07/07/2010 by Philinje.

As a follow-up to my post yesterday, here is a great article on the recent history of Iran. Don’t be too shocked. A good friend in the UK told me some of the same stuff and he spent 30 years in the British Army.

http://www.atimes.com/atimes/Middle_East/LG01Ak02.html

There are a couple of support levels in gold related to 38.2% retracements, depending on how you measure them. One is at 1193 or so and the other is at 1182. We got down to 1185 today. Could this be it?

Here is someone who gives some technical reasons why this might be the bottom:

http://thetsitrader.blogspot.com/2010/07/sp-500-gld-and-gdx-down-more-or-now-up.html

Finally, I found a fairly balanced article on China that is not long and covers a lot of reasonable ground. The debate about China is endless, and considering a lot of hiccups in equities right now are hinged on perceptions of China, this might be worth a read:

http://www.streetauthority.com/node/456310

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30/05/2010 by Philinje.

Check out the case of the shrinking US money supply:

http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html

Shadowstats is an admirable site that tracks such things in an attempt to give an honest appraisal of the economy:

http://www.shadowstats.com/

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30/05/2010 by Philinje.

Perhaps unsurprisingly, gold promptly made it back to $1210 early this past week and basically just stayed there. The pound showed some strength as the UK government got pieced together and the Euro seems to be stabilizing, despite the Fitch downgrade of Spain’s credit rating. Equities seem weak but exhausted, meaning there may be a short-term bounce into June.

But various analysts devoted to cycle theory are calling for severe equity declines in late June and then August. My feeling is if gold doesn’t promptly head for its projected $1350-1400 top, it might be safer to step to the sidelines after mid-June.

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11/05/2010 by Philinje.

Opinions on the equity markets at present diverge wildly. Some people say the recovery is back on track after a possible further 5% drop and others say this is the beginning of a massive decline.

What seems likely is a short rally then a further drop. The levels to watch for are 11,000 or less in the Dow Jones and 1190 or less in the S&P. If prices don’t make it past those levels and then cross below 10,300 and 1100, last Friday’s lows, another decline is underway.

The ending levels of another decline could be below 9870 and 1066, the lows of last Thursday.

In terms of the dollar and Euro, there may be another move up to above 86 on the dollar index and to 1.25 or less for EUR/USD. The Euro’s low in Oct 08 was 1.23.

One commentator has pointed out that Oct 13 08, the day after a major crash and when bailout funds were forced on major banks, is very similar to last yesterday, May 10 10, in one very important respect: NYSE market breadth in terms Advance/Decline numbers spiked to record highs, meaning there was a huge rebound. But that lasted all of 2 days last time, and ultimately led to the Mar 09 low. This time, it’s Euroland getting a trillion-dollar bailout and will things be different?

The dynamics seem similar to Oct 08. Governments moved too slowly and then threw enormous bailouts at the problem just as the markets were coming undone. That didn’t prevent further declines. Now we’ve had a recovery that achieved the 61.8% retracement of the decline (11,246 on the Dow), which is a natural level to achieve, and the same bad movie is playing out.

You need to form your own opinion but personally, I’m looking for a top in the next few days. Currencies are already pretty tired today, so it’s possible we won’t even get above yesterday’s highs. But if we do, there is plenty of resistance overhead.

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08/05/2010 by Philinje.

It happened. Gold closed at a new weekly high, its highest ever. With a relatively neutral NFP release and equity markets figuring out the mood is quickly getting bearish, gold bumped into $1210 again and closed at $1207.

Considering the lengthy consolidation of the past 4+ months and the relatively gradual climb to above $1200, it looks likely that gold will see some more upside. The near-term projection of $1350-ish seems healthier than ever. Of course that is no guarantee - there are no guarantees in the markets.

Interestingly, silver caught up in a big way on Friday. Some folks must have decided its monetary aspects were a bigger factor than its commodity nature, which had been holding silver back earlier in the week. As the problems in Euroland seem to sink into the market’s psyche, monetary safe havens are the name of the game.

Speaking of which, gold in Euros was turning parabolic this past week. It eased off a bit on Friday as the Euro stabilized, but basically Euro gold was looking like a hockey stick curve getting to a peak. If the Euro bounces, a good buying opportunity might present itself. And yes, the performance of gold in Euros is a nice supportive indicator - precursor, if you will - of what could happen to gold in dollars.

Looking at the ugly situation in equities, it may behoove us to discuss stops. An absolutely essential element of any speculative trading includes stops, and when it comes to anything in equities these days, stops are now essential. This is NOT a buy-and-hold market. Anyone still with the mindset that parking a bunch of retirement savings in GE or Intel with no stops and a timeframe of 10 years is playing with fire. Many of us got burned in late 08, early 09 - don’t let that happen again.

