-- Posted Monday, 11 June 2007 | Digg This Article

Because my email and voicemail were overloaded the last couple of days regarding gold, and the fact that I will basically be away from the office on business and vacation until July 10th, I thought it best to pen my latest assessment on gold.

Since returning to the bullish side of gold in the spring of 2003, I have managed to stay on the right side of any significant correction and rally. I bring this to your attention not to stroke my ego but to note that what has worked for four years has been solid fundamental evaluation with some technical analysis thrown in. With bearishness towards gold now solidly in the limelight, I would be the first to join the crowd if my work suggested it, but it hasn’t. In fact, most bullish fundamentals are better now than any other period since 2003. Yes, there are some technical concerns, especially for the short to intermediate time frame, but there is nothing even close to suggesting the secular gold bull market has or is coming to an end.

Rather than write some long-winded essay, I’ll try to cut to the chase. But first, allow me to address some indirect issues related to all this:

  I recently experienced first-hand how many in the media have a negative tilt against gold. The so-called journalist, who twisted an interview with me to favor his negative view towards gold, did an interview this PAST week with one of my best friends in the business, who I’ve told readers is the absolute best technical analyst I’ve ever known. I’m speaking about Frank Barbera. Long-time readers know I’ve gone so far as to reprint some of Frank’s newsletters and have urged readers to subscribe to his publication. I almost never do this, but Frank’s work is a must read, IMHO. Frank has turned quite bearish on gold and even was kind enough to call me to explain why. I paid close attention and while I see the cup half full versus his half empty, I think Frank’s argument is very good and has as much chance of “panning out” as mine. However, Frank’s assessment is mostly from a technical prospective and I use technical analysis only as an add-on versus as the main focus. And, as I noted at the outset, fundamentals for gold haven’t been better. I’m also willing to get caught in a correction this time around versus a year ago because I’m more bullish longer term than I was back then. I also think there are some fundamental factors that technical analysis can’t comprehend, and in the long run gold is mostly a fundamental play.

  Apparently a critic or two of mine have charged that I tout gold because I work for gold companies and I have no choice but to “pump”. While I always go out of my way to make any conflicts of interest and/or bias known, I don’t believe one’s integrity is compromised by compensation unless he or she allows it to be. For every one company by whom I am engaged, I turn down at least 10. If compensation was my main goal, I would have had 150 companies — not 15 — and retired on the pay alone by now. And while it may come as a surprise to my critics, I actually care deeply about my readers. I’ve realized a long time ago that you are my life blood. Spill your blood and there’s no readership- period. No readership, no following. No following, no clients.

If I was always bullish just to plug my companies, why would I have turned bearish twice already on gold since 2003, and adamantly been outspoken of late on being bearish towards base metals? Trust me, if it was just a pump, I would love everything. I’ve watched so-called independent commentators never ever change their bullish stance. Like it or not, I find my willingness to change despite being “compensated” a testament to my internal independence to never let compensation affect judgment. I’ve been canned by companies for this but so be it. I’ve also terminated my relationship with companies because of my own concerns and no amount of money has or will prevent such actions in the future. I’m proud of my work and go as far as one can to maintain honesty and integrity. I comment on this solely so my readers can know my comments on metals and markets are from my heart, not my bank account.

  An extremely small but vocal critic or two are apparently troubled by my faith. While I keep much of it away from Grandich Publications, I’m never going to deny my personal relationship with my Lord and Savior Jesus Christ. But never once have I used my newsletter to “tout” my faith nor have I suggested in any way for readers to follow my faith. Unfortunately, some lost souls like to use my faith in their criticism. I can live with that but again, I ask, no make that beg readers, friends, and business associates to stop “defending” me against these “Inter-nuts”. All it does is feed their flames and cause us to get more emails and voicemails. I fully understand and appreciate your desire to defend me, but look who you’re battling—not once have any of these “voices” ever made their charges to me directly or even in a public forum. And far more important to me, God knows the facts and in the end, that’s all that’s going to matter. So please, make this the last time I have to write about this. Don’t waste another second of precious life on these poor lost souls.

