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Market Intervention Becomes Evident

By: Eric Hommelberg

-- Posted Wednesday, 8 August 2007 | Digg This ArticleDigg It!

Excerpt Gold Discovery Letter August 07, 2007



Dollar on the verge of collapse -
Pierre Lassonde: Gold poised to attack $750 by early fall
HUI - strong support at current levels


Gold: $670 / HUI: 335


The uncertainty in the equity and gold market continues to increase and many investors are throwing in the towel when it comes to gold and its shares. People are getting nervous about the true health of our current financial system and some financial heavyweights argue we do find ourselves near or even at an Armageddon type of melt-down as a result of the on-going sub-prime woes spreading like a cancer to other financial sectors. Yes, the FED and the Treasury have assured us that all is well and the sub-prime worries well contained and yes, there is the PPT (Plunge Protection Team) coming to the rescue each time the market threatens to break down significantly. Last Wednesday was a good example when the DOW rallied out of nowhere by 150 pts in the last 20 minutes of trading. This sudden run-up raised suspicion even among the PPT- non believers:

Dennis Gartman:

We are not believers in the so-called "Plunge Protection" organisation, but yesterday's last half hour rally is sufficient to cause us to reconsider our view on this issue.

Richard Russel:


The sudden buying, seemingly 'out of nowhere,' left me just a bit suspicious.

John Lee, Mau Capital:

Dow closed up 150 points on Wednesday, with American home mortgage issued warning on Tuesday afternoon. We find such market action incongruent and can only conclude that Plunge Protection Team was at work.


It should come as no surprise that the PPT's role is to stabilize markets so when the equity markets tend to fall too far too fast they step in buying futures hand over fist thereby catalpulting the DJIA higher and recovering its losses made earlier during the day. Earlier this week Fed's Krozner admitted that the FED has a key part in ensuring the US financial system weathers financial turbulence:

Fed's Kroszner-Fed has role in buffering shocks


WASHINGTON, Aug 2 (Reuters) - The Federal Reserve has a keypart in ensuring the U.S. financial system weathers financial turbulence, Fed Governor Randall Kroszner said at a nomination hearing on Thursday.

"The Federal Reserve ... has an important role to play in responding to and mitigating the impact of financial crises and shocks," he said in remarks prepared for delivery to the Senate Banking Committee.




The existence of the PPT (Working Group On Financial Markets) is still being doubted by many investors/analysts but the simple truth is that is does exist, the exchange between congressman Ron Paul and Ben Bernanke before the Financial Services Committee proves this point beyond any doubt:

From the Hearings on Monetary Policy and the State of the Economy Committee on Financial Services, the U.S. House of Representatives
July 20, 2006, Washington, D.C.

MR. PAUL: Good afternoon, Chairman Bernanke.

I have a question dealing with the Working Group on Financial Markets. I want to learn more about that group and actually what authority they have and what they do. Could you tell me, as a member of that group, how often they meet and how often they take action; and have they done something recently? And are there reports sent out by this particular group?

MR. BERNANKE: Yes, Congressman. The President's Working Group was convened by the President, I believe, after the 1987 stock market crash. It meets irregularly, I would guess about four or five times a year, but I am not exactly sure. And its primary function is advisory, to prepare reports. I mentioned earlier that we have been asked to prepare a report on the terrorism risk insurance. So that is what we generally do.

MR. PAUL: In the media you will find articles that will claim that it is a lot more than an advisory group you know, if there is a stock market crash, that you literally have a lot of authority, you know, to impose restrictions on the market. And we are talking about many trillions of dollars slushing around in all the financial markets, and this involves Treasury and, of course, the Fed, as well as the SEC and the CFTC. So there is a lot of potential there.

And the reason this came to my attention was just recently there was an article that actually made a charge that out of this group came actions to interfere with the prices of General Motors stock. Have you read that, or do you know anything about that?

MR. BERNANKE: No, sir, I don't.

MR. PAUL: Because they were charging that there was a problem with General Motors, and then there was a spike in GM's stock prices.

But back to the issue of the meeting. You tell me it meets irregularly, but there are minutes kept, or are there reports made on this group?

MR. BERNANKE: I believe there are records kept by the staff. These are staff mostly from Treasury, but also from the other agencies.

