Gold correction nearing its end?

Speaking of the Gold Market, we have to answer three questions: 1. what is happening; 2. how long will it go on and 3. when will gold take off again?

The first graph shows the march of gold from 900 to 1450. We are in a gold bull market. The second graph down shows the last segment of the bull market up to before the correction. A strong (double) support level was set up at 1,225, then a weaker support level was established at 1,375. The third graph shows the breakdown of the upleg and the correction up till now.

A few points need to be pointed out: the march of gold upward has been steady; 2. the 200DMA shows no deviation in the rate of increase in gold prices; 3. the corrections along the way retrace 1/3 to 2/3 of the last segment of the bull, just as we would expect from the Fibonacci numbers

The one third retracement of the current segment (from 1150 to 1450) would put gold at 1350, while a two third replacement would put it at 1,250. The current price is 1319. We are clearly below the 1/3 retrenching, but still above the 2/3 retracement (end point at 1250). And the support level is 1,225.

The next graph down is GDX, the Gold Miner Stock Index. Gold mining stocks are related to the gold price, but move faster than gold itself. Note that GDX is already below its 200 DMA, as it usually is at the end of corrections. It could still move a little lower and not be unusual.

Individual gold miners move according to their own rhythm. THM (one of my favorites) has given up 1/3 of its gains in the last segment, while NAK (my favorite) is showing a takeover pattern and pays no attention to the correction.

This is why I did not sell into this correction. By the time you subtract commission twice, your scalping the drop is not that profitable. Plus, you may miss the bottom and get back in after the correction is over. So, it was not worth taking that risk.

Uncommon Wisdom, my favorite forecaster, predicts that the next up segment will be the steepest yet. Good investing.

The correction under way.

I discussed the possibility of a sharp correction in precious metals (Dec 6, 2010). The first graph is gold prices as of Jan 3, 2011. We see a parabolic/hyperbolic convergence of prices indicating a breakout coming. The second graph shows the actual breakout on the down side. The third graph shows the same thing in the silver prices.

Gold and silver have entered what promises to be a short-term bear market, as the drop is already more than 10%. In any bear market, the questions that arise is how deep and how long before it turns around. Most of these moves go by the Fibonacchi numbers of 33, 66. Gold rallied from 1150 to 1455, or $300/oz. A third retracement would take gold to 1,350 and a two thirds replacement would knock it back to 1,250 an ounce. Current price is 1,329 so we are into the second leg of the downward move. In fact, I expect a bounce upward this week.

In the realm of gold and silver miners, the story is somewhat different. Silver miners have been hit harder than gold miners (silver moves faster than gold), but some gold miners have resisted the downward move. I have a hunch that the strongest gold miners (those ripe for takeover like NAK, THM and NG) may in fact be taken over by the majors, which will create a bear market rally in these stocks. Why would the majors move now? Because they have had good earnings and the next upleg of the gold market promises to be violent and steep, pushing the juniors way up. The best price is now. NAK has been moving up lately, even though gold is in a short bear.

We then have the question of WHEN? When will the bear market in gold be over and gold price take off on the upside? That is harder to answer. Momentous things are happening and they will all converge on affecting the gold market. The yuan will be revalued upward, the Stock Market will have a steep correction and the idiots will recommend buying bonds. Interest rates, inflation and gold price will all be heading higher. Most of these will take decisive turns in the next six months (counting from Jan 1).

Enron execs were jailed for such.

The FED announced new accounting "rules" on Jan 6, 2011. According to these "new" rules, the FED can shove its losses to the Treasury and pretend that it is doing fine. This is the same kind of gimmick that led to the jailing of Enron executives.

Just to make sure that ordinary yokels do not understand what is going on, the FED will call the losses as a "negative liability," instead of a reduction in its capital. The FED will then pretend that everything is fine and go on its merry printing as usual.

Enron executives shoved their losses into a subsidiary and pretend that these losses were mere "negative liability." There is really nothing new under the Sun.

The rain in Spain...

The propaganda we receive from the MSM says that the European financial crisis is solved. The Media even let out that the US (via IMF and even the FED) kicked in a big chunk of dough to rescue the Europeans. As usual, the truth is somewhat different.

True, Greece and Ireland were able to roll over their scheduled debt payments, but these governments continue to spend more than they take in. Their problems are not over, they just kicked the can down the road.

The next dominoes are Portugal and Spain.

Portugal's problems are similar to that of Greece and Ireland, too much govt spending and too little economic growth. Spain is another kettle of fish.

The MSM tells us that in spite of the erosion of Spanish credit rating, they have recently conducted a successful sale of govt bonds. That allowed Spain to roll over a portion of its debt. So, Spain, too, have kicked the can down the road. Of course, we do know why the sale of bonds was "successful." China bought them up.

Which brings us to the question: why is Spain in trouble and how come the Chinese are getting involved?

Spain is run by a Socialist govt and it has two types of banks. One set of banks is the kind of like a regular bank, either run by the govt, foreigners or is otherwise influenced by the govt. The other banking system (that has 41% of the Nation's deposits) is what is called 'cajetas.' Cajetas are local banks, controlled by boards made up of various political factions: Socialist unionists, priests or locally influential people. The govt wanted to control these institutions, so they forced the merger of cajetas: 45 of them were merged into 17. Some of the cajetas refused to hand over their deposits, giving rise to chaos as to who controls what. While this contributes to Spain's financial problem, it is NOT the main contributor. Spain has been living beyond its means and worse, it embarked on building solar power plants: these produce high-priced electricity and had financial problems from the beginning.

Why are the Chinese interested in rescuing Spain? Because the Spanish buy most of their solar panels from China.