Okay, let’s look at gold.

First, let’s try to put gold’s price movement in context. At this time last year, gold was substantially below $600. It had bottomed around $540 in early June. Since then, gold has made a series of higher lows ($575 in October, $600 in January and $635 at the start of March), while the $700 area has been formidable resistance (and one of Frank Barbera’s chief technical concerns). As I noted from the outset, two people can see the cup differently. In my book, this is an ascending triangle formation, albeit if we close below $635 the bullish implications of the triangle are negated.

http://stockcharts.com/school doku.php?id=chart_school:chart_analysis:chart_patterns:ascending_triangle

I think one of the reasons many feel gold has not performed well is the fact that mining and exploration shares haven’t and in the end, that’s what most retail investors are most concerned about. So when the talk that gold may be heading a lot lower becomes paramount, the brains in these folks say, “If my stocks didn’t do so well with gold higher, they’re going to get creamed if gold goes lower.” I’ve seen and heard this a lot toward week’s end despite the fact that the XAU index was up Friday in the face of a $14 gold decline (one day does not a bottom make, but it’s worth noting).

So, while in my work we wouldn’t have any serious technical damage until $635 is taken out by at least 2% on a closing basis, it’s quite understandable how the repeated failures around $700 can be of serious concern.

It’s not a pretty picture when we look closely at the recent failures around $700, and it’s quite understandable why a great technician like Frank Barbera could be concerned. The pattern here does indeed suggest a more profound retreat is possible. The minimum we should expect after a bounce this upcoming week (the fast stochastic reading at the bottom of the chart indicates we’re quite oversold for the very near term) is base-building above the $635 area. Frank is absolutely right; gold is on the defensive for now and can still break down. A close below $635 would suggest a minimum $600 test with ultimate support in the $575 area.

But here lies the heart of my bullish argument: whether the ascending triangle formation holds or fails, I believe the bullish fundamentals overwhelm any technical condition, providing one’s time horizon is at least into 2008 (if shorter than that, then pay more attention to Frank and others). I believe when you carefully review them, you should conclude that the secular gold bull market is in better shape now than at any other time.

It’s been my firm conviction that the following factors make up the lion’s share of the bullish argument:

  The inverse relationship gold has had to the U.S. dollar

  Physical and investment demand

  Geopolitical

  Manipulation

Inverse Relationship –

No single factor has a more winning percentage than the inverse relationship of gold to the U.S. Dollar. About 85% of the time, and certainly over a period of years, they move in opposite directions. So the first question you must ask yourself is, in what direction do you think the U.S. Dollar is heading? My answer has been constant now for quite some time – the only party that doesn’t know the U.S. Dollar is dead is the U.S. Dollar.

As time goes by, we learn that more and more central banks and governments around the world are diversifying themselves away from the U.S. Dollar. A currency is only as good as the country behind it. Ask yourself, do you think the U.S. is going to get better, stay the same or get worse over the foreseeable future? If the answer is better, stop reading this commentary now and immediately turn on CNBC-TV. If you think it’s getting worse, read on.

I’ve coined the phrase “Americans have been robbing Peter to pay Paul but Peter is broke.” When the guy who’s keeping the nation’s books goes on national TV to say we’re in deep doo doo, we should listen http://www.grandich.com/video/60min.162mb.wvx  Ask any Washington insider and they’ll tell you that Congress has grinded to a halt. Little, if any, worthwhile legislation is expected to be passed between now and the presidential election. Some potentially ugly legislation like currency intervention with the Chinese and Japanese (American politicians have a habit of cutting off their nose to spite their face) is likely. Socially, economically, politically and even spiritually, America has never been in worse shape.

