Reading time: 7 – 12 minutes
The recent gold upleg has proceeded fairly predictably based on previous trends. Like the October correction and consolidation the December correction and consolidation has laid a firm foundation for the third round of the upleg.
FIRST ROUND
With gold trading around $995 on 9 September 2009 in Gold Party Barely Started I wrote, “This puts $1,300 gold and $25 silver within range without greatly exceeding previous trading norms”.
Slightly later on 9 October 2009 with gold below $1,050 I was interviewed on BNN:
BNN HOST: You said the credit crisis has not been calmed but intensified. Why? … So as we get more and more concerned with the top of that pyramid, the derivatives play, you are talking about $1,300 bullion. How do you get to that figure?
TRACE: $1,300 bullion comes from looking at the 200 day moving averages and where gold has consolidated and where it goes based on the usual uplegs. It looks like we are following the same thing that happened in 2004 with the rise in 2005, the consolidation in 2006, which went to the rise in 2007, and the consolidation in 2008, and it looks that it will lead to a similar rise in 2009 and 2010 which will take gold to $1,300 which should be a little bit above its 200 day moving average. But in the same trading ranges as we saw in 2005 and 2007.
For the rest of October we saw gold consolidate and prepare for the second round of this upleg. The credit crisis intensified with CIT and Dubai. Commercial real estate is still frozen and about $600B needs to be refinanced during 2010. The spread between 2 and 10 year Treasuries has been getting omnious at highs not seen since the early 1980′s.
SECOND ROUND
On 28 October 2009 with gold trading at $1,031, the lowest price since the BNN interview, in Gold Party Intermission Nearly Over, I wrote:
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. …
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.
Within 26 trading days gold for LBMA delivery was $1,218.75.
THIRD ROUND
Gold is currently trading at about $1,105 with a 50dma of $1,114.57 and a 200dma of $989.68 or a current price of 1.116x the 200dma.
There has been no substantive change to the quality of US Treasuries and the Federal Reserve is failing with quantitative easing. The Greater Depression is still being intentionally exacerbated by the Obomba administration. States are in even worse shape; so make sure you keep nothing in a safety deposit box or it may end up on Ebay. The bond market, in the 28th year of a secular bull market, is due for a secular bear market as real interest rates (using gold as the presentation currency) continue rising.
One substantive change is that private ownership of gold now surpasses officially reported central bank holdings. Big players like John Paulson with over $4B in gold investments is flanked by David Einhorn of Greenlight Capital and Paul T. Jones of Tudor Investments and the sheeplike investment community is beginning to change its attitude towards the Ancient Metal of Kings. Freedom is good for business and private gold ownership is good for freedom.
As Ludwig von Mises wrote,
It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.
After seeing the record and the numbers I chuckle at some of the Establishment ‘financial professionals’. For example, in January 2009 on my article ‘How the Treasury Bubble Will Burst and Why‘ at Seeking Alpha I received a comment from Alan Brochstein, CFA of AB Analytical Services and fellow Gold Standard Contributor who provides analytical services for hire. He said, “Trace, sorry, but this makes absolutely no sense…” This is not surprising considering his 8 Dec 2008 article ‘Own Gold? Time to Fold‘ where he stated, “Gold remains a sucker’s bet…”
Since Mr. Brochstein’s article gold has powered from $772 to $1,104. But gold is not a portfolio asset; everything else is. For those who perform mental calculations of value using gold as the numeraire the results are truly stunning and likely to lead the market entrepreneur to be shell-shocked. It appears that following the advice of most of these ‘financial professionals’ peddling paper coupons was the real sucker’s bet. Scoreboard.
CONCLUSION
Everything appears in place for the third round of gold’s upleg. The previous two rounds have followed the same predictable pattern found during 2005 and 2007. The fundamental reasons for owning gold have not changed. Quantitative easing is failing as little colored tickets evaporate, federal budget deficits are ballooning, States are bankrupt, extremely respected money managers are moving into bullion, the world needs a new reserve currency and private ownership of gold is at record highs.