The denouement. III. Stagflation.

The Obama regime and its defenders in the Media greet every sign of improvement as if all our problems are near solution. But, if you read the Drudge report, you get an entirely different picture. 1. "Jobless Claims Jump, Wholesale Food Costs Surge" says one headline; "Banks repossess 1 million homes in 2010...May Jump 20% in 2011," says another. "S&P, Moody warn on credit rating." There is another article on the possibility of the FED needing a bailout and the Financial Times asks what will happen if the US defaults. Natural disasters add to the feeling of coming doom: the floods of Australia and Brazil seem to coincide with the economic denouement.

In the meantime, the Nation witnessed one of the most sordid episodes of journalistic malpractice, as the Media is trying to smear the Tea Party in general and Sarah Palin in particular. The purpose? To stop opposition to the Obama regime destroying the economy of the Country. Obama, by asking for more civility, is really telling his opponents to shut up.

March may be the start of the denouement. Gold prices are forecast to leap, along with retail food prices. Reducing our bond rating may require further money printing and several States and hundreds of cities face bankruptcy. CHANGE might be all that's left of the Dollar.

The coming denouement. II. Economic factors.

It began with the imposition of "mark to market." This forced the banks to value their mortgage portfolios as worth zero in many cases. The move stopped money flow, sent the economy into a free fall and destabilized the real estate market. Faced with mortgages that were more than the houses were worth, many property owners just walked away, leaving the property to deteriorate. Thus, once "mark to market" is imposed, it initiated a self-sustaining deflation.

The Obama regime promised to "cure" the problem by flooding the economy with money. There was a serious monetary inflation, but price inflation was kept in check by the lack of demand to buy and take loans. This is the first leg of the Denouement.

The second leg of the Denouement was a consequence of the first leg: the recession caused by "mark to market" bankrupted many states and cities. Some of these are raising taxes (further depressing their economy), while others are cutting spending.

The third leg of the denouement is the unraveling of European debt servicing. Several States of Europe are unable to service their debts and have difficulty of raising money in the markets. The reason for this is that their credit worthiness is being questioned, so they have to pay higher interest rates. The EU has established a fund to buy the suspect bonds of Greece and Ireland, but now Portugal and Spain are coming under stress. The US has been pouring money into the EU rescue and now Chine has moved in as well.

All this is like a house of cards sustained by the use of the US Dollar as a world currency for settlement. That means that if the US Dollar slips, the house of cards will come down.

How can the US Dollar slip? There are several factors that can make the Dollar slip. First is the reduction of the credit rating of the US. This does not sound very threatening, but it is. It would mean that the US would have to pay higher interest rates to sell Treasuries. This would automatically increase the deficit. The second way to undermine the Dollar is through inflation (Price inflation).

The Obama regime tries to counter by devaluing the dollar, as Roosevelt did during the Depression. This would be done by having China agree to increase the value of its yuan.

The poster child of the Media coup D'etat.

The coming denoument. I. Its politics.

Historical metaphors abound to describe the current plight of statism. "Apres moi, La Deluge" is what I have chosen: After me, the deluge, said the French King and he was right.

Several skeins make up the politics of the denouement. Part of it is financed and inspired by George Soros. Part of it is driven by the American Ruling Class (Liberals) fighting for its power. There are political opportunists, but they are not the major players.

There are two Left-inspired guiding principles pushing this: 1. that American financial and military power is the greatest evil in the world and 2. that US Capitalism must be destroyed in order to build a just and fair system (Socialism).

In the background of all this is the unraveling of Euro socialism: the inability of some European countries to pay their deficits and service their debts, the destabilization of the Euro and the coming dethroning of the US Dollar as the world's reserve currency and the shifting of power from West to East (Obama and puppet masters refer to this as 'reordering the international economic system'). We have arrived at a crucial point politically. The Obama regime has lost the Congressional elections and faces rough going for the results of its economic policies. So, the regime and its allies in the Media reach for the 'Reichtag ploy.' It is a manufactured excuse to do away with the Socialists' opposition. In Germany, it was the burning of the Reichstag (Parliament). It was used by the National Socialists to do away with democratic means. In the US, it is the shooting of a Democrat Congress woman. The Media is using this to reverse the results of the last election. This is their line. Conservative rhetoric is hate speech. Hate speech = murder. Conservative rhetoric should be banned, rejected. Will it succeed? Stay tuned.

It is against this background that the economic denouement is about to start. Well, it has been going on, but it will now come to center stage.

Euro crisis gets worse.

It is quite obvious now that Socialist moves in Europe or in the US are not growing the economy. Nor are those moves stabilizing the financial situation.

Pressure is mounting on Portugal, Italy and Belgium as they face a bond auction next week. These countries have to pay higher interest rates and pay higher insurance on theirbonds. The uncertainity is once again channeling money into dollars and moving the US Dollar higher. The Dollar Index has once again hit 81, forcing gold prices lower.

Meanwhile, something funny happened to the propaganda tour of the Obama regime and the Liberal Media. It was "highly anticipated" that upwards to 300,000 new jobs would have been created and noted in the last report. The actual number was 130,000. The actual (true) unemployment then has worsened, even though the regime reports it had dropped to 9.4%. The continued weakness in the US economy is made worse by the anemic growth of Europe, so that Western governments have to rely on inflating their currency. Sooner or later, this will lead to serious inflation.

This will be the year that gold prices go through the roof. We should see a modest increase between late Jan and April and enter the hyperbolic phase in the Summer.

How long is inflation and low growth expected to be around? Four or five years, FED Chairman Bernanke anticipates. About right. By then Obama should be gone as President, Republicans should be in control of the Senate as well and the Media destroyed for its lies.