Trading The Midline

263
Sat, Dec 15, 2012 - 11:58am

As you're well aware, the metals have been rangebound for all of 2012. As we enter the new year, where will price be and will the ranges hold? Correctly answering those questions holds the key to successfully forecasting the next big move.

Admittedly I'm biased. Not only am I 100% confident of my long-term assessment, the short-term fundamentals seem extraordinarily positive, as well. To recap:

  • The U.S. government is embroiled in a nasty fiscal debate. Regardless of how these issues are resolved, the debt ceiling must still be increased and, as we know, the price of gold has historically tracked the debt ceiling quite well.
  • The last debt ceiling debate ultimately led to a drop in the U.S. credit rating. This event sparked a 5-week, Cartel short-covering rally from $1665 to $1920.
  • The Fed is poised, in January, to restart the wholesale printing of money ($85B/month) in order to partially fund the U.S. government deficit for fiscal 2013 (which, after just two months, is on a run rate of $1.7T).
  • Recent history suggests that gold rises sharply for 3 consecutive years and then consolidating every 4th.
  • Here are two charts that you need to commit to memory as we turn the corner into 2013. The first is one we've printed here repeatedly. It shows the price of gold tracking the ever-increasing level of U.S. government debt. The second chart is one that I just found this week. It shows the price of gold this century and details the point made in the last bullet above.

    Against this fundamental backdrop, the metals will likely enter 2013 mired within the trading ranges that contained them in 2012. The charts below detail all of the price action over the past 12 months. Please study them for a moment. Note how price has consistently found support or resistance near the midline of these ranges. When trending either above or below the midline, the trader needs to hold either a bullish or bearish bias, depending upon where price currently resides.


    And this is a critical point as we finish 2012 and head into 2013. Where would you expect price to reside currently, based upon the fundamentals? Should price be above the midline or below? Should the trend be toward the upper end of the range or the lower end? Should we maintain a bullish bias or a bearish bias? Again, based upon the fundamentals laid out above and other factors such as total gold open interest (which is only 432,000 so I ask you again, who is left to sell?), I simply do not believe that the metals should break down here, through the midlines and trend toward the lower end of the ranges. A far more likely outcome is that the metals bounce off of the blue diagonal trendlines I've drawn and then proceed to rally into the end of the year. I have been thinking (hoping?) that we'd wrap up 2012 near the top of the ranges. While the action this week certainly calls that into question, there's still quite a bit of time left and, as we saw on Black Friday, thin holiday conditions can lead to sudden short squeezes. If we don't make it back to $1780-1800 gold and $35 silver before year-end, I'll be perfectly content with $1750 and $34. And, regardless of how the next two weeks play out, all of this week's BS regarding the "premature" ending of QE will be soon recognized for what it was...complete and utter nonsense. Why?

    • Unemployment will not print at 6.5% anytime in 2013 and not in 2014, either. Even The Fed's own forecasts do not show sub-6.5% unemployment until 2015 (which is exactly why they've consistently said that rates would be "extraordinarily low through mid-2015).
    • And inflation will not print higher than 2.5% anytime soon, either. Oh, you and I will know that's it's higher than 2.5% every time we go the grocery store. That's not in question. But what's also not in question is that the CPI will never be allowed to show anything higher that 2.5%. Right this minute, your politicians in Washington are discussing ways to alter the computation of the CPI so that they can, once again, dramatically cut the COLAs for Social Security recipients. ( https://www.oregonlive.com/today/index.ssf/2012/12/gop_proposes_medicare_cuts_red.html)

    Finally and again, I can't stress this enough...though I'm too lazy to type it all out again so here's a C&P from the comments section of the previous thread:

    Submitted by Turd Ferguson on December 14, 2012 - 10:17am.
    MODERATOR
    The Fed is buying $45B in treasuries directly from The Treasury Department. This is direct monetization of the debt and money that is put into circulation by federal government spending, transfer payments etc.

    The Fed is also buying $40B/month in MBS from the Primary Dealers. This does two things:

    1. "Cleans up" the PD balance sheets by allowing them to exchange the near-worthless CDS for cash which the PDs then, in turn, use to purchase treasuries.
    2. By purchasing $40B/month in treasuries, the PDs artificially create demand for treasuries at auction. This demand, when combined with Fed demand, creates $85B/month in buying pressure at auction. This continues the illusion of a healthy bond market, keeps auctions from failing and holds interest rates at extraordinarily low levels.

    IT IS CRITICAL THAT EVERYONE HERE UNDERSTANDS THIS. THE FED IS, EITHER DIRECTLY OR INDIRECTLY, MONETIZING AT LEAST $85 BILLION DOLLARS PER MONTH OF U.S. GOVERNMENT DEBT. PERIOD. END OF STORY.

    OK, that's enough for a Saturday. Please use this weekend to step away from your computer for a while. Hug your kids, grandkids or someone else who is near and dear to you. Appreciate and value the important things in your life because, as we were all sadly reminded of again yesterday, they can be taken from you in an instant.

    God Bless everyone in Turdville and thank you for making all of this possible.

    TF

    About the Author

    Founder
    turd [at] tfmetalsreport [dot] com ()

      263 Comments

    Road_Scholar
    Dec 15, 2012 - 12:06pm
    jb
    Dec 15, 2012 - 12:07pm

    First??

