to view the developments over the past week, using silver as an example.

There’s a big difference between Investing(1) & Holding(2). If you adopt approach (1), and are smart enough to handle scenario (3), congratulations! Trading this dip or swapping silver for gold just before the GSR shot over 56 would have reaped a handsome return. After years of following newsletter writers, both paid and free, I came to the conclusion that attempting to achieve (3) is at best illusionary, and at worst risky. This is particularly true in a manipulated market. Take a look at some of the forecasts by well respected industry players here. Either they missed this week’s price action or are not telling us something. Richard Russell puts it this way:

I look at gold and silver, not as a play for profits, but as an accumulation of hard assets, in a world that it drowning in fiat money, and a world that will probably print trillions more of irredeemable paper.

Finally, if you’ve been waiting patiently (4) or have spare dry powder, congratulations! While the paper price of gold & silver gets whacked, physical demand is very strong. KWN reported that Sprott Money temporarily runs out of physical silver. So, get ready to pick up your discount. Not necessarily immediately, but then again, picking the absolute bottom can also be illusionary. Best industry advise is cost averaging.

Updated:

• 28 Sep “On the basis of the hard information available early this week, it is highly likely that gold and silver prices were pushed down rather than fell as a result of free market trading.” Read Patrick A. Heller’s take on how the recent gold & silver market manipulation was orchestrated.
• 30 Sep “Engineered fall in gold and silver; Trying to scare people out of precious metals“ Gerald Celente

-

After the massive silver take down on May 1, and after several weeks of consolidation, there was much uncertainty as to the direction of silver. On June 21, we featured an article from Richard Guthrie which helped answer the question Silver: Will it be Up or Down? He wrote:

I implore all those still nervous about getting onto this silver rocket to take a long hard look at the following graph.

Based on his analysis, he was certain it was going to be UP. Sure enough, 1 week later, silver started its climb from $33.50 right up to $44, when it was taken down yet again on Aug 23, together with gold. Now, after about 3 weeks of consolidation, there’s this lingering question - Has gold reached an intermediate top and entered into a multi-month correction phase?

True to form, Rich has written another great analysis on why he think it has not, this time by looking at the gold miners price action. This is his story, told with a series of 7 convincing charts.

-

By Richard Guthrie (Live from ‘The Bridge of the Silver Rocket Ship’)

Much of the technical commentary I’m reading is still short term bearish on the direction in the precious metals and there are concerns we’re started a multi-month correction.

However they have conveniently forgotten to include within their analysis the recent action of the miners.

I have charted below the action of the Price of Gold and circled each occasion in the last 8 years when the Price of Gold has topped out and has entered a multi-month correctional phase.

-
Now let’s look in further detail at the action of the Hui (Gold Miners) Index during those periods of topping out.

The charts below show the Hui price action (Candlestick) with the Price of Gold overlaid (Black line).

-
Early 2004:

-
-
Late 2004:

-
May 2006:

-
-
March 2008:

-
December 2009:

So on every multi-month Top in the price of Gold throughout the duration of this Bull Cycle to date the Hui index has always topped out before the price of Gold.

Now let’s look at the present action in Gold and the Hui Miners.

-
As the graph clearly attests while the Gold price peaked (on a daily close basis) some 3 weeks ago in mid August, the Hui Index has been continuing higher and has risen a circa 5% more since then.

In summary, the action of the miners does not indicate that we have reached an intermediate top in the Gold price. If history is to be our guide we should be back to record highs in Gold in the very near future and this present up leg should have plenty more upside to come.

It’s ironic that the ‘Corrective Bear Callers’ always like to make a mockery of the phrase, ‘This Time It’s Different’. Well if indeed we have just topped out in the Gold Price then this time ‘It would truly have to be different‘ from every other intermediate top in this Bull Cycle to date!

I personally don’t believe it will be different and still have every confidence we’ll be well over $2,000 within the next month or so, And that’s where my money lies,

It seems Bully Boy’s shaking a few more weak longs out of his saddle before the next charge north, And who can blame him, No one likes to run with too much weight on his back!

-