December Metals Report

Greetings friends- I'm basically just pasting a bunch of charts for you today that caught my eye, with only captions. But I'll have a more thorough year end post for you. Following my successful guarantee that the Swiss Initiative would fail, I am emboldened to make another --but only to my Platinum Members ... $1350 gold in the next three months. 

Gold Meditations

In a Twitter exchange a few weeks ago I mentioned an insight offered by Jacques Rueff into the gold pricing mechanism under a classical gold standard in his book “The Monetary Sin Of The West”.

A few people asked me to expand on that comment. (As usual I’m late in getting this post out.) Long story short, Jacques Rueff tells us that there were two reference points for setting a currency peg with gold. In gold producing countries it was the average production cost of mining gold. In countries without significant gold production the reference point was average exports.

He also talked about gold having a place in the “price hierarchy” of commodities which, by inference, is discovered as a result of mining for gold. (I’ll provide some page references and extracts from Rueff’s book below.) So gold mining had two inter-related pricing functions.

The traditional price discovery mechanism for the commodity price of gold wasn't trades on a COMEX style exchange or a “fix” by a group such as the LBMA. (In the case of the LBMA perhaps it might be more realistic to view the fix as a market maker’s operation. Meaning the LBMA clearing members simply provide liquidity like the primary dealers in the US Treasury securities market by standing in the market with a bid and offer price.)

Rueff’s insights have some interesting implications for the COMEX gold market. If this paper by Douglas Pollitt is on the money then a realistic assessment of the current overheads in the gold mining business means that miners require a gold price many hundreds or even thousands of dollars higher than the price COMEX is signalling. In my opinion the disconnect between the COMEX price and the production cost of gold requires an explanation.

As Rueff points out the price of gold also regulated the supply from mines by disciplining the “marginal producers”. It exerted pressure on them to reduce supply when prices were low and encouraged production to expand when prices were high. Could this apparent mispricing be due to the gold miners sucking in capital without being able to provide a return?  (Mining their stockholders as Pollitt's paper suggests to Uncle costata.) Are other commodities produced for years despite being priced below their production cost?

As I mentioned earlier I’ll provide some page references to the digital copy of Jacques Rueff’s book that I linked above. He described gold as having a place in the “price hierarchy” of commodities (P. 33). He talked about gold residing in the “general price hierarchy” (P. 208) and that gold’s place in this hierarchy was determined by the cost of mine production.

That makes sense to me. The costs that impact on other commodities also affect the cost of gold production – labour, capital, technology, interest rates, machinery, energy, various consumables, land, government fees/charges and so on. Gold mining was the conduit through which the components that make up the “general price level” (P. 142) impacted on the overall cost of gold production. This is Jacques Rueff’s description (P. 58) of the benefits of pegging to one of these reference points:

“No doubt, the fact that legal parity is pegged is the main feature of the gold standard. I would even say that its major virtue is that it maintains the whole scale of prices in the countries that apply it at a level where the average cost of gold production [10] coincides with the legal parity of the currency.

But when its operation has been suspended—as was the case in nearly all belligerent countries during the last two world wars—or disrupted—as was the case as a result of the application in the greater part of the world of a system which, like the gold-exchange standard, stretches nearly to breaking point the link between gold and aggregate purchasing power—then there is no alternative but to jettison appearances to save realities and, while acknowledging the situation that you have allowed to develop, to re-create the basis for continuing expansion without impairing order or stability.

[10] And in the non-gold-producing countries, the average price of gold in terms of exports.”

Gold provided an anchor for the currency to the rest of the commodities that constitute the general price level. When this level increased significantly (e.g. as a result of a major war) Rueff’s policy recommendation was to increase the price of gold in order to restore equivalence. Expressed in currency terms this meant cutting the exchange rate of the currency peg to reflect the change in the general price level. In a situation where prices had doubled a peg set at 50:1 before the rise would require a reset to 100:1 in order to recognize the true position of gold in the general price hierarchy of that currency zone.

