December 2006


December 31, 2006

The Gold Standard Manifesto
by Antal E. Fekete

Dedicated to the Memory of Ferdinand Lips (1931-2005)
Student and Advocate of the Gold Standard

On the Occasion of the Inauguration of Gold Standard University Live*


Introduction

A specter haunts executive mansions, chambers of legislatures, and halls of universities: the ghost of the gold standard. Governments and academia have utterly failed in discharging their sacred duty to provide a serene environment for the search for and dissemination of truth regarding economics in general and monetary science in particular.

This failure has to do, first and foremost, with the incestuous financing of research ever since the Federal Reserve System was launched in the United States in 1913. The formula for distributing the profits and undivided surpluses of the Federal Reserve banks has made it possible for the United States Treasury to grab the lion’s share. As a consequence the bond market has been reduced to a gambling casino where the shill, alias Open Market Committee of the Federal Reserve (OMC), whips up gambling frenzy and gamblers, alias multinational banks make obscene gains at the gaming table. Bond speculation has been made virtually risk-free. Multinational banks rush in to pre-empt the OMC in buying government securities first. Losers are the involuntary participants: savers and producers of goods and services.

Under the gold standard government bonds were the instrument to which widows and orphans could safely entrust their savings. Under the regime of irredeemable currency they are the instrument whereby special interest fleeces the rest of society. You don’t have to be a bondholder to be victimized. If you are a saver, your savings account is surreptitiously pilfered as bond speculators drive interest rates up. If you are a producer, your capital account is clandestinely plundered as bond speculators drive interest rates down.

Official Check-Kiting

Unknown to the public, at the end of the day the shill is obliged to hand over her gains to the casino owner, alias the United States Treasury. There is nothing open about what is euphemistically called ‘open market operations’. It is a conspiratorial operation. It has come about through unlawful delegation of power without imposing countervailing responsibilities. It was never authorized by the Federal Reserve Act of 1913. It defies the principle of checks and balances. It is immoral. It is a formula to corrupt and ultimately to destroy the Republic.

Even though later amendments to the Federal Reserve Act authorized it retroactively, the constitutionality of open market operation has never been put to the test. Such an examination would not be permitted by the powers-that-be. Open market operations are tantamount to check-kiting whereby two conspiring parties issue obligations that neither one has the intention or the means to honor but, when they come up for clearing, the phantom obligation of one party is covered with that of the other.

Incest in Financing Research

The junior partner in the conspiracy, the Federal Reserve, can only increase its share of the loot beyond the mandated limit of 6 percent per annum of subscribed capital by increasing its power. To do so it makes grants to anybody pretending to be able to write awe-inspiring, mathematically convoluted, nonetheless vacuous papers on macroeconomics or anything else of which the fraudulence and charlatanism is hard to detect.

As a result a veritable deluge of worthless papers has glutted the technical literature on money which have one common earmark: they all attempt to defend the indefensible, the issuance of irredeemable promises to pay: bonds issued by the Treasury and notes issued by the Federal Reserve banks. Thus, then, the basis for money creation is the flimsy check-kiting scheme whereby the Federal Reserve banks buy the bonds with freshly printed notes, while the Treasury uses these notes to pay the bondholders. Bonds are supposed to have value because they are ‘redeemable’ in the notes which, in turn, are supposed to have value because they are ‘backed’ by bonds. In effect both instruments are irredeemable and neither has backing in the form of any verifiable segregated wealth in existence. At the heart of the money-creating process, however explained, analyzed, or defended, is the stubborn fact that both the Treasury and the Federal Reserve banks are privileged, improperly and unconstitutionally, to issue obligations that they have neither the intention nor the means to honor. Check-kiting by anybody else constitutes a crime dealt with by the Criminal Code.

The grant departments of the Federal Reserve banks have effectively put themselves in charge of deciding what should and what should not be researched on the subject of money. This incest in financing research stands without precedent in the entire history of science, to the eternal shame of this ‘enlightened’ and ‘pluralistic’ age.

Crime of Omission

The hijacking of the agenda for economic research has resulted in a distortion of traditional values. The new values favor ephemeral knowledge, myopia in planning, instant gratification, marginalization of savers, consumerism, debt-creation with abandon, without seeing how it can be retired, scientific charlatanism, spreading half truths. Discarded are the old values: durable knowledge, work-hard/save-hard ethics, long-horizon planning, and a healthy fear of dangers involved in the unlimited accumulation of debt. The agenda for research sponsored by the Federal Reserve banks is no less a crime of omission than it is a crime of commission, as revealed by the following.

  1. Support for research on the merit of metallic monetary standards as a political arrangement of placing the power to create and to extinguish money directly into the hands of the people in conformity with the U.S. Constitution, rather than into the hands of appointed agents, is nil.

  2. Support for research on the question whether the value of irredeemable currency is an exception to the ‘Rule of Mean Reversal’ and, for this reason, is subject to the ‘sudden death syndrome,’ is zero.

  3. Support for research on the legality of open market operations, as it has been surreptitiously introduced and retroactively authorized, is unavailable.

  4. Support for the examination of the absurd tenet that it is possible to increase the volume of debt in the world indefinitely, in complete disregard of the ability ever to reduce let alone retire it, is denied.

  5. Support for the examination of the question whether the issuance of promises to pay which the issuer has neither the intention nor the means to honor can have any justification in contract law, is not available.

  6. Support for research of causal relation between the making of bank notes legal tender in Europe in 1909, and the massive and persistent world-wide unemployment that followed twenty years later, in 1929, is withheld.

Integrity of Courts and Universities

The above short list already makes it abundantly clear that something is woefully amiss with the granting of unlimited power not subject to advice and consent, still less to control, review, or withdrawal by the public empowering one particular agency not only to issue purchasing media as it sees fit, but also to direct, permit or inhibit research pertaining to questions about its own activities.

It is a sad commentary upon the integrity of our institutions that not one court of justice, not one university in the entire world has found it possible to put the regime of irredeemable currency on trial. Directly attributable to that regime is the unprecedented economic and financial devastation of the past thirty-five years, including the decimation of the purchasing power of all the currencies of the world, followed by the even more vicious decimation of the market value of all bonds, as a result of an earthquake-style destruction of the interest-rate structure.

It was this corruption of financing research that has disabled the immune system of society. It has made economics open to the invasion of quackery, and politics to that of chicanery. It has ensured the success of the final assault on sound money. As a result of the darkness that has descended upon monetary science, the government of the United States could inflict irredeemable currency not only on its own subjects, as it did in 1933, but on the peoples of the rest of the world as well, as it did forty years later in 1973, without meeting any significant resistance.

Integrity of Financial Journalism

Nor is this the end of the corrosiveness of irredeemable currency upon our institutions. Financial journalism has failed to alert the public to the imminent danger of a credit collapse arising out of the global use of irredeemable currency which governments have blithely embraced and foisted upon their subjects. They did it without bothering to examine the scientific and juridical arguments against it. In previous instances of experiments with this type of currency sane and self-respecting governments have always resisted the temptation of siren song to join others living in financial backwater. Whenever weak-minded or weak-kneed governments came to their senses and wanted to return to monetary rectitude, there was no lack of countries around on the gold standard to lend them a helping hand. No such luck this time. The world is a rudderless ship on uncharted waters, and the storm is fast approaching. When it strikes, it will be ‘everybody for himself’. No helping hand will assist survivors. All defenses against disaster have been systematically dismantled, all life savers cast overboard.

In order to soften the coming blow a group of concerned citizens have decided to establish Gold Standard University Live, home for the study of monetary issues placed under taboo by other institutions of higher learning.

* * *

Gold Standard University Live appeals to all those

  • who cherish freedom and the ideal of government of limited and enumerated powers;

  • who support the principle of checks and balances in public affairs as well as the notion of delegating power only to the extent it is encumbered with countervailing responsibilities;

  • who reject the incestuous combination of the monopoly to create money with a monopoly to dictate the research agenda for the principles governing money creation;

  • who reject the prostitution of monetary science to be used as a smoke-screen with which to camouflage the gradual enslavement of the entire population of the Earth.

It calls upon them

  • to step forward and support the cause of exposing monetary deceit and mischief;

  • to demand the reinstatement of the gold standard, the return to constitutional money, and putting the individual citizen in charge of money-creation at the Mint once more;

  • to force the government to write gold clauses into its bonds.