Sure, the third round of the upleg could not materialize for any number of reasons such as interest rates being raised, the mythical Cibola being discovered, etc. As the upleg progresses the gold to silver ratio should probably close from the current 63.27 towards a more normal 50-55. The better time to buy gold, silver or platinum was before the first or second rounds of this upleg. But if the precious metals are absent from one’s portfolio then the second best time to buy them is now although the real bargain may be around $1,050-$1,080 but we may not see that. And by all means, avoid the GLD ETF despite the caterwauling of the prospectus challenged illiterate apologists as it is merely a paper ticket that struts around like the precious metal.
DISCLOSURES: Long physical gold, silver and platinum with no position the problematic SLV or GLD ETFs.
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{ 6 comments… read them below or add one }
Mr.Mayer,i watched the interview on BNN and you made more sense then most people[experts] that i have listened to this past year.This last year i have spent my time trying to understand how this all happened to the economy.I would like to know, if you have heard of Pastor Lindsay Williams and what has spoken on how the economy is being manipulated by the elite.Ihappened to see him on you tube,Paster Williams wrote the book THE ENERGY NONCRISIS.Iwould appreciate your opinion on this thank you.
I have heard of Pastor Williams but have not delved too deeply into his work. What I have read or listened to seemed to lack the academic rigor I am used to (ex. Dr. Vieira, Ludwig von Mises, Murray Rothbard, etc.) so I seemed to quickly lose interest. Consequently, if you really want to understand what is going on instead of wandering around in speculation is to get a grounding in the Austrian school of economics and Dr. Vieira’s venerable work Pieces Of Eight.
MR.Trace Mayer Thank You for your reply.I will take your advice and read Pieces Of Eight by Dr. Vieira.
http://www.youtube.com/watch?v=ghLF47xSc94&feature=quicklist&playnext=9&playnext_from=QL
Interesting vid
Hey Trace,
Great article, and I am a huge fan of your work! I just had a few questions that I would like to ask you, and I apologize in advance if these questions are a little ‘obvious’ in nature.
1) Canada: If/when the U.S. experiences hyperinflation, etc, etc., in 1-3 years, will Canada be affected just as badly? As a Canadian resident and citizen, should Canadians themselves be looking to accumulate Gold and/or Silver? Why or why not?
2) When the U.S. economy tanks, and the USD becomes close to zero (while Gold becomes upwards of $5,000 an ounce), will there be any countries in the world that WON’T be affected? How much of a GLOBAL impact will all of this have? Which countries should one move to if the U.S. tanks?
Thank you in advance Trace.
I am not sure if the timing on hyperinflation, Weimar style, will be within 1-3 years. I have written about the FRN$ already being in hyperinflation under IAS 29 using gold as the presentation currency under IAS 1. Really, all fiat currencies are the FRN$. The precious metals are mortal enemies to the fiat paper franchises. Consequently, gold or silver are cash and will allow Canadians to remain liquid and buy up lots of things.
The US economy has already and will continue to tank. The evaporation of the fiat currency monetary system will affect the entire world. No one knows how it will play out as many of the outcomes are dependent upon human action which has not yet been taken. But the crisis will likely move through these stages: financial, economic, social, political, geo-political and geo-strategic. There is a probability it will progress to protectionism and world war like the 1930′s. But it could also go the other way.
As far as moving somewhere, I like South American cone: Brazil, Argentina, etc. They will likely have food and are used to currency crisis. Consequently, everyday life is not tremendously impacted by these types of events. On the other hand, Americans have not had a good currency crisis since the Revolution. Their standard of living will be greatly diminished by the events and they will likely not take it very well. Additionally, the use of fiat currency has eroded their moral character; just look at their political process. For these reasons I prefer to watch the descent of America into the third world on my flat screen and not out my front porch. I wrote about all of this in Provident Living Principles and Survivalism In The Suburbs.
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