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Friday, September 11, 2009

The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure)

I first wrote this blog post in My original blog on June 15, 2009. Here is the original post (The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure) -- If you are a CAPS user, please rec the original blog post. It is one of the most important and comprehensive posts I have ever written and needs as much exposure as possible --). I have decided to update the post right now for a few reasons:

1) Gold and Silver are beginning their breakouts. And per my fundamental analysis and my Wave Counts, the patterns are very bullish for the near term and long term. Is this *THE* breakout to new all time highs, and never looking back? Or is it another run-up to 1000-1030 and then a retest of support levels down to 700-800. I don't know. And more to the point, I don't care. Gold is about value and preserving wealth over the long term, through the current and future inflationary policies of the Fed and Treasury and the next crisis in the continuing financial meltdown. More on this point further in the post. But this next move is setting up to be a potentially significant technical event. Which way it breaks is a matter of opinion and debate. I am in the bullish camp. But moreover, I am in the *long term* bullish camp. I am a fundamentally engaged gold investor and have been for years now. So my opinions on this matter should not be read from a traders perspective. I have bought on all pullbacks, but I will also buy in a confirmed move above 1050. The peaks around 1000-1030 have been resistance for a long time. But based on the size of current short positions in gold, a move to 1050 could set up some massive short covering and fuel the leg of the next large bull move in gold.

2) I am a huge dollar bear. I have written two large posts on the US Dollar (Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog Jun 17, 09 and USDX Count Update and Thoughts Aug 12, 09) and while I agree that we will get a bottom in the Dollar that should last for a couple of months, it is *extremely* important to understand the long term trends of the US Dollar (down) and the fact that all fiat currencies eventually trend toward their intrinsic value (zero). This is not a gold bug statement. Look at the history of all fiat currencies. We even have dead United States currencies, since the US has been in existence! Anybody who thinks the Fed will not try to inflate their way out of this mess, or thinks there will not be political pressure to inflate the money supply or increase the debt ceiling on the US National Debt, really does not understand history or the willingness of politicians to dismiss sound economic policies in order to "look like they are doing something".

So this post is a repost/update to the original post. It has all updated charts with new annotations and revised counts (where necessary). Also I was playing around with a few numbering/coloring schemes when I wrote the original post, and all the charts in this new post are compliant with my EWP Numbering Scheme

Addition Oct 16, 2009

I am including the preamble that I wrote to this blog post: Steve Saville: Gold and Saving. The preamble is also very relevant to this blog post. But follow this link and read this post, it is a very good article by Steve Saville.

Inflation (monetary inflation) is the selected course of action. Always has been, always will be when it comes to the Government, Fed and Treasury. Prices of many asset classes have fallen and will continue to fall, and this in and of itself is *NOT* deflationary. But the Fed (and analysts like Krugman) continue to pepetuate the myth that price deflation = deflation ... which is WRONG! These "deflationary" events are deflation scares in which the Fed is given free reign to drop rates to 0% and monetize debt like there is no tomorrow, due to popular (and intentional) misconception about deflation and thus public acceptance of these polices.

So, binv, asset prices are falling. Why do I care about the academic distinction between monetary inflation / deflation and price inflation / deflation?

Because monetary inflation or deflation beget vastly different long term consequences!

It is cause and effect. Monetary inflation not only enters into the economy unevenly but also changes the structure of the economy. Non-productive enterprises are propped up (especially government spending). But the biggest difference will be the price of real goods, such as commodities and especially gold, will reflect their real costs (inflation adjusted). 

Many take this argument to support the theory that inflation will help stocks, as a general asset class, to maintain their levels. The only thing inflation will do will be to help stock from falling as far as they otherwise would. Please read this post for my explanation as to why: binve's Long Term View

Even in an inflationary environment, there are several asset classes that will continue to fall due to poor fundamentals. This is a demand issue and is not necessarily deflationary.

But there is one asset class that will maintain purchasing power through this period of massive inflation: Gold.

Notice my wording. Maintain Purchasing Power. Gold is *NOT* going to the moon! Anybody who thinks that does not realize what gold is. If gold goes to the moon, it is because the dollar goes down the the Earth's core. It _maintains_ purchasing power.

