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The recent gold bull upleg is in the midst of a
predictable slight correction and consolidation. When that finishes it
is highly probable, based on seasonality and technicals, that the next part
of the upleg will commence. The Federal Reserve and Washington are only
making matters worse through their extremely damaging policies.
GOLD PARTY BARELY STARTED
Back on 9 September 2009 I wrote:
200 day relative price of gold is at 1.08x …
Based on seasonal trends gold and silver will be strengthening, with the
strongest months in September and November
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
Back then the price of gold
was $996 and the 200dma was about $920. Today gold’s price is
about $1,030 with a 200dma of about $950. While the probability for a
profitable trade is not nearly as high as it would be should the price
relative to the 200dma be significantly below the 200dma there is still room
for the price to run as we enter winter. The October intermission is
likely coming to a close.
OCTOBER
INTERMISSION
Dr. Greenspan testified in 1998
that, ”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.”
One of the key reasons to keep the price of gold suppressed through central
bank gold leasing is to keep interest rates low. This will be
particularly helpful for the $182,000,000,000 of certificates of confiscation that will be
sold during the week of 26-29 October 2009. Another reason is that
NYMEX November options expired 27 October 2009.
PHYSICAL
PREMIUMS RAISED
The physical coin dealers are fairly wise to the
machinations of Wall Street. When the paper price of bullion falls
precipitously then the dealers often raise the premiums.
For example, a reader asked me a few weeks ago when
would be a good time to buy gold American Eagles. I suggested after the
next drop and if lucky then he may be able to acquire them around $1,025 spot
but the premium would likely increase. He reported his shopping to me a
couple days ago after the recent drop in price and informed me the premium had
been raised from $37.95 to $41.95 per coin.
SILVER BACKWARDATION
On 12 September 2009 I observed that “the
London SIFO, the Silver Forward Mid Rates, have been trending towards
backwardation.” It is interesting to observe the continuing trend
and brief entry of silver in backwardation in the LBMA on 9 October 2009. It seems like
the physical silver market is getting a little tight.
QUANTITATIVE
EASING
The big
issue is whether the Federal Reserve will be able to, as Ben
Bernanke said on 8 October 2009 in The Federal Reserve’s Balance Sheet: An Update,
‘tighten the stance of monetary policy and eventually return our
balance sheet to a more normal configuration?’ Back in March 2009
when Bernanke started this lunacy I asserted that The Federal Reserve Will Fail
With Quantitative Easing.
Bernanke asserts:
Although the Federal Reserve’s approach also
entails substantial increases in bank liquidity, it is motivated less by the
desire to increase the liabilities of the Federal Reserve than by the need to
address dysfunction in specific credit markets through the types of programs
I have discussed. For lack of a better term, I have called this approach
“credit easing.
What Bernanke is trying to do is get capital to take
on additional risk by moving up the liquidity pyramid. But The Great Credit Contraction has begun.
While there may be differences in the velocity at which capital moves
down the liquidity pyramid the overall direction has not changed.
Washington and the Federal Reserve are tiny actors compared to the
total size of the market.
Their policies are aimed and designed to grant
special privilege to banks like JP Morgan and Goldman Sachs. Through
government assistance the banks are able to move their capital down the
liquidity pyramid. In effect, they have privatized the gains and
socialized the losses. While there may be a case for a rise in the FRN$ in the short term the ultimate destiny
is known: the
fiat currency graveyard.
 
EXACERBATING
THE GREATER DEPRESSION
As Murray Rothbard observed on page 18 of his
1963 America’s Great Depression:
It is true that credit contraction may
overcompensate, and, while contraction proceeds, it may cause interest rates
to be higher than free-market levels, and investment lower than in the free
market. But since contraction causes no positive malinvestments,
it will not lead to any painful period of depression and adjustment.
Mr. Rothbard continues the observation that
government policy can hobble the adjustment process by: “(1) Prevent or
delay liquidation, (2) Inflate further, (3) Keep wage rates up, (4) Keep
prices up, (5) Stimulate consumption and discourage saving and (6) Subsidize
unemployment.”
In the present case, mark-to-market rules, like FAS
157, are not implemented, delayed, ignored or willfully violated. The
financial markets are now undergirded by fair-value lying standards. For example,
Section 132 of the Emergency Economic Stabilization Act of 2008 is titled
“Authority to Suspend Mark-To-Market Accounting” and restates the
SEC’s authority to suspend the application of FAS 157.
The Austrian definition of inflation is an increase
in the money supply. The Adjusted Monetary Base, the very lowest layer
of power money, shows a tremendous increase over the past year. The
effects are most likely masked by the tremendous slowing in the velocity of
money.
In an effort to stimulate consumption and discourage
savings that will result in keeping prices and wages high the Obama
administration has unveiled a $1 trillion stimulus package. The
Geithner toxic asset plan will only serve to hasten the destruction of wealth
from the economy as the system evaporates.
The Federal minimum wage rose in July 2009.
Unemployment will be subsidized by extending benefits for 13 weeks and
delaying the income tax payments. Legacy industries, like the auto
industry, are receiving bailout money to keep wage rates up and people
employed doing nothing all day long because of the huge over capacity of
automobiles. With Cash-For-Clunkers automobiles which have value are
destroyed to reduce supply of alternative goods to new cars made by
Government Motors. This is a prime example of what Washington DC is:
A giant wealth destruction machine.
Therefore, like heroin to cure a hangover the
quantitative easing from the Federal Reserve and the lunatic policies from
Washington are not improving the situation for average people but instead
exacerbating the greater depression. Now is the time to Raze The Fed and while doing the spring cleaning who
needs Washington?
CONCLUSION
The current correction and consolidation of gold
appears to be within trend and expected based on the seasonality.
November is the strongest month and this recent correction on low
volume is laying a strong foundation for a large move upwards.
The Federal Reserve’s quantitative easing
programs have not been helping the situation but instead exacerbating the
greater depression. All in an effort to save the inefficient, barbarous
and archaic relics of a fiat currency and fractional reserve banking
system that is destined for extinction and replacement.
The Crash of 2008 was just the start of The Great Credit Contraction and it
will last for decades.
DISCLOSURES: Long physical gold and silver and no position the problematic SLV or GLD 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.
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