The FRN$, the world’s reserve currency, has no
definition and the quantitative easing
will fail. After all, what is a dollar? Because there is no definition
therefore it is impossible to perform accurate, or even semi-acccurate,
calculations of value using this tool. Consequently, other key
ratios ought to be used to hone in and focus on value.
MAY 2009 RECAP
While the DOW may continue its rally I highly doubt
it will breach 11.5 gold ounces before it resumes its downward destiny and
reaching 5-6 ounces sometime this year. Silver will likely continue its
upward ascent and return to a more normal ratio with gold around 55. A
little bit more difficult to prognosticate is oil but if I were to wager it
would not descend too far below 15 on the chart but the probabilities are not
particularly clear either way.
In May the DOW to gold ratio was 9.32, S&P 500
to gold ratio was 0.97, gold to silver ratio was 66.4 and gold to oil ratio
was 16.2. I concluded,
There appears to be (1) a strong uptrend for gold, (2)
a fairly decent bear market rally for equities that is running out of
upward pressure, (3) a resurgent oil, (4) insane accounting sorcery that is
rending any remaining confidence from the financial statements of
corporations, (5) insolvent banks being sustained only through
government bailout, (6) massive job losses with (6) continued bankruptcies
which (7) detonate financial weapons of mass destruction.
Around the end of July I warned of the coming market crash. At the time the DOW to gold
ratio was 9.5 ounces and the S&P 500 to gold ratio was 1.05.
CURRENT RATIOS
The DOW to gold ratio is 9.49 and S&P 500 to
gold ratio is 1.03.
Despite the S&P 500 rocketing up over 10% in
FRN$ during the past 4 months when priced in gold, a definable
currency, there is no material change. In other words, despite the
proclamation of recovery and green shoots, which are really only red roots, the market has not been fooled. The
rising equities are really just a function of an evaporating fiat currency.
Where does the top line come from when 40% of working age
Californians are unemployed? California is just a portent for the
other states.
The resurgent oil price, with the gold to oil ratio
at 13.95, seems to be the most difficult to explain. Because of
the slowing economic picture, empty ports, empty trucks, empty railroads and
empty stores the demand for oil seems to have slowed considerably.
Natural gas stockpiles may soon exceed capacity. Why the oil
price, in gold, has continued rising is probably the result of it being
extremely cheap compared to historical norms. Even with the 12.5% gain
in gold it still has a significant ways to go before it reaches much more
normal territory.
Perhaps the market is beginning to take the Peak Oil Theory seriously? But we
understand the importance between gold, oil and our stomach.
Perhaps Nate Hagen understated the
magnitude of the recent IEA report when he wrote, “the initial language
in this year’s Executive Summary is of an urgent nature.”
The Independent reported,
“The IEA estimates that the decline in oil production in existing
fields is now running at 6.7 per cent a year compared to the 3.7 per cent
decline it had estimated in 2007, which it now acknowledges to be
wrong.”
GOLD AND SILVER
Silver’s movement seems to amplify
gold’s. The current gold to silver ratio is 60.2 and declining
quickly.
Physical gold is on the move as both the Arabs and the
Chinese are moving physical gold bullion bars out of London to the Middle
East and Hong Kong. As MarketWatch reported, “Hong
Kong is pulling all its physical gold holdings from depositories in London,
transferring them to a high-security depository newly built at the
city’s airport”. The timing with the CME clearing of
OTC gold derivatives is particularly interesting.
Additionally, Barrick Gold “will
issue $3 billion in stock to eliminate all of its fixed-price gold hedges and
a portion of its floating hedges, taking a $5.6 billion hit to third-quarter
earnings, the world’s top gold miner said on Tuesday.”
Dr. Greenspan testified before
Congress in 1998, “Nor can private counterparties restrict
supplies of gold, another commodity whose derivatives are often traded
over-the-counter, where central banks stand ready to lease gold in
increasing quantities should the
price rise.”
Central banks carry gold in the vault and gold out
on loan to the bullion banks as the same line item and in effect report cash
and accounts receivables as the same thing. As Bill Murphy of GATA has
observed, “They cannot get this gold back. They say they lent it;
when you lend something out you expect to get it back.” Is the gold cartel retreating in the face
of a coming tsunami of physical demand?
PROGNOSTICATION
The DOW to gold ratio is fairly above the 200dma
while the gold to oil ratio and gold
to silver ratio are significantly below. A relative
price is the current price divided by the X day moving average. For example,
the 200 day relative price would be the current price divided by the 200dma.
In FRN$ the DOW is at a 200 day relative price of
1.14x, gold is at 1.05x, silver is at 1.26x and oil is at 1.29x. Based
on seasonal trends gold and silver will be strengthening, with the strongest
months in September and November, while oil just finished the usual August
surge and will be weak the rest of the year with the weakest month in
October.
This upleg in gold and silver will have significant
strength because of the long period of consolidation just like in 2004 and
2006 which provided the foundation for the uplegs in 2005 and 2007 that took
gold from $400 to $700 and $650 to $1,000, respectively. If the current
upleg is similar to the previous two then the 200 day relative prices for
gold and silver at the top of this upleg would be about 1.5x and 1.7x,
respectively.
This puts $1,300 gold and $25 silver within range
without greatly exceeding previous trading norms and would result in a gold
to silver ratio of 52 which would be about average for the past few years
excluding the panic of 2008 where silver went into backwardation
for nine weeks. If the DOW retreats to 6 ounces then that would be
about 7,800 and a gold to oil ratio of about 12 would mean $110 barrel oil.
While we could see both the USD Index and gold rise at the same time,
because of their respective places in the liquidity pyramid, I think it is
more probable than not that the USD Index will retreat below the 75 level.
CONCLUSION
Given the shakiness of the FDIC, the routine bank
failure Friday and counter-party risk from OTC derivatives, financial weapons
of mass destruction, it still makes sense to establish an alternative and
eventual substitute monetary system for your ordinary daily and business
transactions. While the OTC derivatives were latent they have now
become financially lethal.
To immunize and protect yourself and your capital I
recommend either buying gold, silver or platinum and taking
possession of the physical bullion or using a trusted third-party storage
service like GoldMoney which allows for physical delivery at anytime.
By all means, stay away from the problematic GLD or SLV ETFs if you are seeking safety.
The markets are not fooled by the red roots being
touted as green shoots. The technicals, fundamentals and seasonality
are merging and consequently the ratios are materially changing. The Great Credit Contraction is grinding on
and capital is seeking the safest and most liquid assets. Gold and
silver have been preparing for the next upleg for over a year and laid a
strong foundation for a massive run which has likely just started.
Humanity’s gold lust has
been dormant for nearly a century and when it awakens it will be extremely
vehement and go viral. Those who own
gold know of what I speak. The yellow metal seems to call out to the
inner conscience and resonate with our DNA. Our cash balances ought to
be denominated in gold to avoid unnecessary risk from barbarous relics like fiat currency and fractional reserve banking.
Think of how few people have held physical gold in their hand; let
alone owned it. This fact is perhaps the most bullish aspect of this
upleg. Consequently, this gold party has barely started.
DISCLOSURES: Long
physical gold, silver and platinum with no position in the DOW, S&P 500,
Barrick or the problematic GLD or SLV ETFs.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young University,
a law degree from California Western School of Law and studies the Austrian
school of economics. He works as an entrepreneur, investor, journalist and
monetary scientist. He is a strong advocate of the freedom of speech, a
member of the Society of Professional Journalists and the San Diego County
Bar Association. He has appeared on ABC, NBC, BNN, many radio shows and
presented at many investment conferences throughout the world.
|