Rueff seems to be offering a way of approaching a fundamental analysis of gold pricing. Now I realize a lot of people believe that fundamentals play second fiddle to technical analysis (TA). And the savants of Team TA have certainly been racking up the points against Team Goldbug lately. I posted a comment here recently with a quote from a post that I thought summed up the current situation perfectly. It's from a blogger who styles himself Tiho (at The Short Side Of Long blog) who said: “Fundamentals are useless until the market decides to price them in.” After further reflection I began to have doubts about how the average person could profit from adopting this perspective. 

If you don’t know what the fundamentals are how can you position for the market’s ultimate recognition of their existence? (Perhaps Tiho's statement could be restyled as Technical analysis is useless unless you know when the fundamentals will be priced in.)

If you do know gold's fundamentals (and they aren't being priced in) how can you determine in advance that the market is about to price them in? Can TA answer this question? 

If you think you have the answers to these questions or you would just like to comment about this post please join the discussion.

October 2014 metals wrap

 Greetings, friends-

Truly an awful time for gold and silver investors right now. Mining stocks are in one of the worst bear markets in history. E.g. compare five-year charts of the NASDAQ crash to mining stocks below. The terrible irony is that I'm sure many people sold common equities and bought mining stocks after the financial crisis to protect themselves from the Wall Street circus ringleaders. Little did they know that they would transfer up to 90% of their wealth over to them in the next 5 years. And that doesn't even touch upon the opportunity cost of pulling out of stocks, which haven't done too badly.

Heavy Metals

 Greetings, friends-
Not a happy time for gold and silver bugs, sadly. Here's some mood music to set the tone . . .

 And what will surely upset gold and silver bugs even more is that my long absence from regular posting must needs continue for a while longer, but I see we still get a large number of loyal visitors daily, a few of them not bots, so with September in the books, I felt it incumbent upon me at very least to update some of my regular charts. Once again, the reversals on the two weekly three-line break charts below (with the first, as usual, being the leading indicator) have signaled the recent bear cycles in gold and silver.

My 2014 prediction that the GOLD/S&P500 ratio would hit the yellow line has come to fruition.

 Then the chart from my previous post did what I thought it would: the correlation (red) would reverse and become positive again soon--that was clear--and the only question for me was whether emerging market equities and silver would both move up or down together. The strong resistance line on EEM told me down was far more likely ... and sure enough silver just closed the week at its lowest level since February 2010 (!) ...
 I see $15 in play next, and I wouldn't rule out $12 before a long-term bull rally takes hold. My target (pink circle) here was on the money

My conviction that we won't see the low in gold until the "treasuries in silver" chart hits the green flanging wedge is also looking likely now, a year and a half later, with, unfortunately, still a ways to go:

[thoughts] On Predicting when Bullion will Return to GLD (FAILED PREDICTION) PLUS a new permanent spreadsheet resource

A number of months ago I predicted the return of some specific GLD bars, and I'm sorry to say they haven't yet returned and statistically there is now less than a 5% chance that they will. So that is a FAIL; my method for detection of unusual GLD withdrawals did not create an accurate prediction. I'm disappointed and it's back to researching that area. I will of course update this article if I ever see them back on the ledger, but because it's outside the three to four month range expected, I'm admitting defeat.

Sunday PM pre-game, 8/31/2014

Greetings friends-

Another month is in the books, and it very much looks like gold's year-long trading range is approaching its long-awaited denouement. The key chart is above ...

Sunday PM pre-game, 8/3/2014

 Hello friends -
As many have noticed, I'm still on an extended break.

At present, I'm not at liberty to reveal exactly what it is I've undertaken, but suffice it to say, I've found that the older I get, the less and less I worry about dying young.

Still I've found the time for a quick end-of-month chart dump. The most important chart is this one -- gold has fallen below its 20-30 week moving average ribbon. Buyers beware. Even though a move to $1350-60 may still be in the cards (based on some charts below the fold), that should be it -- so, risk is greater than reward here...

GLD Trade Spreadsheet vs GLD Bar List (Updated)

a quick question:

"Are there any significant discrepancies between the numbers in the GLD trade settlement spreadsheet and the GLD bar list?"

Thursday update 7/3/2014

Happy 4th of July to all of our dedicated readers in banker-occupied America.

