There He Goes Again

485
Mon, Oct 24, 2011 - 7:55pm

At some point, I guess I've got to stop and decide whether or not it's just wishful thinking.

About two weeks ago, I gave you this:

https://www.tfmetalsreport.com/blog/2658/rally-cometh

I'd been itching for a gold rally but, until now, it hasn't developed. In the post above, I called for a rally in the HUI to 560-580 and it made it to 560 before falling back to 500 last week. A sharp rally has it back to 538 tonight and it still looks like 580-600 is in the cards. That would be about a 10% rally from here.

But what's got me really worked up is the latest CoT survey. Remember how I always say that the only consistent way to make money trading the metals is to sell when all looks rosy and buy when all looks dreary? The tough part is to get yourself to actually follow that discipline as it goes against basic human nature. Put a different way, history has shown that you want to buy with the banks when the specs are selling. Additionally, you should sell when the specs are strongly buying. Now, back to that CoT survey. Note these week-over-week changes:

Large Specs long: -3901 contracts

Large Specs short: +3623 contracts

Small Specs short: +1878 contracts

The speculators (those consistently wrong) continue to rotate away from long to short.

Commercials (banks) long: +2592 contracts

Commercials short: -6733 contracts

The commercials (those consistently right) are covering shorts to and some are even going long.

Now, chew on this for a moment. The dreaded and evil BoA puts out a report that warns of further U.S. credit downgrades before year-end.

https://latimesblogs.latimes.com/money_co/2011/10/us-credit-rating-debt-downgrade-warning-merrill-sp-moodys-fitch.html

Hmmm. Do you recall what happened from 8/7 to 9/6? How about a $250 gold rally, primarily caused by massive bank short-covering, all of it following the initial U.S. downgrade from S&P. Think of that CoT survey again. Could the banks be trying to front-run the next downgrade?

So, let's just go ahead and put it on the record: I'm expecting a 10% rally in gold before 12/1/11. This gives us a minimum target area of 1780-1840. Let's split the difference and call it 1810 or about 10% UP from where we stand this evening. That type of rally corresponds with where we are on the charts, too:

Soon, we will burst through the tough resistance around 1700 and begin mounting this assault on the backs of continued bank buying as well as the short-covering of the misguided specs. If December plays out similar to Decembers past, gold will then finish the year somewhere between 1750 and 1800, continuing the trend of 20-25% annual returns.

I wish I could be as enthusiastic about silver but I'm not. Though I still expect a stellar 2012, the remainder of 2011 will find silver continuing to struggle with high margins and a pit bully named JPM that doesn't appear ready to begin covering its massive short position just yet.

So, there you go. Once gold closes above 1705, my confidence in this forecast will grow considerably. At that point, I'll look to buy some Dec11 calls. Maybe buy some outright or spread some 1700s vs some 1800s. We'll see. I'll keep you posted.

TF

9:50 am EDT UPDATE:

WOPR is in charge this morning as the PMs are being sold because of this headline:

https://www.zerohedge.com/news/ecofin-meeting-cancelled

Down goes euro. Up goes dollar. WOPR sees dollar up. WOPR sells gold and silver. Yawn.

Perhaps some human buying will emerge soon. At around 1630-35, the hourly chart holds the promise of a little reverse H&S bottom of off last week's test of support near 1600.

Hang in there and enjoy the ride. More later. TF

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  485 Comments

Hammer
Oct 25, 2011 - 11:09am

The Telegraph Bad economic

The Telegraph

Bad economic news from the US - consumer confidence has slipped to its lowest level since March 2009, when the country was in the midst of recession.

The Conference Board's sentiment index fell to 39.8 from 46.4 in September, new figures showed. That was well below economists' forecasts.

Anxious consumers, reluctant to spend because of a weak jobs markets and falling house prices, will put a further drag on the US economy.

Nick Elway
Oct 25, 2011 - 11:15am

Could the Vatican have enough gold to be world central bank?

OMG, remember Foundation X ? Vatican Gold "value more than the entire value for all the gold ever mined in the history of the world"

Lord James of Blackheath, Speech on Foundation X (House of Lords, 01/11/2010)

Gold part starts 6:40 in

Video unavailable

What a rabbit hole!

Dr G
Oct 25, 2011 - 11:18am

Total boner in the metals.

