Nothing has been done to address the structural
inadequecies and distortions that lead to the 2008 financial crisis Â
instead our leaders have resorted to the procrastination made possible by
turning to drugs, specifically Quantitative Easing, which has enabled them to
clamp interest rates at 0 to prevent the already unserviceable debt load from
compounding out of sight. Spearheaded by the US, this money printing policy
has now become standard practice around the world, with Europe and Japan
following suit in a big way. The notion put about that all this newly printed
money can somehow be contained within banks is nonsense as demonstrated by
the soaring prices of stockmarkets in developing markets until recently and
in various asset bubbles like the boiling London and New York Real Estate
markets.
Nothing has been done to address the structural inadequecies and
distortions that lead to the 2008 financial crisis  instead our leaders
have resorted to the procrastination made possible by turning to drugs, specifically
Quantitative Easing, which has enabled them to clamp interest rates at 0 to
prevent the already unserviceable debt load from compounding out of sight.
Spearheaded by the US, this money printing policy has now become standard
practice around the world, with Europe and Japan following suit in a big way.
The notion put about that all this newly printed money can somehow be
contained within banks is nonsense as demonstrated by the soaring prices of
stockmarkets in developing markets until recently and in various asset
bubbles like the boiling London and New York Real Estate markets.
Nothing has been done to address the structural inadequecies and
distortions that lead to the 2008 financial crisis  instead our leaders
have resorted to the procrastination made possible by turning to drugs,
specifically Quantitative Easing, which has enabled them to clamp interest
rates at 0 to prevent the already unserviceable debt load from compounding
out of sight. Spearheaded by the US, this money printing policy has now
become standard practice around the world, with Europe and Japan following
suit in a big way. The notion put about that all this newly printed money can
somehow be contained within banks is nonsense as demonstrated by the soaring
prices of stockmarkets in developing markets until recently and in various
asset bubbles like the boiling London and New York Real Estate markets.
This global procrastination worked until recently, but now this reckless
and economically suicidal policy is visibly coming apart at the seams  it
didnÂt work for Robert MugabeÂs Zimbabwe and it wonÂt for anyone else
either because it is a flawed scheme to avoid facing up to the consequences
and fallout from oneÂs actions. The only reason that the ship hasnÂt sunk
so far is complex financial engineering that has enabled the rot at the heart
of the system to be obfuscated for as long as possible, but now the markets
have gotten control of the ball and things look set to get ugly fast.
Of course, no-one really wants them to grasp the nettle and seriously
attempt to rectify the mistakes of the past, because they have left it so
late to do this that it would lead to an earth shaking deflationary implosion
that would economically lay waste most of the planet. This being so they have
no choice but to continue with more of the same, and any attempt by the Fed
to resist the inevitable QE4 will lead to the markets getting it in an arm
lock and forcing it to comply and cough up. This process has already started
as deflationary forces have been gaining ascendency. A symptom of these
gathering deflationary forces is the crash in oil prices, and the failure of
key support in copper about a week ago, which threatens to crash too unless
something is done. The big question is when will they (the Fed) capitulate
and reverse course  will they do so immediately to keep the game in play,
or will they let the US stockmarkets crash first, so that they can use it as
a justification for their actions. Europe, which is already being ravaged by
deflation, has already surrendered and is preparing to do massive QE, which
is why the euro is so weak.
Last week we had the bombshell development of the Swiss abandoning their
Franc peg to the euro. This was a development with grave implications. They
know that this move will severely damage their exports and tourism
industries, but they have done it because they realize that it is better to
take to the lifeboats now than go down with the Titanic (the euro). This was
a major vote of no confidence in the euro that has kicked out an important
prop from under it  and its nice to see the Swiss going back to their
independent mountain ways  now all they have to do is kick out the
international snoopers spying on bank accounts to restore the confidence of
the global tax dodging community.
If you are starting to think ÂWhen is this guy going to get to the point and
start writing about gold I ask you to bear with me, because all this has
profound implications for the future course of Precious Metals prices.