Now the recent argument is that interest rates are rising and that’s good for the U.S. Dollar. It would be if they were just rising here, but they aren’t. And unlike in Europe, for instance, where the main reason for the rise is strong economic growth, the U.S. is possibly entering the worst of all worlds last seen in the 70s-stagflation.

There’s absolutely nothing but hot air to support the argument that the U.S. Dollar is going much higher. Not only has it been on a continuous long-term slide from 120 basis the U.S. Dollar index, but there’s nothing to suggest on the weekly chart that it’s doing anything more than correcting a very oversold condition. The testing and eventual breaking below the 80 level on the U.S. Dollar Index is, in my mind, not a question of if, but when? Believing this and knowing how well the inverse relationship has worked in the past, the single most bullish factor for gold remains staunchly bullish.

Supply vs. Demand –

Jewelry demand has declined to about 70% of the market but remains a key fundamental supply versus demand factor. With expectations of a softer economy worldwide and tough times in America forthcoming, we can expect to see a drop off in jewelry demand. However, investment demand, particularly from Asia, can pick up a good part of the slack. Combine that with continuing tough times in the mining industry for a variety of reasons and gold supply is not likely to overpower demand any time soon. It’s important to note that gold managed to absorb very aggressive Central Bank sales this year and one should ask where the price would be if this large amount of gold wasn’t sold?

Geopolitical –

While people like Frank have a certain “technical” pattern that makes them feel good about their assessment, I maintain my strong affection for gold because of what I believe is going to be the driving force going forward – acute increase in geopolitical concerns worldwide. I can’t emphasize enough how much of this makes up my bullish argument.

I think it’s fair to say that Uncle Sam is no longer the world’s favorite Uncle. In fact, I need only one hand to count the number of countries that still welcome America with open arms. This comes at a time when strife around the world has become acute and America and the world-at-large can no longer feel insulated.

What I’m about to discuss is nothing personal but simply what I think is going to move to the forefront of worldwide financial markets, including gold. I don’t judge whether it’s right or wrong but do believe it will become a front and center factor, especially for gold. Since Biblical times, the Middle East has been a flash point but never has it come to the point where one can simply dismiss it and say it’s their problem, not mine.

Americans, in general, go about life now as if 911 was a fluke. While the latest news of plots to attack Fort Dix (not far from my home) and JFK Airport made headlines, the vast majority of Americans believe these plots are not likely to come to fruition, as the authorities will always catch the perpetrators beforehand. Before you accept this false sense of security, let me tell you that America’s “homeland” defense is no better than the best in the world – Israel – and that country can’t fend off all attacks. It’s only a question of when, not if, it happens here and Americans will witness a profound change of life.

The breeding ground for terrorism against America and the western world is the Middle East. It’s true that the vast majority of people there don’t want to kill westerners, but their own political immune system against terrorism is collapsing before our eyes. The Iraqi war has lit a fire under jihadism. The war has created a new generation of extremist jihadis who are sprouting like poisonous mushrooms in the darkness engulfing the Middle East. It may not be politically correct to speak about this, but I truly believe it’s going to be front page news far more times than most Americans can imagine, and it will be a driving force in the gold market for years to come.

Before the war in Iraq, the country itself was jihadi-free. Now it, like Afghanistan, is a magnet for cadres skilled in terror. As bad as that is, virulent jihadism is now raising its head on Arab soil almost everywhere. It’s spreading into Gaza, Northern Lebanon, into Iraqi Kurdistan and southeastern Turkey, into Jordan, Yemen and across North Africa.

For America, the Taliban, Iran, Hezbollah and Hamas may not be enemies the U.S. need to be very worried about being attacked by, but Al-Qaida is fast becoming America’s most ardent enemy ever. Al-Qaida is literally franchising itself in mushrooming conflicts not only in Iraq, Lebanon and throughout the Middle East, but is now inspiring home grown supporters and/or sympathizers here in the U.S. I urge my readers to read the book The Day of Islam: The Annihilation of America and the Western World, by investigative reporter and former FBI consultant Paul Williams.

