June 2009


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viz

There is still interest, but not as high as the high price of $1000/oz. That’s a positive for gold bulls. There has not yet been the parabolic blow off-top. It is still to come. It’s the width of the range that makes this trade difficult.

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This chart doesn’t visualise the concept of a parabolic chart move terribly well, but essentially that may well be what is present. Despite the underlying fundamental arguments for a higher price, simply, it may be in a bubble that will ultimately deflate back to the $400/$500/oz level.

I’ve closed all GLD positions while I have a think about the possibility of instigating a SHORT position. Possibly a flip-flop on gold.

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flip-flop-fly is on the twitter recommended list, my main man!

The_Real_Fly Jun. 29 at 11:27 PM # reply ATTENTION BEARS: Tomorrow you get skull fucked. Sleep tight. $$

Classically wrong.

To be fair, I’ve only just found him, so I’ll follow his calls a little more closely and see how long he lasts.

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Inflation defined as TM = FM + [MV*CM] under the current policies of Bernanke and the Federal Reserve is alive and well.

MV*CM refers to the market value of credit money which with the collapse in late 2008 of asset prices, crushed the asset price inflation contained within residential real estate, commercial real estate, stockmarkets and commodity markets worldwide.

The massive money creation, measured by M2, has stabilised all those markets save residential real estate, although commercial real estate is looking decidedly wobbly currently.

What should have happened is that the massive inflation should have collapsed into a truly epic deflation. The massive overcapacity built on inflationary money, would have proven unsustainable with a natural rate of interest being charged for capital.

Thus the current inflation is invisible. It is visible only in what is not happening: viz. the absence of a true deflation being allowed to run it’s natural course.

The primary victims of such a deflation would have been the Banking system, both visible [traditional] and the so called shadow banking system. Currently, what we have are the banks most guilty of egregious lending practices being supported, while prudent banks are being squeezed through not being allowed to pick-up market share via inability to access the cheap capital available to the cretins at Citi et al.

Figure2

At first glance, there isn’t much of a correlation between the series under review. However, if a closer look is taken at series’ underlying trends, which strip out short-term fluctuations and “noise,” two findings stand out.

First, trend money growth of M2 and trend changes in consumer prices are pretty much on the same wavelength, and they are positively and highly correlated. Second, trend changes in the money stock seem to affect trend changes in prices with a time lag, and trend money growth seems to lead trend changes in prices.

The (admittedly arbitrary) trend lines suggest that consumer prices will go up and that the latest drop in rising consumer prices should be interpreted as a temporary downward blip (driven by lower commodity prices).

Why might inflation continue to increase, so much so that it again becomes visible to the mainstream via rising prices? Simply, government, when it cannot raise money legitimately through either debt and or taxation, must, essentially expropriate the property through theft.

The previous post details the levels of deficit spending that are being projected and the level of debt required to pay for this. The numbers are simply not tenable – thus, inflation is the only answer that government will seriously consider in their grab for ever increasing power.

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Should the current deficit spending continue at the projected rate or higher, the US debt will become unsustainable [assuming the debt could even be sold at these levels] If it can’t [be sold] and printing is used as an alternative, total disaster.

Under current law, CBO projects debt held by the public will rise from less than 40 percent of GDP before the economic crisis to nearly 100 percent by 2040 and 300 percent by 2083. If current policies are continued, CBO projects the debt will rise to 100 percent by the early 2020s, to 200 percent before 2040, and eventually to 750 percent.

Deficit Projections

spending growth

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Gold looks to gap up on tomorrows open. This seems to be a pattern, trading up in Asia, selling off in the US. Anyone who wants to test this relationship, let me know the results, if it’s tradeable.

June 30 (Bloomberg) — Gold climbed above $940 an ounce in Asia, heading for a third quarterly increase, as the weakening dollar fueled demand for the precious metal as a store of value.

Bullion, which typically moves inversely to the U.S. currency, has climbed 2.4 percent in the quarter, while the dollar fell against all 16 major currencies as increased investor risk appetite spurred demand for higher-yielding assets. Gold holdings in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, were unchanged for a second day at 1,125.74 metric tons yesterday.

“The main driver of gold at the moment is moves in the U.S. dollar and its impact on Comex and over-the-counter investors,” John Reade, UBS AG’s head metals strategist, said in an e-mail. “Exchange-traded fund flows remain subdued, jewelry demand is weak, coin and investment bar buying is subdued.”

Gold for immediate delivery gained 0.4 percent to $941.42 an ounce at 9:40 a.m. in Singapore. The metal is up 6.7 percent this year as longer-term inflationary expectations boosted demand for a hedge against accelerating consumer prices. Gold futures for August delivery were little changed at $941.30 an ounce on the New York Mercantile Exchange’s Comex division, up 1.8 percent this quarter.

“Latest positioning data indicates that speculators have reduced net-long positions in the market significantly, which should limit downside risks somewhat,” Stefan Graber, analyst at Credit Suisse Group in Singapore, said in a note today. “As long as the important support at $925 holds, the short-term outlook remains positive.”

Net-long positions in New York gold futures decreased by 5 percent in the week ended June 23, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 166,294 contracts in New York.

Silver climbed 0.8 percent to $13.9775 an ounce, up 7.8 percent since March 31 and heading for second quarterly increase.

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Gold, due to its subjectivity, is notoriously difficult to assign a valuation to. However by viewing the data, some objective conclusions may be drawn.

Jewellery consumption has fallen by 24% This may, or may not be significant. Jewellery particularly in India and China have traditionally and currently remained a store of wealth. That gold has reached $900+ and not fallen below $850 for a while now, might be construed as an acceptance of a higher base price. This of course is highly subjective.

Where we have a much more objective look at a subjective view is within the investment community. Here demand has increased by 242% That is significant. [These are Q1 2009 over Q1 2008] In fact the entire trend over 2008 was upwards.

The most significant cause of increase was within the financial markets and the GLD ETF. This went from Q1 2008 buying 72.7 tonnes @ $2.1 Billion dollars to 465.1 tonnes @ $13.5 Billion dollars.

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So we have essentially the price of gold being driven by the financial markets. Financial markets are prone to boom/bust scenarios. Certainly due to the credit crisis and currently highly inflationary policies emanating from Central Banks the world round, inflation and unsound money certainly are major contributors to the current price.

If the current Central Bank policies are to continue, and it seems increasingly likely that they will need to do so, we can expect an accelerating inflation at some point. The current price of gold prices in a 4.4% compounded inflation rate from 1933. This is very low inflation rate for the amount of monetary and fiscal stimulus that is being imparted to the system and has been monetary policy since The New Deal.

In conclusion, until a major shift in government policy and Central Bank commitment to providing inflation, buying the dips in this bull market will probably work out well. The end, when it arrives, will possibly arrive quickly due to the tremendous liquidity of investment holdings via the GLD ETF. Investors, speculators will be able to not only exit very quickly, but actively reverse their positions by selling short.

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