Disenfranchised people of the Earth, rise! Put an end to the usurpation of power by the clique of impostors pretending to be monetary experts! Chase the money-mongers out of the temple! Cast your jail-keepers into the sixth circle of the seven in Hell to which Dante confined all counterfeiters of money, perpetrators of false pretenses, and other tormentors of widows and orphans! Truth is on your side! You, not your slave-drivers, command the high moral ground! You can win a world free of yokes! The only thing you may lose is your shackles!

Savers and producers of the world, unite!

————————————————-

* Gold Standard University Live; see http://www.safehaven.com/showarticle.cfm?id=6610.

Global systemic crisis in 2007

Financial sector: « Another bubble » close to bursting

Public announcement GEAB N°10

(December 16, 2006) –

Finance is one of the four sectors identified by LEAP/E2020 in the December issue of their confidential letter (the GlobalEurope Anticipation Bulletin N°10) as likely to be severely affected by the development of the global systemic crisis in 2007 (1). The other three sectors are: international trade, exchange rates, and energy.

A large number of events – whose importance began to appear clearly at the end of 2006 – is about to thrust the world’s financial sector into a process of deep crisis: depreciation of US dollar-denominated assets, monetisation of US debt, fast degradation of US banks’ and of some EU banks’ balance-sheets, low level of banks’ reserves, fast depreciation of housing loans (2) and recession of the US economy.

For example, the value of US dollar-denominated assets worldwide (3) compared to the composite basket of currencies of the US main trade partners, decreased by USD 2,000 billion only because of the US currency’s loss in value. Another example, because of the same devaluation, the US debt fell by more than the US trade deficit’s worth (forecast: USD 750 billion) or than the balance of payment deficit’s worth (forecast: USD 900 billion) (4).

World's payment balances in 2005 (States in surplus in blue (dark blue = Euroland) / States in deficit in red)
World’s payment balances in 2005 (States in surplus in blue (dark blue = Euroland) / States in deficit in red)

The monetisation of the US debt (anticipated in February 2006 by LEAP/E2020 (5)) directly affects the balance sheets of the big international financial players, with some effects that should become more obvious in 2007.

In the United States, a growing number of financial institutions is beginning to announce that the bursting of the real-estate bubble and the increasing amount of default on housing loan repayments has started to impact on banks’ (6) and loaning institutions’ results. For instance, due to the market’s fast degradation, the US government non longer even tries to look into Fanny Mae’s and Freddy Mac’s accounts, the two giant quasi-government financial institutions who together weigh more than half of the US mortgage market (7). Thus Fanny Mae has not presented any quarterly or yearly report since 2004 and must ask for an exemption in order to remain listed on the New York Stock Exchange (8) and continue to increase its market share. Less than a month ago, Kevin M. Warsh, governor of the New York Federal Reserve, warned against risks of systemic crisis for the US loan mortgage market due to Fanny Mae and Freddy Mac accounting practices (9). Those risks are likely to cross US boarders since foreign investors, namely Asian, who walked away from US Treasury Bonds, have started a few months ago to buy Fanny Mae and Freddy Mac stocks.

Moreover, for many years, the US authorities have allowed banks to diminish drastically their asset reserves while making massive bets on the derivatives market where the risks are high. The chart below shows how those Wall Street’s giants (such as JPMorgan/Chase or CityBank or Bank of America, who were on top of all financial news in the past months), with counterparties close to none, are in fact doomed to bankruptcy in case a big crisis occurs. This provides a rather eloquent image of the frailty of the hedging sector banks invested in so massively.

Seven largest US banks' counter-party to their investment on the derivatives market - 2005 (Source: Office of the Comptroller of the Currency / US Department of Treasury)
Seven largest US banks’ counter-party to their investment on the derivatives market – 2005 (Source: Office of the Comptroller of the Currency / US Department of Treasury)

——–

Notes:

(1) With a EURUSD exchange rate now steadily above 1.30, the LEAP/E2020 researchers feel entitled to consider that the impact phase of the global systemic crisis has well started. LEAP/E2020 calculated that an operator who invested 100,000 Euros and followed over the last 10 months their anticipatory advices in terms of EURUSD exchange rate or US real-estate evolution, earned a minimum of 15,000 USD (currency) or 10,000 USD (US real-estate). A good proof that strategic analysis and individual short-term choices can gather in anticipation.
(2) Source : « Mortgages delinquencies : a rising threat » AP/Yahoo, 11/12/2006
(3) Sources : International Bank of Settlements and GEAB N°2
(4) A 10% loss of the US dollar against the currencies of its main trade partners corresponds to an USD 850 billion reduction on the relative value of the US debt (source: US National Debt Clock), with a US trade deficit estimated to be around USD 750 billion in 2006 and a US balance of payment deficit over USD 900 billion (source: Roubini Global Economics Service). Thanks to the devaluation of the dollar, the US government transfers an increasing amount of its deficits to its creditors and trade partners.
(5) “With their decision to put an end to the publication of M3 and other indicators designed to measure the evolution of Dollar ownership worldwide, the US authorities initiated a policy of « hidden monetisation » of the US debt. The Bush administration’s incapacity to handle the various deficits (budget, trade) and the related debt will result in a monetary creation of unequalled proportion, leading to a dilution of the American debt in an ocean of Dollars. The process has in fact already started: during the first three and a half months of the US fiscal year (beginning in October), the Federal Reserve has increased by 320 billion USD its stock of currency, that is 5 times more than it did over the same period last year”, source GEAB N°2, 16/02/2006
(6) As already announced by the world’s third largest bank, HSBC. Source : [Banknet360]url:http://, 06/12/2006
(7) Source : « Time to Reform Fanny Mae and Freddy Mac », Heritage Foundation, 20/05/2006
(8) Source : “Fanny notes more accounting problems”, 10/11/2005, MarketWatch/DowJones
(9) Source : « Financial Markets and the Federal Reserve », Governor Kevin M. Warsh, Federal Reserve, 21/11/2006

Συνήθως παραθέτω τα άρθρα που ανθολογώ απ’το διαδίκτυο ασχολίαστα….αλλά αυτή εδώ η πολύ bullish είδηση μ’έβαλε σε τούτες σκέψεις….
Φανταστείτε τι έχει να γίνει από τη στιγμή που σχεδόν κάθε Κινέζος θα έχει δυνατότητα αγοράς -έστω και 100gr.- χρυσού!…
…οι δε Κινέζοι είναι λαός που παραδοσιακά αγαπά το μέταλλο…

enjoy!

China makes gold more accessible to small investors

Lawrence Williams and Dorothy Kosich
’26-DEC-06 11:00′

LONDON and RENO, NV (Mineweb.com) –From Monday (Christmas Day), The Shanghai Gold Exchange lowered the size limit for trading in gold bars from one kilogram to 100 grams in a move to make trading in the precious metal more accessible to small private investors. Initial trade on the exchange in the smaller units was very slow though, which the Exchange put down to the Christmas holiday season, despite trading in the old larger units being fairly brisk.

According to the Xinhua News Agency, in July last year the SGE proposed spot trading of gold by private investors in cooperation with the Industrial and Commercial Bank of China. However, the one-kg 160,000 yuan (US$20,000) threshold is thought to have turned off many private investors and the volume of spot transactions by private investors in the first 10 months accounted for only 0.57 percent of total trading.

As China becomes more of a consumer society with more disposable income flowing down to the general population, this kind of move could make a lot of sense in terms of the country’s gold market and demand there. However it seems it may take a little time to catch on, but if it does …….

The Year of the Pig (which starts on February 18th on the Gregorian calendar), suggests a year of good fortune to the Chinese and in 2007 this coincides with a metals year on the five year elemental cycle tieing in with the five major planets, and the metal associated with this is traditionally gold. So the combination of pig (good fortune) and metal (gold) might well lead to additional private investment in the precious metal once the New Year starts – and this should be made easier by the much lower threshold of entry.

According to the SGE provincial measures regarding the spot trading of gold, a private investor can participate in spot trading and even claim gold at warehouses in Shanghai, Beijing, and Shenzhen via any SGE financial members or other agents approved by the People’s Bank of China. Wong Hasang, the Chairman of Guizhou Xixibao Mining, said the lower SGE threshold would attract more small private investors.

