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Are Gold and Silver preparing for another upside
breakout? The battle is between the bullion banks with large short positions;
and investors and hedge funds, (along with Asian central banks), that are
protecting all or part of their net worth by owning some gold. It has been
eleven weeks since my last article. In that article titled: “Gold and
Silver Update” I indicated that the summer doldrums appeared to be
over. Gold was trading at $1620 and silver at $28.03. I wrote that article
with the observation that both metals were ready to rise, and I write
today’s article with a similar observation. The fundamentals have
seldom been more favourable for the bull market in
precious metals than they are today.
· The floodgates of
monetary inflation are wide open.
· Central banks are buying
– no longer selling.
· South African output
continues to decline – South Africa was once the largest gold producer
in the world.
· Price inflation is
rising, leading to a decline in the value of bonds. This in turn creates
demand for gold.
· The U.S. Federal
Reserve’s recent announcement of continued ‘quantitative
easing’ puts a rising floor under the price of gold and silver.
· The large ‘net
short’ position in the COT report has the potential for commercial
traders to run for cover and reduce their ‘short exposure’. This
happened also in August of 2011. You may recall that the ‘net
short’ position of commercial gold traders on August 5th was reported
to be 288,000 contracts. Gold was trading at $1663. As gold began to rise
(despite the large COT number), commercial traders ran for cover and by
October 21st the ‘net short’ number was reduced to 159,000. In
the meantime gold rose from $1663 to $1884 by September 2nd. (A rise of
$221.00 in just one month).
· The period from U.S.
Labor Day until February is historically the time of year when precious
metals are at their ‘most bullish’. A number of Asian countries
celebrate festivals during autumn, while items of gold and silver are very
popular. Meanwhile in the West we can usually count on a ‘Christmas
Rally’ in gold and silver. I’ve been told that one analyst
recently advised his subscribers to ‘short gold’. One wonders
what this man is smoking. During a bull market in gold you buy or you hold
– don’t be tempted to short gold!
Note: Charts in this article are courtesy
Stockcharts.com unless indicated.
 
This chart courtesy Mises.org shows the True Money
Supply in the USA. The rate is rising exponentially with no sign of leveling
off. This trend provides energy for gold and silver to continue to rise.
ECB balance sheet (€mm)
This chart courtesy Mybudget360.com shows the one
year increase in the balance sheet at the European Central Bank.
1. Worldwide money printing continues unabated
2. Just In 10 years $120 trillion have been printed
making global debt $200 trillion
3. World GDP has gone from $32 trillion to $70
trillion 2001-2011
4. Thus $120 trillion debt is required to produce a
$38 trillion annual increase in GDP
5. The marginal return on printed money is negative
in real terms
6. Thus the world is living on an illusion of paper
that people believe is money
7. This illusionary paper wealth will implode in the
next few years
8. The initial trigger will be the collapse of the
world’s reserve currency – the US dollar
9. The dollar is backed by $120 trillion of US
government debt and probably NO gold
10. All currencies will continue their race to the
bottom and lose 100% in real terms against gold
11. This will create a worldwide hyperinflationary
depression
12. All assets financed by the credit bubble will go
down in real terms
13. This includes stocks, bonds, property and paper
money of course
14. The financial system is unlikely to survive in
its present form
15. The banking system including derivatives has
total liabilities of around $1.2 quadrillion
16. With world GDP of $70 trillion, the world is too
small to save a financial system which is 17x greater
17. This is why there will be unlimited money
printing and hyperinflation
18. The only asset that will maintain its purchasing
power is gold.
19. Gold has been money for 5,000 years and will
continue to be the only currency with integrity
20. Western countries’ 23,000 tons of gold is
probably gone. See recent article by Eric Sprott.
21. The consequence is that most of the gold in the
banking system is likely to be encumbered
22. This means that Central Banks one day will claim
it back against worthless paper gold IOUs
23. Thus gold and all other assets within the
banking system involve an unacceptable counterparty risk
24. Gold should be held in physical form and stored
outside the banking system
Courtesy: Egon von Greyerz
Featured is TIP, the bond fund that is indexed for
inflation. The buyers of this fund expect price inflation. The trend is clearly upward bound.
Featured is the daily gold chart. Price is carving
out a bullish ‘cup with handle’ formation. This type of chart
formation most often resolves to the upside. The two supporting indicators
are back at support levels. The 50DMA is in positive alignment to the 200DMA
(green arrow), while both are in rising mode for the first time since we saw
a similar pattern (called a ‘golden cross’), in early 2009, see
next chart. A breakout at the blue arrow will turn the trend bullish again.
Featured is the ‘golden cross’ that
occurred in gold in early 2009. Gold was trading at $875 at the time.
Featured is the gold price in 6 foreign currencies.
The breakout at the blue arrow tells us that gold is rising not only in U.S.
dollars but also in currencies such as the Euro and the Swiss Franc. The
50DMA is back in positive alignment to the 200DMA (green arrow), while both are
in uptrend. The supporting indicators are back at support levels (green
lines).
Featured is the index that compares gold to bonds,
with the gold price at the top of the chart (black line). Since 2002 gold has
outperformed bonds. The green boxes highlight a breakout in the index at the
50D. Notice how each breakout in the index, coincides with a bullish rally in
the price of gold. The last time this index rose up from the 200D (in 2009),
gold rose from $800 to $1920. (In the event that both long bonds and the US
dollar break down simultaneously, the conclusion will be that China is
dumping treasuries. An unnamed Chinese official was quoted last week as being
unhappy with the way the U.S. administration is handling the dollar).
”Over the course of 600 years, five dynasties
in China had implemented paper money and all five had made frequent use of
the printing press in an attempt to solve problems. Economic catastrophe and
political chaos inevitably followed. Time and time again officials looked to
paper money for instant liquidity and the immediate transfer of wealth. But
its ostensible virtues could not withstand its tragic legacy; those who held
it as a store of value found that in time all they held were worthless pieces
of paper.” …..Ralph T. FOSTER - Author of Fiat Paper
Money – the History and Evolution of our Currency – P 29.
This chart courtesy World Gold Council and Thunder
Road Report shows the change in the attitude of Central Banks toward gold. In
2009 the selling of gold turned into the buying of gold and the trend is now
upward bound.
Summary: Technical analysis tells us where price has
been in the past. Since history repeats, there are a number of patterns that
give us a clue where price is headed next. Combined with the study of
fundamentals, we can improve the odds in our favor.
Ø Disclaimer: Please do
your own due diligence. Investing involves taking risks. Peter Degraaf is not responsible for your investing decisions.
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