Gold at 1,641: new top

Gold has set a new record this morning. This is the day that the new debt ceiling is supposed to be voted on by the US Senate. Passage is anticipated. It is quite obvious that the new high in gold reflects the Market's vote on the raising of the Debt Ceiling. Why you might ax.

The new Ceiling authorizes the Obama regime to borrow $2.4 (or 2.5)T. Since, a lot of government programs are income transfers, I have no doubt that the regime will spend the money. Since, "baseline budgeting" involves a 5% spending increase every year, a $100B cut per year (part of the Debt Ceiling deal) does not even freeze the budget, let alone cut it.

The gold price is not reacting to the fact that the "cut" is phony. The gold price is reacting to the consideration: "where will the money come from?" Two and a half trillion bucks is serious cash. Not many countries have an economy that big, let alone being able to fork over that much into the insatiable maw of the US spending machine. China's reserves are said to be near $3T, but it is highly doubtful that even China could finance this debt, assuming they wanted to. So, where will the money come from?

It is highly likely that the FED will print the money and that is propelling gold prices at a time when gold is relatively quiet. We could also be seeing short covering; a factor predicted and aired on KWN.

Have we moved another notch?

All eyes are on the debt ceiling charade. It is clear now that the debt ceiling will be raised along lines that the Bubba Clinton suggested. Which means: 1. raise it $2.5T (to last past the next election); 2. an imaginary cut of $1.2T to be decided by a group of Dems and Pubs and 3. shelving tax increases.

What of new revenues ( meaning a tax increase)? Irrelevant. If all income above $250,000/y was confiscated for taxes, it would reduce the deficit by only 50%.

Don't the Pubs know that by agreeing to the Obama plan they agree to the destruction of the Dollar and put the Country on the path of certain default? Yes, the Pubs know, but they are afraid that the Dems and the Media will make their opposition to raising the debt ceiling the imaginary culprit for the bad economy and the calamities to follow.

Why is default inevitable? The US is closing in on the figure of $15T as the National Debt. If our current rate of spending continues, rating agencies will reduce our rating and bond vigilantes will demand more for buying Treasuries. Even at 10%/year, the US will have to pay $1.5T (soon $1.6T) interest on outstanding loans and finance another $1.5T in deficit. The only way out then is to print money to pay for interest and the deficit - leading to enormous rates of inflation.

Under Obama, 200,000 new federal employees have been hired and spending went up by $1.5T.

The Market is anticipating the coming financial calamity. The US Dollar broke out of a rising wedge and is once again below 74. Gold continues its slow rise and has closed above $1,625/oz. Only the XAU shows a moderation in gold price. Is it because people do not believe that gold will continue to rise? Or, are the miners being shorted again? If the latter, then the PM miners will undergo one heck of a shorts squeeze. Gold sales are usually slow in the Summer and the persistent rise in gold price is an indicator of things to come.

Gold/Silver: report from the trenches.

To be sure, I AM NOT in the trenches, but I report here on people who are.

Gold bears (bouillion banks and swap dealers plus weaker (private) shorts) have tried to keep gold below 1,580 and have accumulated a large short position. Bulls (hedge funds and small public buyers) have moved in the dips and brought gold back above 1,600. Now that gold is past 1,600, the private shorts will run to cover and the bouillion banks and swap dealers will continue to enlarge their shorts. The private shorts may take gold up to 1,625 (a minor resistance). Gold's interim high should be around 1,650.

The 1,760 figure mentioned on KWN is a capitulation figure for the shorts. Once that figure is breeched, gold will go into a hyperbolic mode so that the 50 DMA will far outpace the 200 DMA.


What is driving gold? For one thing, there is the Greek default. Greece has already defaulted according to the rating agencies, because there has been a 21% reduction in the value of the Greek bonds that is part of the deal reached by the Europeans. Greek bonds are rated default privately and those bonds are not bought by the public, but the European governments and banks. Official recognition of the default is coming. So, it is a matter of time till the 'contagion' becomes known.

Besides Greece, the US is heading into troubled waters. The argument about raising the debt ceiling comes about within the context of another dose of mass layoffs and continued economic softening. If gold closes above 1,760, it will mean that the Market had given up on the US and the Dollar.

The fundamentals of the PM Market.

I remember a poster's comment on Seeking Alpha, re the fundamentals of the PM market: "what fundamentals?" he asked. Obviously, the Poster was influenced by other than facts, because the PM market does have fundamentals.

First, PMs have intrinsic value. They are rare, have uses and it costs to produce them. Thus, they represent a certain amount of value. Because of their physical and chemical properties, they have served as money throughout history. People liked PM money, because counterfeiting is easy to spot and governments could not cheapen the money without the people knowing about it. Modern day predatory governments like paper money, because they can counterfeit it (I.E. print it) and the counterfeit money is indistinguishable from the original.

Like everything else, PM prices in paper money reflect supply and demand as well as the accepted value of the paper currency: i.e. the degree to which paper currency is being expanded.