Gold is about holding value. Gold does not pay dividends, gold does not multiply, gold does not make the world go round. Gold holds value. That’s it. So gold is not a way to get rich. Let’s be very clear about this point. Gold is a way to be NOT POOR. Like I said, it holds value.

So if it goes to $5000/oz, it means that the economic toilet paper we call the US Dollar has been ravaged / devalued by the polices of the US Government, the Treasury, and the Federal Reserve. And you can now buy that much less with the Dollar. 

The problem is debt.

And the Fed has made it very clear that monetizing as much debt as is necessary to keep the system going, at the direct expense to the Dollar, is not only a course of action that is open to them, but THE course of action that they are taking and will take. Anybody who does not understand and accept this is a bit naive (IMO). This plan will continue until there is no longer a Federal Reserve

And as Saville is pointing out, the fact that the population is becoming wise to this is a natural and not at all unforeseeable consequence. Savings is increasing. And yes, for many people, that means into gold too.

Addition Oct 18, 2009

A response I have written many times regarding investment in Gold, and why I consider investing in Gold an optimistic endeavor.

In my investment account that I am in gold and oil. Why? Because I am bullish on the very long term prospects for the economy of the US and the world.

.... Now that might seem odd, because aren't all the people who invest in gold assuming the world will end? The answer is no, at least for this gold investor. I invest in gold not because the world might end, but I invest because I firmly believe it WILL NOT!!. If I was uber-bearish for the very long term, I would build a bunker underground, stocked with years of food and buy guns. Gold? For the end of the world? It makes no sense. Why would a useless shiny metal rock be something to collect if civilization ends?

It is the same thing with fiat currency (such as the US dollar). If you really thought the world would end, why collect little pieces of green paper with faces on it? How is that possibly useful? If there is no government to give you goods in exchange for it, then there are better items for a bunker mentality.

So I invest in gold because I am an optimist.

I am not bullish on the US government. I think they will inflate the dollar into worthlessness (or devalue it highly at least). But ultimately economies WILL recover, and I want to trade my gold in for something useful. Shares in a profitable alternative energy company, or a company the produces / distributes water from seawater to sustain drought countries, or any number of productive future endeavors.

Gold is simply a way to maintain purchasing power as the worlds economy goes through this large and needed contraction. So as an optimist, you should invest in gold :) Just my $0.02 (silver coins of course, not actual pennies ... :) )

Gold is an exceptionally polarizing subject matter. This blog will NOT be a rant by a gold bug telling you to buy gold before the world devolves/vaporizes/implodes etc. Instead it will be a brief history of gold, why it has been traditionally important monetarily, why it still continues to be important, some FA and TA of gold, and some of binv’s thoughts on the matter.

There are a few thoughts that I would like to set the stage with for this blog post, and both come from the classic film: The Treasure of the Sierra Madre

“Gold in itself ain't good for nothing, except for making jewelry and gold teeth.”

“A thousand men, say, go searchin' for gold. After six months, one of them's lucky: one out of a thousand. His find represents not only his own labor, but that of nine hundred and ninety-nine others to boot. That's six thousand months, five hundred years, scramblin' over a mountain, goin' hungry and thirsty. An ounce of gold, mister, is worth what it is because of the human labor that went into the findin' and the gettin' of it.”

You many wonder at these quotes and question their pertinence to the topics I enumerate in the opening paragraph, but I assure you that they are exceptionally poignant and get at the core of this whole discussion.

The Point of this Post and What is NOT the Point of this Post

This is not going to be a detailed analysis of every aspect of gold. And if you have been on Caps for more that 5 minutes you will have already realized that Caps has a gold aficionado: TMFSinchiruna. Sinch’s (Chris’s) blogs and pitches contain a wealth (pun intended) of information going back several years regarding gold fundamentals, gold trends, macroeconomics, miners fundamentals and cost drivers, etc. I could write a whole blog just indexing his information. But I urge you to read his blogs, especially the older ones at the beginning and mid 2008 which have unbelievably good information. Sinch is like me, he is not a gold bug. He is a guy who has looked at the fundamental issues facing our economy and nation, looked at the short and long term macroeconomics and policy decisions, and has concluded that gold has a place (perhaps even a significant place) in any serious investors portfolio.