Sales of gold bullion and gold bars account for more than one tenth of gross gold consumption in China. The President of the China Gold Association Cheng Fumin predicted that more investors will be attracted to spot trading and the number of transactions will be increased “as the SGE opens its door wider.” The SGE is also developing derivatives, including futures, options and investment funds, according to Xinhau

Forecast 2007
by David Chapman

Offering an annual forecast has to be one of the biggest mug’s games on both Wall Street and Bay Street. That doesn’t prevent many from trying. At least nobody claims to have a crystal ball or mystic powers. We certainly don’t. But if there is one thing we have learned about technical analysis, it is that patterns repeat themselves. And that forms the essence of our forecasts.

W.D. Gann, the famed technical analyst of the early 20th century, showed that he could accurately determine the points at which stocks or commodities should rise or fall within a given time. We confess we are not experts on W.D. Gann. But we do follow Gann experts such as Michael Jenkins of Stock Cycles Forecast (www.stockcyclesforecast.com). So his thinking does creep into our writings and we certainly appreciate what we have learned from Mr. Jenkins. But we also read a lot of other material and try to maintain a broad perspective. And it is that perspective that we hope forms the basis of our writings.

Market performance in 2006 has exceeded most forecasts. After the rather flat year of 2005, expectations were not high for 2006 being much better, although Abby Joseph Cohen of Goldman Sachs predicted 1,400 for the S&P 500 (and she was pretty close).

In May the market started to fall, raising the spectre that the four-year presidential cycle of market troughs was getting under way. Even after the market rallied back in July, the expectation was that if the four-year trough was indeed commencing, the rally would not last. We cited the 60-year cycle that showed a secondary top in August following a major top in May 1946, and then a sharp collapse into October. It didn’t happen this time.

The Record to Date 2006 – To December 15, 2006

Dow Jones Industrials – up 16.1% S&P 500 – up 15.2% NASDAQ – up 11.4% Russell 3000 – up 14.4% TSX Composite – up 14.1%
Tokyo Nikkei Dow – up 5% London FTSE – up 11.4% German DAX – up 21.8% Hong Kong Hang Seng – up 28.5% Paris CAC 40 – up 17.5%
Oil – up 3.9% Natural Gas – down 29% AMEX Oil Index (XOI) – up 24.4% TSX Energy Index – up 3.2%
Gold – up 18.5% Silver – up 48.3% Gold Bugs (HUI) – up 22.5% TSX Gold Index – up 27.5% US Dollar Index – down 7.5%
Gold in Cdn$ – up 18.3% Gold in Euros – up 7.6% Gold in Yen – up 23.1% US 10 Year Treasuries – up 5.3% Fed Funds – up 26%
US CPI – up 3% (Oct) M2 – up 4.0% (Oct) US Government Debt – up 8.3% (Nov) Household Debt – up 6.6% (Q3) Business Debt – up 6.5% (Q3)

Instead the bulls have continued to follow the 1936 bull market that just kept going up into year end with barely a pause. Last year we noted “So 1936 might be worth a look given the continued flow with the 1930’s cycle (70 years). In 1936 the mid-year pause occurred in April/May and after that it was almost straight up into year end. Indeed, after a brief pause in December 1936 the market continued its amazing rise into early March 1937. After that it was lights out for five years as the 1937-38 bear market wiped out over 50 per cent of market values, and despite some rolling around over the next few years the final bottom did not occur until 1942.

Almost forgotten in the market euphoria since last July is that the energy, precious metals, and metals and mining sectors have also had a good year. They too topped in April/May along with the broad market but that has been largely it ever since, except for the metals and mining sector that just kept going up. The TSX Metals & Mining sector was showing a spectacular 72.9 per cent gain at December 15. While the TSX Energy Index lagged at +3.2 per cent on the same date, its bigger US cousin the XOI Index was up a sharp 24.4 per cent despite Natural Gas struggling all year (down 29 per cent). Silver was also a big performer. up 48.3 per cent. The Gold Bugs Index gained 22.5 per cent and the TSX Gold Index 27.5 per cent.

The gains in the commodity sectors overwhelm the gains in the broader market, but since they have been generally down since topping in April/May it has felt as if they were poor performers this past year. Not so. Since 2000 the commodity, energy and precious metals sectors have solidly outperformed the broad market. The S&P 500 is still about eight per cent under its highs of 2000 and the NASDAQ has not recouped even 38.2 per cent of its huge 2000-02 collapse. The Dow Jones Industrials has seen new highs but it has been a lonely walk.

The seventh year of the decade has a decidedly mixed record. The record for the Dow Jones Industrials since inception is a dead heat of six up and six down.

It doesn’t particularly help us if the prior year (ending in 6) was an up year or a down year. When years ending in 6 were up (seven times), the year ending in 7 was down four times and up three times, including the past two. When years ending in 6 were down (five times) the year ending in 7 was up three times and down twice (and down big, both times).

The coming year will be the third year of George W. Bush’s second semester. There were eight other presidents who enjoyed second terms since the inception of the Dow Jones Industrials. Here the record clearly favours the bulls with six up and two down. It is also a pre-election year and the general record for the market shows that the first 6-7 months tend to outperform. Typically the incumbent President is opening up the spending spigots in order to stimulate the economy in the prior year to the election to help increase the odds of re-election.

With the record of years ending in 7 a dead heat, following an up year in 6 slightly favouring the bears, the third year of a second-term president favouring the bulls, and a the pre-election year also favouring the bulls we have to turn to our key cycles to look for a hint of what is to come for 2007.

Michael Jenkins has always emphasized the importance of the 100-year cycle. One hundred years ago we had the San Francisco earthquake (April 1906) and a financial panic known as the “poor man’s panic” in 1907. This time, a few months earlier, we had the New Orleans hurricane disaster in September 2005. The housing market did not begin its collapse until several months later. With housing supply clearly exceeding demand we do not believe the bottom has been seen. The economic fall out is being delayed and 2007 might soon bear the brunt of that collapse.

Thirty years after 1907 came the 1937 collapse that wiped out most of the 1932-33 advance. And 30 years ago, in 1977, the market collapsed on the back of huge (for those days) trade deficits, a sharply falling US dollar and rising interest rates.

Ninety years ago, in 1917, WW1 was raging. The USA entered the war in April 1917. In May the draft started and the market kept falling all year long. Now we are hearing that they are talking about increasing troop numbers in Iraq instead of withdrawing and we read they are preparing plans for a military draft. We are reminded that US warships continue to gather in the Persian Gulf, offshore from Iran. The US has been in a bellicose, off-and-on spitting match for years over Iran’s nuclear program, most recently with its volatile President Mahmoud Ahmadinejad.

One of the bullish cases for the market in 2007 is the master 60-year cycle that saw a small up year in 1947. But that followed a down year in 1946. The 10-year cycle is also encouraging, as 1997 was a very sharp up year. But the 10-year Japanese cycle is very negative as the Tokyo Nikkei Dow collapsed in 1997-98 following an up year in 1996.

The four-year presidential cycle that was due to bottom in 2006 also has an interesting history. On occasions it has not worked, as we have seen in 2006. The last time we stretched out was 1982-87 where the market kept rising into 1987 before the famous stock market crash that October. The 1932-37 market also stretched further than expected. Of course, what followed was a huge collapse in 1937-38. We also found that the market stretched in 1912-17 and the 1917 collapse was quite vicious. The lesson seems to be that while we can get through the fourth year without making our trough, we do not survive the fifth year without paying for it.

We remind everyone that we still have our major long-term cycles in play. The cycles outlined by Ray Merriman of MMA Cycles Report (www.mmacycles.com) include a 90-year cycle and a 72-year cycle that in turn sub-divide into 36-year and 18-year cycles. He believes both the 90-year and 72-year cycles bottomed at the time of the Great Depression in 1932. If so, then the 72-year cycle low is due 2004 +/- 12 years and the 90-year cycle is due 2022 +/- 15 years. The two overlap from roughly 2007 to 2016, so we are just entering that time period now.

The 36-year cycle last bottomed in 1974 and has a range of 30-42 years. The current 36-year cycle low is due during 2004-16. Finally, an 18-year cycle low with a cycle range of 15-21 years last occurred in 1987. It is due to unfold 2002-08, so it is possible that one bottomed in 2002. The next one would be due between 2017 and 2023, which is also the outer range of the 90-year cycle.

Our presidential four-year cycle falls within the context of the 18-year cycle, where Merriman notes there are usually five of them. As we noted, the current one was due in 2006 but the cycle does have an observed range of 36-56 months. The low therefore could occur as late as June 2007.