    Great post Turd

    Missed it by thiiiiiiis much!

    El Gordo
    Dec 15, 2012 - 12:07pm

    Wow

    This one just sneaked up on me.

    tobydaniel
    Dec 15, 2012 - 12:18pm

    Are you a shill turd?

    You said, "I shill believe that, as we enter 2013, we are more likely to be above the line". I think this is a conspiracy:) I hope everyone has a great weekend. Thanks for the update Turd.

    Charles S. Hamlin
    Dec 15, 2012 - 12:21pm

    Thanks

    In the spirit of the holiday season I must say "Thanks Turd" for your continual effort to get the word out to those that will listen.

    Have a Great Saturday everyone!

    -Charles

    tobydaniel
    Dec 15, 2012 - 12:25pm

    My poor handwriting

    It is sloppy but, if you look closely, the word it "still" not "shll".

    Anonymous
    Dec 15, 2012 - 12:36pm

    Removed comment

    Removed comment.

    Road_Scholar
    Dec 15, 2012 - 12:36pm

    and Stacked...

    That ring is under about as much pressure as the silver/gold shorts. Eventually, nature always wins...

    ¤
    Dec 15, 2012 - 12:42pm

    How much gold would...

    Moving this forward from last thread. Any takers or forward thinkers here?

    Of course there is

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    ...the U.S. need to allow China to purchase on the open market at held back (shorted to death )prices while China gets repaid or made whole on their debt they hold?

    We have a sharp group of Brainiac's on this site and yesterdays discussion on China being the big short via JPM and the U.S. was interesting to consider and seems really straightforward and sensible to at least consider further.

    Given the last known (or thought to be) parameters that the U.S has 8,000 tonnes of gold and China has 1,500 tonnes and that gold goes for approx &1700 today yet is on the US books at $42 I'll ask the following and throw some scenario's out there.

    If the U.S. owes China about $3 trillion USD and they've negotiated some type of arrangement regarding gold and silver and it's price is being suppressed via heavy shorting so that the Chinese can take delivery of as much supposedly western metal that it would take to satisfy them, my question becomes one of.... how much U.S. or western gold/silver would the U.S. allow China to stockpile and at what price will they possibly value gold and/or silver if they use both to back a new joint reserve currency at some point?

    Would the U.S allow China to have half of the U.S gold or not even close if it's being used to pay China back to some degree? Given the assumption that at some point they make a historic pact and share the reserve currency would it be 50/50 or 60/40 etc?

    Will the USD/RMB become a new trade pairing that is based on each currency being pegged to the other in some type of new valuation or ratio that reflects the new reserve currency arrangement that allows and forces the Yuan to float much, much higher to gain and reflect it's new found strength?

    My guess would be that the U.S. would allow possibly a 70/30 or 60/40 type of split but I think a 50/50 would probably work best for both if they both agree that gold/silver gets priced much higher for both of their benefits.

    My questions are...

    1.) How much gold would the U.S give up but never admit to in order to repay China in some measure?

    2.) How much would they revalue gold up to and what ratio would they use for silver's price?

    3.) Would they split the reserve currency role 50/50 or something more/less?

    My assumption is if they make some huge change in the monetary system then gold/silver are mostly no longer available or it's prohibitively high in price and being sold in very small amounts such as milligrams if they were to price gold much higher.

    My other thought on gold/silver purchases by the Chinese citizens is that it's a sure fire way for the Chinese Govt. to almost instantly raise the standard of living and wealth of many or their citizens if they revalue good to a crazy amount. About 50% of the average Chinese citizen makes a daily wage of approx $1.

    If many of their citizens own gold and/or silver (no matter what amounts) and the value of the metal goes up appreciably then those same people will instantly have become much wealthier then they were on a day to day basis previously. My point regarding most of the above is that their seems to be no shortage of benefits to either the U.S or China and it's citizens regarding taking care of the outstanding debt issue, weak currencies relative to each other and the possible instant wealth effect the revaluing of gold and/or silver would have on both countries and the world.

    In an a world full of debt and bad collateral and low growth and revenue being taken in it appears to me that in one full swoop they could eliminate many of their problems and get people to start spending money on each others produced consumer goods etc to stimulate growth and jobs and taxes revenues. The Chinese, Americans (and Indians and the rest of the world who buys gold/silver) would be suddenly enriched with their newly found wealth and would soon buy up all the depressed housing at dirt cheap prices thus clearing significant inventory and the last big significant hurdle to any recovery (in this country at least).

    My guess on that hypothetical scenario is that the U.S would give up approx. 2000-3000 tonnes of gold without public acknowledgement (maybe not even their own gold but other countries) and have a 66.6/33.3% reserve currency ratio with China and gold trades at the newly established price of $15-25,000 per/oz with a 20 to 1 ratio being allowed for silver and the price of gold not being fixed but becoming a floor and it being allowed to float, but only upwards.

    If they could keep gold and silver down and shorted for their gain (like they do now) then they could certainly keep it jacked up and made suddenly unavailable and increasingly scarce. Supply and demand will finally kick in for their benefit so that the price can only go up and the value of their backed currency can be kept strong.

    silver66
    Dec 15, 2012 - 12:56pm

    Road_Scholar

    STOP IT-- your postings are preventing me from thinking with a clear mind

    ah hell- on second thought who wants to think clearly

    Silver66

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