Nor is this going to be a blog with a hundred charts talking about the minute movements of gold. I do not trade gold. I invest in gold. The short term movements are quite irrelevant to me. Now this may seem at odds with what you know of binv. After all, this binve port was built to take advantage of short-term/momentum plays. So why not trade gold? Because I believe that gold is one of the few asset classes right now in a legitimate bull market. Now, your gold bug alarms may be flashing with this statement, but I assure you that it is not based on a gold-bug mindset. It is based on a well-reasoned and balanced examination of a lot of facts, and is a conclusion that I have come to (but I am getting ahead of myself). More on this later.

You may hate gold. You may think it’s stupid. That it’s a shiny yellow rock, as arbitrary for storing monetary value as seashells, bottle caps or baseball cards. And that is fine if you do. I am not going to try to convince you (if that is your persuasion) to dump stocks and buy gold.

But I would like you to ask yourself, instead of gold, why put your trust in green pieces of paper with dead presidents faces on it?

Your first thought might be: “That is an absolutely ridiculous statement. I mean dollars are the currency of the United States”. This is a true statement. But why do dollars have value? You may have thought about this, or maybe you haven’t. But saying that gold is irrelevant because it is not longer an official currency, and just leaving at that, is extremely short-sighted and is (IMO at least) a bit gullible.

So the ultimate point of what this post will be about is a (hopefully) well-reasoned approach as to why gold is relevant to todays investor, actually especially to todays investor. I am not trying to win anybody over, nor will I simply preach to the choir. Instead I will give my thoughts any why I have come to the conclusions that I have, and hopefully it will cause you the reader to think critically about gold.

But First (I’m sorry to Say) A Slightly Off-Topic but Extremely Relevant Rant

In my last two large blog posts: More Thoughts and Analysis: Timeframes – Bearish, to Bullish, ...to Bearish and Market Thoughts and Analysis: Potential Turning Point This Week and Some Important EWT Observations I had two fairly large rant sections. These can be summarized into two statements:

1. “Anybody who says they know what will happen is delusional, a paid liar, or both”

2. Any analysis that is performed (macroeconomics, FA, TA, etc.) is ultimately an opinion and should always be treated by any reader as a guess, not as a fact.

In fact, I spent a lot of time belaboring these two points. And still I was questioned about the validity of my analysis, saying how I could claim to predict the future even though I had very specifically said in the original posts that I was not.

So read this, this is EXTREMELY important

Whenever I write a blog or a comment on a blog, this is my intent and thought process. And I would further argue that this should be any writers intent: I am not trying to convince anybody of anything! I am simply sharing my thoughts and ideas, sometimes the evidence and facts that I have looked at that helped me to form my opinions. But never will I claim that any of my opinions or the conclusions from any of my analysis as either a fact or an inevitable occurrence. I offer my thoughts and a guess with some probability of occurrence. THAT’S IT. And I would urge you as a reader to be highly skeptical of ANYBODY who claims anything beyond that.

Any author who claims to be an authority at: Interpreting macroeconomic trends, Technical Analysis, Sector Analysis, etc. is ultimately engaging in a non-definitive exercise. Why? Because the ultimate point of these analyses is to try to predict the future. And this is impossible.

The best anybody can do is to predict aspects of market with a certain degree of probability. That is it. To identify likelihoods of occurrence for events, to assess some amount of relative impact, and to identify risk/reward.

So let me (again) preempt any comment that questions my thoughts and analysis as if I were claiming any definitive outcome. I am not claiming to predict the future with any accuracy, nor am I trying to convince anybody to do anything with their money. I am sharing my thoughts and observations, nothing more.

What is Money?

What is Money? Another simple question with a seemingly obvious answer. But if you haven’t seriously thought about it, I invite you to do so now. The most basic definition would be: Money is a medium of exchange. Okay, that makes sense. Instead of a true barter system, money allows for goods and services to be exchanged between groups and individuals based on some agreed up ratio, or an exchange rate (remember this, this is important). E.g. A Snickers bar is worth 2 units of currency, or an hour of Babysitting is worth 10 units of currency, etc. Okay, so if you can purchase a Snickers bar with currency, and it is exchangeable (you can trade Snickers bars with other people), then is a Snickers Bar money? Again, the answer I expect to hear is a resounding “no”. I mean that’s ridiculous right? But let’s explore for a minute why this is ridiculous.