It is possible that the drop seen into June/July 2006 was the four-year cycle low. If so, it had to have been one of the most shallow on record. The drop on the S&P 500 was only eight per cent. The 1998 four-year cycle low drop, for example, was 21.6 per cent. But the 1994 four-year cycle low fall was only about 10 per cent, so it is possible. Given the low volatility as measured by the VIX indicator and the current high bullish consensus factor, we doubt that the low has occurred. But the thought can not be dismissed and we recognize that the low volatility (as measured by the VIX) can continue for some time.

There is also the well-known Kondratieff Wave that has an observed range of 50-60 years. The consensus last bottom for the previous Kondratieff Wave was 1949, so once again we are in the range for its trough. The Kondratieff Wave has generally approximated to the life span of a man, and with man living longer, it is possible that this one could extend and fit more with the longer 72-year and 90-year year cycles.


Ten-Year Stock Market Cycle
Annual % Change in the Dow Jones Industrials Average
Year of Decade

decades 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
1881-90 3.0 -2.9 -6.5 -18.8 20.1 12.4 -8.4 4.8 5.5 -14.1
1891-00 17.6 -6.6 -24.6 -0.6 2.3 -1.7 21.3 22.5 9.2 7.0
1901-10 -8.7 -0.4 -23.6 41.7 38.2 -1.9 -37.7 46.6 15.0 -17.9
1911-20 0.4 7.6 -10.3 -5.4 81.7 -4.2 -21.7 10.5 30.5 -32.9
1921-30 12.7 21.7 -3.3 26.2 30.0 0.3 28.8 48.2 -17.2 -33.8
1931-40 -52.7 -23.1 66.7 4.1 38.5 24.8 -32.8 28.1 -2.9 -12.7
1941-50 -15.4 7.6 13.8 12.1 26.6 -8.1 2.2 -2.1 12.9 17.6
1951-60 14.4 8.4 -3.8 44.0 20.8 2.3 -12.8 34.0 16.4 -9.3
1961-70 18.7 -10.8 17.0 14.6 10.9 -18.9 15.2 4.3 -15.2 4.8
1971-80 6.1 14.6 -16.6 -27.6 38.3 17.9 -17.3 -3.1 4.2 14.9
1981-90 -9.2 19.6 20.3 -3.7 27.7 22.6 2.3 11.8 27.0 -4.3
1991-00 20.3 4.2 13.7 2.1 33.5 26.0 22.6 16.1 25.2 -6.2
2001-10 -7.1 -16.8 25.3 3.1 -0.6 16.1*
8 up
5 dn
7 up
6 dn
6 up
7 dn
8 up
5 dn
12 up
1 dn
8 up
5 dn
6 up
6 dn
10 up
2 dn
9 up
3 dn
4 up
8 dn
* to December 15.

If our outlook for the stock market is cloudy to negative for 2007, we can’t help but notice that many analysts continue to view it with great optimism. Their thoughts should not be ignored. If there is one thing we have learned, it is that nothing plays out as you expect. While all of the cycles have in the past worked, there are forces at work against these cycles. There we are reminded of Alan Greenspan, who as a student of the Kondratieff Wave once declared that if he ever became chairman of the Federal Reserve, he would stave off the Kondratieff winter by various means such as injecting money into the system or supporting the dollar, etc. Of course he did become Fed chairman, and money supply and debt both exploded on his watch. Money supply (the old M3) about tripled, as did the official US debt.

What this indicates is that during the Greenspan years there were huge injections of liquidity (which are continuing in the Bernanke years and who can forget Bernanke’s declaration that if the economy was in trouble he would drop money from helicopters). While the growth of debt and money in the USA has been a key provider, it has not been done by the Fed alone. Japan has also been a big provider of liquidity over the past several years. These huge liquidity injections played a major role in the internet/technology bubble of the late 1990s and again in the housing bubble in the early part of this decade. That both have now been pricked does not mean that the ability to inject liquidity into the system has been halted. Indeed, it may be heightened.

We don’t always agree with the economic team of Louis and Charles Gave and Anatole Kaletsky (GaveKal – www.gavekal.com) but we do pay attention. In a recent writing of GaveKal Five Corners (December 13, 2006) they commented on the low volatility in the economy and how that has contributed to the high leverage. We agree that a highly volatile economy encourages savings and a low volatility economy encourages spending. Combined, of course, we have both a low volatility stock market and a low volatility economy – the best of all worlds.

GaveKal attests all of this to our “Brave New World” of globalization, allowing corporations to expand around the world and concentrate on what adds the most value: financial management of balance sheets both for the corporation and the individual, freeing up capital; and evolution from an industrial society to a knowledge-based society; and that ideas can be generated using a lot less capital. Combine this with the liquidity booms that have occurred, particularly since the 1980s following the steep recession of 1980-82, and then it all becomes understandable. Huge liquidity expansions were seen 1984-86, 1993-94, 1997-99, 2002-04, and another may have begun in 2005-06 (coinciding with the end of reporting of M3). All corresponded with a sharply rising stock market.

Liquidity contractions were seen 1980-84, 1988-92, 2000-02 and very briefly in 2004. They corresponded better with stock market corrections either concurrently or shortly thereafter. It is for these reasons that GaveKal remains quite bullish into 2007. They also believe that stocks remain quite cheap. Having seen other forecasts from other analysts, we know that GaveKal is not alone in the bullish camp.

But we are also reminded that chairman Greenspan said that “History has not dealt kindly with the aftermath of protracted periods of low risk premiums”. And a protracted period of low volatility such as we have seen in both the stock market and the economy is inevitably followed by a period of high volatility. Has gold already discovered that?

Since December 31, 1999 the Dow Jones Industrials is up 8.9 per cent, the S&P 500 is down 3.0 per cent, the NASDAQ is down 40 per cent and the US Dollar Index is down 18 per cent. On the other hand, gold is up 114 per cent, silver is up 132 per cent and the Gold Bugs Index (HUI) is up 363 per cent. Oil is up 147 per cent, Natural Gas is up 203 per cent, and the AMEX Oil Index (XOI) is up 141 per cent.

We could go on about other commodities, and the metals and mining stocks as well, all which have enjoyed at least 100 per cent gains this decade. Even if GaveKal is right about 2007, these sectors should continue to outperform. Despite a six/seven month intermediate mini-bear occurring in precious metals and energy, they have still outperformed the broad market this past year.

Commodities, precious metals and energy all entered new major bull markets between 1998 and 2002. From roughly 1980 to 2000 these sectors were in a major bear market while the broad market was enjoying an 18-year bull market from 1982 to 2000.

In 1947, Edward Dewey and Edwin Dakin published a book entitled Cycles – The Science of Predictions.They detailed a 54-year cycle in wholesale prices going back to 1790. (This study ties in nicely with the work of Nicolas Kondratieff). As a part of their study they predicted the future timing of peaks and troughs in wholesale commodity prices. Each rise and fall is roughly 27 years.

Not surprisingly, their last peak prediction was for 1979 and their most recent trough prediction was for 2006. Commodity prices peaked in 1980, while the trough may have occurred early from 1998 to 2002. If Dewey and Dakin are correct, then we have entered a multi-year bull market in commodities (including metals, precious metals and energies). The next idealized peak would be due in 2033.

There will of course be sharp corrections during this long up period, which will shake many out. But the long-term trend seems to be established and these periods of corrections are buying opportunities. Gold has an 8.5-year cycle (all cycles are credited to Ray Merriman) and probably a 25-year cycle. It is believed that the last 8.5-year and 25-year cycles both bottomed in 2001 – this also fits well with Dewey and Dakin. This means the next 8.5-year cycle trough is not due until 2008-11. If there is an 8.5-year cycle there probably is a half-cycle of 4.25 years. We believe that happened in July 2005.

Another subset for gold is an 18.5-month cycle. If July 2005 was both a 4.25-year cycle low and an 18.5-month cycle low, then the next 18.5-month cycle is due anywhere from October 2006 to March 2007. After this low we should embark on another strong up move in gold. If it is accompanied by a wave of liquidity injections, the next move in gold could be spectacular. Based on the current triangle pattern that appears to be forming, a move to $1,000 is not out of the question – quite possibly in 2007.

Silver cycles are very similar although they do not necessarily overlap with gold. Silver may have already hit its cycle trough back in September 2006. Silver should target up to $20-$22 in 2007 if the triangular patterns prove correct.

