-- Posted Monday, 25 August 2008 | Digg This Article
| Source: GoldSeek.com
by Howard S. Katz
The month from mid-July to mid-August was a bad time for gold bugs. Support levels were broken, and bearish technical patterns completed in the HUI and XAU. But this is a time to keep perspective. My technical studies indicate that we are already past a bottom, and this shake-out will be looked back upon as a wonderful buying opportunity.
First, what is the central thing going on in the world of economics today? Prices are exploding to the upside. The big commodity move from Aug. ’07 to Mar. ’08 is now feeding through into consumer prices, and every nation in the world is facing shocking CPI readings. The reaction of virtually every other central bank has been to raise interest rates. Let us do a little calculation. The 12 month rise in the CPI here in the U.S. is 5.5%. But the yield on the 3-month Treasury bill is 1.7% (as of 8-22-08). That is a real short term interest rate of negative 3.8%.
The last time that real interest rates went negative on the short end was early this century. That was the cause of the housing bubble, which led to the sub-prime crisis. Indeed, negative real interest rates are almost unheard of in economic history. Negative real rates mean that they pay you to borrow and charge you to save. One would think that it was time for rates to rise. Indeed, the other central banks of the world are trying as hard as they can to keep their nominal short rates rising as rapidly as the price indexes. Only Ben Bernanke has not gotten the message.
It is not for want of trying. Three of his own FOMC members are screaming at him to raise rates. He faced a palace revolt just before the last FOMC meeting and barely put it down. If 3 FOMC members actually vote against a chairman, then it will be viewed in the press as a vote of no-confidence very much like a no-confidence vote in a European parliamentary system. Bernanke will be viewed as a weak chairman, and the other members of the FOMC will start playing politics in order to replace him.
So what has to happen economically as Bernanke holds the line, and the world tightens? Clearly this is the same as Bernanke easing while the rest of the world remains steady. And this will cause another major collapse in the dollar, as well as major advances in gold and crude oil.
There is a report that the Organization of Economic Cooperation and Development coordinated central bank buying of dollars. This was responsible for the dollar rally and the fall in commodities from mid-July to mid-August. This must be considered a possibility as governments hate gold and have been trying to knock its price down since Aug. 15, 1971. Gold bugs have learned that they must maintain defensive positions so that they can ride out such attacks confident in the knowledge that gold will go much higher in the long run.
Gold bugs have to keep in mind that the Federal Reserve is the counterfeiting department of government. The Government makes promises to (various special interest groups among) the people to give them something for nothing. Then it counterfeits the money to pay for the promises. But something for nothing is impossible. The counterfeited money causes prices to rise. Then the Government (or its apologists) blames certain scapegoats (such as the oil companies) for the increases in prices. Since the gold bugs are onto this scheme, the Government persecutes them every chance that it gets. Thus our financial strategies must expect periodic attacks on gold from time to time and be defensive enough to withstand them.
Some time ago I pioneered a new technical formation, which I call the MJ pattern. This occurs when a market moves sideways for some time and then declines sharply breaking all support. The sideways move is the M. It may be a rectangle or perhaps a double top. The sharp break is the J. A good example of an MJ is the “bear” market in the DJI in 1989-90.
The tricky thing about the MJ is that it is caused by a bullish larger cycle trend and a bearish smaller cycle trend. With the 1989-90 DJI, the grand cycle trend was bullish, and the major cycle trend was bearish. The bullish larger trend pushes up on the bearish smaller trend and turns most of it into a sideways movement. But the last part of the bearish smaller trend is too strong. It breaks through to the downside with a short, vicious move, and that is the bottom.
That is the danger of an MJ for technicians. Superficially it looks like a rectangle or a double top, etc., but by the time it gives its bearish signal it is too late. The decline is over.
Above we see an MJ pattern in gold. The larger, bullish trend is the major trend bull market. The smaller, bearish trend is the intermediate decline (which happened in many commodities) that started in March. The M is the period from mid-March to mid-July. The J is the period from mid-July to mid-August.
An MJ pattern cannot be predicted in advance. But the conventional technician will be faked out twice. He will fail to sell at the absolute top (or near it). But then he takes the bait and sells on the break down, and this turns out to be very close to the bottom.
In addition to the pattern above, we have other indications of an MJ, such as the COT figures on gold, crude oil and the dollar. These are discussed in my newsletter, the One-handed Economist, along with recommendations on specific gold stocks, discussions on bonds and (conventional) stocks and other aspects of the economy.
The period 2001 to (approximately) 2020 is going to be a repeat of the 1970s, writ large. Commodities will go (are going) up. Bonds and stocks will go down. People who take the establishment’s advice will lose. Ever since the New Deal remade the Government into an institution for robbing from the poor and giving to the rich (e.g., Bear Stearns, Fannie Mae, etc.), there have been a class of intellectuals who propagandize the unthinking majority. In order for the establishment to profit, the majority must lose. Do not be a part of this unthinking group. Educate yourself, and protect your wealth. Visit my web site, www.thegoldbug.net. There you will find (no charge) social commentary with an economic orientation designed to help educate you. If you want to get more specific, I recommend a subscription to my newsletter, The One-handed Economist” ($300/year, available via the website). This offers trading strategies designed to maximize one’s wealth and to take advantage of the stupidity of the establishment.
Remember, in 1970 the establishment of that day laughed at the gold bugs. By 1980 most of the top mutual funds, with the best 10 year records, were gold funds. So the establishment economists agreed, “If we just pretend that the gold bugs never existed, then the stupid public will never know the difference.” To the shame of the American electorate, this strategy worked. But you do not have to be a part of this ignorant public. When the gold bugs become the majority, then the establishment will fall, and America will once again be a country which safeguards the property rights of its citizens.
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-- Posted Monday, 25 August 2008 | Digg This Article | Source: GoldSeek.com
