World Of Wallstreet

Follow Up: $USD And 2012 Gold Outlook Based On The 10-Year Historical Trend

Here's a follow up round on this recent post:2012 Gold Outlook Based On The 10-Year Historical Trend

2b (a remarkable micro-cap stock picker) responds: "My only question would be how gold has correlated to the U.S. dollar and what effect a strong dollar might have on your future price prediction."

Good question. Best gold type podcast I've heard in a while was Sinclair is linked from here: http://www.jsmineset.com/2011/12/26/a-modest-1700-2100-gold-price-in-2012/

 

He claims Pierre Lassonde (King World News) is expecting gold between $1500 and $1800 in 2012 and that is based on strong dollar. Sinclair's call ($1700 to $2100) is based on the dollar not being as strong as expected.

 

 

But here's a chart of the dollar action for the four big corrections. I find for the three previous corrections:

(a) The dollar rises up until the end of the correction.

(b) What the dollar does after the gold bottom varies from one correction to another.

 

So, if the dollar keeps rising at this point, I expect that the bottom is not yet in for this correction. I guess you are expecting further dollar strength as Europe continues to look risky. The "Japan is next" buzz is starting to get thicker also. Japan right now seems to be like Italy was when all eyes were on Greece. The smart guys were talking about Italy. Now the smart guys (Kyle Bass...) seem to be talking about Japan.

 

MontyHigh

Are The Banksters Net Short Gold And Silver? Will The Banksters "Blow Up" Anytime Soon?

I hear many different voices in the gold community discuss the idea that the "Banksters" are manipulating the price of gold. There is an interesting difference of opinion regarding the end-game of this manipulation.

Some voices, Bill Murphy being one of them, claim that the Banksters are leveraged short the price of gold (and silver) and that eventually (e.g. when they've sold all their physical as part of the price suppression scheme) the price of gold will shoot to the moon with the Banksters in ruins.

Other voices, including Jim Sinclair, Catherine Austin Fitts, Stewart Thompson claim that the Banksters, while managing the price of gold, are firmly in control and aren't going to lose control anytime soon. Instead they manage the price to produce extra volatility to take the leveraged trader's money. Sinclair and Thompson claim that nobody is going to make more money from the gold bull market than the Banksters and Thompson in particular mocks the idea that the Banksters a net short gold and silver.

Thompson in particular is trying to buy when the Banksters buy (that would be now) and sell when the Banksters sold (that would be above $1800 this fall).

I've recently come around to the Sinclair, Fitts, Thompson view. We may see various financial institutions go bankrupt and governments lose power and/or default on debt, but I don't expect to see the mainstream powers-that-be behind the scenes (let's call them the banksters) fundamentally lose their grip or their wealth.

How about you? Do you think "THEY" are losing it soon?

MontyHigh, www.worldofwallstreet.us

2012 Gold Outlook Based On The 10-Year Historical Trend

NOTE: This piece was written during the Christmas holiday. As I publish it on Dec 29 after three hard down days, I see that the lows I was calling for January or February are happening right now.

Its that time of year and so I'll take a twirl with my own 2012 outlook focusing on where my money is: Gold. I'm writing this as I do my analysis so you'll be seeing my thinking as it takes shape. The basis for my thinking is three key ideas:

• The 10-year gold bull market is intact. I don't think any of the fundamentals driving the rise in the price of gold are fixed (the unstable and unsustainable exponentially-increasing debt-based financial system). Perhaps more controversially, I don't think the Banksters will, this year, lose their ability to manage the world economy and the price of gold. I think we are in for more of the same, but at an accelerated pace.
• August/September 2011 the price of gold got ahead of itself and is now in a significant correction. My failure to see how overextended Gold had become was my biggest trading failure this year. Gary Biiwii was right on top of this, but I didn't listen to him. Woulda, coulda, shoulda.
• The best way to estimate the current correction is to look at comparable corrections from earlier in the gold bull market.

The above chart summarizes my view of the 20xx Gold Bull Market to date:

• (GREEN LINES) Most of the time Gold has been trending higher. The underlying trend as been accelerating as the bull market has proceded (each green line is slanted a little higher than the previous one).
• (RED LINES) Four times (culminating in 2006, 2008, 2009 and 2011) gold has gotten ahead of itself in an unsustainable above-trend run. The triggers for these above-trend runs were, in my view:
  • 2006 - accelerating inflation of all commodity prices.
  • 2008 - accelerating inflation of all commodity prices.
  • 2009 - an overhang of central bank intervention to end the 2008 collapse.
  • 2011 - an overhang from central bank intervention in the form of QE2 money-printing.
• (BLACK LINES) Each of those unsustainable runs has been followed by an extended, multimonth correction.That's where gold is right now.