Oil has what appears to be a four-year cycle, with the last one occurring in early 2002. That meant the next one was due in 2006 (anywhere from late 2005 to late 2006). The recent lows in oil near $56 may have satisfied that requirement. However, until we firmly break out once again over $70 there remains the possibility of a move to lower lows under $50. Patterns forming on oil would suggest a move to at least $100 once new highs above $78 are made. At that level it then just equal the price of oil seen in 1980 on an inflation adjusted basis.

Natural Gas cycles are quite irregular but appear to range from two to three years, trough to trough. A key cycle low may have been made here recently near $4.60. There is a possibility of a secondary low in spring 2007. Interestingly, Natural Gas, after each major low over the past several years, has shot up to new all-time highs each time. This would suggest that once the low is in, we could exceed the highs of 2005 at $15.78.

One of the keys for gold and the precious metals is the US dollar. The other major currencies (the euro and the yen) may have made important cyclical lows against the US dollar over the past few months. If so, then these lows were probably important four-year cycle lows and the US dollar should embark on another major move to the downside. We have targets that suggest a minimum of 72 for the US Dollar Index.

We have heard stories already about the demise of the dollar and how the Chinese are preparing to dump their portfolio of US Treasuries. These stories actually are more likely to signal temporary lows in the dollar. The Chinese are not foolish enough to dump their entire portfolio of US Treasuries as it is not in their interests to do so. One has to remember that whatever the Chinese do will be in their own best interests.

But technically, the dollar has already begun a decline. Even if is the desire of the US Fed to allow the dollar to decline further, powerful efforts will be made for it to be orderly. There remains a risk of course that things will get out of hand. Keep a sharp eye on trade discussions; the Doha round of global trade talks has already broken down. That doesn’t mean they are dead, as powerful financial interests around the world do not want a US dollar collapse. An orderly decline, yes. A collapse, no.

Our conclusions on market direction in 2007 are clear. While the broad market could survive until March, we believe that will be either the high or a secondary high. Following that we will begin a five-year bear market with a big portion of the collapse occurring in 2007-08, very similar to the collapse of 1937-38. Gold and precious metals should resume their bull runs in 2007, with an outside chance of gold running to $1,000 an ounce. Other commodities should also rise. Oil should resume its bull market once again once we break out over $70. The US dollar should go into decline, but we expect it to be orderly, with periodic sharp corrections.

In early 2007 we will discuss many of the issues that may have an impact on the markets in 2007.

DavidChapman.com
Technical Scoop

Charts and technical commentary by:
David Chapman of Union Securities Ltd.,
69 Yonge Street, Suite 600,
Toronto, Ontario, M5E 1K3
(416) 604-0533
(416) 604-0557 (fax)
1-888-298-7405 (toll free)

David Chapman is a director of Bullion Management Services the manager of the Millennium BullionFund www.bmsinc.ca

Got Gold Report – Liquidity Floods Into Silver ETF

By Gene Arensberg
24 Dec 2006 at 09:11 AM EST

HOUSTON (ResourceInvestor.com) — What is the big news in this issue of the Got Gold Report? It is the stunning 325 tonnes of new silver added to Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF. For details see the Silver ETF section below.

Typically thin holiday trading and a lack of marquee gold-moving news had the ancient standard of wealth moving sideways more or less for most the week. Ho, ho, ho hum…. That is to be expected in the last full trading week before Christmas, especially when the holiday falls on a Monday.

Since gold put in an interim high on December 1 in the $650s it has now retreated to the lower edge of an up-trending channel and tantalizingly close to what bears would view as a chance for gold breakdown pay dirt.

What better a week than this or next to attempt to crash the obvious implied support indicated on this graph. (See the close-together popular moving averages). For more see the Gold Charts section below.

Should we expect a visit from short selling Grinches right out of the gate on Tuesday? Sure, but they are only half the equation. January is practically here, equity options have already expired and how much ammunition is left in the bear’s collective magazine?

Not that it couldn’t change and change quickly, but one problem from the bear’s point of view is that the recent weakness for gold metal is not and has not been well supported by the indicators followed closely by this report. The usual rundown of some of the indicators follows, but before we take a look at them just a quick word of thanks to all our loyal readers and best holiday wishes to all. Got Gold?

Moving right into this report’s indicators:

COT Changes. The Tuesday 12/19 commitments of traders report (COT) shows that the large commercials (LCs) collective combined net short positions (LCNS) fell 14,550 or -13% to 101,732 contracts net short Tuesday to Tuesday having declined 3,886 lots the previous week. Gold metal dipped $7.45 or -1.2% to $622.70 Tuesday to Tuesday. The last trade on the cash market Friday showed $621.21 or pretty much sideways from Tuesday’s last tick. Gold managed a $5.49 gain for the calendar week.

Total COMEX gold open interest added 3,995 lots to 337,096 open contracts having inched 2,571 contracts up the prior week. Long-term December ‘07 and beyond COMEX forwards ended the week 4,760 contracts higher at 68,836 or 20.4% of open contracts.

As of Tuesday, which followed gold’s near-significant dip to the $612 region on the cash market Monday 12/18, (the day before the COT cutoff), the data show the large commercials reducing net short exposure at an accelerated pace. As one measure of that metric, consider that as gold declined 1.2% the LCs reduced net short exposure by 13%, nearly an 11:1 ratio. For another measure, we have to go all the way back to the September 12, 2006 COT report to find a larger reduction in the LCNS percentage wise. In that September 12 report the LCNS declined 20,570 contracts or 16% but was during a week that saw gold metal cliff dive a whopping $47.96 or 7.5% from $637.94 to a bone shattering $589.98. (Roughly only a 2:1 ratio then.)

Gold bulls will be comforted by the faster pace of LCNS reduction which occurred above key support for gold metal. This indicator stays on the bullish side of the gold market ledger.

Gold versus the large commercial net short positions as of the Tuesday COT cutoff:

Gold ETFs. This week gold holdings at streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD], added another 3.09 tonnes to 452.01 tonnes of gold bars held by a custodian in London for the trust. The previous week saw an addition of 7.4 tonnes.

The U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, was near flat for the week at 90.30 tonnes of gold held, while Barclays’ iShares COMEX Gold Trust [NYSE:IAU] jumped 1.23 to 44.46 tonnes of gold metal held for its investors.

After a short pause, positive money flow into gold ETFs is plainly apparent. The last full Got Gold Report two weeks ago mentioned: “Even though positive money flow seems to have paused, we cannot ignore the over 52 tonnes of new gold metal added to GLD alone in the month of November. Intuitively that kind of wealth flowing into gold sure seems like it ought to have long term bullish implications. Something to watch for over the near term now that gold has pulled back some is whether GLD ends up adding or subtracting gold…”

Well, since then GLD alone has added over 10 tonnes of fresh new gold bars to its hoard indicating that more wealth has been entering gold ETFs than leaving it. Investors have indeed been buying the dip. That is good to know, but the positive money flow indicated into gold ETFs pales in comparison to the strongly positive money flow story for silver (explained below). This indicator remains on the bullish side of the gold market ledger.

Financial data for GLD are updated daily at streetTRACKS Gold Trust.

Silver ETF: While silver metal on the cash market was mistreated over the past two weeks and plunged as much as $1.89 the ounce, metal holdings for Barclays’ iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, skyrocketed by a stunning 325.5 tonnes to total 3,768.02 tonnes (121,144,585 ounces) worth $1.51 billion as of Friday’s figures. And get this; 279.02 tonnes of that titanic increase in silver holdings occurred on Thursday, December 21. Talk about positive money flow!

To put this eye-opening liquidity-induced silver positive money flow event into context, consider that the 279 tonnes of silver metal added to SLV’s holdings Thursday 12/21 is higher than each of the previous four monthly additions (November 153.8, October 14.09, September 123.02 and August 247.35 tonnes of silver added to SLV holdings). Not since the week following SLV’s April 28 inception has there been a 200-plus tonne addition in one day and only a few weekly totals top 200 tonnes, the last one way back in June (June 19-23, 264.16 tonnes).

So, positive money flow continued for SLV in a huge way. Does anyone doubt that investors are buying this dip for silver?

Meanwhile silver metal appears to be attempting to mark support with a new pivot near $12.50. Given the extremely large inflow into the metal evidenced by the SLV metal holdings, a pretty good case can be made for sustained support to form somewhere between right here and the 38.2% Fibonacci retrace level. (“Here” is the cash market intra-day low Monday 12/18 at $12.29. The 38.2% Fib basis is shown on the 1-year graph below and comes in at around $11.94.)