MR. PAUL: And they would be available to us in the committee?

MR. BERNANKE: I don't know. I am sorry, I don't know.


Now ever since Paulson became Secretary of the Treasury the Working Group on Financial markets is meeting more frequently but unfortunately this is done in utmost secrecy and no minutes are ever released from such meetings.  John Crudele, a reporter of the NY Post has requested through the FOIA (Freedom Of Information Act) copies of the minutes made during these meetings but unfortunately Crudele and the Post are waiting for over a year now. You may wonder why it's so hard to comply with US law? What do they (PPT) have to hide?


NY Post July 26, 2007

Already since July 2006 July The Post's lawyers have sent  several requests to the U.S. Treasury asking for copies of the minutes of meetings held since 2000 by the secretive organization called The President's Working Group on Financial Markets. FOIA refers to the Freedom of Information Act and it's supposed to be a way for the government - our elected officials and their selected cronies - to have the kind of transparency that keeps corruption and self-dealing at a minimum.




Sure enough when it comes to stabilizing markets the dollar comes into the picture as well. The FED has a terrible dilemma here. They should raise rates in order to fight inflation and defend the dollar.  The dollar has put up a terrible performance lately and is threatening to take out its multi decade support to the down-side.. But raising rates is like adding keroxine to the on-going sub-prime woes which is threatening to spill over into other financial sectors as well. The problem however is that no-one exactly knows how these sub-prime woes will solve itself. The implications could be staggering and many heavy weight financials are calling for an URGENT response from the FED, which of course translates itself in lower interest rates.


Jim Cramer raised his voice in a dramatic appearance on CNBC in which he begged for lower rates ASAP in order to cushion the on-going sub-prime woes. You can see his appearance here at:


So lowering rates to rescue the US financial system or higher rates to defend the dollar, well, no easy way out I guess, maybe that's why the American public is being fed over and over again with assurances from the FED and Treasury that all is well, the sub-prime woes are well contained, the economy is strong, a strong dollar is in the interest of the US....and so on....


Now how to keep up the illusion of a strong dollar?


Well, in order to keep the illusion of a strong dollar all one has to do is to bury gold since a fast rising gold price would undermine the dollar's credibility. Former FED president Paul Volcker said in his memoirs (referring to the dollar crisis of the 70's):


Paul Volcker, Former FED president:

Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake. Through March, the price of gold rose rapidly, and that knocked the psychological props out from under the dollar." END.

The US government tried to prevent a dollar collapse (partly) by gold sales before. The Wall Street Journal reported in Jan '05 (referring to the dollar crisis of the seventies) :

Jan 17, 2005

Worried the falling dollar was undermining its anti-inflation efforts, the Carter administration announced a multi-part support package on Nov. 1, 1978: The Treasury would use gold sales and foreign borrowing and draw on its reserves with the International Monetary Fund to defend the dollar. At the same time the Federal Reserve raised its discount rate a full point." END.

So there it is, The US Government used Gold sales in order to support the falling dollar. Seems like deja-vu all over again. Any wonder we are hearing stories of gold sales by IMF, France, Italy and so on?

Announcements like these are creating fear in the gold market. This fear is being utilized by the commercial bullion banks to add new short positions hand over fist to force the gold price down. Sure enough the speculators being long are forced out of their positions since all critical sell-stops are being hit. In the Gold Discover Letter of July 28 I wrote:

TGDL July 28, 2007

Adding the largest amount of fresh new short positions since June 2005 has nothing to do with lower gold price expectations but points to a strong determination to force the gold price down.

Sure enough once the short sellers managed to hit some stops the terrified longs were bailing out in droves thereby generating the largest volume traded on the COMEX for over 6 years. Again it goes far beyond the scope of this update to discuss these kind of manipulation efforts but the bottom line is that such a pace of liquidation is unsustainable thereby reducing further downside risk from here. END.

Well, downside risk was limited indeed since the gold price bounced off its $660 low and trades around $672 today.. The market seems to be gearing up for a dramatic up-move. Trader Dan Norcini reported on JSMineset

Dan Norcini

Last week I remarked that the commercials had put on the largest number of brand new shorts in one week time that they had done in nearly two years, back when gold was trading just below $450 and they were trying to cap it there. Well, guess what? This week they turned right around and covered the LARGEST NUMBER OF EXISTING SHORT POSITIONS in one week’s time since April of 2004! It is evident that they are wasting no time in taking profits in their short futures position’s, perhaps they are sensing that the weakness in the dollar is going to be too much for them to try holding the line on gold for much longer.