Money needs to be a medium of exchange. And as such should have reasonable consistency among measures of exchange (e.g., the Dollar or the Euro). So the first part is true. Snickers Bars are consistent with respect to the exchange rate with US Dollars (e.g. the Snickers/USD exchange rate). You can go into any Walmart or convenience store and pick up a medium Snickers Bar for $0.99. So why can’t you exchange a stockpile of Snickers back to a convenience store for say a gallon of gasoline?

Because simply being a medium of exchange is not enough to define money. Money must exhibit other properties: 1) Money must be valued equivalently by all parties in the exchange, 2) Money must have enduring value, 3) The supply of money needs to be regulated, 4) Money must be liquid, 5) Money must be fungible. So lets step through these one-by-one and apply them to our Snickers example

1. Money must be valued equivalently by all parties in the exchange. Lets say Joe and Linda both love Snickers and Joe has 100 Snickers and Linda has a lawn mower. Joe and Linda decide to make a trade for 90 Snickers. Now Joe needs gas for the lawn mower and Tim has some gas, Joe offers Tim 10 Snickers for a gallon of gas. However, Tim is a diabetic. What good are Snickers to him?

2. Money must have enduring value. Joe has 100 snickers and is about to make the lawn mower deal with Linda. So Joes walks up to Linda, Snickers in hand, and then they start discussing lawn mower maintenance. It is a very sunny day and by the time the trade is ready to happen, Joe finds that all of his Snickers have melted

3. The supply of money needs to be regulated. Lets say that, despite points 1 and 2, Snickers does catch on as money. Well M&M/Mars has just realized it has a way to mint money. So what if it flooded the market with a new supply of Snickers? The market would be come saturated, driving down the price (much more supply vs. demand)

4. Money must be liquid. Let’s face it, carrying around cases of Snickers to buy groceries is a bit insane. Nor could you ever have a “digital” currency based on Snickers (what is the point of eating a digital candy bar, where is the store of value in that).

5. Money must be fungible. This may be a term you are unfamiliar with. Fungibility is the property of a good where the units are capable of mutual substitution. i.e. A single US Dollar is equivalent to every other US Dollar in existence. A pound of 0.9999 Oxygen-Free High-Conductivity (OFHC) Copper is equivalent to every other pound of high-grade OFHC Cu. But unless the Snickers bars are completely pristine they are not fungible (e.g. Is a brand new unopened bar fungible with one that is opened, with a bit missing and past its expiration date?)

So this should scuttle the dreams of any of you scheming up a “Snickers-based economy”. But moreover, it should really call into question what can be used as “money” or as a “monetary asset”. A share of common stock exhibits many of the properties above. But what about a home? Is a house fungible? Is it liquid? What about a Credit Default Swap (CDS) or a Collateralized Debt Obligation (CDO)? I am not trying to tell you what is money and what is not. I have laid out the properties that money and monetary assets should exhibit. You should think about those properties and then think about the assets that are held by your favorite companies or by financial institutions when they make loans or secure debts against those assets.

The US Dollar / Fiat Currencies as Money.

So I think we all agree that the US Dollar is Money. As is the Euro, the Franc, the Yen, etc. It displays all of the properties described above. But the money is not simply the notes that are issued by the governments and Central Banks (which is “token money”). The “money” of a nation is defined as its money supply. The “money” that is defined by the US Dollar is a bit more complicated that you might believe. The Federal Reserve issues (creates of thin-air) what is called base money. Banks (which are legally part of / have access to / and grow the money supply) increase the money supply by taking the deposits of customers and using it to lend to other people. Banks, by Federal rules, are required to keep a fraction of the deposits on their balance sheets as cash and can loan out the rest. This is the basis of fractional reserve banking and is the basis of our entire banking system. But not only the US, all over the modern world.

Okay, that’s all well and good, the Fed has complete control over the base money supply, and banks act as arms of the federal banking system and increase the money supply. But who decides what the “value” of the Dollar is?

The US Dollar / Euro / Yen, etc. are all examples of what is called “fiat currency”. Fiat money is legal tender because the government has decreed this to be the case. Fiat comes from Latin and means “Let it be done”. The decree of value is a literal one. But the basis for this decree is backed from the fact that the government collects taxes from its citizens. Quite simply, fiat money is a tax credit. The value of the US money supply exists as a claim on the future tax of US citizens. Remember this, we will come back to this one.