Please also see the 1-year silver graph for additional commentary. Each tick lower will very likely see buying pressure for physical metal in most popular forms increasing logarithmically as the trading approaches both the 200-dma and the 38.2% Fib and just below that, in the roughly $11.70 region as of Friday, is the lower edge of a medium-period up-trending channel now well defined. In other words, all things else being equal, silver bears face a rather daunting challenge over the near term if this report’s read is close.

Having said that, when downward momentum is ruling, new silver purchases made in this region should be made only with fairly tight new-trade trailing stops, but can be attempted here in incremental scale-in amounts in this report’s opinion. That is, of course, provided traders are disciplined in the use of appropriate stop management. As always, each trader should study the issues carefully and make their own trading decisions.

SLV metal holdings graph as of Friday, 12/22:

Gold Charts. The daily chart shows gold metal roughly hugging the 50-dma having briefly touched the 200-dma and modestly bouncing off of it. Both popular moving averages are above the bottom feature breakout level of $607-$610 which happens to coincide and frame the 38.2% Fibonacci retrace level. (Please see the 2-year chart for Fibonacci basis.) Gold has traversed what could be a developing uptrend channel and if so currently resides near an implied uptrend support lower channel line. Bad news for bears, definition of the uptrend channel is yet to be confirmed and if that tentative level is defeated there should be strongly increasing support not very far underneath. Bears beware of a potential light liquidity trap door reversal which very well could follow a 200-dma breach. Many hot-money short stops will likely be very tight, “at support” levels by now, meaning any convincing thrust would gain some additional fuel.

On the other hand, mentioned out of an abundance of caution, a very large number of sell stops and long trailing stops will have no doubt accumulated by now in the $5 to $8 region below the November breakout ($607-$610). It would not be all that surprising to see a determined attempt by energized fund traders to crash that important technical level during the thin-market conditions extant in the week between Christmas and New Years Day. It is this report’s opinion that should that significant technical event occur it would be an opportune time to begin scaling into new long positions for gold metal. More likely than not, such a breach would be of short duration, no pun intended.

Please also see the 2-year weekly version for context as well as additional commentary. This indicator remains bullish and as of Friday (12/22) negative momentum developed over the past three weeks seems to be pausing, if not losing steam. (Note the histogram in the MACD). A convincing dip into the low $600s (below $607) would alter the chart signature if not immediately (within a few days) corrected. Emphasis on the word “convincing.”

U.S. Dollar. Data in the 12/19 commitments of traders report (COT) show that as the U.S. dollar index rose 51 basis points from 82.94 to 83.45 Tuesday to Tuesday the LCs pared their considerable net long positions by a scant 616 contracts to 15,177 NYBOT contracts net long. Since Tuesday the index tacked on 35 ticks to close Friday at 83.80.

The last U.S. Dollar section two weeks ago included: “Given the apparent support forming for the U.S. paper currency here this indicator has to move over to the short-term bearish side of the market ledger for gold. Even though the former lock-step inverse correlation of gold and the U.S. dollar ended convincingly in 2005, large moves in the dollar still affect gold in short term bursts. Over time though gold more or less trades independently now, answering primarily to demand and liquidity in all paper currencies.”

For whatever reasons the LCs are way long the greenback and at the same time they are short the British Pound in a hefty way, long the Canadian dollar, modestly long the euro, long the Japanese yen, while short the Mexican peso, and flat Swiss francs. Judging by that it looks like the LCs are strongly positioned for weaker pounds versus the other paper currencies while remaining short gold in what has become an average sort of way.

Given that set up, this report suspects that gold will once again break free from the anti-dollar reverse correlation (ingrained in so many short-term traders) imminently, a matter of days or weeks, not months. Gold remains strongly undervalued basis the paper promises issued by governments and central banks of the world and we should not forget that some central banks and probably other large holders of U.S. dollar denominated forex reserves are likely to add the metal as part of a long-term diversification away from U.S. dollars.

This indicator has to stay on the bearish side of the gold market ledger for now. Although the LCs have not exactly been in sync with the USD of late this indicator tracks changes to their positioning in the buck and they most likely won’t be out of sync for long.

Please see the 1-year daily USD chart and the 2-year weekly USD version for additional commentary about our large commercial paper currency trader friends.

Gold Indexes. All over the globe technically minded portfolio and fund managers, long and short-term traders and investors large and small track their favorite indexes and make trading decisions based on them. The AMEX Gold Bugs index, [AMEX:^HUI] which follows a basket of fifteen of the most popular mining companies that generally do not use hedging and therefore should have more leverage to the gold market, is one of the most popular of those indexes and is the index that this report tends to focus on.

The 6-month daily HUI chart has mining shares stepping out to the downside of the steep up-trending channel formed as the index shot 46% higher in just two months to 362.53 from its October nadir of 274.72. Fibonacci enthusiasts will be looking for support to form near the current level (328.02) as the 38.2% Fibonacci target for that short-term move resides at about 329.05. Next on the Fib-scale is the 50% level at 318.67, then the 61.8% Fib on down below at 308.30. This report has the rounded bottom breakout near 313, so there are a multitude of potential support targets in the neighborhood.

Unless gold bears are rewarded with a key support gold technical breakdown (convincingly below $607-$610) a strong bullish case can be made for sustained support to form here or not very far below. “Here” is the intra-day low marked Friday 12/22 at 324.70. “Not very far below” includes the Fibonacci targets mentioned above or within 10% in other words.

Please also see the 3-year weekly HUI chart for context and additional commentary. One long-time reader who runs a medium size fund based in California focused on the natural resources sector commented Friday that he felt that some of the weakness seen in the past week was from book squaring ahead of the holiday. In addition late year profit taking ahead of the January bonus month (presumably for funds and firms with calendar year ends?) might also have a little skin in the game. Meanwhile he notes that at least so far we have not witnessed the harsh, high percentage plunges which followed both the May and September highs. “They (mining shares) seem more resilient this time than then,” he said.

In both the May and September periods mining shares refused to answer the last impulses up for gold metal prior to those harsh plunges as gold sold off. This time, however, is different. Mining shares were outperforming the metal at the most recent high for the HUI at the same time as a flood of liquidity was entering the gold ETFs (November). Can we make the connection that so much new wealth having flowed into gold and silver ETFs over the past two months might be correlated directly to the reluctance of the miners to fall? And is that a reliable signal? We’ll see.

HUI:Gold Ratio. The popular HUI:Gold Ratio measures the relative performance of mining shares versus gold. When the ratio is rising mining shares are putting in a stronger performance relative to the metal and vice versa.

The one-year daily HUI/Gold ratio chart shows mining shares finally answering the gold and silver pullbacks some, but certainly not as much as they are capable of. For an example of what the HUI components are capable of when a liquidity exodus is in play take a look at the September period. Nothing prevents such a mining share liquidity exodus from taking place, it just hasn’t yet. While gold has pulled back as much as roughly $40 the ounce off its December 1 high, or about 6.1%, mining shares on the HUI are off about 10.4% off theirs. That’s not even a 2:1 ratio.

The last HUI/Gold Ratio section two weeks ago said: “A reasonable pullback in the ratio here while the HUI stages for another run at its 350-ish resistance would not be surprising at all and would still be within the context of a continued trend of mining share strength.”

Well, please also see the 2-year weekly HUI/Gold version for additional commentary which includes that the action seen over the past two weeks remains consistent with what has been a steady, but choppy outperformance by mining shares versus the metal since September.

For now this indicator remains bullish.

Cash Gold-HUI. The cash gold minus HUI indicator comes in this report at 293.19, a jump of 16.82 points from the 276.37 reading in the last full report two weeks ago. Ordinarily a large jump in the spread is cause for concern if sustained so this indicator bears watching near term. Having said that, the jump higher was from what has been a low-ish level for all of 2006 and could just be a snapback to equilibrium. For an example of what would raise caution flags at this level, a move over 305-310 from here would signal a short-term loss of collective confidence by mining share investors in this report’s opinion.


Source for data Thompson Financial via Stockcharts.com

Short-Term Outlook: (Continued cautiously bullish; add into significant dips; add more aggressively into strong dips. Trailing stops normal for gold and mining shares.)