The top graph shows the annual production of gold. Gold production began to rise in 1980 and doubled. However, it has now leveled out. So, the supply of gold has become limited once again, so that changes in gold prices viz a particular currency reflects the change in the value of the currency. Another factor influencing gold price is the demand. The second graph down shows the buying by central banks.

We now come to an important distinction that Bernanke fuzzes out deliberately. First, the value of the US Dollar continues to go down, because more is being printed. You can see this in terms of comparing the value of US Dollars to currencies NOT being printed in excess, such as the Swiss Frank, the Canadian and Aussie Dollars, the Baht, etc. You can see the loss of value in the US Dollar when comparing it to the value of Dollar in gold (last graph). Gold is steadily gaining value vs the US Dollar, because of the printing of the US Dollar. This is DEFLATION. At the same time, we have INFLATION. This is the amount we have to pay in terms of Dollars. Inflation will continue to escalate as the Dollars printed cycle through the economy of the world.

Bernanke complains about DEFLATION, but deflation can not be cured by printing more Dollars.Meantime, PM prices in US Dollars are going up but in an orderly fashion.

When?

In forecasting what will happen to the Precious Metal (PM) prices, we are interested in the answer to two questions: 1. How much and 2. When?

Martin Armstrong and Alf Fields estimate the top of the gold bull market to push gold prices to between 10,000 and 12,500 USD/oz. So the we are left with the question of when.

Jim Sinclair and Dan Norcini told KWN that the key figure to watch is $1764/oz gold. When the market closes above that figure, confidence in the US Dollar will be lost and gold will go hyperbolic, jumping $100 to $200 daily. So then, how far are we from the $1764 figure?

In order to try to answer this question, I decided to look at the graph of the weekly gold price. So far, gold prices have increased on a predictable schedule. A mini rally lasts 4-5 months, followed by a slight correction and then the rally resumes. Weekly gold prices run above the 50 DMA and the 50 DMA is diverging from the 200 DMA, so that the two lines are coming further apart. Assuming that gold prices continue moving at this same rate, the weekly average would exceed $1760/oz between November of '11 and April of '12.

There is the question of fundamentals to consider, however. Financial conditions have deteriorated in Europe and the United States and this may shorten the time to 1764. Europe may have to print some serious cash to rescue Italy and Spain and the O'Bungle regime is busy trying to engineer a US default. This might shorten the time to the financial denouement. There are two technical indications that this might happen: 1. the MACD of the graph is continually rising, indicating that the momentum of the gold price is getting stronger and 2. the breakout from the last correction is much stronger than in previous mini rallies.

Uncommon Wisdom estimates using the Cycle Theory that the big rally will begin in the Fall.

On the cusp of rapid change.

Rapid changes are taking place in the valuation of gold and the US Dollar. The first graph shows the aborted breakout of the US Dollar. As I reported to you in the previous post, the slow mo collapse of the European (Socialist) system was forcing European investors to look to the safe haven of the US Dollar. Consequently, the US Dollar began a rally, which was documented by a breakout from a wedge pattern. The breakout occurred on the upside. Yesterday's events aborted this breakout and the US Dollar retreated sharply into the wedge pattern. Will it break out on the downside now? Still waiting.

Gold, in the meantime, set a new high by blasting past the 1,571 price. The next graph shows the daily gold price and we can see that it is flirting with 1,600 and overbought conditions. The final graph shows the weekly gold chart. Although, gold has entered the next upleg and is advancing rapidly, it is not yet in the parabolic phase.

The PM markets reflect the changes occurring in the financial world. Greece, Portugal and Ireland can function now only with borrowed money. This shows up in the valuation of their bonds. Greece now is rated just above default, while Portugal and Ireland are rated as junk. Italy has been downgraded and cost of servicing its debt is going up rapidly. Spain has just started this progression. European authorities are meeting to do something about this crisis. WE COULD BE WITNESSING THE CRUMBLING OF SOCIAL DEMOCRACY (European-style Socialism). Eastern-style Socialism fell, because its leaders could no longer lie that Central Planning worked. Socialism in China was abandoned, because the Communist Party of China saw that it was an economic dead end. Since then China has been blooming economically.

Meanwhile, the US has been put on a downgrade watch.

Is the US Dollar rallying?

If you follow the US Dollar, you see it going up during the night then come back during the day. Yeasterday, it was different. The Dollar went up past 76 and put a dent in the PM prices. It seemed to me that the long-awaited Summer rally in PMs was on (see previous post) and that yesterday's events were contradictory.

Today was a different story. The Dollar stayed above 76 then began to move down. Then the PMs moved and gold jumped $22.

What gives, u might ax.

There has been a flight to the Dollar in Europe as the sovereign default of Greece is now likely and Italy and Spain are now in the cross hairs (hence the buying of US Dollars during our night hours, which are daytime in Europe). However, now the US Dollar is coming into the cross hairs as the Obama regime is trying to engineer a US default. Hence, the jump in gold.

The first graph is the US Dollar on a daily basis. You see the breakout coming. On a weekly basis, the breakout is not there. The Dollar is still sinking.

As I write this, the Dollar sank to 75.79 and gold is up $20. to $1,569. The Summer rally is here.