Absolutely the worst mentality to have is the conviction that the market will come back to eliminate losses and then you can safely get out. That is the highest risk strategy possible in the current scenario, and a bad one in general. Do not get suckered by your own psychology.

As prices move up, move your stops up. That’s called a trailing stop. When the price plunges through your stop, you are out, end of story. In terms of where to place stops exactly, that involves some familiarity with the particular stock and its volatility, but as a general rule of thumb, normal equities should have a 25% stop (25% below the current price or just beneath a recent support level), and highly volatile instruments like gold could use a wider margin of safety. Some junior gold stocks, for example, might require a 50% stop. But think about it, that means you are willing to lose 50% of the value. Are you, really?

Another rule of thumb is to move the stop above your entry as soon as possible, meaning after the price has moved about 25% above your entry price. That way you will not lose money. Every day that your stop remains below your entry, you are at risk of losing money. Without any stop, you could lose all of it.

So the trap many people fall into is getting into a bad loss, then holding until the position comes back to breakeven. That is the worst possible way to trade anything. Instead, a stop should have triggered a small loss and then if it makes sense, a new lower entry could be initiated.

But assuming you have one of these bad losses still limping along, what do you do now? Step 1: Put a stop underneath the current price. Step 2: Move the stop up as the price moves up. Ok, maybe that particular stock has a support level 40% below the current price, such as an all-time low. Then set the stop just under that. You have to know enough about the stock to be intelligent about where to place the stop. If you dont know enough, why are you in that stock at all? Get rid of it, ferchrissakes!

The point is, your entry is not that relevant after you’ve initiated a position. It’s only relevant to your ego. The market will do what the market will do. A trailing stop will get you out automatically, with no emotion or ego attached.

Having said all that, using stops with gold or silver is extremely difficult. The best approach is to get the best possible entry and keep a stop well below a recent support level until the price moves up significantly to a new area. But the price swings can be large so stops may get triggered. As a rule of thumb, the less confdent you are about a position or entry level, or the bigger the gain gets, the closer the stop should be. That’s the inverse of what you would think intuitively.

Think about it. Let’s say a month ago you bought some GLD at just under $1100, knowing that was a major support level. Then a stop at $1040 or so might make sense, because that would be a key area that indicated a major breakdown was occurring. Your loss would be large, but not as large as it could be. Then, when the price broke through $1160, a major resistance area, you move the stop up to $1090. I know that breaks the rule about getting above your entry ASAP, but with that excellent entry and the behavior of gold, it makes sense.

On the other hand, if you initiated a position at $1130, and felt a bit queasy about it, like you were just putting your toe in the water to see if a crocodile bit it off, then keep the stop pretty close, like at $1110. That way, a major swing down would take you out with a small loss and you could get back in at a lower and better level. An entry you are not confident about usually means the price has to move rapidly in the right direction for you to get to a place of safety, and that may or may not happen. Also, as price moves in your direction it gets more and more likely to turn around, so sneaking stops up closer to the price as it gets toppy is a good way to preserve profit.

Please note that the level of stop relative to the entry is what determines the size of your position. The potential loss has to be calculated at least roughly in advance so you don’t use too much money on any single position. That’s common sense, but it’s amazing how many people don’t follow this basic technique of money management.

Ironically, the better entry with the wider stop will require a smaller position. Shouldn’t you bet more money as the entry improves? Yes, and no. Getting in at a major support level is good, but speculative, meaning the price could still move to an even lower support level or just bounce around at this level. Once price moves in the right direction, it could make sense to add more, albeit at a worse level, but it’s less speculative. Your tighter stop will compensate for a larger position.

There are variations of this approach, and to each his own. But the principles are always the same.

I wish some of the books I read about trading had given me what I just wrote here.

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27/04/2010 by Philinje.

This article says it all, very succintly and with simple, clear charts:

http://goldscents.blogspot.com/2010/04/on-brink-of-asset-explosion-ii.html

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17/05/2009 by Philinje.

Here is an excellent aummary of the reasons for gold will do in a deflationary environment:

http://www.gold-eagle.com/editorials_08/brochert051409.html

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15/05/2009 by Philinje.

Intuitively, it seems that all the money printing in the US will have an inflationary effect. At a high level, more dollars means lower dollar value and higher prices of assets. The last article I posted explains how this can still result in a deflationary bias, especially as regards government bonds. And in short, money moving out of bonds will to some extent move into gold, which benefits from lower dollar value as as a physical commodity as well as its perceived value as an alternative to money.

However, there are fierce arguments at present about whether we are facing deflation or inflation, mainly because it seems all the new money is not flowing into the economy. The worry is that we have entered a deflationary spiral, much like the Great Depression, and all the money printing is having no effect on this Kondatrieff Winter, in which the economy just gets sucked into a black hole.