Total boner in the metals. Still, I could see these gains easily getting erased completely or erased for the most part in later trading. This scenario is just begging for a take down from the machines.

Hammer
Oct 25, 2011 - 11:20am

A bit of levity :) A couple

A bit of levity :) A couple of tunes to singalong

Courtesy The Telegraph

I Will Delay (from Angela Merkel: The Disco Years)

First I was angstvoll, I was petrified

Greece looking like defaulting, Ireland on the slide

I spent oh so many years with the euro much too strong

Now it’s not even clear, which countries should belong

And so we’re back

At the Council

With Nicolas, and Enda, and Silvio as well

We should have tightened up the rulebook

For the single currency

If we’d known for just one second

We’d fund this facility

Go on now go, down to Brussels

We’ll fly over and talk some more, while the market sells

They want a big bazooka, a comprehensive fix,

An ECB-backed bailout fund, but we’ll give them nix.

It’s all okay! We can delay!

We’ll have a weekend summit

And another one Wednesday

There’s a G-20 coming up

For the Greeks it’s just tough luck

Let’s just delay

Til someone pays…

And then cross-border banks started to fall apart

Talk of haircuts and big writedowns nearly broke my heart

I spent oh so many nights in the Justus Lipsius

Talking late

Til we said ‘just make them wait!’

You see these bonds

They’re something new,

Fudge them with the ESM, it might just get us through

Markets in a tailspin, spreads about to burst

I wish we’d kept our promise from July the twenty-first

Call the BRICs and Jean-Claude Trichet, hope that we can cheat our fate

And maybe in the meantime let’s just name another date?

Come on again, down to Brussels

We’ll work on technicalities while the true Finns yell,

Markets may be seized up, there’s no liquidity,

But we’ll create distraction by chastising Italy,

It’s all okay! We can delay!

We’ll have a weekend summit

And another one Wednesday

There’s a G-20 coming up

For the Greeks it’s just tough luck

Let’s just delay

Til someone pays…

and another offering from WSJ

To the tune of Queen’s Bohemian Rhapsody

Athenian Rhapsody (The Ballad of Papandreou)

Is this our real debt?
Is this just fantasy?
Won in a landslide
Now I’m facing austerity
I opened the books
And said “are you kidding me?”
Did what we did to get into the Eurozone
So there was never a need to grow
Euro’s high, rates stayed low
Anything to enter, didn’t really matter to Greece, to Greece

Papa, just told the truth
No one’s paying any tax
And my colleagues here are hacks
Papa, Greece had everything
But the bankers came and took it all away
Papa, ooh ooh ooh ooh
Goldman told us it would work
and now I sit here like a jerk
They were wrong, they were wrong, that swap illusion’s shattered

Too late, the market crashed
My country’s on the brink
And my bond spreads really stink
Goodbye to the good life – it’s got to go
I never thought our bonds could trade so low
Papa, ooh ooh ooh ooh – (anyway my yields go)
No one wants to buy
And some folks wish they never had bought at all…

We need some euros need some euros very fast
Mykonos, Skiathos, you can sell them to China
DSK and Regling – say our debt is frightening – Hey,
Papandreou, Papandreou,
Papandreou, Papandreou,
Papandreou runs the show – he’s out of dough oh oh oh

He’s a professor from Minnesota
He’s a professor leading his country
Found that the Greeks had been cooking the books

Bail in – bail out – will you bail us out?
ECB. Nein! We will not bail you out
Bail us out
IMF. We will not bail you out
Bail us out PSI. We will not bail you out
Bail us out
Will not bail you out
Bail us out (never)
Never bail you out
Bail us out
Never bail you out – ooh ooh ooh
Nein, nein nein nein nein nein nein!
Oh mama Merkel, mama Merkel, mama Merkel we’ll default
The Bundestag has no package set aside for Greece
For Greece
For Greece

China: So you think you can stiff me and just say goodbye?
So you think I’ll just hold and continue to buy?
You’ll pay us – we’ll want more than Piraeus Ships, airports and banks, as for your unions, no thanks!

Ooh yeah, ooh yeah
Once we had an empire
That is history How did this transpire? – back to Minnesota for me.

Goodbye to the Euro…

¤
Oct 25, 2011 - 11:21am

Ivars

Just wondering how numerous pending world events (politically/economically/militarily) would effect your charts, short and long term?

