Gold Update

Gold - From The Situation Room

Last month was a momentous one when the financial world passed the point of no return. Right after a German court cleared the way for massive European QE to get underway, steamrollering opposition from German politicians and the German public in the process, the Fed announced not just QE3, which was expected, but open-ended and unlimited QE and suppression of interest rates over a longer timeframe. Central Banksters declared open warfare not just against the dollar and savers in general, but against the entire middle and lower classes, who will be progressively stripped of their assets and impoverished, the better to serve the interests of the banking class and the elites at large.

It is interesting that the Fed fired its biggest guns right after the German courts cleared the way for Europe to do QE on a grand scale in a similar manner. This means that the dollar and euro are going to go down in value pretty much in lockstep, so we are going to have to take this into account when looking at dollar index charts, which have a very heavy euro weighting, as going forward the dollar index chart may partially mask the ensuing dollar collapse. 

This brings us to another point – is the rest of the world going to stand by and watch and do nothing as the dollar accelerates into a downward slide, which will have the advantage for the US of devaluing its huge debts in real terms and increasing its competitive advantage re exports? – the answer to that is no – everybody is going to be in on the game and the fiat race to the bottom will intensify fuelling accelerating global inflation even as economies shrivel.

Last month also signaled that we are entering the endgame stage – where the accelerating demise of fiat leads first to rampant inflation and then hyperinflation, devastating global economies and leaving them a smoking ruin, at which point, finally stripped of their comfy sofa and TV set and other essentials of life like food and power, the masses go on the rampage, and “do an Iceland” on the bankers and politicians who brought them to this pass. Then and only then can we start over.

 

Track Our Point Break Road Book 

The Fed is playing a very dangerous game. While it is, or should be, hard for any person of even moderate intelligence to understand why anyone would want to invest in either the US bond market or the dollar, given the hopeless debt problems afflicting the US, there are still a lot of investors out there who haven’t given up faith. These latest cavalier actions by the Fed have essentially given a 2 fingered salute to investors in US dollar assets, and could be the last straw that brings out a wave of dumping of US assets, especially as the effects of this policy become more and more apparent with passing time.

From all of the foregoing it should be obvious that with the starting gun having been fired last week on the fiat endgame, where wave of wave of money creation drives the value of fiat lower and lower, not just in the US and Europe, but around the world, the price of anything with real or intrinsic value is going to go up and up and up – the most obvious beneficiaries being gold and silver.

The forecasts made in the last “Gold - From the Situation Room” turned out to be correct. A pause was expected, which we got and then a breakout and strong run, which also duly occurred.

So what does all this mean for the Precious Metals, and for gold in particular? It means that they are to go up and up and up and not just against the dollar but against most other currencies, and as the fight to preserve wealth from the depredations of inflation intensifies, the scarcity value of gold and silver should guarantee gains that more than compensate for the loss in value of currencies – in other words their gains should more than offset inflation. If, late in the endgame, as the increasingly desperate Fed and other Central Banks accelerate their already discredited policies to put off the day of reckoning by heaping still more debt on debt, inflation morphs into hyperinflation, then of course gold and silver will go parabolic.

Gold has an uncanny ability to resemble tangible wealth. When the monetary powers that be finally come to the realization that printing dollars isn’t going to fix the problem – the world monetary system will fall to the golden common denominator.

The China Bombshell…

It is now safe to say that in 2012 alone China has imported more gold than the ECB's entire official 502.1 tons of holdings. Sure enough, acc

ording to the latest release from the Hong Kong Census and Statistics Department, through the end of August, China had imported a whopping gross 512 tons of gold, 10 tons more than the latest official ECB gold holdings. We can now safely say that as of today, China will have imported more gold than the 11th largest official holder of gold, India, with 558 tons.

One thing is certain: China no longer has any interest in buying additional US Treasurys. What it does have an interest in is up to readers to decide.

All rhetoric aside, one unspinnable aftereffect of China's relentless appetite for gold comes from a different place, namely Australia, where gold just surpassed coal as the second most valuable export to China. (Monday Oct 22)

Another long-term developing theme that could alter the course of the gold market is China’s strategic gold holdings.

Between now and 2015 China will send a shockwave through the global currency system — it has the potential to change the global economy, dethrone the U.S dollar and most importantly, send gold prices soaring.