I have read endless articles detailing both sides of the argument and providing precise definitions of inflation vs deflation. These are loaded terms, and commonly abused and misused. Inflation of money results in deflated dollars and higher prices. Often what is called inflation is really the end result, namely higher prices. De-leveraging, as we saw last October, results in spikes down of asset prices that can resemble price deflation, and of course house prices are dropping.

Inflation itself, as opposed to price inflation, is an increase in the money supply. This has been the general trend since early in the 20th century as fractional reserve lending mushroomed. Fractional reserve lending is the ponzi scheme that is the basis of modern economies - some capital is used as the basis for loans that far exceed the value of that capital. There is roughly 10 to 1 leverage, so at any time a bank could have on hand 1/10 the capital it lends out. And that is just the first step of the pyramid.

Today, banks are hoarding new capital in an unprecedented way. So this creates a lot of questions about what will really happen in the economy.

If you want to understand this in depth, I highly recommend this article:

http://www.gold-eagle.com/editorials_08/pollaro051309.html

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12/05/2009 by Philinje.

This article is the single best description I have found of the current situation, which is not just a crisis but an ideology:

http://www.gold-eagle.com/editorials_08/kutyn051109.html

Even if your eyes glaze over when you hear about debates regarding Keynes vs. Mises, this boils it all down to the basics, and answers the question of how gold will do in the case of deflation. Here it is reproduced in its entirety:

Keynes vs. Ludwig von Mises and the Death of Capitalism

John Kutyn

Recently, massive amounts of fiscal and monetary stimulus have been injected into the global economy by governments and their central banks incurring debt. With U.S., Asian, and British economies and financial markets showing some signs of stabilising, there are those that claim that we are witnessing a clear empirical demonstration that Keynesian demand management can stabilise the market economy and protect capitalism from its own excesses.

Keynesian thought claims that financial imbalances and an economic contraction that results from excess debt can be corrected by going even deeper into debt, with central banks now predicting the end of the current recession by the end of 2009.

Countering this view is the Austrian school of economic thought that holds that the problem of excess debt cannot be cured by additional borrowing, but requires a major recession that liquidates unsound investments. Given the extraordinary levels of debt in the global economy, Keynesians correctly point out that such an approach would not only devastate public finances, but that the resulting job losses, bankruptcies, foreclosures, and general loss of living standards would be politically and socially unacceptable.

The key question is whether Keynesian demand management will work, because if it does not, an Austrian style collapse will occur, only from a much higher level of debt with government finances destroyed by the Keynesian approach.

In the U.S., interest rates are at record lows, government loans and guarantees are now estimated at almost $13 trillion to deal with the recession, the central bank debt has more than doubled to $2 trillion, and it is estimated that the government fiscal deficit will be about 12% of GDP. It is only reasonable to expect that such extraordinary measures should have some positive effect.

Keynesians claim the ability to see “green shoots”, indicating that their way will save world capitalism. These “green shoots” are driven by ideology and not reality, and can only be seen by Keynesians. Housing starts, having collapsed from 1,823,000 to 358,000 is a “green shoot” because they have not collapsed to zero. A slowing in job losses, even as hours worked collapses at a 9% rate is another “green shoot”. Keynesians have even examined the nations banks to find even more “green shoots”. In spite of rising loan delinquencies, foreclosures, and falling asset values, Keynesians see the creative ability of banks to post profits by creative accounting as a sure sign that banks can use the same creative ability to withstand even greater loan delinquencies and foreclosures.

Housing re-sales consist 50% of foreclosed homes. With hundreds of thousands of foreclosures held off the resale market, with foreclosure filings continuing to reach record levels, and more than 20% of homeowners owing more on their house than the market value, foreclosures and falling house prices will continue to dominate the housing market. Yet even here, Keynesians have found another “green shoot”. One is truly amassed at the genius of Keynesians and their ability to find “green shoots”.

Keynesians have not only deluded themselves by a failed and illogical economic theory, but by leveraging the national economy to this theory, they are on the verge of destroying the capitalist economic system.

The Chinese are beginning to question the wisdom of the Keynesians. Perhaps they are now questioning the wisdom of American consumers going into debt to purchase Chinese goods so that the Chinese can purchase U.S. debt. The Chinese have expressed concern about the future value of this debt. They are calling for the end of the U.S. dollar as a reserve currency, and have recently established currency swaps with Argentina, South Korea, Hong Kong, Malaysia, Indonesia, and Belarus. The Chinese are adding gold to their official reserves, and pleading with the IMF to sell all their gold in order to increase gold reserves further.