The above chart shows how I identified the four above-trend runs. The above-trend runs all culminate with a rise to more than 20% above the 150-day moving average (top red line). Its worth noting that apart from above-trend run corrections the price of gold has fallen no more than 8% below the moving average throughout the bull market (lower green line).

The charts I'm looking at today are all logarithmic scale. That means we can compare percentage price changes by comparing the height of rectangles on the chart. The chart above has for each of the prior corrections a rectangle giving the price change from top to bottom. It also has a rectangle that can be used to estimate the end of 2012 price of gold. This rectangle gives the price change from the high a little more than a year and a quarter out. That's how long it will be from the 2011 high to the end of 2012. I've made a copy of each of these rectangles and moved them to start at the 2011 high. This allows us to see what will happen if the 2011 correction follows one of the earlier corrections. For the 2006 and 2008 corrections this price is less than the previous high. The correction we're having now lasted at least that long prior achieving all-time highs in 2006 and 2008, but not in 2009.

The above chart gives a closer look at the three prior corrections and what they would mean for the current correction. The table that follows gives the numbers. 

The above table suggests that the bottom may not be in for the current correction especially if the current correction is like 2008.

Let's look at the 2008 correction a little more closely. The low price of gold, prior to the Lehman brother's bankrucpy was 21% down from the high, a value very close to the 2006 drop. I would argue that the powers-that-be lost control for a few months during the 2008 crisis starting with the Lehman Brothers bankrupcy. I don't expect them to lose control in 2012, but who really knows.

Here's the previous table with the assumption that the Aug 2008 lows were the lows for 2008 (that is, without the post-Lehman brothers collapse). Now the 2008 correction looks a lot like the 2006 correction.

The 2006 and 2008-without-Lehman scenarios are the pattern for my best guess outlook for the price of gold for 2012:

• I expect a low around $1500 in January or February.
• I expect gold to end up around a little over $1800 at the end of 2012.

Well, that's my outlook with the reasoning behind it. I wouldn't call it bearish, but its certainly not as bullish as many of the predictions I expect you are hearing. I heard one analyst call for $2500 gold in 2012. I'm not the only analyst within the gold-bug community with modest expectations for gold 2012. Even the ever-cheer-leading Eric King could not elicit a bullish-sounding outlook from Pierre Lassonde who is expecting the average price of gold for 2012 end up below the average price for 2011 (click here). I believe Martin Armstrong expects further weakness in early 2011 as well.

The next couple of months are quite strategic. In fact, I think that next Monday, January 2, is very strategic, but the reasoning behind that is for another post. The annual percentage gain from the trend line of the first graph in this post is around 23%/year. If gold can regain and hold the recent uptrend from the first chart in this graph (see above) the target price for the end of 2012 becomes $2020/oz. If it rises above the trend line by some amount (say $75) the target rises accordingly.

It hasn't regained that trend line yet so I'm sticking with my earlier prection. My best guess outlook for the price of gold for 2012:

• I expect a low around $1500 in January or February. If the system really starts coming unglued the target price is significantly lower (e.g. $1324).
• I expect gold to end up around a little over $1800 at the end of 2012.

While I don't need links to predictions without any substantial reasoning / analysis behind it, I'd be obliged if you'd leave a comment with a link to any other analysts who both provide a quantitative outlook and the reasoning behind it.

MontyHigh, www.worldofwallstreet.us

Does Credit Have To Expand Over Time To Prevent Monetary System Collapse?

How often do you watch a youtube multiple times? Especially an educational one? This is one I watched once and it had enough important information that I had to watch it multiple times to see if it really made sense.

Michael Maloney explains in this long tube (click here) how the fiat, fractional-reserve monetary system works. This is the system used by the USA and virtually the whole world. Maloney claims thats that credit has to continuously expand or the system collapses. Can you help me figure out if he's right?

There's four segments that need to be considered. The first two are gimmees and definitely accurate. The key idea of the third and fourth segments are what you can help me figure out.