Why Gold is Money.

Gold is money because it is a medium of exchange and exhibits all 5 attributes described above. And I can just hear some of you now “Can you go down to Wal-Mart and buy a Snickers bar with gold”. The answer is no, you cannot. The US government no longer recognizes gold as an official currency for all debts public and private. But does that make it any less valid as money? If you said yes, I would first ask you why?. Next I would point out that the Euro cannot be used to settle American debts, but does that invalidate it as a currency? A rebuttal would be, well you can go any Forex counter in the world and for a fee, exchange most major currencies with each other. And I would say: precisely! And in every city in the world, you will find a seller who will exchange gold for local currency.

Before I continue, let me say that before I read TMFSinchiruna’s blog (a couple of years ago, back when he was just Sinchiruna :) ), I thought gold was stupid. I had all of the same preconceptions and misconceptions that people typically have. I was born after the gold convertibility window was closed by Nixon in 1971. I have always lived in a world when gold was not an official currency. I am not a gold bug in any way. But I have gone through the process from being a skeptic to seeing the value in gold.

Gold is a currency, not a commodity. This is not strictly true, it is mostly true. The gold supply feeds three markets mainly: Jewelry (~65%), Investment (~20%) and Industrial (~15%). However, a very large portion of “Jewelry” demand really is investment demand. Indian and Asian cultures in particular use their jewelry as savings, and accounts for a very large portion of the overall jewelry demand.

It is a currency first, and a commodity only in a very distant second. Some of its properties have beneficial industrial uses: it is non-reactive and non-corrosive in many environments which make it good for dental fillings, it is a very good conductor and is used for high grade electrical connectors or contacts, and it has useful thermo-optical properties so is sometimes used as the outer layer in thermal shields for spacecraft, and yes, I would know :). But each of these uses can be filled with more cost-effective alternative that yield similar performance (polymer epoxies for dental fillings, Silver/Copper/or even conductive composites for high-conductivity electrical connections, and First-Surface Aluminized Kapton or Copper Foil for similar thermo-optical properties).

But it is precisely because of gold’s other properties (valued equivalently by all parties in the exchange, has enduring value, supply is to be regulated, is liquid, is fungible.) and the fact that it is NOT as industrially useful as other metals that makes it ideal as a currency. It is rare. New mining supply adds only 0.25-1.5% per year to the above ground supply.

So lets get back to the Treasure of the Sierra Madre quotes.

“Gold in itself ain't good for nothing, except for making jewelry and gold teeth.”

“A thousand men, say, go searchin' for gold. After six months, one of them's lucky: one out of a thousand. His find represents not only his own labor, but that of nine hundred and ninety-nine others to boot. That's six thousand months, five hundred years, scramblin' over a mountain, goin' hungry and thirsty. An ounce of gold, mister, is worth what it is because of the human labor that went into the findin' and the gettin' of it.”

As I just said above, gold is a currency because it is used overwhelming as a store of value, and not as an industrial commodity. It is rare. Rare enough so that it is precious, (much rarer than iron or even copper), but not too rare (such as diamonds), and it is easily made into different sized denominations (unlike diamonds much are much more difficult to subdivide).

Among all of the materials in this world that could be appropriate for monetary uses, gold exhibits the best of all of the desired properties of money. Which is why it has been money for over 2600 years.

Okay, so Gold is Money, The Threats to Our “Money” (the US Dollar and all Fiat Currencies), Why I Made the Statement that Gold is One of the Few Legitimate Bull Markets, and What’s the Upshot?

Gold is money. Based on all of the evidence above, I am making that statement. It is irrelevant to me or to the world at large whether you personally accept this or not. The world has used gold as money for thousands of years, and I have a sneaking suspicion that it will continue to do so long after all of us are dead. It is a rare yellow rock, under nobodys jurisdiction, under nobody liability, sitting there quietly and quiescently preserving value. That is what gold does, it stores value.

Gold does not pay dividends, gold does not multiply, gold does not make the world go round. Gold holds value. That’s it. So gold is not a way to get rich. Let’s be very clear about this point. Gold is a way to be NOT POOR. Like I said, it holds value.

