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Gird Your Loins

 -- Published: Thursday, 12 March 2015 | Print  | Disqus 

By Craig Hemke

Frankly, I have no idea what that means. I suppose I could have typed "batten down the hatches", instead. Either way, now's the time to gird/batten. I fear that your faith in gold and silver is about to severely shaken.

Why would I say that?

As we've documented for months (and before everyone else in the blogosphere, I might add), "sell gold" and "sell yen" have become inexorably linked in the HFT algo-dominated world. What began as a slight correlation 10 years ago morphed into a closer relationship after 2008. It then evolved into an almost straight 1:1 correlation in 2013. See this chart below of the yen in candlesticks and gold in bars:

And here's why you need to gird your loins and batten down your hatches. Check this six-month chart of the same yen-gold plot:

I know that chart is messy and noisy but please be patient with me. Here's what you need to notice:

  • Through early November of last year, the 1:1 correlation.
  • This correlation suddenly broke in early November. Why? Because the physical market nearly "broke" under the stress of trying to provide physical metal at the algo-derived price.
  • How do we know this? Because beginning on November 5, London GOFO rates plummeted to historically negative levels.
  • During the time GOFO was steeply negative, the yen-gold correlation stopped. See the crossing red and black arrows.
  • However, within days of GOFO returning to positive...demonstrating an easing of the physical stress...the correlation resumed. See the blue arrows.
  • Though a significant "gap" had opened between gold and yen by mid-January, that gap has now been closed.
  • And the yen-gold correlation is once again in place, courtesy of the HFT algos. See below for a chart of just the past 5 days:

And why is this important and, potentially, quite devastating for paper gold? Because, just as the euro has completely done a swan dive over the past week after breaking support at 1.110.....

....the yen looks like it's about to do the shown in the inverse as USDJPY:

Shown below as JPYUSD:

IF THE YEN BREAKS SUPPORT AT THE LOWS OF THREE MONTHS AGO AND BEGINS TO COLLAPSE SIMILAR TO THE EURO, IT IS GOING TO TAKE PAPER GOLD DOWN WITH IT. The only thing that can prevent/halt this would be the re-emergence of a physical supply crisis in London and there are two problems with that:

  1. How will we be able to tell if this occurs? The freaking LBMA conveniently stopped publishing GOFO six weeks ago.
  2. The Banks have had four months to procure new supply. The overnight news about BoA and CS "negotiating" with Venezuela to steal their gold is just one example of their efforts:

So, anyway, all I can say is that you need to prepare to have your faith shaken. Personally, all of this matters little. I know why I own physical gold and silver and I'm confident that the events for which I'm preparing are still, most certainly, coming. You, however, may not share this faith and confidence. You may read the shrill writings of the AGAs and the Apologists and find yourself falling back into their paperbug traps. I hope not and I promise will remain here as a consistent source of reassurance.

Recall that back on Friday I urged you to consider some hedging...maybe buy some puts or other form of "insurance" against short-term paper valuation declines. If the coming volatility concerns or even frightens you, please give these options your full consideration. If, instead, you're like me and you remain confident in the long-term rationale for owning precious metal, just get ready for another "sale" by raising cash and crafting an action plan for further accumulation.

These are incredible times. Nothing about this is "normal" or sustaining and no one ever said that The End of The Great Keynesian Experiment would be an orderly, rational process. Your role in this is to remain clear-headed and focused, protecting your family while alerting others to what lays ahead. Keep the faith, remain situationally aware and prepare accordingly.

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 -- Published: Thursday, 12 March 2015 | E-Mail  | Print  | Source:

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