By James M. Carrillo
May 15, 2013
On March 1st I suggested that gold had broken its all too sharp long term angle of ascent and would pull back to its more sustainable long term trend line on a technical basis. Today I believe gold is now nearing bargain basement levels that offer an immense opportunity. Keep in mind the news media will be saying gold's day is done. Much like they said when the stock market hit its bottom in 2008. Here are some facts by the numbers on Gold, Stocks the US Dollar and Interest rates.
The US dollar is currently trading at above 84.00. 86.00 is major overhead resistance that professional traders should be selling into. Remember that historically the Dollar and Gold are mirror images of one another in value. I fully expect the next major move in the dollar to be in full decline back to the lower end of its channel and to test the bottom end of the channel below 72.00, the same low we had in 2008. Why?
The fundamentals have not changed for the greenback and in many ways they are far, far worse. Our Fed has been very fortunate to have a more worrisome Euro crisis over the past few years that has allowed them to add massive amounts of currency to the system and get away with it, for now. As with all things in life the true fundamentals will eventually win. Tripling the monetary base, or anything in supply, will not lead to strength but eventual collapse in value. See the updated chart of money creation below the US Dollar chart.
Please also note on the chart above the red line "Open Interest" in the dollar. It is the HIGHEST in over a decade. This is how many contracts are in the market. With all of this demand the dollar should have done a moon shot straight up. It hasn't.
I use this adage always when looking for buy or sell opportunities; when everyone is on one side of the boat, the boat will flip! Much like it did in 2008 and the end of 2010 when total contracts were excessively high because people were SHORTING the dollar to excess, now it is the opposite. It is time for cash holders to get out of that cash while the getting is good.
US Monetary Base
In a currency war, a government prints currency to weaken its currency against others. We are in a currency war and by the Fed's actions (seen below) we fully intend on winning this war. Weaker dollar = stronger gold. We have tripled the monetary base in just three short years. This is currency debasement. Turn this graph upside down to see our U.S. Dollar's "future" buying power.
Rates have begun to stabilize and in fact may have broken their major long term trend. If rates start to move higher this Bond and Bill bubble may be about to burst. This historically will cause a panic and will quickly erase the so called deflation we have been experiencing. People will rush to buy once they see rates rise fearful that they will no longer be able to afford things as cheaply.
Meanwhile, corporations have cut to the bare bone and no longer have the manpower on hand to handle a huge rush in demand. This is why inflation always happens almost over night, too much demand and little-to-no supply equals higher prices. Then it snowballs. This is exactly what the Fed and bankers want. Inflation will help them to market the now worthless assets they hold. The even bigger problem is in our nearly 17 trillion dollars in debt. As rates rise so does the interest payment on our massive debt. I don't see this ending well.
S&P 500 (Stock Market)
As interest rate driven inflation rises it will cause people to quickly seek yield. Holders of bonds, bills, cds etc will panic sell allowing the stock market to perhaps rise further. BUT it is my opinion that banks have been propping up stocks during the past few years and they will sell those shares to the unsuspecting public so they can get back to doing what bankers do, lend. This will cause anemic growth in stocks and corporations will be spending money expanding operations to try to keep up with demand (see Interest Rates above).
Why do I believe it is the banks and not the public? Look at the red line called the open interest in the chart above. There are NO contracts? There is little to no interest in the stock market by the public? This makes no sense. Unless the banks were given massive amounts of money and told to buy up stocks to regain consumer confidence. After all if consumers don't have some hope, bankers have no future!
As you can see above open interest was steadily trading at 3 MILLION contracts from 2005 through 2008. It has been steadily dying since! That last figure shows a record low 130 thousand. Do the math, this doesn't add up.
Despite what the talking heads in the media say, gold has been the top performing asset over the past decade. This recent sell off is only bringing gold back to a more realistic angle of ascent. Consider that the stock market, via the S&P 500, is up only 30% over the past decade. Meanwhile, the dollar has lost 20%. That doesn't even keep up with the cost of living.
Gold in the same time frame has gained nearly 400%, even with the recent pullback. Demand from Central banks for gold is increasing, dollars are being debased through creation at an alarming rate as seen above and I will make a strong case below that the stock market rally may, in fact, be a false rally.
The last time we saw gold pull back from its high by 30% was in 2008. That pullback was after the price doubled. After that pullback, the slingshot caused gold to better than double again. Based on our overall financial condition, the debt and debasement of U.S. Dollars, gold could double again on the next wave.
Doubling prices or better seems to be the clear pattern for gold. It nearly doubled from years 2002 through 2004 from $250.00 to $450.00. >From 2005 -2006 it nearly double again from $400.00 to $725.00 then corrected to $550.00. From 2007 to 2008 it nearly doubled again from $600.00 to $1,000.00. It then corrected back to $700.00 before gradually moving back to $1,000.00 then again nearly DOUBLED to $1,900.00. The most important fact: in every instance listed in this bull market, the media cried the gold bull market was over. They fail to watch the true fundamentals of currency debasement, in other words, the increasing money supply.
What the Fed has done here is runaway monetary creation, as has NEVER been seen before. The concern I have in the short term is our National debt, now nearing 17 trillion. Simultaneously we have a potential real bubble burst coming in the mother of all bubbles, U.S. Treasury Bonds and Bills.
What do we do? The answer in my humble opinion is to BUY gold over the next month and position yourself while gold is in the $1300.00-$1400.00 range, before the price doubles again. From this point forward the fundamentals are on our side. Numbers don't lie!