Just curious if any of those game changers are relevant or if it's all based on past performance and DMA's etc. going forward. Todays events and news would seem to be of major importance as we've seen with the wild market swings based on no real news or information.

Just wondering how you view the still-to-be-seen aspects of this and where it fits into the charts in a variable way.

Thanks

Eric Original
Oct 25, 2011 - 11:22am

A Primer on Financial Repression

My post from Sunday morning, which referenced Financial Repression, seemed to get positive reviews, so I thought it was a good time to put together a little primer on the subject. For background, here's the post:

https://www.tfmetalsreport.com/comment/360601#comment-360601

There's nothing new about "Financial Repression". For those who've been around these issues for a while, you've seen these kinds of statements many times:

  • They are inflating away the debt.
  • They are printing money.
  • The purchasing power of my savings is being inflated away.
  • We have negative real interest rates, and that's good for gold.
  • Inflation is a "hidden tax".

Essentially, these are "old school" terms for what is currently underway, while "Financial Repression" is the "new school" terminology for the same thing. The "new school" kicked off in March of 2011 with the publication of a scholarly paper by Carmen Reinhart and Belen Sbrancia. Reinhart's paper pulled together a lot of data, put things all together in a rational framework, and resurrected an old name for it, namely "Financial Repression".

A couple of definitions are in order before we get much further.

Nominal interest rates, less inflation, equals real interest rates.

Nominal GDP growth, less inflation, equals real GDP growth. It might be more useful to rearrange that equation to read real GDP growth, plus inflation, equals nominal GDP growth.

Here is a link to Reinhart's paper. It's about 50 pages of scholarly writing, but well worth a read. Lots of data and charts too. At a bare minimum it deserves a good skim.

https://www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdf

If you are pressed for time, here is an article which summarizes it succinctly.

https://danielamerman.com/articles/2011/RepressionA.htm

If I had to summarize the whole thing in one sentence, it would go something like this: "Negative real interest rates are the primary tool by which the purchasing power of the nations savers is appropriated and ultimately applied toward the retirement of the nations debts".

The first heavy hitter to give it a mention was Pimco's Bill Gross, in his May Investment Outlook;

https://www.pimco.com/EN/Insights/Pages/The-Caine-Mutiny-Part-2.aspx

The next fellow to really give it some traction was Jim Rickards with his KWN interview from June. Rickards does a pretty thorough job of summarizing both Reinhart's paper and Gross's comments, and weighs in on his own with comments about gold, and why he feels that even though financial repression will likely work for a while, it may not be ultimately successful this time around.

https://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/6/4_Jim_R...

If you don't have the time to listen to 20 minutes of Jim Rickards (shame on you!) then here's an article with something of a brief summary of some, but not all, of the interview.

https://usawatchdog.com/the-federal-reserve-is-playing-an-inflation-game/

Jump ahead now to just a couple of weekends ago, to another Rickards KWN interview. Starting about 6 minutes in with comments about the Volcker Rule, the discussion is pretty much all about how current events play into the framework of financial repression, with a lot of talk about gold as a bonus.

https://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/10/16...

A couple of additional comments are in order.

The point of my original post was that real GDP growth was not essential, and that nominal GDP growth was the bottom line. In refreshing my memory for this post, I was surprised to find Rickards saying that financial repression might not be successful this time partially because we are not getting real GDP growth. So I went back to Reinhart to see if she really did say that real GDP growth was essential. I'm not finding it. While it is fair to say that the real meat of Reinhart's paper deals with the post WW2 United States, and that there was real GDP growth in the period, I don't see any statement by Reinhart saying that real GDP growth is essential across the board.

We would all agree that real GDP growth is a good thing. It makes the whole process easier. It keeps people from marching in the streets and from tossing politicians out on their butts every couple of years, but when push comes to shove it is not essential. A bare look at the math will tell you that if nominal GDP growth exceeds the growth in the nominal debtload, then progress is being made. If TPTB can't get real growth, they'll go for nominal. That is to say, they'll do it all with inflation if they have to.

I'll give Rickards the benefit of the doubt here because he was really saying that the Fed is not getting the real growth that they'd like, and they are not getting the inflation they would like, and therefore between the two components, they are not getting the nominal growth that they would like.

