Gold: Massive Catalyst Required

Gold is getting into massive resistance around the 975 - 1000 area. This attack will likely run into a vigorous defense.

Gold is also significantly overbought. However, momentum is definitely there... as evidenced by a new high in the MACD.

Because Gold is at the very top of it's price channel, an initial retracement from these levels is most likely. Support in the 900 - 925 area is pretty strong and would help work off overbought conditions. Failure to stay above the 875 area could then result in a test of the 750 congestion area.

A major catalyst is definitely required for a sustained move above $1000. The entire global economy is in a deflationary spiral... despite the feverish attempts of ALL central banks. The parabolic 'narrow money' numbers that have the Gold Bugs hyperventilating are not inflationary. 'High powered money' can't even begin to replace the 'broad money' being vaporized by the great credit bubble implosion.

From my post The Master Plan: "The Federal Reserve creates what is called High Powered Money. For that money to be useful it needs to be transmitted into the economy. If the transmission mechanisms don’t work, it is utterly useless. Bank hoarding on a grand scale is just such a failure to transmit. Printing without transmission cannot result in inflation. (ZERO velocity = ZERO money)

To make matters worse technology and financial innovation has resulted in what is now referred to as the Shadow Banking System. Since money and debt are fungible, that is to say that money is debt and debt is money, non-bank financial institutions were able to borrow, leverage up and then lend out on the grandest scale ever in human history. With such financial innovations as securitizations, new accounting gimmicks such as off balance sheet accounting, and new vehicles such as structured investment vehicles, this system literally PRINTED money! The broadest measures of money supply increased dramatically.

As part of the current de-leveraging of the ENTIRE financial system this debt money is being DESTROYED as they are called in and liquidated or go into outright default. This has the added consequence of smashing the very asset prices the shadow banking system used as collateral.

The Federal Reserve is therefore also in the race to merely REPLACE the amount of money (M) being destroyed as the shadow banking system implodes. To actually increase the money supply AND make up for the reduction in money velocity (V) the Federal Reserve has to print AND transmit truly astronomical amounts of money."

The CURRENT demand for gold is not as a hedge against inflation, but rather a pure safe haven bid as various currencies come under stress. A sudden large bank failure in Europe or Eastern Europe just may be the catalyst gold needs to break $1000.

Because of the massive, global deflationary forces at work, gold is very vulnerable to the downside IF no major systemic shocks manifest themselves... and IF they don't occur in rapid succession. Each cataclysmic failure is just another massive black hole of deflation. For example, an implosion of a 'larger Iceland' would destroy a ridiculous amount of both wealth and debt... but leave behind, undamaged and unencumbered capital goods (everything from factories to bridges). The consequences would be instantly deflationary.

Mish explains the process in great detail in Fiat World Mathematical Model.

Therefore, this ninja would only buy gold when:

1) It is above $1000
AND
2) He can still here the sounds of whole countries imploding in the distance. This would be visible in the FX markets... where major currency pairs would start going absolutely apeshit AND multiple, global financial institutions start collapsing SIMULTANEOUSLY (Lehman style, despite the best efforts of central banks and governments).

Otherwise the risk of watching gold go cliff diving is actually very large...