Now, if you are an investor in dollar based assets you might be thinking ÂGreat
 the markets crash, and a tidal wave of money floods into the US seeking
safe haven in Treasuries, driving up the dollar and the value of my dollar
assets even more like in 2008Â. This is likely true up to a point, but the
key to understanding the looming massive uptrend in gold and silver is to
grasp that at some point, in the face of collapsing markets, the Fed will do
an about face and announce QE4 Â when this happens the overinflated dollar
will cave in as global rebalancing starts.
HereÂs another point in relation to the looming gold and silver
mega-uptrend. Most investors, looking at the chart of the dollar index, think
ÂHow impressive and wonderful the mighty dollar is, advancing like that
after 3 QE programs! but what we need to remember is that it is simply Âking
of hellÂ, a temporary best of a bad bunch. All major currencies are being
inflated away to oblivion, with QE programs around the world vying with each
other for supremacy. First the US started the whole process as a way of
getting out from under the financial crisis of 2008, then, inspired by this,
Abe of Japan followed suit with his Âbeat that! mega-QE challenge, and
while admittedly his audacious QE plan will indeed be hard to beat, it is
sure to inspire imitation.
Where is all this leading? Â as we have already observed, it is way too
late to revert to the financial rectitude of decades past  you know, doing
old-fashioned things like balancing the books, and buying stuff with money
that you have actually saved beforehand. Any attempt to do this would trigger
a ballistic increase in interest rates, and bring the global economy to a
dead stop. So instead they have no choice but to print and print and Âthe
piper will be paid by ordinary people, the middle and lower classes,
getting poorer and poorer as their wages fail to keep up with ever rising
asset prices. In a way this is poetic justice, because voters have always
voted for politicians who lied to them and indulged their insistent and
childlike ÂI want it all, I want it now demands at the cost of future
generations.
So, currencies will continue to spiral towards the plughole, including the
US dollar, which we can expect to be rudely kicked off its perch when the Fed
backpedals and announces its next QE program, QE4. As in the 70Âs, but on a
vastly greater scale, investors will increasingly look to stores of value,
like gold and silver, as currencies purchasing power withers.
ThatÂs enough background, now letÂs proceed to look at the charts.
Starting with the 15-year chart for gold we can see that the bearmarket of
the past several years looks like a correction to the strong advance from
2009. Given the magnitude of the rise in the dollar in recent months, gold
has held up remarkably well, and has even climbed back well above the support
level that failed late in October. On this chart we can also see a big reason
for the weakness of gold over the past several years  the continuing
advance in the broad stockmarket, shown at the bottom of the chart, which is
sucked in hot money, and we can also see the rotten performance of Precious
Metals stocks at the same time on the XAU index shown at the top of the
chart, which are now very undervalued relative to gold.
On its 18-month chart we can see in more detail how gold has performed well
in recent weeks, rising well above the support level that failed late in
October at $1180. It has followed almost exactly the predicted path set out
for it in the last Gold Market update posted on 14th December, although it
got to its present level somewhat faster than we expected. On this chart we
can also see that it is getting overbought short-term, so a minor reaction
soon is possible.
On its 6-month chart we can see that the pattern of the past several months
looks like a down sloping Head-and-Shoulders bottom, which it has certainly
broken clear out of to the upside over the past week.
Now we will take a look at various indicators for gold, starting with its
latest COTs. These show that Commercial short and Large Spec long positions
are starting to get to a rather high level  not enough to preclude further
advance  but enough to put us on notice that we should not be surprised to
see a consolidation or correction to the recent advance before much longer.
Click on chart to popup a larger clearer version.
The Hedgers chart, which is a form of COT chart, is in middling ground and
doesnÂt give us much of a clue regarding immediate direction, although it
makes plain that there is room for a sizeable move in either direction now.
Click on chart to popup a larger clearer version.