Starting at 20:55 and continuing to 22:15 he provides an explanation of how a non-fractional-reserve gold-standard money system used to work. This is good background material, but not particularly relevant as its been a hundred years since any country used that system.

From 22:15 to 28:06 he provides an excellent introduction to how a fiat, fractional-reserve money system works. This is something that is hard to understand, hard to believe but true and quite important. Do you get it? I accept that this explanation is accurate and reasonably complete. He doesn't mention that it is the threat of force (police and military) that is the reason why this system must be accepted by the population.

From 29:59 to 32:12 he claims that because interest is required on all of the money borrowed into existence money that the total amount of debt has to increase every month or the system starts to collapse. 

From 45:09 to 46:34 explains why he thinks the total amount of debt has to increase and why this is unsustainable and must end in a debt collapse. This is because there is more money owed (amount borrowed plus interest) than is created by borrowing (the amount borrowed) and as the debt comes due (debt plus interest) and is paid or rolled over the relative amount of debt to currency in existence increases. This animation is the thing I couldn't stop thinking about and brought me back to this youtube and caused me to write this post.

Ok, so that is the background to the claim and here is the claim under consideration (starting at 31:56) verbatim: "This system requires that we go deeper into debt every month than we were the previous month; we have to always borrow more currency into existence than we are extinguishing every single month or the whole things starts to collapse". That is an exact quote. Here it is abbreviated with fixed up syntax: "This system requires that we go deeper into debt every month ... or the whole things starts to collapse".

Help me here. Is that claim true? And does "the whole thing starts to collapse" imply that the whole thing must collapse or merely that ongoing intervention is required to keep it from collapsing and that continued intervention is inherent in the system.

It seems to me that:

1. the total amount of debt in the system can be reduced by default or debt forgiveness. For example, what happens to someone's debt when they die? It will never be paid back. Whoever the debt is owed to must write the debt off and thus the total debt in the system is reduced.
2. the debt, including interest, owed by the US treasury to the Federal Reserve is in a different category from other debt in that nothing bad seems to happen if the US treasury defaults on that debt. So, let's call total effective debt the total amount of debt minus the amount owed by the US treasury to the Federal Reserve.
3. the amount of money relative to the total effective debt can be expanded by having the Federal Reserve print money (buy US treasury debt) and having the US treasury hand the money out as it sees fit (ordinarily directly to its pals especially to the war industry).

So it seems to me that the system is not unsustainable in that it must end. It seems me that the system is economically inefficient in that economic distortions take place when the US treasury spends money (hands out money) to its pals where that money is wasted rather then invested in more productive activities that a free market select. Should we call that handing out of money to pals malinvestment or looting? In either case it sounds like stagflation to me, not a deflationary collapse and not a hyperinflationary collapse.

So, help me. Am I wrong and is the system inherently destined for deflationary or hyperinflationary collapse or is a "slow burn" (to use Catherine Austin Fitts terminology) ongoing fall in the middle-class standard of living another alternative that can be sustained for years or decades? What is it about the system's operation that I don't get that means that a collapse MUST happen?

MontyHigh, www.worldofwallstreet.us

Trading Wisdom: Why The Pop Today On No Good News?

Here's something I've learned thru the school of hard knocks. 

Fearful Bearish Sentiment + Absence Of New Bad News => Relief Rally.

So, when things are really scary (as they have been recently with all the Euro news), the market does not need good news to pop. Nothing need be fixed. The mere absence of scary headlines is enough for a significant market pop.

That's why we got the pop today in things like the stock market, commodities, etc. Gold is pretty heavily manipulated so it doesn't perfectly follow this rule, but I think that it too is popping because of the absence of bad news plus a really scared gold community.

MontyHigh, www.worldofwallstreet.us

For Debbi:

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Good Bye $1605 Resistance: Christmas Bounce A-Coming

Gold is now free to move up to the next resistance around $1670.

MontyHigh, www.worldofwallstreet.us

 

Chart Survey

Here's what I'm seeing in the charts. I guess I'll publish it.

The 30-Year treasury bond yield, which has turned down again, seems to be signaling a bigger, scarier market event than 2008. 2008 was a single spike down with an immediate sustained recovery back into the moving average channel. The current situation has a similar spike down that is not returning and is instead signaling more danger. Here's some observations:

• In 2008, gold's low occurred immediately prior to the spike down. This time gold is only now falling hard suggesting perhaps another fear-induced spike down in 30-year interest rates.
• Sometime soon a "short the long-term US treasury trade entry should appear" when the crisis fear peaks.
• A US stock market collapse has yet to accompany the spike down. It has been foreign stock markets collapsing this time. In 2008, the depths of the US stock market panic arrived after 30-year treasury rates had recovered. The US stock market is not out of the woods yet.

