Monday, May 24, 2010

If the Gold Price Closes Above $1,242 the Rally has Resumed

Gold Price Close Today : 1,193.80
Gold Price Close May 14th: 1,227.40
Change: -33.60 or -2.7%

Silver Price Close Today : 17.982
Silver Price May 14th : 19.202
Change -122.00 cents or -6.4%

Platinum Price Close Today: 1,529.00
Platinum Price May 14th: 1,714.40
Change: -185.40 or -10.8%

Palladium Price Close Today: 449.40
Palladium Price May 14th: 524.80
Change: -75.40 or -14.4%

Gold Silver Ratio Today: 66.39
Gold Silver Ratio May 14th: 63.92
Change: 2.47 or 3.9%

Dow Industrial: 10,061.96
Dow Industrial May 14th: 10,620.16
Change: -558.20 or -5.3%

US Dollar Index: 86.253
US Dollar Index May 14th: 86.269
Change: -0.02 or -0.0%

"Bull markets climb a wall of worry," the market proverb says, and it's true. Somebody always stands by ready to tell you why this bull market has ended or can go no further. After all, the bull wants to shake off as many riders as possible, and he doesn't play fair.

Lately the discovery glands of newspaper and internet gurus have been squirting overtime, filling their bloodstreams with visions of the gold price crashing. One reader sent me an article that said gold was in danger of falling to "$450, its cost of production," which only proved that the author knoweth not sic 'em from come here. Industrial demand means very little to a silver and gold bull market, because they are driven entirely by monetary demand, new demand hitting the market at the margin, the demand for silver and gold as money.

One specter the croakers like to conjure up is "deflation," by which they usually incorrectly mean "a fall in prices" rather than the correct meaning, "a decrease in the money supply." While there are strong forces driving prices down -- collapsing real estate bubbles, collapsing debt, collapsing consumer demand -- these are not deflation, and deflation will not occur. Here's a rough outline of what I think will happen.

Economic activity will continue to shrink as more and more bad debt and bad investments made under the influence of the last 100 years' inflation continue to surface. Even governments will default on their debt. Because they are locked into their stupid Keynesian paradigm, when consumers won't spend governments will step up to the plate as "spender of last resort." There is no limit to how much they will spend, but the spending won't work today any better than it worked for Roosevelt in the 1930s. To enable government spending, central banks will create new money, a.k.a., "inflate." They will continue creating money even if that creation causes a hyperinflation, because they are true believers in Keynesian orthodoxy, and because all politics today is built around the idea that government must manage the economy. (You and I know that means "the people who own the government manage the economy for their own benefit.") You see, the "Elite" knows that we hoi polloi can't be left to run our own lives. No telling what we would buy, sell, smoke, drink, or how many children we'd have without their benevolent dictatorship to guide us. Shucks, people might even drink raw milk!

Today's reality is that politics trumps reason, common sense, history, experience, morality, everything. Ergo, all social and political forces are lined up solidly behind forcing silver and gold ever higher, at least for the next five years, maybe ten. Ben Bernanke, Barack Obama, and all their condign ilk in other governments are all laboring mightily for you, silver and gold investor!

Wherefore, when you hear or read jaundiced jeremiads against silver and gold, remember the ancient market proverb, "Bull markets climb a wall of worry."

What launched me upon this meditation? Only that silver and gold prices took a wound last week, and fell to the ground. Out crawl the croakers from their lurking places to re-state theories old and new that "prove" the silver and gold bull isn't a bull at all, but an nine year, well, well, splutter, merely a nine-year run up. You just have to toughen up your eardrums to these arguments and keep your eyes on the primary trend.

Now to today's markets.

On Friday the US DOLLAR INDEX bottomed about 85.20, falling from an 87.50 high last Wednesday. Schizophrenia, thy name is dollar! Given that the Euro's infection has, like malaria, only relaxed its grip & not departed, the dollar is likely to remain strong for a time, maybe reach 90. Throwing the ultimate curve ball at small minds, last week the dollar moved WITH gold. Clearly, gold has decoupled from paper currencies and is now behaving as an independent alternative to all the paper monies. Dollar index today is trading at 86.53, up 87.7 basis points. 86.5 has it blocked right now. More chastisement is coming in the next few days, but dollar probably won't be whipped lower than 85.

On Friday stocks rose 125.38 to close the Dow at 10,193.39. Today the Dow lost 131.43, to close at 10,061.96. Correct me if I am wrong, but for all that action, doesn't that net to a loss? Pity the poor Nice Government Men! Keeping stocks afloat is a bigger job than Sisyphus had in Hades, rolling that boulder up the hill.

Stocks are bouncing on their 50 week moving average (10,005.75), and languish way below their 200 day moving average (10,266.56). Psychological support enters at 10,000, but that will crumble quickly and only add downward momentum once broken. Two bottoms at 9869 and 9918 stand to catch a fall, but once stocks fall through there only an empty elevator shaft remains. Beware of a sharp rally at any time, normal behavior in a bear market.

Dow in Gold Dollars fell out of its year long trading range and fell fast to the previous low at roughly G$175 (8.466 oz). It has traded up a bit off that low, but today has fallen through and will speedily plunge toward G$145 (7.014 oz).

Where's a limb for me to crawl out on? Oh, right here! I'm guessing the gold price posted its low for this corrective move last Thursday at $1,166.50. On the chart this appears as a spike-like low from which gold has steadily climbed. Ceiling now blocks gold at $1,195. If my guess is right, then gold won't drop below $1,175 again. It should rise to roughly $1,220, then fall again to test the low (say to $1,187 - $1,195) for a final kiss good-bye before single-mindedly resuming its rally.

If the gold price closes above $1,242 the rally has resumed without further correction. If gold closes below G$1,166.50 you'll know my interpretation is dead wrong. Today gold closed up $18.10 at $1,193.80, good show.

Because of my absence I had to reconstruct Thursday and Friday prices, but the 5-day chart I'm looking at sports a roughly 17.45c bottom on Thursday and 17.40c on Friday, dead on the 20 week moving average (17.41c). That might hold, and it might not. Between those two bottoms the same chart shows a tight band of trading between 17.80 and 17.60, followed by a rise through the weekend. Today silver traded up to 18.06, dropped back 17.71, then jumped to 18.06c again. It has since backed off
to 17.90, leaving an "M" on today's chart. That looks like silver successfully defending the gains made over the weekend and today.

Where's that limb again? I'll say that 17.40 was the low. Moving the opposite to stocks, silver lost 39.7c on Thursday, 6.3c on Friday, and gained back 35.1c today to close at 17.982c on Comex.

Okay, volatility has arrived and it is beating our nerves with a bamboo cane. Only cure is to lift your eyes up to the horizon, the long term, and remember why you bought silver and gold in the first place, and where they are headed.

Argentum et aurum comparenda sunt -- -- Gold and silver must be bought.

- Franklin Sanders, The Moneychanger

© 2010, The Moneychanger. May not be republished in any form, including electronically, without our express permission.

To avoid confusion, please remember that the comments above have a very short time horizon. Always invest with the primary trend. Gold's primary trend is up, targeting at least $3,130.00; silver's primary is up targeting 16:1 gold/silver ratio or $195.66; stocks' primary trend is down, targeting Dow under 2,900 and worth only one ounce of gold; US$ or US$-denominated assets, primary trend down; real estate in a bubble, primary trend way down. Whenever I write "Stay out of stocks" readers inevitably ask, "Do you mean precious metals mining stocks, too?" No, I don't.