Gold has been a currency since ~600 B.C. 2600 hundred years of history as a currency. But let's not even go there. Lets just stick with the US currency just to compare recent apples to apples. Between when the US colonies were formed and up until 1934 there were two forms of currency gold and whatever paper currency the US was using (Continentals, greenbacks, etc. there have been a few). But up until 1934 the US dollar was backed by physical metal. The US Dollar was redeemable for 1 ounce of silver, and the ratio between the convertibility of silver-to-gold was also fixed and the dollar was tied to it. Then in 1934, this breaks. The Dollar is devalued relative to gold and the strict gold and silver backing of US money is broken partially. It is completely broken by Nixon in 1971. So from 1971 until now (not a very long time when this is viewed in historical context) we have a US Dollar backed only by debt.

Now I said the US Dollar is backed only by debt. Remember above that the US Dollar (or more specifically the US money supply) derives it value from the fact that it is a claim on the future tax of US citizens. This is a finite amount (the maximum of course being 100% tax on all citizens). But the point to realize that this is conceptually finite. On the other hand, the Federal Reserve has no limit as to the amount of fiat dollars it can produce.

Increasing divisions (more fiat dollars created out of thin-air) of a finite resource (the future taxes the US money supply is claiming against) make each division, both old and new, by definition less valuable.

This is the definition of monetary inflation.

Now in order to fully describe all of the issues and to illustrate the full scope of the problem, this blog would go on for another 20 pages. I literally don’t have the time or the energy to talk about it right now. I will have to save it for another post. But what needs to be discussed is:

- The Federal Reserve
- Chairman Bernanke and the “lessons” he learned from studying the Great Depression
- Deflation
- Deflation-Scares
- Stagflation
- Monetary Inflation
- Price Inflation (which is NOT inflation, it is a by-product of monetary inflation)
- True Money Supply (TMS)
- Monetary Inflation and Price Inflation Cycles and Time Lags
- And much, much more! Call now, operators are standing by!

I have talked about all of these issues in one form or another in my binv271828 portfolio and in comments all over Caps. If you want to pursue the topics further (and I highly encourage that you do) please read these blog posts:

- Steve Saville: Market Value, Money and Credit
- Quantitative Easing Explained
- Steve Saville: Why We are Gold Bulls
- Steve Saville: Money Confusion and Inflation/Deflation
- Zeal: Big Inflation Coming 2

What all of these posts talk about and discuss is what I believe (again, this is all simply my opinion, nobody has a crystal ball on this one) to be the biggest threat to our “money”, and that is inflation.

I believe that every signal that the Fed has given, both in rhetoric and action, is that it will try to spur the economy / avoid economic collapse by monetizing the debt of the Federal Government and all the Financials that made bad mortgage bets. The newest euphemism for this activity is Quantitative Easing. And this will be an unprecedented transfer of private debt to public debt (largest in the history of mankind). Bond rates are already beginning to signal the inflationary hazard of this policy DESPITE the fact the one of the main goals of QE was to put a floor under bond prices (put a cap on bond rates).

An argument that I have heard going around is that the US will be in a relatively stronger position as the currency devaluation wars goes down. The US is not the only economy in trouble. Far from it in fact. Nearly all Central Banks will be engage in a currency devaluation war. The main purpose of which is to make the debt servicing burden easier for all of the interest paid on Treasuries held by foreign governments. Whether the US comes out on “top” in this “strongest among the weak” battle (which I remain skeptical of, considering the size of the US debt the size of the ongoing QE programs) is irrelevant from my point of view.

Because having a currency that is “stronger” than your competitors while you are devaluing your own, still puts your currency in a weaker position relative to a currency that is not being devalued.

And what currency would that be? Gold.

This is the ultimate reason why I believe that gold is one of the few legitimate bull markets. Because I believe the US and most other Central Banks will try to inflate their way out of this mess. The US Dollar will undergo a huge devaluation in both real and nominal terms. And gold utility and true value comes during times of economic crisis (which I believe we will have a lot more of) and during times of weak currency confidence.