The Keynesian’s rely on a functioning bond market to support their economic theory. There must always be someone willing to purchase government debt, no matter how much is required, and no matter how great the government deficit. Record low interest rates and $13 trillion in loans and guarantees have only resulted in a small slowdown in the rate of economic collapse. Take away the ability of the government to go further into debt, or raise current interest costs, and the economic collapse will accelerate dramatically.

The American economy cannot tolerate a stagnant or contracting state for very long. The economy does not generate sufficient cash flow to meet debt obligations, requiring strong economic growth in order to avoid a collapse of the bond markets. Should the economy not respond to the present stimulus, even the federal government may not be able to borrow. A collapse of the bond markets not only takes away the ability of the government to stabilise the banks and the economy, but the resulting high interest rates will bring America down both economically and politically.

Perhaps the Chinese sense this. In their quest for world domination, economic warfare may be cheaper and more effective than a military conflict. A fire-sale of their U.S. debt holdings at a time the U.S. needs to raise $3 trillion in new loans could substantially raise interest rates, and call into question who has the financial capacity and desire to invest $4 to $5 trillion in U.S. government debt.

To avoid an economic collapse, and prevent outside forces from taking advantage of it’s present vulnerability, America needs to fundamentally alter its financial system. This involves a controlled collapse of the commercial banks and the Federal Reserve Board. The creation of the means of exchange must be taken away from the commercial banks and Federal Reserve, and given to the Treasury. Money would be in the form of Treasury notes (T.N.). The first step would be to simply create sufficient T.N. to purchase all bank assets.

Bank deposit holders, no longer being able to use bank deposits as currency, would close their accounts in return for the T.N. the banks acquired in exchange for their loan assets. These T.N. would be held at banks established by the Treasury department with transactions occurring electronically. The Treasury now owns all debt obligations, presenting it with a number of policy options. One policy would then be to cancel all debt, and in a simple step solve the present debt crisis. Alternatively, all interest payments could be cancelled, with principle payments used to fund government operations, eliminating the need for government taxation. The commercial banks, no longer having any assets or liabilities cease to exist.

Having solved the debt problem and establishing a stable monetary base, America will be able to achieve economic prosperity unparallel in human history. This of course is too much for the Keynesians. They would rather go deeper into debt and continue their search for “green-shoots”.

Keynesians suffer from a severe case of self-deception. Not only do they not understand economic analysis, but also they do not have a clue about how the banking system really operates. Keynesians are firmly in control of the American government. Instead of altering the structure of the financial system and bringing about a controlled collapse of the commercial banks, they are providing unlimited public funds in a useless attempt to bail out the pyramid scheme known as commercial banking.

The case for owning gold is not driven by the fear of future inflation. As a general rule, debt repayments are deflationary in nature, while debt creation is inflationary. However, much of the recent debt created by the U.S. government has not been used to increase economic activity, but has been injected into the financial system. Public debt has been used to finance the losses of the financial system. This still leaves the economy in a deflationary bias, due to existing debt levels.

On one level, a deflationary economy is positive for the bond market, as it increases real interest returns. However, a deflationary economy results in falling cash flows and asset values, leading to debt defaults and write-offs. It is the collapse of the bond markets and commercial banks that will drive the price of gold. The Chinese appear to sense this. Keynesians will drive the American economy into the ground. The interesting question is whether the Chinese will take advantage of both Americas vulnerability and stupidity and act so as to accelerate the financial and economic collapse.

John Kutyn
May 11, 2009

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12/02/2009 by Philinje.

Everything you wanted to know but were afraid to ask:

http://www.galmarley.com/framesets/fs_keep_it_safe_faqs.htm

This information is from the founder of BullionVault. I must say I find BV to be more and more impressive, the more I learn about gold and how they structured their business.

BullionVault is a highly superior option to gold ETFs, which are themselves much better than gold futures, and somewhat better than gold e-money, and now I believe this is slightly better than holding gold or silver coins in one’s possession. You can read about all these options on the same site referenced by the link above.

Coins are the most reassuring form of gold ownership, and the risk of theft is low. Before I considered having physical coins in one’s possession as the most desirable form of ownership. However, I now realize that storage of bullion in an appropriate facility outside of one’s country is in fact highly safe, highly liquid and very convenient in case you have to leave the country you are currently living in. The one problem with coins is what happens in the event of your government making gold illegal - the benefit of being able to use coins for everyday expenses becomes diminished.

So a safe approach might be some gold and silver coins, and some BullionVault, then everything else is more or less short-term. If you want to be trading in and out, then vehicles like ETFs and futures are ok. Just be aware that these trading vehicles carry the same inherent risks that endanger the financial system generally. So they might go up in price, but things could get screwy when you were expecting to cash in.

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