Just one chart for you. With my first target ($1335) from last week's post hit, I decided to sell. Frankly, this is a tough market to trade right now. A lot of conflicting signals from my charts. I'm still bullish, but the metals are so overbought presently, that I'm going to watch from the sidelines.

Friday metals wrap, 6/27/2014

Quick update -

I'm bullish, but the two gold price points I mentioned in my last post, which I'd like to see cleared before opening a substantial long position, continue to serve as stubborn resistance: namely the monthly downtrend line above (blue), and the 300-day MA below (black)

I'd still bet on $1390 (and at least $1335) for gold and $22 for silver before this rally is over, based on charts below the fold. A move down to $1290 in gold would be a good entry point too, IMO.

Friday Metals Wrap 6/20/2014

Greetings friends!

Sorry for my inactivity of late -- to give you an idea of how busy I've been, I thought today was Friday and printed out a bunch of weekly charts for you. So hopefully nothing too crazy will happen tomorrow after today's fireworks, to render these obsolete.

I've also been too busy to trade. And as luck would have it ... I missed a few obvious long opportunities based on my own damn charts. Hopefully I helped someone make money this week??

E.g. last Friday, turns out there was a reversal on the 3-line break chart I beat to death every week, as a proxy for when an intermediate term bull cycle begins. Another bar has been added since, and should remain there tomorrow to close the week.

I hope I've made some believers in these charts. Note how my silver proxy chart below (GLD:GDXJ) never confirmed the bearish reversal of the gold proxy chart above (DOW:GDXJ). I had mentioned I wouldn't go short until it did so. And in fact now it's very close to adding a new red (silver-bullish) bar.  
Then, there was my previous post, ("Important chart") ... Sure enough, silver broke through that important trend line days ago (as I now note commenter Fix the System tried to apprise me of, to no avail. Thanks though!). Luckily, someone did make money by means of this chart. Our good friend "David P. out of Europe", who posted it on King World News on Tuesday

You just can't keep a good meme down

Zerohedge ran the following article:
"One ton Gold Shipment Into Hong Kong Revealed to contain Just Worthless Metal"

The author linked a few pics of gold covered Tungsten bars ignoring the facts of the case and giving the impression, if you skimmed the article, that it was another "Salty tale" of Tungsten wrapped in a little gold.

Reading the ZH comments would indicate that some (/most?) people read it as a "Salty tale" but the reality was also in the article for those who actually read it.
 "On Wednesday, Zhao Jingjun, 43, opened part of his shipment in front of his buyer in Hong Kong and discovered the gold had been switched for worthless metal." There was no mention of salted bars. 
27,000 reads on ZH, retwitted, reflogged and linked "About 7,780" times.

A picture, as they say, is worth a thousand words.

Here is a pic:


Important chart

I didn't do an end of month TA post, not least because I didn't want to distract our readers globally from the fine discussions going on in the posts below, but there's one monthly chart that stands out ... silver. As badly as the price of silver has looked, it needs only to hit $19.50 this month to clear the long downwards trend line that goes back all the way to the $50 peak three years ago. That line (green, dotted) has since been a rally stopper nine different months.

In fact, the $18.90 level where silver now stands would be enough to break that trend line next month. So, more evidence that a big move is coming in silver (and by extension gold) pretty soon. I'm still guessing that it will be in the downwards direction, based on my target below the fold.

GLD Inventory Large Addition Analysis

Just like the gold price itself, the inventory of GLD was incredibly boring for the last few months then it got some excitement all in a hurry with 668 gold bars being added to the inventory on the 30th May bar list (shown three days earlier on the trade settlement spreadsheet). That's a big increase for one day, let's take a look at the bars themselves.

I was expecting a large percentage of the add event to be from gold bars previously seen in the inventory (dark bullion). I wasn't disappointed. 487 bars were previously dark ... i.e. 23% new, 73% old.

The FreeFiat Fracas

("FreeFiat" - Controversies Post 1)

A tweet from 'DP' prompted me to read the most recent argument about a concept dubbed "FreeFiat" that was unfolding on page two of the comment thread of FOFOA's latest post. Victor The Cleaner was re-presenting the FreeFiat concept and a few members of Team FreeGold were trying to clean his clock.