China is stockpiling gold. Currently they are the number one producing nation in the world with over 400 tonnes per year (heck, it could be more!) Not only that, imports into Hong Kong tell the same, hoarding tail.

But as you likely know, China is a strategic nation. So right now we really have no clue as to how much gold the country holds.

The last time they announced gold holdings was 2009. At that point they upped their holding to 1,054 tonnes – more than a 75% increase to its 2003 holdings of 600 tonnes.

Think about it. Since the 2009 announcement China has been producing hundreds of tonnes of gold and importing hundreds of tonnes of gold. The only logical conclusion is that they have amassed a stealthy pile of gold that could sit them as the second largest gold holding nation in the world.

To outmatch Germany, the world’s second largest gold holding nation, the Chinese would simply need to add an additional 2,500 tonnes to their holdings.

If they announce around 2015, they will easily have amassed that much gold. If you do some back of the envelope math you can see that China could easily be added almost 1,000 tonnes per year. 2009, 2010, 2011, 2012, 2013, 2014, 2015….. add it up and they could add nearly 7,000 tonnes to their stash.

That’s a bombshell. But it’s also a big step towards becoming the world’s next reserve currency. China has already announced that they aim to make their currency fully convertible by 2015!

Fourth Quarter Outlook

Let’s now review the charts to see how gold is shaping up. On the long-term 12-year log chart we can see that gold remains in a fine and orderly long-term uptrend that has been in force from mid-2005. In a freak move occasioned by the 2008 crash, gold broke down from this uptrend briefly, late in 2008, but its decline stopped at a classic support level and it quite quickly repaired the damage by hopping back into the uptrend, and it has been a case of onward and upward ever since.

We can see that gold has begun a major new uptrend in recent weeks, but is still some way from taking out its highs of August. It should have little trouble doing so before much longer, and given what went down last week, the chances of it double topping with those highs is now rated as close to zero. Once new highs are attained it should accelerate away to the upside, with the Fed graciously providing a monthly reminder of why it should do so. Before leaving this long-term chart we should note how it shows that the new uptrend is still in its infancy, and that the projected upper boundary of the uptrend allows us to estimate a target for this move in the $2400 area.

This is the chart of a commodity that is clearly accelerating into a spectacular parabolic blowoff move that could take it much, much higher than current levels.

So it looks likely that it will run at the resistance at about $1800 and stop and rest to digest its gains at about this level, and there is some chance that it could press on as far as the highs of last August at over $1900 before consolidation set in.

The 6-month chart shows recent action in more detail. On this chart we can see that gold is now super critically overbought on its RSI indicator, and and it can continue higher in this overbought state for some time, the chances of a consolidation/reaction setting in soon are now quite high, the reading of this indicator puts us on notice to expect consolidation/correction soon, even if it continues higher for a little while first, and this would make sense given that all the “good news” with respect to EU and Fed largesse is now common knowledge.

Although it looks likely that it will run at the resistance at about $1800 and stop and rest to digest its gains at about this level, and there is some chance that it could press on as far as the highs of last August at over $1900 before consolidation set in.

But short-term gold now has a few technical issues to deal with. Take a look:

First, gold is definitely overbought, so a near-term unwinding of both the RSI and stochastic is to be expected. 

Second, a fairly significant area of price resistance has been reached. The reaction highs in November 2011 and February 2012 both failed between $1790 and $1810 an ounce. We saw three intraday highs last week in the $1790s. Finally, traders need to deal with slowing momentum. 

See next issue for  impacts and our views on Gold mines

US Dollar weakening

We will close by taking a quick look at the dollar. The dollar index has now broken down from its uptrend by a clear margin, and is expected to continue to drop. Last week the Fed declared open-ended warfare on the currency which will become the victim of relentless dilution going forward. The only mitigating factor is that other countries and trading blocs are going to follow the Fed’s example and go in for currency dilution of their own, with the German court last week clearing the way for massive Fed style European QE. 

What this means is global QE, so we should see gold rising against most currencies as their buying power is eroded by dilution. Given the magnitude of the Fed’s assault the support levels shown on this chart are unlikely to count for much, and it could easily crash them quite quickly. Over time however the dollar’s demise may be masked on this index chart by as Europe races to catch up in the QE stakes and the euro is thus subjected to similar treatment.