Regardless, the result is that the fund net long position and the commercial net short position are both at levels that are more commensurate with the end of liquidation cycles in gold rather than with tops in price. If the dollar's weakness continues into next week, gold is well positioned for an upside breakout. Preventing that will require another massive effort on the part of the bullion banks. Can they repeat their success from the previous week? Stay tuned! END.

Norcini is not the only one reporting the price capping efforts. GATA consultant James Turk of wrote in his latest essay:


James Turk:


If anyone didn't believe the gold price was being capped by central banks, they must now be convinced as a result of events the past few weeks. END.


Turk explains that gold was not allowed to rise over $666 lately despite the tremendous growth in gold demand. Turk wrote:

For example, the Istanbul Gold Exchange reported last week that Turkish July gold imports jumped to a new record of 45.7 tonnes, an astounding 36.5% above the previous record set in May 06. Despite this strong demand gold stays stuck below $666, the level central banks are trying to defend.

We know they are defending that level by, among other things, the following:

  • increased anti-gold propaganda by central banks (for example, Italy saying that it will sell gold to reduce its government deficit)
  • the huge increase in Comex open interest on little price movement (the central banks are feeding paper into the market to stop price advances)


Despite the anti-gold propaganda Turk concludes:


Nevertheless, central banks will get blown out of the water -- and soon I think. I'm still looking for $800 gold before the end of this year. END.


Now to those out there still having doubts regarding any manipulation efforts from the big bullion banks please consider this:

  • Blatant sell-offs have nothing to do with producer hedging, strong DOW, weak DOW, high oil prices, low oil prices etc...but with adding astronomical fresh amounts of new short positions (see Dan Norcini's comments above). The result is sudden spike down, see picture below:


  • These sudden sell-offs are always induced during COMEX sessions
  • It's always the same small group of bullion banks starting the relentless selling.
  • This aggressive selling forces the speculators out of their long positions. Once the longs have bailed out the short sellers start to cover again.
  • It's easy to manipulate the gold price through paper contracts since the paper gold market is about 40 times larger than the physical gold market.
  • COMEX sessions are pushing gold prices down in more than 93% of all sessions. No statistician on earth will tell you that free markets could behave in such way.

The good news however is that each orchestrated attack on gold automatically dies once the specs are flushed out. In other words, the commercial bullion banks can push the gold price down on strategic moments but they can't reverse a fundamental trend which is up. The latest attack on gold seems to be over now and as James Turk noted the one year outlook for the yellow metal looks bright. Turk's view is being shared with Newmont's Pierre Lassonde. Lassonde is bullish on the yellow metal as well. Not only for the short term but also for the years ahead. Speaking with reporters after a presentation to the Diggers and Dealers mining conference in Kalgoorlie, Mr. Lassonde said:


Pierre Lassonde, vice chairman Newmont Mining:

  • I think this bull market will be a lot longer than we think," he said. "I believe gold could have three zeros after the first number. I just don't know what the first number will be.
  • Gold could rise to $US750 an ounce this year and to $US850 an ounce within 12 months.



So if we see gold prices reaching all time highs in 12 months time then when could we expect a serious break-out from the gold shares?


Well, as we will see in the charts below the main key-issue for the HUI remains to take out its long-term resistance at 360. In order to do so the gold shares need to get some tailwind from the gold price itself which should take out the $682 mark again towards its 2006 high of $730. It's hard to predict when the HUI will be catching fire, I mean, whether this happens once gold takes out $682, $700 or $730 doesn't really matter. The thing that matters is that once the HUI slashes the 360 long-term resistance for good then a powerful rally can be expected launching the HUI to well over 450 in 6 months time. The same happened in 2003 and 2005 after a long consolidation period. In short, the main reasons for being so bullish on gold stocks coming 12 months:

