The financial tug of war.I.

At the bottom: what is money?

Contemporary financial Liberals argue that gold and silver are "barbaric relics" and that the real money is the fiat currency printed by Central Banks commanded by Liberal governments. This myth gives rise to several other myths: 1. that the US can print money without consequence; 2. that we owe the debt to ourselves; 3. that it is a good thing to weaken the dollar (let's us export more). These myths can be easily exploded and I won't bother to repeat the process of doing so. Instead, I will concentrate on the consequences of these beliefs as they lead to action by the Liberal financial elite.

The US Dollar.

The central player on the financial scene is the US Dollar and its manipulation. The FED and its zombie banks maintain Liberalism by counterfeiting the Dollar and 'loaning it' to zombie banks, who can then turn around and loan 10x as much to customers. As long as the FED does not overdo it, the resultant inflation is small and the populace can be made to believe that inflation is a natural phenomenon.

As long as other Social democracies (meaning left-leaning governments) follow the same path, the rate of descent of the value of the dollar can be controlled by manipulating the interest rate (the Prime Rate the FED charges to banks for using the counterfeit money) and by adding/withdrawing fiat currency by telling the banks how much of funds they have to keep as reserve.

The economic use of the US Dollar.

The way it normally works is that the rate of inflation is controlled by the amount of money put into circulation (- the downward pressure on prices due to industrial innovation), which sets the interest rates. The FED can intervene and does by setting the Prime Rate.

The FED puts out money by selling Treasury Bills, which are IOUs by the US govt. The FED can write itself checks (and pretend that these checks are assets) and buy back some of the IOUs (Treasury Bills) and this is called Quantitative Easing. It is counterfeiting in a big way.

The bond vigilantes.

These are folks who buy bonds. If the interest rate is too low, they won't buy. This puts an upward pressure on interest rates.

Interest rates.

These are used by the Social Democrats to spur growth. Reducing the interest rate makes it easier for business to borrow. But it also increases inflation.

The hidden tax.

The outcome of all this is that a parasitic class of government regulators and bureaucrats is supported not just out of taxes, but running deficits. Inflation is a hidden tax used to finance the parasites.

Hyperinflation: the ultimate result.

As the National Debt rises due to the increase of income transfers and other govt programs, the day comes when the amount of money printed becomes so large that inflation becomes uncontrollable. That's hyperinflation.

Precious metals are marching on.

Silver just hit a new high at 38 + change. It is flirting with 39 as I write this. Silver miner stocks are also hitting higher, though they lag behind previous highs. Finally, gold has begun to move and is heading to 1453, the magic number Larry says it must close above twice in a row to make the rally in gold credible. He further states that if gold does not correct to 1,250 then a correction in gold price might last two years.

I think I know what is going on. Larry uses a formula, a mathematical equation, that involves the current price of gold. And it figures into future price.

The last time my favorite guru was this wrong it was Joe Granville in the 80's. Joe developed a formula that allowed him to predict BUY/SELL signals and Joe told us to short the Market. I learned the hard way that no formula works all the time. In the 80's the wild card was the coming presidency of Ronald Reagan. People understood that the fumblings of Jimmy Carter would soon be over. Reagan was not in Joe's formula. This time, the wild card is Obama and the PM market knows the outcome. So, formulas that worked before, no longer work.

Correction to previous post.

The previous post refers to a "head and shoulder" formation. The text should read "reverse head and shoulder formation." The blog refuses to accept commands to correct the mistake.

Edelson has reiterated his forecast of gold dropping to 1250 or below. The market shows no sign of moving much lower. What we see is massive volume. What we see is a massive volume in gold transactions. It it is buying, how come the price stays put? And if it is selling, why don't we see a drop?

The obvious explanation is that very large quantities of gold are being transferred (most likely to China) and the gold price reflects the agreed upon transfer price. This is very similar to what happened in December.

Precious Metals: In the Murk.

From October 2010 till Jan 2011 gold has traced out a near-parabolic pattern that are usually seen at market tops (graph 1). This was followed by a reverse head and shoulder pattern that signals the reversal of a previous down pattern. Graph 2 shows a smaller portion of the data so the pattern is clearer. Were this all that was said, I would be saying...'get ready for a rally.'

But, Larry Edelson of Weiss Research is forecasting (again) a drop to 1,250. His forecast is based on graphs 3 and 4. Graph 3 in comparing the gold prices predicted by the cycle theory (red) and the weekly composite gold price. While there is some agreement up to October 2010, the relationship clearly breaks down afterword. We can then proceed to Larry's second graph. Here he contrasts the gold price with the RSI. From July through November, the rising gold price is accompanied by overbought conditions. Then the recent rally shows much less overbought conditions. To Edelson, this signifies less strength. However, a look at the top graph (graph 1) shows that overbought conditions signify a pending reversal, a coming drop. And there is no showing of an overbought condition now. We see much more overbought conditions in the silver prices and indeed that market has been busy.

The last two graphs show the gold miner index GDX. The next to last graph shows a massive head and shoulder formation. Not only is the formation broad, but compound; i.e. it has short jabs downward halfway into the trough. So, let's look at the GDX over a more extended period (last graph). We see a compound reverse head and shoulder that hit its low in Feb 2010. This formation did not send the GDX to new record, but the following formation (centered at the beginning of August) did lead to new records. The current RSI is a bit larger than the one centered in August. Are gold and gold mining stocks about to take off again?

As I stated before, a good weather man looks out the window before delivering the forecast for the day. So, how is gold doing today? Well, earlier it was down forty dollars an ounce. Now, it is down $29.

The markets are generally crazy today. While, we are told that Lybia has suspended oil shipments, crude is down $3.72 this morning.