On the bullish side of the gold market indicator ledger we have the LCs reducing their collective net short interest by the largest percentage since September 12, (-13%). Positive money flow into gold ETFs continued as gold moved sideways following a dip. A galactic sized increase in silver holdings shows in the silver ETF of over 325 tonnes the past two weeks which makes the phrase “positive money flow” seem inadequate. Gold charts still possess bullish technical signatures although trading has neared key implied support. And, mining shares seem reluctant to sell off like mining shares can do.

On the bearish side of the ledger, the LCs remained very strongly long the greenback, some weakening of mining share investor confidence surfaced via the Cash Gold-HUI indicator albeit from a low level, physical gold demand was lackluster for much of the prior week although it picked up noticeably late week, and premiums for physical precious metals on electronic bourses remained noticeably less firm for much of the week, also firming somewhat late week.

The last full Got Gold Report two weeks ago included: “…an apparent bull market style pullback, the third of the current advance, is once again underway as expected. As mentioned above so far the current pullback is not supported by most of the indicators followed closely by this report. That is not to say that the indicators couldn’t turn right around and answer a determined sell-down, they just haven’t done so. Given that, and assuming that there is not a significant deterioration of the indicators over the near term gold metal is nearing significant dip status and any further weakness, if any, ought to trigger a legion of dip buyers into action.”

Sure enough, dip buying is certainly underway as evidenced by the metal additions to the ETFs, with the additions to the silver ETF no less than spectacular. While we have to note some weakening of collective confidence for mining shares, the miners continue to not (repeat not) lead this market lower. Instead they seem reluctant to sell off as they are capable of.

Ever mindful of the occasional light-liquidity holiday period hi jinx attempted by energetic funds with access to electronic bourses and more leverage than they deserve, unless there is an unexpectedly significant deterioration in the indicators between now and the next scheduled report in two weeks, this report plans to remain cautiously bullish for gold and mining shares with normal trailing stops. Provided resource investors are disciplined in the use of reasonable new-trade trailing stops for protection, significant dips can be bought in scale-in measured increments and stronger dips bought more aggressively.

Mentioned last, but not least, in the event of a gold metal technical breakdown during the upcoming light-liquidity period, it is this report’s intention to add gold metal in measured increments using reasonable new-trade trailing stops and to add aggressively should that breakdown turn into a high percentage sell stop triggering event. It just might be the last opportunity for cheap gold for some time to come.

Until next time as always MIND YOUR STOPS.

Long-Term Outlook: A secular bullish perfect storm trend for precious metals continues. Rapidly escalating global investor demand, easier participation by investors via ETFs, conversion of Middle East petroleum dollars to gold, rising new demand from Asia, possible central bank buying partially offsetting central bank selling, conversion from dollars to gold by large U.S. dollar denominated foreign exchange reserves, declining gold production, increased political and NGO interference to bring new sources on line, rapidly escalating costs to produce, delays and shortages of equipment and manpower, previous two-decade bear-market-induced shortage of intellectual capital for miners, safe-haven buying to hedge strong, reckless, competitive dilution of under-backed fiat paper currencies, probably continued de-hedging and continued troubling global political and religious tensions are just some of the factors contributing to the long-term bullish winds now blowing. In real terms gold remains undervalued versus nearly all other commodities and strongly undervalued as measured by the world’s fiat paper promises…. The Great Gold Bull has a long way to go. It just won’t go straight up.

The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author currently holds a long position in streetTRACKS Gold Shares and iShares Silver Trust, and holds various long positions in mining and exploration companies.

Three Strikes Against the Dollar

by James Turk

The markets are winding down for the year-end holidays, and as a consequence, little consideration or attention is being paid to three events, each of which adds another nail to the dollar’s coffin.

1) Iran and euros

Though it has been given scant coverage in the US, Iran’s decision to drop the dollar in favor of the euro has been receiving widespread attention in Europe. As reported by Agence France-Presse on Monday, Iranian government spokesman Gholam Hossein Elham told news reporters: “The [Iranian] government has ordered the central bank to replace the dollar with the euro…in commercial transactions,” repeating exactly what Saddam Hussein did in September 2000. Lest there be any misunderstanding, Elham went on to say: “Foreign income sources and oil revenues will be calculated in euros, and we will receive them in euros in order to put an end to our dependence on the dollar.”

This change will lessen the demand for dollars, which will cause the value of the dollar to drop. Strike one.

2) US Ban on melting and export of coin

The US Mint implemented a new regulation that bans the melting down and exporting of pennies and nickels. It is sound economics to harvest the metallic value of these coins, because the value of their base metal content is greater than the coin’s face value. Here’s what Lee Rogers, editor of the Funny Money Report, says about it. His analysis is spot-on:

“They [i.e., US Mint officials] claim that they are imposing these rules because they don’t want certain individuals who melt down coins taking advantage of the American tax payer. It isn’t the people who are melting down the pennies and nickels that are taking advantage of the American tax payer. Those people are just trying to protect themselves from the stupidity of the Federal Reserve that continues to destroy our currency. The Federal Reserve is the very reason why the melt value of these coins has risen beyond their face value. Federal Reserve Notes have lost over half of its value in terms of gold and silver since 2000 because they have dramatically increased the money supply over this period of time. The Federal Reserve has taken advantage of the American tax payer, not the people who are melting down these coins. It is complete rubbish that the U.S. Mint would make scapegoats out of individuals who melt their coins to be the ones who are screwing over American taxpayers. The press release should be blaming Alan Greenspan for taking advantage of American taxpayers because he was responsible for creating the excessive amount of credit that has since decreased the value of the currency.

What is going on with pennies and nickels is an exact repeat of what took place in the late 1960’s. Back then the U.S. Mint made melting silver coins illegal. At that point in time the melt value of silver coins became worth more than their face value. As a result, these coins began to disappear from circulation because people realized what was happening and kept them. Why would people use a coin to pay for something if the face value of it is worth less than the melt value? That’s why the coins stopped circulating. I believe that the same exact thing is going to happen to the currently circulating forms of pennies and nickels.”

The entire article in the Funny Money Report is worth reading. It also includes the press release by the US Mint announcing their new regulation.
http://www.funnymoneyreport.com/article_view.php?id=20

There are many lessons that we can garner from monetary history, but one of them is unmistakable. When debasement becomes so extreme that even the base metal content of circulating coins is greater than the coin’s face value, that country’s currency is headed for the currency graveyard and will soon be buried there. Strike two.

3) Increasing government control

There is a corollary to the lesson from monetary history explained above. When a government interferes with commerce by imposing restrictions, commerce suffers. These restrictions impede economic activity, and that is a bad outcome because it is economic activity that is the backbone of society as each of us strives to meet our needs and wants.

There is perhaps no better account of this principle than the one penned in 1912 by Andrew Dickson White in his classic book, Fiat Money Inflation in France, which describes the horrific monetary debasement the French people suffered prior to Napoleon. He explains the adverse consequences that are caused by government controls and how successive controls by the French government inflicted increasing damage to that country’s economy. White’s book is essential reading for everyone, and can be downloaded for free at the following link:
http://www.gutenberg.org/etext/6949

We have this week seen the principles expounded by White at work. The Thai government announced the implementation of foreign exchange controls, and one immediate response was the stock market there dropped 15%. Untold and unknown at this early stage is how severe the repercussions will be on that country’s capital flows, both domestically and in its relations with the rest of the world.

Lest you think the actions taken by the Thai government are an isolated event that could not happen in Europe or the US, I suggest you read the following article published 3 weeks ago in the online version of London’s Daily Telegraph:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/11/27/ccview27.xml

While acknowledging that “currency controls” would be the “nuclear option”, the article says that “Brussels may lawfully freeze capital flows in and out of the EU, and within it, and that this could be done by a “qualified majority” of EU finance ministers.” It goes on to say that this authority is already in place in Europe and was granted “to enable Europe to stem the rise of the euro if the dollar goes into free fall, the underlying argument being that Washington should not be allowed [to] export the consequences of its own reckless spending policies through a “beggar-thy-neighbour” devaluation. The idea was to stop money coming in, though it could equally be used to stop money leaving.” The really interesting question is why would the EU want to stop money from leaving?