The US dollar looks really strong although it seems short term likely to go thru a week or two long consolidation (see other RSI 70 touches/excursions).

The VIX isn't sensing the same fear that the 30-year treasury is signaling. Its pattern seems similar to 2010 and where a return to the 40-week moving average indicated a bottom in the stock market and anticipated the Bernanke Jackson-hole speech that hinted at QE2. It also looks like Apr/May 2009 where is signaled the end of the 2008 panic.

I'm surprised, but real-estate looks short-term bullish. Is it benefiting from those low interest rates? Still it has stopped trending up from the 2009 bottom and is basically range trading.

Commodities look weak to lousy across the board. The above chart shows industrial metals threatening to break down. Going short big miners with a stop if they don't break down in two weeks might be worth looking into as a hedge that the crisis has not peaked. 

If you have read this far, the following three gold charts should reward you.

Gold took a little excursion outside the 55-day bollinger bands this week. This is ordinarily a good entry point. The RSI also took a little excursion under 30 this week (also a good entry) point. Gold found stupport at the May 2011 (previous to the most recent) all time high. Also a good place for support. If this is not 2008 all over again, then Thursday was probably a good entry point.

This chart shows that 55-day bollinger band excursions are good entry points, generally (blue arrows) and that RSI 30 touches or excursions are also often good entry points. Holding until an upper bollinger-band touch or near-touch looks good on this chart after such an entry except for some of the 2008 entries.

Here's a close up of the 2008 crisis. As you can see, even in that extreme situation, returns from 55-day bollinger band excursions and returns from sub-30 RSI excursions all had short term pops with all but one having a return to (or close to the upper bollinger band. A trading system of:

• Enter on a return from such an excursion.
• Exit on an upper bollinger touch or near touch.
• With a generous downside stop of at least stops of 12% percent below the entry price.

Would produce very nice positive results on all of the entries in that chart. That's what I'm holding out for currently. By the way, the current situation looks most like the Nov 2008 situation as far as the MACD goes . I wonder if we'll see a few weeks of choppy consolidation like we saw then.

In retrospect, the first chart and the last three seem most significant. They seem to be saying that we are in a serious situation like 2008, but that most of the damage to gold is done. Furthermore, the VIX chart and the real-estate chart suggest that the worst is over for the rest of the markets including the US stock market.

MontyHigh, www.worldofwallstreet.us

End Of Year Gold Trading

Well, we are now at that point I was planning for in an earlier post (click here). We are at the point discussed in the post, two weeks before the end of the year. Here's the current gold chart:

Its been a painful week and a half with my account being leveraged long in gold options. My Feb 2012 $1700 options are pretty close to "going to zero". I bought a few more options this Thursday close to the bottom. I still have enough gold bullion to retire on a mercenary general's pay plus a bunch more other assets. Still, I'm pretty sure that if I weren't keeping my "basically a hobby" day-job that my trading would be a lot more lucrative. 

So, what's the outlook from here. Let's do a little pattern matching. We are looking for years with:

1. a hard drop
2. thru significant support (and moving averages)
3. down into RSI over sold conditions

around mid-December. There aren't any years in the last decode record with an oversold RSI in Dec.

Here's a quick eval of several years in terms of the above criteria (1, 2, 3);

• 2004 - (1), (3 only to 42 RSI): +.7% from low close to end of year close.
• 2005 - (1), (3 only 45 RSI): +4.8% from low close to end of year close.
• 2006 - (1), (2), (3 only to 40): +3.2% from low close to end of year close.
• 2007 - none.
• 2008 - (1 early in month), (3 only to 45): +16% from low close to end of year close.
• 2009 - (1 bottom later in month), (3 only to 38): +.9% from low close to end of year close.
• 2010 - (1): +3.6% from low close to end of year close.

So, the year that is closest is 2006. It went on to have a nice run into the end of the year, a really scary start of the year followed by a great run into late spring.

Finally, if the low is in for December (big if) there is some winnings to be made to the end of year all those years.