My first exposure to this concept was back in November 2013 when an old chum sent me a message asking if I had "converted to FreeFiat". Here's a link to the post where the FreeFiat argument first erupted (again on page two of the comment thread). The fact that I had to ask my old chum to explain it to me should give you, dear reader, a strong hint about my answer to his question.

Uncle costata also got a mention in the latest exchanges as being a disciple of the FreeFiat school (h/t to The Motley Fool for raising the red flag on that). 'TMF' also observed that the posts I committed to doing here at STFU have been arriving at a "glacial pace". Sadly true, a series of unforeseen events forced blogging way down in my list of priorities. I'm going to try to make amends with more regular posts from now on.

The FreeFiat Concept
As I understand it one of the main arguments is about whether people will hold their savings in gold or some type of debt instrument (such as bank deposit accounts) after the transition to a new gold-based international financial and monetary system (IMFS). So this fracas is predicated on gold replacing the US dollar in the IMFS. The FreeFiat camp say people will primarily save in currency and their opponents say it will be in gold alone or gold will have primacy in the competition for savings. (I should note here that FOFOA draws a clear distinction in his writings between savers, investors, speculators and so on.)

This FreeFiat concept strikes at the heart of two of the foundational theories of FOFOA's writings. At the risk of over-simplification, one of these theories states that there is a fundamental conflict between debtors and savers which is resolved by savers ceasing to save in debt instruments and making gold the receptacle for their savings. There is also a perceived conflict here with a second foundational theory advanced by FOFOA about gold taking over the store of value (SoV) role in the monetary system leaving currency solely/primarily with the role of medium of exchange (MoE) and unit of account (UoA) in a new gold-based IMFS.  

Victor the Cleaner (VtC) and his allies argue that the Euro is designed to flourish in this new gold IMFS. They argue that the Euro will be as good as gold over periods measured in years and most Europeans will happily hold their short and medium term savings in Euro. VtC argues that storing large amounts of wealth in gold will be more applicable to very wealthy people who are trying to manage inter-generational wealth transfers. Presumably he's talking about people for whom limited government deposit guarantees are insignificant compared to their liquid assets. Of course there is more to this argument than my brief summary can convey but I'm trying to adhere to my commitment to brevity.

(Frankly this aspect of the FreeFiat concept doesn't particularly interest me BUT there is another part of the argument that does interest me greatly. The FreeFiat camp also argue that the ECB's interpretation of its stability mandate will at some point shift from a positive inflation rate target to a zero rate or even to welcoming gradually falling prices (defined by most analysts today as mild "deflation"). I'm going to do one or more separate posts on this aspect of the FreeFiat argument because it opens up a gigantic can of fascinating worms for an old economics junkie like Uncle costata.)

Saving In Gold
In my opinion the average person won't need to personally hold any gold in order to benefit from the stabilizing effect of gold on the major currencies in a new gold-based IMFS. They will be able to ride on the coattails of other key players such as central banks, Treasuries, extremely wealthy people with an affinity for gold and large populations with a cultural preference for gold. Provided there is an international, liquid, free market in gold then gold will be able to price currencies and discipline currency issuers.

The fact that gold is widely distributed across currency zones will be helpful in other ways but this isn't a necessary condition for gold to price all currencies. As long as there is, say, a Euro gold price it would transmit a local currency gold price to other currencies. In order to manage their currency the issuers will also have to deal with the fact that in normal times over 90 per cent of the circulating money is bank credit money loaned into existence by banks in the form of bank deposits. So currency issuers will need to manage the bank created component of the money supply as well. I'll be doing some posts on this issue as well in order to share the results of my reading and research into this topic over the past couple of years.

Dual Currency Systems
I think we can obtain a sneak preview of how gold will discipline currency issuers in a future IMFS by taking a look at countries who, today, operate under dual currency regimes. Historically citizens of countries with a weak or untrustworthy domestic currency have tended to adopt a secondary "hard" currency as well. (In recent decades it was generally the US dollar.) In some instances the local currency functions as the 'petty cash' component of the money stock. Ecuador and Panama, for example, issues coins in the local currency and use the US dollar as legal tender. Domestic demand limits the local issuers ability to debase the currency.