Simple. If capital controls are imposed, they would come with compliance from other countries, particularly the US and Japan, which would impose controls complementary to those implemented in Europe. In other words, though the above quote implies that the EU would pursue its own interests, the reality is that these countries’ central banks are joined at the hip. Therefore, it is likely that the US and the EU (with Japan as well) would pursue a common agenda. Namely, they would drop the value of their fiat currencies more or less in concert so that they all end up losing purchasing power against gold and other tangible assets, but more importantly, these currencies would drop in unison against the Chinese yuan. In this way the yuan’s exchange rate would rise, in theory bringing down its trade surplus and also reducing the investment money flowing into China. It seems probable that the EU may justify taking this dire step toward capital controls on the spurious grounds that they need to prevent their monetary union from unraveling. So strike 3 is against the US dollar, euro and Japanese yen.

In summary, the outlook for the US dollar is worsening, which is a conclusion that can also be reached by looking at what happened during last week’s trip to China by Treasury secretary Paulson and Fed chairman Bernanke. They came home empty handed, without any concessions from the Chinese or commitments by them to help the US by continuing to hold dollars, which the US is recklessly spewing throughout the world as a consequence of its ongoing trade deficits.

___________________________________________

The Daily Reckoning PRESENTS: Only rarely can you look into the economic future and see what’s coming… at least in time to take advantage. This is one of those times. As David Galland points out below, clarity is possible because of a combination of factors that, taken together, leave nothing but hard choices…

THE MOST IMPORTANT NUMBER IN THE WORLD
by David Galland

78 million.

That figure is the key to steering your portfolio successfully past the
reefs of today’s brewing monetary crisis. And, if you play things right,
it’s the key to making a lot of money for yourself over the next decade.

78 million is the number of baby boomers who are in or approaching
retirement. That’s the biggest demographic bulge in U.S. history, fully
26% of the population.

And many of those 78 million are in a jam. As they approach retirement,
they are still carrying historic levels of debt and, on average, have
woefully inadequate net worth — and much of that based on shaky housing
prices.

In fact, 25% of the retiring boomers – nearly 20,000,000 in all – are
facing retirement with a net worth of less than $50,000. You don’t need to
be an accountant to see that, with today’s degraded currency and longer
life expectancies, they won’t get very far on so little.

This is a real tragedy in the making. After all, what could be sadder than
millions of people striving for a lifetime to reach the American dream and
then discovering that the “golden years” are just a fantasy, their wealth
having been sucked away by decades of inflation and taxes so that
politicians and bureaucrats could squander it to grease the skids for
their own political success.

In 1930, the total share of the U.S. economy directly controlled by or
dependent on government was about 11%, leaving the balance of 89% firmly
in the hands of private enterprise.

Today, by the late Milton Friedman’s calculations, the government’s share
of the U.S. economy – including the time and resources required to comply
with all the regulations – has ballooned to over 50%, reducing the
wealth-creating machinery of free enterprise to an auxiliary engine for
government.

No wonder so many people live paycheck to paycheck.

U.S. government debt now tops $9 trillion, before taking into account its
unfunded obligations for Social Security and Medicare – debts that the
retiring boomers will soon have their hands out to collect.

After adding in Social Security, Medicare and all the government’s other
pay-later obligations, the current debt actually comes in at over $60
trillion – an amount so large, not one person in a million has a real
sense of it. So let’s try to put that number into perspective.

A trillion is 1000 X 1000 X 1000 X 1000, or a million millions. In his
first address to Congress, President Reagan, himself a big spender,
accurately pointed out that a stack of $1,000 bills four inches high makes
you a millionaire, and that a trillion dollars would be a stack 67 miles
high!

The U.S. government owes 60 of those sky-piercing stacks of $1,000 bills.

It’s a lot of money. And it’s not just any kind of money. Amazingly, this
unbacked currency of a bankrupt government is still the reserve currency
of virtually every nation in the world today. But not, we think, for much
longer.

To service its debt and keep the game going, the U.S. government must sell
on the order of $2.5 billion per day in new Treasury bills, much of it to
foreigners already sitting on something like $6 trillion of U.S. paper.

Absent the foreign buyers of U.S. Treasury securities, the whole scam
begins to unravel. And once it begins to unravel in earnest, with wealthy
foreigners and then governments rushing to switch out of dollars, the
speed and steepness of the monetary collapse will be breathtaking.

While millions of boomers will be lucky to scrape by for a year or two of
hard living in a trailer park, their meager assets won’t carry them
through the 20 or 30 years of retirement that medical science now
promises. For that, they’ll have to rely on scraps from Washington. And if
they have nothing else, every one of them has a mailbox that’s just right
for receiving government checks.

In fact, according to the Fed, a majority of retired Americans already
rely on Social Security for 80% or more of their income.

And that makes Social Security and Medicare politically untouchable, no
matter how badly the programs trap the U.S. economy.

Recognizing that the United States has little capacity to rein in its
profligate spending and has neither the intent nor the ability to actually
pay off its $60 trillion debt in money worth anywhere near what it’s worth
today, foreigners are increasingly leery about accumulating more
greenbacks.

On November 9, for instance, Reuters reported that, “The bond and
foreign-exchange markets were struggling to come to grips with comments
from China’s central bank governor Zhou Xiaochuan, who said his country
had a clear plan to diversify its $1 trillion in foreign-exchange reserves
and is considering various options to do so.”
Normally, the more skeptical foreign investors become, the higher interest
rates must go to entice them to continue raising their hands at Treasury
auctions… and to keep them from dumping their existing holdings.

But even that route, at least for now, is closed. That’s due to the
critical role of housing in today’s economy and in the financial
statements of so many millions of American homeowners. Simply, higher
interest rates would devastate the already weak housing market and bring
ruin to a heavily indebted populace, especially cash-strapped boomers, and
further ratchet up the cost of government borrowing. In other words,
raising rates is not an option.

So what are nervous bureaucrats to do?

The answer is to depreciate the currency – and as quietly as possible.
That allows the government to meet its obligations, but with ever more
worthless dollars. It’s their only way to buy time.

In fact, Fed Chairman Ben Bernanke virtually gave the game book away in a
speech in Frankfurt on November 10.

“It would be fair to say that monetary and credit aggregates have not
played a central role in the formulation of U.S. monetary policy.”

In other words, the total amount of money in the system – what we “print”
— is whatever the government finds convenient from one day to the next.
That’s a politic way of admitting that the U.S. government is planning to
paper over all its many obligations and accelerate a trend that has been
in motion since the creation of the Federal Reserve in 1913.

Make no mistake, it’s a desperate strategy, but at this point it’s the
only option for a government whose decades of reckless spending have led
the economy into a box canyon, the floor of which is covered in quicksand.
There is no way out. The best they can hope for is to stall the inevitable
for as long as they can. “Not on my watch” is the phrase of the day.

In this age of instant communication, the government can’t hide the truth
– at least not for long. So, no matter that they have stopped publishing
M-3 money supply numbers, recognition that we are between a rock and a
hard place is spreading.

Reckoning day is not far off. And when it comes, it will rush in faster
and more brutally than almost anyone expects. The world’s financial
picture will be redrawn from scratch, and a painful unwinding of the
economic dislocations built up by decades of political pandering will
begin.

While no one can say with certainty how the disaster will play out, there
is one truth you can take to the bank. Throughout all of human history,
gold has always held its value as a monetary instrument. That sort of
shockproof durability cannot be claimed by any paper currency, certainly
not by the dollar, which has lost 95% of its value since abandoning the
gold standard in 1971. With the dollar untethered from gold, the worth of
the $20 bill in your pocket is headed for its intrinsic value… as a
recyclable.

In the weeks, months and years just ahead, gold, silver and other tangible
assets are again going to become much more than financial obscurities
tucked away on the commodities page. They’re about to become front-page
news.

When that happens, the prices of the metals – and of the high-quality gold
and silver shares we follow on behalf of subscribers to our International
Speculator — are heading for the moon.

Hopefully, enough of the 78 million baby boomers will catch on to the
underlying realities of their situation early enough to take advantage.
For many, it may be their last chance at enjoying dignified golden years –
instead of laboring through their eighth decade under the Golden Arches.

Regards,

David Galland
for The Daily Reckoning

Editor’s Note: David Galland is Managing Director of Casey Research, LLC.,
publishers of Doug Casey’s International Speculator, a monthly newsletter
focused on identifying high quality natural resource stocks with the
potential for a double or better over the next 12 months. A 3-month
risk-free trial to the letter is available for interested investors. Click
here for all the details:
International Speculator
http://www.caseyresearch.com/crpmkt/crpSolo.php?id=30&ppref=DRK031ED1206A

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