I expect I will stay leveraged until the end of the year. I expect that I will try to get unleveraged on the last day of the year, wait for what happens of the first day of the year to decide what comes next.

In general I find the work from the earlier post (click here) to be useful for trading gold thru the New Year. You might want to take another peek. Longer term (say between now and the end of 2012) I'm quite bullish on gold as I think that nothing has changed, interest rates are still negative and the desire for gold as an inflation hedge and a safe haven against systemic risk is likely to accelerate as the financial system's problems are increasingly understood.

MontyHigh, www.worldofwallstreet.us

 

 

Best Of The Web: Gregor.us - The End of Growth in the United States

Gregor McDonald is among the best on Peak Oil and its implications. He brings the data and the analysis. He is not long-winded. I'm currently wondering whether his monthly piece with Chris Martenson is is worth enough by iteself to get me to try out Martenson's subscription service.

His latest (click here) really puts last week's unemployment numbers in perspective. I'll put a chart in here, but I rec you click thru to read the piece.

MontyHigh, www.worldofwallstreet.us

Gold-Bug Mythbusters: Need To Back-Test Those "Observations"...

One idea I've heard repeatedly in the gold community is that having the gold mining stocks go down while the general stock market and gold itself are not down is an imminent warning of a "gold take down". This is alot like the idea that "THEY" always do a gold takedown when the unemployment report goes out. Another one (click here) is "They always take the price of gold down for options expiration). All three of them anecdotally seem to be true, but none seem to hold up when I actually analyse the data.

Here's how I did my analysis of the "stocks down signals gold take down" idea:

• Throw the historical daily price data for GDX (gold stocks), SPY (S&P 500) and GLD (price of gold itself) into a spreadsheet with the dates lined up.
• Look for a day when, relative to the previous close, GDX is down more than 1% while SPY and GLD are either up or down by less than .2%. 
• Look at what happens to the price of gold and the price of GDX one thru five days thereafter (close to close).

Here's the results:

The result is that for every duration and for both gold and gold stocks the price goes up (on average) for all those durations. This is particularly surprising given that the average includes that "outlier" bad results from the crash of 2008.

By the way, I don't despise those making this kind of observation. I appreciate their experience and these kinds of observations have to led me to significantl profitable short-term trade setups based directly and indirectly on those "THEY ARE MANIPULATING THE PRICE OF GOLD" thoughts. So, keep em coming and I'll just follow St Paul's advice from 1 Thess 5:21: "Examine everything carefully. Hold fast to that which is good".

Best wishes and let me know if I've got my analysis wrong or overlooked something. It won't be the first time.

MontyHigh, www.worldofwallstreet.us

 

 

 

Retire On A Mercenary General's Pay

Xenophon (Ancient Greek Ξενοφῶν, Xenophōn; c. 430 – 354 BC)

Here's an interesting bit from "The Exploits Of Xenophon" written by Xenophon himself (loosely translated for children by Geoffrey Household) regarding what happened to him around 400 BC. A Thracian Prince named Seuthes II offered Xenophon's mercenary army: "one gold piece a month to the men, two to the officers and four to the generals".

Two observations:

• Compared to an ancient Greek mercenary army, the USA does have gross income inequality with CEO's making way more than 4 times the average worker (see http://www.stateofworkingamerica.org/charts/view/17) for the background on the picture that follows: Ratio of average CEO total direct compensation to average production worker compensation, 1965-2009
• To retire on a mercenary general's pay (say with a life expectancy of thirty years) save up 1440 (30 * 12 * 4) gold pieces and spend four a month. Assuming a gold piece is an ounce in weight and at the current price of gold ($1725 when this was written), you need roughly 2.5 million dollars worth of gold and you'll be living on four oz of gold per month, that is, initially $6900 a month or $82,800 per year. You'll be living on the same wage as a Mercenary General for those thirty years.

This second point illustrates the idea that gold is a long-term store of wealth even across a span of 2,400 years.

UPDATE: 1/4/2011, The best estimate of Xenophon's pay is four Persian Daric's per month (click here). A Persian Daric gold coin weighed 125.5 grains (click here) or 8.1 grams (click here) or .26 troy oz (click here). So my best estimate of a Greek Mercenary General's pay is 1 oz/month (not the 4 oz/month given above). This a lot less than what it would take to live a middle-class retirement on.

MontyHigh, www.worldofwallstreet.us