Citizens can also force the adoption of a de facto dual currency system by demanding payment for hard assets such as real estate in a hard currency or gold (as reported in Vietnam). Wealthy people with funds outside their currency zone can transact domestically in local currency and make secret adjustment payments offshore at a different rate to the official exchange rate. So the secondary hard currency can operate in a separate hard asset "circuit" along with the domestic currency in its own daily consumption "circuit".

Countries can be forced to formally adopt a secondary currency by their international trade partners. The forces at work here would also be applicable to the system of currency swaps that China has been developing with gold functioning as the international hard currency unit. So this inquiry is relevant on several levels. International trade partners can (and do) force countries to hold reserves of US dollars in order to facilitate trade settlement. So this $IMFS is a de facto dual currency system.

This international trade requirement can discipline currency issuers in other ways. Sometimes governments (e.g. Argentina, Venezuela recently) attempt to over-ride the market and impose an artificially low exchange rate on their currency against the secondary hard currency that their trade partners demand. If the government's "official" (imposed) rate is above the "black" (free) market rate the government will bleed foreign exchange (FX) reserves attempting to defend their currency peg. As those FX reserves reach dangerously low levels the government will usually capitulate and converge to the market rate or they risk a currency collapse.

Store Of Value
The argument about the SoV role seems straightforward to me. In your local economy the currency must have the quality of SoV for some period of time or it's a dead currency. So at minimum, over short periods of time, your domestic currency will have SoV properties. In my opinion the situation from an international perspective will be even more clear cut. In a gold-based IMFS it will be gold (not currency, SDRs or sovereign bonds) that will have primacy as the store of value. In a gold-based IMFS gold will have the greatest liquidity, universal convertibility and it will exploit all of the network effects that the US dollar has benefited from.

Sunday PM pre-game, 5/25/2014

Happy Memorial Day!

Since gold could not clear and hold $1300, the death cross is on schedule for Friday barring a late-inning rally. You heard it here first. Friday is also the end of the month.

More bearish news -- gold finally closed below the 100-day MA. Those of you who chronicle the price of gold as closely as I do (both of you) are surely aware of its significance. Two times the Gold Bulls tried to break its stiff resistance--on Jan 27 of this year, and again on Feb 5--only to be beaten back by withering fire, by swords and pikes and pistols and muskets. Let me recount it for those who don't remember.

A blur of movement. The racket stepped up feverishly. Brigade Commander Sprott peered over his parapet in readiness to join his reeling men--though cautiously, very cautiously, ever wise and never impatient of restraint. In between thoughtful sips from his silver flask he gathers himself. There will be times when exposure is essential, he reflects, but should his deep-rooted pugnacity get the better of his lucid judgment, what of his contingent then! Boldness might make fortunes, but caution - ah! divine caution must keep it!

Cut now to February 10 ..., with the Cartel's guns dangerously aligned along their trenches. Heartless and fearless, that juggernaut of mechanized warfare has their dive bombers, their high explosives and their seemingly endless replenishment of reinforcements at the ready. A spirit of grimness penetrates the air. Abruptly, uncowed by stark position and high stakes, the Chinese People's Army dares to go where Rick Rule has feared to tread, blasting through the 100-day barricade!

But now the mist dissipates, now amidst the sweet savor of victory, Brigade Commander Sprott surveys the landscape from a high (very high) emplacement. The attrition has become evident. Long specs lie motionless by the thousands, their grotesque twisted corpses sprawled out in blood-soaked grass, riddled with shrapnel, gashed in scores, bored with bullet holes. They had been frightened out of their position by repeated raids at fifteen minute intervals carried out with the clock-like precision for which the Cartel was known. The sweet spoils of victory were not theirs to share. Sprott murmured between his teeth to Private Embry, whose eye had fixed upon a fallen man of broad muscled back, his white well-fed body made marble statue by Death. Embry turned him over in his mind and weighed him with his eyes. Sprott's gaze settled on the water-logged corpse of an elderly man stuck in a running brook, caught in the tangle of branches from a fallen tree. The deceased senior's steady sway lulled Sprott into a sedated state of sober reflection ... back and forth, pendulum-like, the slow stream stripping soft skin piece by piece from his face ... when -- terror! -- the lips detach, revealing white teeth in an indignant sneer. That evening, throughout the wonderful meal of venison medallions (cooked to perfection on an antique charcoal brazier), throughout the jaunty dancing with Embry and King and Rule and wife, throughout the bottles of post-prandial oak-aged Royal Maria lustily consumed, brought up from the cellar for the occasion, the dead old man's scornful visage darkened Brigade Commander  Sprott's thoughts.