Chart courtesy of www.sentimentrader.com
The Gold Optix or optimism chart still looks quite strongly bullish. There is
certainly plenty of room for a big rise by gold on this chart.
Click on chart to popup a larger clearer version.
Chart courtesy of www.sentimentrader.com
The normally wrong Rydex Traders still have extremely low holdings in
Precious Metals assets, although they are just starting to be attracted back
in by rising prices. The chart below shows this and also makes clear that
gold has huge upside potential before the Rydex traders holdings start to be
a cause for concern.
Click on chart to popup a larger clearer version.
Chart courtesy of www.sentimentrader.com
As noted above, gold stocks are way undervalued relative to gold, and the HUI
index lost over 75% of its value at its 2011 highs by last December, as shown
on its 5-year chart below. We bought a range of big gold stocks in December
in expectation of a New Year rally, which is what we have seen. This strategy
has paid off and while we could see a short-term reaction back from
resistance near to the falling 200-day moving average, overall the picture
for the sector is brightening.
The 5-year arithmetic chart for the Market Vectors Gold Miners ETF, GDXJ is
actually much more useful in alerting us to the underlying condition of this
sector, which is now VERY bullish. What makes this clear is firstly the
breakout from the downtrend, but of much more decisive importance is the
explosion of volume last year to massive levels, as Dumb Money finally
capitulated and handed over its stock en masse at rock bottom prices to Smart
Money. This is why we are getting the high quality juniors on board now as
fast as we can  prices are already starting to rise, and it shouldnÂt be
long before the sector takes off strongly higher.
The 20-year chart for the XAU large gold and silver stock index divided by
the price of gold shows extreme fear with respect to the sector which
indicates that we are close to a major bottom. This is because when investors
are fearful towards the sector, they favor gold bullion over gold stocks,
because they are scared that gold stocks will approach 0, but reason
(correctly) that this will never happen to gold itself. So the lower this
ratio is, the more positive it is for the sector, since the majority are
always wrong.
In the space of two weeks investors have gone from being 0% bullish on gold
stocks to 50%, a huge jump, as we can see on the Gold Miners Bullish Percent
Index shown below. This puts us on notice that we should not be surprised to
see some short-term corrective action in PM stocks, either consolidation or a
reaction which should be minor.
Of crucial importance to the outlook for gold is the dollar. As we can see on
its 6-month chart the dollar has risen to hit a trendline target in an
overbought condition, where a couple of toppy looking candlesticks have
appeared over the past couple of trading days. It could go into reverse here
or very soon, and various indicators suggest that this is likely. However, a
market crash would be expected to trigger a final swansong spike, as in 2008.
After its latest rally the dollar hedgers chart, which is a form of COT
chart, is showing readings in Ânosebleed territory  at a record level by
a wide margin, and considerably worse than at the dollar peak associated with
the 2008 market crash.
Click on chart to popup a larger clearer version.
Chart courtesy of www.sentimentrader.com
Likewise, optimism on the dollar is at record Ânosebleed levels. Taken
together these indicators suggest that we are either at or close to an
important top. This implies that a shock reversal in Fed policy may be closer
at hand than most people think.
Click on chart to popup a larger clearer version.
Chart courtesy of www.sentimentrader.com
The dollar and the US stockmarkets have been in a Âvirtuous circle feeding
off each other for a long time now. The appreciation of the dollar has
attracted money from moribund countries and regions around the world, like
Europe, who see price appreciation of stocks and other investments magnified
by currency appreciation. This attracts more money which drives both the
dollar and stocks higher still. The positive background fuelling all this is
that the Fed has been scaling back on QE while other countries and regions,
like Japan, and soon Europe, have been stepping up QE. What the charts above
are telling us is that at some point and perhaps not very far into the future
Âthe music is going to stopÂ, and you sure donÂt want to be around if that
happens. If the Fed were to reverse course and announce QE, the dollar and
stockmarkets wonÂt just drop, they will crater. To see just how dangerous
the current situation is, take a look at the following chart  and draw your
own conclusions.
End of update.
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