While I haven’t even touched on the black hole called Iraq, nor the next act to follow- Iran, I believe the geopolitical frontline is growing much faster than the average American has any notion of. In the last couple of weeks:

  Palestinian President Mahmoud Abbas has warned that his people are on the verge of civil war. He went so far as to suggest the infighting is worse than living under Israeli military rule.

  A growing political crisis in Pakistan is engulfing one of the few so-called allies the U.S has in that area of the world.

  Perhaps the most profound news on the geopolitical front of late is Russia’s triggering of a potential new arms race thanks to the planned deployment of a U.S. missile defense installation and other forces in Europe.

Manipulation –

Over the past few years, yours truly has come to be an overall believer of the argument of GATA http://www.gata.org. Up until a few weeks ago, I thought my good friend Bill Murphy gave far too much credence to declines in the daily gold price to what has been called the “gold cartel.” But given …

1.  the trading patterns, especially those on either side of 11AM EST on the COMEX;

2.  the fact that open interest was rising sharply during declines (an unusual pattern, as it usually falls as longs close out their positions during the decline);

3.  and sharply increased central bank sales that the market managed to absorb despite the unusual trading patterns;

… and well, gone are any lingering doubts I had of someone or some group manipulating gold more than occasionally.

But as right as Bill and GATA appear, the inability to stymie such actions largely remains despite GATA’s valiant effort (if you agree, get off your butt and financially support GATA. It has managed to bring this argument to the forefront on mostly fumes. Imagine what it could do if it had some real money to spend). Someone asked me once how will we know if the manipulation was real? I told them, when we read Bill Murphy and Chris Powell were found dead. I almost think they both would die to finally expose this once and for all. The problem is that almost no one outside the metals industry (and even few within it) cares so GATA receives minimum support. I think part of the reason why few support GATA is because to admit they are right would thereby suggest that all the technical analysis (and much of the daily fundamental analogy given for gold’s ups and downs) would be worthless. I think for most, including myself for the longest time, would sooner die (and some will).

On the pretense that it does, in fact, take place, one has to accept that these folks are now positioned to inflict more pain as gold is clearly on the defensive technically until such time that it can close above $675.

Bottomline –

The combination of some technical damage, seasonal weakness until September, and the potential of some group or groups who take advantage of markets through trading strategies most can’t or won’t implement, can cause gold to go lower before it eventually gets above $700 and challenges its nominal high around $875. Yours truly is not stepping aside at this time as I did a year or so ago because the fundamental argument appears to be the best that it’s been for gold in quite some time. If you would like to err on the side of caution, use $635 or so as a mental stop and/or wait until we close above $675.

Please note –

I will be speaking at the World Gold Show http://www.goldshow.ca/ch_june2007.html It appears Damien Reynolds of Longview Capital will be unavailable to host a talk with yours truly, but Dean Nawata of Longview Capital will be at my 3:00PM workshop to answer any questions on LV.

I will be on vacation from June 23rd to July 10th.

I will be on BNN’s “Market Call” July 9th from 12:30PM EST to 1:30PM EST

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-- Posted Monday, 11 June 2007 | Digg This Article

Peter Grandich is the Managing Member of Grandich Publications, LLC (www.grandich.com).
The company publishes The Grandich Letter (first published in 1984) which covers the metals and mining industry, follows world markets and economies, and covers the Canadian markets from an American prospective.

Grandich also provides a variety of corporate finance and development services to publicly-held companies.

Peter Grandich is also the Managing Member of Trinity Financial, Sports & Entertainment Management Company, LLC (www.trinityfsem.com), a Registered Investment Advisor in the State of New Jersey. Trinity provides investment advisory services to individuals, small to mid-size businesses, professional athletes and entertainers.

Peter is a long-standing member of The New York Society of Security Analysts and The Society of Quantitative Analysts.

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