There is still a lot of talk about “deflation”. And while I agree that there will be price deflation in a number of assets (housing prices I think are still too high), this in and of itself is not true deflation. Prices in any asset class can rise and fall due to supply/demand considerations. As I said above, both inflation and deflation are monetary phenomena. In fact much of the recent price deflation in assets has been occurring among periods of extremely high growth of the TMS (monetary inflation). And if you read the Steve Saville links I have above, you will learn about the time lag between monetary inflation and price inflation. I would caution you to be very careful and to think very critically about the argument any author makes when they use monetary measurements when talking about deflation. Remember the 5 characteristics above that any monetary asset must exhibit.

Gold is simply a currency that holds its value. That’s it. Nothing more, nothing less. It shines (pun sort of intended) when it becomes obvious that there is a serious crisis with the value of a nations currency.

Moving on to some Technical Analysis of Gold, Silver and GSMs

Remember, as I said in the beginning, I do not trade gold. This will not be very detailed microcount type chart. I am looking at very long term trends and capturing the general direction for gold. As I have said before, Gold is in a legitimate bull market, and I am not interested in shorting or trying to time a legitimate bull market. I am fundamentally engaged and want to be part of the whole rally up.

Gold, The Really Long Count

From above: “Between when the US colonies were formed and up until 1934 there were two forms of currency gold and whatever paper currency the US was using (Continentals, greenbacks, etc. there have been a few). But up until 1934 the US dollar was backed by physical metal. The US Dollar was redeemable for 1 ounce of silver, and the ratio between the convertibility of silver-to-gold was also fixed and the dollar was tied to it. Then in 1934, this breaks. The Dollar is devalued relative to gold and the strict gold and silver backing of US money is broken partially. It is completely broken by Nixon in 1971. So from 1971 until now (not a very long time when this is viewed in historical context) we have a US Dollar backed only by debt. “ .

Here is the count associated with these actions.

Notes on these counts:

This long term action of gold really tells this history of the “falling out of favor” / “government releasing the shackles of economic responsibility” that gold enforces. And because of all of the inflationary policies that have been heaped upon inflationary policies, I believe gold is in a very long term secular bull market.

Again, I do not ask you to believe me. I am sharing my opinion. Nothing more, nothing less.

In the grand scheme, I think we are at the beginning of a very big {3} wave which will last several years. Since the peak in March 2008 to the bottom in Oct 2008, there was a 34% correction (nearly 45% of the entire move from 2000-2008). So the count I show is that the large 2 of {3} correction is over and we are now into 3 of {3}. The recent price action is unclear. We could be in a small correction (2 of 3 of 3 of {3}) or a larger correction (C of 2 of 3 of {3}).

Either way, I don’t care. I welcome any opportunity to buy on a pullback.

Here is a look at some long term trendlines and MAs for Gold on the Monthly Chart. Also see the horizontal triangle (bullish continuation) pattern on the Gold Chart. The monthly technicals still look very strong.

Dow-Gold Ratio

Here is another important classic measurement, the Dow-Gold Ratio (DGR).

The Dow-Gold Ratio is exactly what it sounds like, the Dow priced in ounces of Gold. What is important to note is how unstable the DGR gets starting in 1934 and then even moreso starting in 1971. My personal feelings on the ratio? I believe on this cycle, given the size of the problems and given the governments plans to try to “fix” the problem, the DGR could go to 1, and I wouldn’t be at all surprised if it goes lower than that. So what might that look like? Maybe the Dow reaches 4000 and 4000 $/oz of gold. Or maybe the deflationists are right maybe it 400 and 400 $/oz. But I doubt that will be the case. I think inflation will prevent the price of assets (such as the Dow) from going as low as they would otherwise go, but I expect the price of gold, which is a hedge against inflation and economic shenanigans to go much higher.


I know I have spent the majority of the post talking about gold. I would like to talk about Silver in more detail, but I am simply running out of steam. Silver is another monetary metal. Silver though has a very wide range of industrial uses. As such it straddles the line between a currency and a commodity. However Silver has some very interesting facts: Silver for a long time was not recycled (unlike gold which has been recycled for a long time in industrial applications). This is not true anymore, it is being recycled much more now. But as such, a large portion of silver is literally sitting in landfills in various chemical states. And because there is still so much industrial demand, the amount of silver sitting in vaults as a monetary metal is lower than the amount of gold. This makes Silver a bit of a conundrum at times. It whipsaws much more than gold. When gold sells off, silver sells off harder. But when gold rises, silver rises much faster.