  • HUI's trading pattern of late shows strong similarities with 2003 and 2005 before break-out
  • HUI break-out 2003 at 150 yielded a gain of 60% in 5 months time.
  • HUI break-out 2005 at 250 yielded a gain of 66% in 8 months time.
  • HUI currently struggling to overcome its resistance at 360
  • HUI break-out above 360 could result in HUI trading above 450 levels in 6 months time.
  • Gold on the verge of clocking all time monthly highs!
  • Gold clocking an all time monthly average high could spark an increase of interest.
  • In case the dollar catches some support (thereby pressuring the price of gold) it won't be for long since its fundamentals are pointing towards much lower levels. (See also my pieces GOLDDRIVERS 2007 - Fundamentals still pointing towards $2000 and GOLDDRIVERS 2007 - Gold & Inflation).

Now the recent set-back in the gold shares does provide us with a unique 'buy' opportunity. The HUI is trading at 335 and further downside risk is limited. Please take a peek at the updated Gold/HUI charts and see why:

relative HUI chart:

The r-HUI chart is gold divided by its own 200 dma.It has proven to be a reliable indicator in spotting major bottoms for the gold shares in the past 5 years.



What does this chart tell us:


The relative HUI chart tells us that the gold stocks are nowhere near 'SELL' territories as of yet. In contrary, each time the relative HUI dips below 1.0 the gold shares are entering the 'GOLD STOCKS BUY' zone.

GOLD/HUI Ratio chart:


The GOLD/HUI ratio chart divides Gold by the HUI. Whenever the Gold Stocks under perform Gold by great margin a 'BUY' opportunity surfaces. 

What does this chart tell us?


The Gold/HUI ratio chart tells us that the story remains the same as of June last year. The HUI continues to clock higher lows and Gold/HUI ratios exceeding the 2.0 mark can be considered as 'BUY' opportunities. We are right there right now again.

Relative Gold chart:

The r-gold chart is gold divided by its own 200 dma. It has proven to be a reliable indicator in spotting major bottoms in gold for the past 5 years.

What does this chart tell us?

This chart tells us that the trend for gold is up, not down! Furthermore it clearly demonstrates that major correction like the one we witnessed in May 2006 don't occur from current levels. In other words, gold is nowhere near strong sell territories!


  • Market intervention becomes evident
  • In order to support the dollar gold has to be capped
  • Gold attacks by commercial bullion banks are less successful as in previous years
  • Dollar at the verge of taking out its multi decade support to the downside
  • In case the dollar catches some support it won't be for long since its fundamentals are pointing towards much lower levels. (See also my pieces GOLDDRIVERS 2007 - Fundamentals still pointing towards $2000 and GOLDDRIVERS 2007 - Gold & Inflation).
  • Gold will be challenging its 2006 high ($730) later this year
  • Gold on the verge of clocking all time monthly highs!
  • Gold clocking an all time monthly average high could spark an increase of interest.
  • Gold shares will be catching fire once gold sets new highs
  • Gold shares still find themselves in a long consolidation phase
  • HUI's trading pattern of late shows strong similarities with 2003 and 2005 before break-out
  • HUI break-out 2003 at 150 yielded a gain of 60% in 5 months time.
  • HUI break-out 2005 at 250 yielded a gain of 66% in 8 months time.
  • HUI currently struggling to overcome its resistance at 360
  • HUI break-out above 360 could result in HUI trading above 450 levels in 6 months time. 

Now where to go from here?

Well, if you are a believer in gold's future then these are the time to increase your gold share positions since the gold shares are selling at fire sale prices due to the extreme bearish sentiment. In other words, downside risk is low. Higher gold prices in the years ahead will lift the entire gold share sector but the most exciting rewards will come from junior mining companies making new discoveries.

Here at the Gold Discovery Letter we track promising junior companies which we believe could be huge winners before this decade is out. If you would like to participate you could opt for a free trial subscription (one month)

For the more advanced/experienced investor we just introduced a new discovery mail service which delivers all discovery news within 15 minutes of initial press release to the end user's mailbox.

Investors who are more interested in general market behavior can opt for our new TGDL chart service by mail which delivers all charts being used here at by e-mail to the end user on a weekly base accompanied with links to related articles.

Feel free to comment at:

Best Regards,


Eric Hommelberg


The Gold Discovery Letter/
The Gold Drivers Report

-- Posted Wednesday, 8 August 2007 | Digg This Article


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