Thoughts on Markets

Tuesday, August 19, 2008

Prices of Precious Metals Caped by Paper Metal Prices

This graph for GLD, the proxy for gold often used by Richard Russell, gives us some interesting technical formations. There seems to be a "W" formation over the period February to July. This is a bullish formation, but one can also observe at double top over the same period which is a bearish formation. After about the middle of July to the middle of August we see a drastic drop which confirmed the double top and canceled out the "W." I suspect that we have witnessed sheer manipulation of the precious metals.

The paper metal prices have driven the physical metal prices down. Lower prices have acted in the market as governmental price controls have in the past. Price controls from any source will result in shortages of under priced good, or in our case precious metals. Business Line (www.the hindubusinessline.com) confirms the shortages in an article entitled "Price fall leads to gold rush, short supply."

The article reports that Mumbai's average daily sales have been 500 kg which has expanded to 4000 kg over the last two weeks. Premiums on precious metals have increased to all time highs. There are about three times as many buyers as is normal. Thus, the supplies are very short, because sellers do not want to bring their products to market at these low prices. The Indians are rushing to the market with cash, but are not being able to buy as much as they would like.

Gold is under-priced and oversold. How long can that situation last? Were we in a free market, it would not happen. However, our markets are not free at all.


Both silver and gold are oversold and trading in a narrow range. At some time, there will be a break out which I suspect will be upward. When? That is the unknown. An election year yields weird market situations as the powers that be want to give the citizens a pretty picture so that they will vote for the perceived correct person. As I say, "Vote early and vote often." That way maybe we can outnumber the dead voters.

The dollar remains stronger boosted by the good news coming out of the economy. For example, auto sales are at multi year low, foreclosures are rapidly increasing (Up 55% in July), National Association of Home Builders Index at 16 down from 70 about 3 years ago, the Freddie Mae & Freddie Mac government bailout is likely to wipe out the common stock in both entities (Barron's), increasing unemployment, gigantic government and consumer debt, and all the other good news on the economy. I believe that intervention by central banks is the only reason for the strong dollar.

Pricey gasoline has encouraged us to park some of our SUVs and ride mass transit. By the same token, truckers are used for shorter hauls while trains are the preferred long haulers. This is the direct result of the economic concept of selection of alternatives as prices rise in the primary good. For example, we might switch from citrus fruit to apples when oranges get too pricey. In this case, more economical means of transportation is selected rather than the preferred.

Throughout the history of gold bull markets we have experienced huge "corrections" before. In the 1971 - 1980 there was a 40% correction along the way and from May to June, 2006, we saw a 35% drop from 730 to 542. This stuff happens in a market wrought with intervention.

By the way, German consumer confidence came in higher than expected. This flies in the face of those worried about the European market. I mentioned this, not to say all is rosy there, but to let you know the truth and to encourage us to hope that Germany is able to pull the rest of Europe ahead.

There is no way for These United States of America to pay off the debt without a massive expansion of paper dollar supply. There are only two other alternatives: (1) Unilaterally, cancel our debt. (2) Conquer the countries to which we owe debt. Neither of these are acceptable, so the currency will be inflated causing price inflation making all things more costly for us. We should expect to have a lower standard of living as we lose the opulence enjoyed through the debt escalation.

I rejoice and am so thankful to King Jesus for the continual blessing of His people. However, it is incumbent upon us to exercise wise justice, show great mercy, and walk humbly in obedience to Him. When we fail to do this, the result is His discipline upon us and the nations in which we live. It is His people who are called to turn pray, repent of our wicked ways, and turn back to Him in obedient humility. Then, and only then will He heal our land.

Gold is currently 791.20 and silver 12.94. Casey's Resource Daily Plus suggests that we all go out and take delivery on one ounce of silver at a price of 12.94 (It said 12.80) and that would really upset the intervention apple cart is a day's time. The Hunt's impact in 1979 - 1980 would seem very small in comparison to this impact.

Best to each, Doug

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