I believe Silver is in a secular bull market much like gold. And the commodity correction last year gave an excellent entry opportunity. And I think even now is an excellent entry opportunity. Will silver fluctuate? You better believe it. But this is another investment I am fundamentally engaged in.

Notice how deep the retracement was during the commodity correction. It was nearly 72% of the entire bull move up from 2002. I honestly believe both gold and silver are in bullish continuation phases of their overall secular bull markets.

The Gold-Silver Ratio (GSR) is still trending down, which is indicative of Silver catching up to gold from relatively more oversold conditions. My $0.02. As much as I would never short gold, I would short silver even less. That’s just me. I am sure there are people who will trade Silver short, and do it successfully. And I wish them luck (I honestly do). But I would never do it with my money.

Gold and Silver Miners (GSMs)

There are several ways to measure the performance of Gold and Silver Miners (GSMs). You can obviously do it on an individual stock basis. I prefer looking at the HUI (the AMEX Gold Bugs Index). The reason I prefer this one is that it is a basket of miners that do not hedge their production. I think it is a better proxy for Gold / Silver / GSM performance than say the GDX or the XAU.

Let me also say there are many other ways to value miners. Including mining and extraction costs, ore grades, Measured Reserves, Indicated Reserves, Total Cost of producing Gold Equivalent Ounces (GEOs), Revenue from Mining By-Products (Copper, Zinc, Lead, etc), Royalty Revenue, etc. But this is beyond the scope of this post. And I would just end up pointing you to TMFSinchiruna’s blog anyways :) He has written several good valuation posts as well as valuation articles that get published on the Fool main page

The HUI/GOLD ratio is showing that during the commodities correction, GSMs became extremely oversold relative to gold. It this the count of this ratio is showing that GSMs are a very gold value relative to gold at the present time. Aditionally GSMs historically tend to lead the price of gold, both up and down, and the strength that miners have been showing is (to me at least) a very bullish signal.

My Thoughts on Gold / Silver / GSMs

Let me make my position on Gold, Silver and GSMs very very clear. These to me are investments. I have a lot of all three in my long term investment account. CEF is my biggest holding. I sometimes trade GSMs (from the long side only). I would NEVER short gold or silver. Ever. Period. So when I look at the long term counts and these corrective patterns are unfolding, they could currently still be in a correction and go down. As far as I am concerned, that is great! Because it gives me an opportunity to buy lower.

So if you are looking at my charts and are trying to glean trading advice, I suggest you look somewhere else. Because I am fundamentally engaged in gold and silver. I think they are going much higher. And they will cease to be attractive investment only and not before the US economy transitions from a consumptive based to a productive based one, the dollar devaluation stops or slows dramatically (after the Dollar Index reaches a much lower level) and the FED fiscal responsibility.


Here are a few charts of Oil, mainly because I said I would. I am too tired to write anything meaningful right now :) But I have written about oil supply in several of my older blogs (see January timeframe). The situation right now is not driven by supply/demand (IMO). Supply reports have been coming in pretty much as expected the last 2 months. What this looks like is a mania again. There is a lot of talk of “green shoots” in the economy and a 2nd half recovery … blah, blah, blah. I call BS on all of that.

Oil is trading as if the recovery was expected, and I am highly dubious. Oil has nearly hit the targets that I set out in January ($77/bbl) which is 38% retrace of the whole drop down, but it has hit them much faster than I thought it would. I think oil will pullback when the rest of the market does.

In the meantime, oil will probably put on one last show before the correction. Oil likes to extend a lot, nor does it like to stay within trendlines. I would just expect the unexpected here :)

As far as a long term investment: I am highly bullish on oil. I think we are in a long term secular bull market with oil just like we are with gold. I believe all commodities will do well as inflation hedges. I think the public forecast by EWI that oil will go back down to $10/bbl is exceptionally unrealistic. Even if there is still a C wave down to come for a Wave {2} (assuming it is not done, which I think is a strong possibility), then there are still some major support levels below $35.

Of course, as always, all of this is just my $0.02 .... :)


Please feel free to comment, disagree, discuss. And even if you don’t agree with my conclusions, please rec if you appreciate the effort or the explanation of my thoughts, even if you use them draw different conclusions than mine.

The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ultimately be comfortable with their own investing decisions.
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