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Friday, February 20, 2009

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
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...


Anonymous said...

Banks are hoarding money behind a damn..if it gets out below...your right i buy now not for inflation, but in case of currency collapse or outright currency devaluation (not necessairly creeping inflation)

I rather loose 1-300 an ounce if the sun comes back out, than be without if night falls. If it does get pitch black out, you will not be able to find physical like trying to stock food just before a hurricane when everyone has raided the stores. Ounce of prevention is worth a pound of cure and all that.. to me..precious metals are a the bedrock foundational investment in your portfolio.

Anonymous said...

Ahhh...a clear plan even I can understand. Thanks! No countries imploding this morning...maybe over the weekend though, who knows?

Anonymous said...

Hmmmm....private issuance of money in an unregulated manner?
You say its destruction is deflation: more like, that money/debt that was "created" thereby, was never in existence, except in people's minds.
"Sure, let private interests print money, how could that harm the nation? Why would they want to devalue their own holdings?", paraphrasing Greenspan.
Idiots....shocked idiots. Greenspan claims to have seen the light...
As to gold, well, some shall be watching when you spend it down at the Market: they shall follow you home, and "question" you as to where the rest is kept. Those people may even be wearing uniforms.
And if, OTOH, you do not take physical delivery, your gold shall only be as secure as your Depositary institutions....which have not been doing so well...
The only "safe haven" is in numbers, as in, allies, friends, family and society: as it has ever been.

dacian said...

Yep, I totally agree with you. As money (whatever that is) dissapear more rapidly than they are created AND injected, they will be more scarce, so their purchasing power will go up.

There are 3 forms of money the market recognize:

1. US bonds (reason is their army)

2. Paper money, main currencies; even the hard beaten pound is gaining purchasing power when compared with UK assets (reason is we are in a 'paper money' system)

3. Gold (market sees it like money lately, and not a commodity)

That is to say, I totally agree with you on all you say in the article. Gold is inversely correlated with the market again; last year it was the delevarging which pushed gold lower. When the bear market ends, gold will literally implode.

There is no inflation and there won't be high inflation for years to come; this process and its effects will be felt by our economies for quite some time.

Anonymous said...

premium$ for physical coins are inflating faster than the price of gold....another consideration when waiting for $1,000

Anonymous said...

Like others have said, I've bought gold, actual coins, not as an investment, but as an insurance policy. If the banking sytem goes t1ts up, the currency drops like a stone etc etc, I want something in my hand that still counts as money. Not a piece of paper that says I have money in a bank I can't access, or shares I can't sell, or even gold held somewhere I can't get at.

If all goes well, I'll lose money on my gold coins. But that will mean all my other investments are OK. I'll be quite happy with that.

If it does go wrong, I've got a bit of a cushion. I'll be ahead of the crowd, which in a bad situation is where you want to be.

michael said...

Well does this ninja believe in unlimited liquidity, so you will be able to buy gold when it has really hit the fan?
Seems to me that belief (creditwise) brought LTCM and AIG down...

Good luck though!

darkcloud said...

Ninja -

Just an interim, recurring thank you for another great post here.

IMHO, Mish and you are two of the boldest, pull-no-punches best in the business. Great style, both of you.

Best regards, and thanks.

Anonymous said...

Ooops, I think I hear the sound of Antigua exploding. Its only an it might not count.

Anonymous said...

Gold rises precisely because of the deflationary forces. Deflation means that banks would get into even bigger trouble (debt deflation). And already, people begin to question the ability of governments to bail out banks (they have become too big to be rescued). Roubini warns that some European countries might default on their debt. What's left? Gold. Second: the central banks can do much more to counter the deflationary forces: print massive amounts of money. They haven't done that. Yet. Deflation will force them to do it. And the fed might be the first to do it. Together with the BOE. This might completely undermine the credibility of fiat money and lead to hyperinflation. See paper 'Could hyperinflation happen again?' by Joachim Fels & Spyros Andreopoulos.

Anonymous said...

"European banks may need £16.3 trillion bail-out, EC document warns ...

There are dozens of these links. I read the story last week. I saved the link. But, lo and behold, when I clicked my saved link on Monday morning, the story did not mention a specific figure.

There was a reason for this. The editors at The Telegraph had taken out the following paragraphs:

European Commission officials have estimated that impaired assets may amount to 44pc of EU bank balance sheets. The Commission estimates that so-called financial instruments in the trading book total £12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU bank balance sheets.

In addition, so-called 'available for sale instruments' worth £4trillion (4.5 trillion euros), or 11pc of balance sheets, are also added by the Commission to arrive at the headline figure of £16.3 trillion.

Fortunately, web sites around the globe have posted the deleted paragraphs.

Converted into dollars, £16.3 trillion are the equivalent of $25 trillion.

The original paragraphs can be found in several links in the Google list of headlines."

That is 25 trillion with a T. Of course when the 1.14 quadrillion derivative goes belly up, we will need 14 planets earth (50 trillion each) to pay it off. However, Bernanke will save us, I mean them, with his printing press.

Anonymous said...

What has this goldbug hyperventilating IS deflation. 400 years of history shows that gold has done well in deflation and has done poorly (relative to most other assets) in inflation. It isn't what governments decree shall be money, in the end it shall be the market. That is now happening.
And agreed gold looks toppy and overdue for a correction, but when it makes its move through $1000 decisively, you may find it is no longer easy to get. It is already very hard to get hold of. Have you actually tried ?
Also are JPM and BAC going to again dump a huge quantity of futures contracts on the market like they did last March, and get themselves even deeper in the shit with their naked short position ? It's quite possible, but that will only mean gold will then explode through the $1000 mark in a $200 or $300 one day move when the correction is over. You won't have time to get it.
Those in forms of paper gold are going to get burnt by it one day.
I will ride this gigantic bull market through all the corrections. A bull of this magnitude will throw most of its riders off.

Anonymous said...

I want to add that the guys who make the most money in the futures market are those who pick the trend correctly and then have the guts to sit through the most horrendous corrections. As Jesse Livermore said, "It is those who do the sitting !" that make the big money. The difference here is the more than real possibility of a COMEX default. That means one day a delivery breakdown/failure.

Anonymous said...

in the spirt of the last two comments I would like to state once again that it is the sitting not the thinking that makes big money.

Anonymous said...

Hmmm, what if it is banks exploding instead of countries? Next week, we'll be short a couple more banks, and the price of Gold will reach 1200 by Friday. It and Silver will still be undervalued versus any reasonable measure. Will you be waiting for the bear market to end? Is there a "floor" to this market?

Jerry Gene said...

I really like your writing style. Nice Post keep it up.

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