What about those inflation rates? The Gov't numbers are an obvious lie. A prime motive for that is to manipulate the public's perceptions about the degree of financial repression that is in place. If you use the inflation data from ShadowStats, or something in between, you realize that you are being financially repressed far more severely than most people realize. Rickards addresses it in the USA Watchdog article above by saying that if you are trying to get inside the Fed's head, and guess their moves, then you need to use the numbers that they use, which are the Gov't numbers. Whether that is really true or not is another question.

And what about gold? It would seem an article of faith around here that gold is one way, probably historically the primary way of escaping the clutches of financial repression regimes. A holy grail of a defense against the dark arts, if you will. Yet Reinhart barely gives it a mention. Under the subject of the creation and maintenance of a captive domestic audience, she states, way down the list of steps, that there must be "prohibitions on gold transactions". That's all I can find. There's really no depth of research here about whether such prohibitions have been integral to a variety of historical financial repression regimes. Again, it might be a product of the focus on the post WW2 United States experience. The public couldn't own gold through most of it, therefore that must be important. Seems rather weak.

I was therefore surprised that Rickards again chimed in on the subject. On his list of reasons why financial repression might not work this time, he adds the fact that the public currently can own gold, and that therefore a primary escape route has not been blocked off. I'm surprised that Rickards jumps on an issue of Reinhart's that seems so poorly researched. And it also begs the question as to whether said escape route might be blocked off in the future. Confiscation anyone? It's been beaten to death on this blog, but not addressed by Rickards here.

Wow, I think that's it for me. Better get this posted before it goes "poof". Have a great day everyone!

Bay of Pigs
Oct 25, 2011 - 11:22am

Gold/Silver

Until we get through $1705 and $33 (and stay there), there is really nothing to get too excited about. Miners remain range bound until TF's and Tom L's prediction of 580 on the HUI. I'm even more bearish than they are and say we need 600+ and 230 on the XAU to confirm anything to be considered a breakout. We're still a long way from there.

Gold, silver and the miners all remain considerably undervalued, IMO.

In other news, this just in, the McRib is back...

Shill
Oct 25, 2011 - 11:24am

Is this another Ivars on a

Is this another Ivars on a soapbox day? I thought we saved those for Fridays.

Tyler
Oct 25, 2011 - 11:25am

anyone feeling a major takedown today in everything?

i think oil could be the commodity to watch. without war i see equities and PMs down

¤
Oct 25, 2011 - 11:25am

Eric O'

Awesome work piece and relevant at the same time!

Thanks!

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Key Economic Events Week of 11/11

11/12 Three Fed Goon speeches
11/13 8:30 ET CPI
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11/4 10:00 ET Factory Orders
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Key Economic Events Week of 10/28

10/30 8:30 ET Q3 GDP first guess
10/30 2:00 ET FOMC fedlines
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10/31 9:45 ET Chicago PMI
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1/1 10:00 ET ISM Manu PMI

Key Economic Events Week of 10/21

10/22 10:00 ET Existing home sales
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Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
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10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
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10/18 10:00 ET LEIII
10/18 Speeches from Goons Kaplan, George and Chlamydia

Key Economic Events Week of 10/7

10/8 8:30 ET Producer Price Index
10/9 10:00 ET Job Openings
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10/9 2:00 ET September FOMC minutes
10/10 8:30 ET Consumer Price Index
10/11 10:00 ET Consumer Sentiment

Key Economic Events Week of 9/30

9/30 9:45 ET Chicago PMI
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10/2 China Golden Week Begins
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Key Economic Events Week of 9/23

9/23 9:45 ET Markit flash PMIs
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9/27 8:30 ET Durable Goods
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9/27 8:30 ET Core Inflation

Key Economic Events Week of 9/16

9/17 9:15 ET Cap Ute & Ind Prod
9/18 8:30 ET Housing Starts & Bldg Perm.
9/18 2:00 ET Fedlines
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9/19 8:30 ET Philly Fed
9/19 10:00 ET Existing Home Sales

Key Economic Events Week of 9/9

9/10 10:00 ET Job openings
9/11 8:30 ET PPI
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9/12 8:30 ET CPI
9/13 8:30 ET Retail Sales
9/13 10:00 ET Consumer Sentiment
9/13 10:00 ET Business Inv.

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