And gold has stayed above the 100-day MA since. Until Friday.

Death cross

Do you want to know why the $1300 level in gold has been so important to defend?

The chart below tells us what gold has to average over the next n days for a "death cross" to occur in n days.

(A death cross is an ominous trading signal that occurs when the 50-day moving average falls below the 200-day)

It will occur soon if the average price of gold stays at or below $1300 (see dotted red horizontal line). Put another way, if gold can't clear and hold $1300 within the next few trading weeks, a death cross will occur.

Big move in gold and silver ahead

People often ask me how I got so damn good at trading and I figured the answer to this question is so important, I'm gonna go ahead and make this post open to the general public.

My secret is that I have so many charts, with so many lines everywhere, that when I scroll through them (usually during a pedicure), one of them is always liable to be at an important point. So, e.g., I saw a chart in the comments of Kid Dynamite's post on gold manipulation today, and knew I had my own version of that chart somewhere. (There are very few charts I don't have, although I've finally given up on following the 3-month heliocentric cycle of Mercury. I now look only at the 5- and 10- minute versions).

And lo!! it's at an important point.

Sunday PM pre-game, 5/11/14

What a great time to be alive for the silver shorts!!

I mean shorts with deep pockets, unlike those on the picture above (which, incidentally, I got from my good friend Eric King, who's got an extensive collection of this stuff)

(I actually swapped one from my portfolio in return, below the fold ...)

The Fed has things under control

 Obviously, the Fed will never do anything that isn't also in the best interests of the financial elite (by which I mean those parasites upstanding citizens nematodes who typically spend more on a bottle of wine than the average chump earns in a year)(that's not hyperbole -- the median global per capita income is substantially less than 10k). That said, let's not be ungrateful. The Fed will do whatever it can to help the lot of the average American as well, once it sees to it that the best interests of the financial elite are well served. (The rest of the world is on its own and will certainly be spied upon and robbed, perhaps even killed.)

Sunday PM pre-game, 5/3/2014

Hello friends,
--and sorry for the infrequent posting many of you have been wondering about. My plate's been pretty full of late.

Speaking of "full plates" -- we recently heard from our erstwhile contributor and lemur-emeritus, JdA (left) in the comments of my previous post.(Lemuritis was a tempting contraction, but sadly too evocative of another contraction, one that has led to the fever and painful urination I've been suffering on and off since Spring Break in 1997) ... and we're all thankful (as always) that she could take the time off her busy schedule to chime in:
 The PM situation is looking very ropey to me: in fact, I'm pretty sure that gold is going to tank over the next few months, and silver will perform even worse. Perhaps even in time for the anniversary of the Great Mayday Massacre of 2011…
 I have to agree, but I'm not short yet: the PMs have a way of following the long term charts, but flipping off the short term ones. As I pointed out last week, still waiting for a break below the 20-30 week ribbon on a weekly close (as well as the 144-day MA below that):

As well as confirmation of the first three-line break chart's reversal by the second (which I use to gauge intermediate cycles in gold, silver respectively)

The Search for a Universal Bar Number

In the bullion bars database we have the signatures for about 250,000 gold bars and 800,000 silver bars. I'm at the stage now where I need a consistent referencing number — currently the unique identifiers get created fresh each time I import a major set of data, which solves a bunch of other problems but makes it difficult to permanently catalog interesting bars. If you're not into 'Barspotting' please feel free to tune out - this is another of those posts where I'm just talking out loud, trying to solve some boring questions open for discussion.