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Gold Market Update - Clive Maund; SafeHaven



March 24, 2008 – Comments (1) | RELATED TICKERS: GLD , CEF , IAU

March 23, 2008

Gold Market Update
by Clive Maund

Originally published March 23rd, 2008.

Gold is back in buying territory after its dramatic correction back to key intermediate trendline support.

In the last update we were looking for gold to break out above the $1,000 level. It did and briefly got to about $1030 before it turned tail and dropped precipitously. Interestingly, the short-lived run at $1030 occurred last Sunday at the time of the Bear Stearns emergency, and the time when the crisis was at its most acute was the point at which gold topped out, which is what one would expect.

The action in both gold and silver early last week was short-term bearish, with gold backing off rapidly after its run at about $1030, leaving behind a bearish "gravestone doji" candlestick on its chart, and silver backed off from a run at its highs early this month, thus marking out a small Double Top. These bearish omens were noted and a warning that a possibly heavy reaction was imminent was posted on the site.

The size of the drop last week appears to have been due to the market suddenly becoming aware of the Fed taking action over a period of time to curtail money supply growth behind the highly publicized façade of big interest rate cuts. If they were and are in fact doing this, it would of course have deflationary implications and deflation is the kiss of death for commodity bull markets. This issue several very important questions. If they have been and are continuing to do this, then a tug-of-war situation must surely exist between deflationary and inflationary forces, for into the foreseeable future boatloads of new electronically created money are going to have to be created for the line of dominoes of collapsing major banks and other financial institutions, in addition to which other countries and trading blocs are likely to continue their policies of competitive devaluation, and even if the Fed succeeds in curtailing the rate of growth of liquidity it would be a Pyrrhic victory, for the current mess and mayhem in the global financial system DEMANDS rapid liquidity growth, and if it doesn't get it the result would be an almost instant credit gridlock leading to a deflationary implosion. This brings us to the next important point, which is just how much control the Fed actually has in the present situation. One thing is clear and that is that if the Fed does have control of the situation, it has done a decidedly poor job of showing it these past 6 months or so. The Fed is thought to have about as much control of the current situation as a trucker does whose brakes have failed halfway down a steep canyon - he doesn't have control, he has influence. The truck is going to go over the cliff, we know that, but by skillful handling, he can significantly delay the point at which it hurtles over the cliff. So let's stand back and review the 2 main scenarios; the Fed succeeds in curtailing liquidity, which inevitably leads to a credit freeze and deflationary implosion. The Fed obliges all comers and goes all out to save the big banks, brokerage houses and mortgage institutions from going under by manufacturing as much electronically created money as they need to avoid insolvency. This, given the gravity of the crisis, would lead to hyperinflation. However, there is a third route, which is a highly unsavory and prolonged period of stagflation, that would involve recession coupled with high inflation. This is essentially a muddle through situation in which deflation and inflation exist side by side - we have already seen this with house prices collapsing even as gasoline prices rise. This would be a situation in which most everyone loses. At this point it is of course not at all clear which of these scenarios will play out, and everyone involved in this giant mess appears to be taking it one day at a time, but what is clear is that gold is certainly set to continue to advance in both the hyperinflation and stagflation scenarios, and even in the deflationary implosion scenario, after a possible initial shock drop when most everything goes into the tank, it should then ascend as it would be "the only game in town".

While the correction in gold and silver was an accident waiting to happen, on account of their being extremely overbought with record levels of bullish sentiment, it appears to have been exacerbated, as we have already noted, due to the deflationary implications of the recent liquidity drain that has caught the market's attention and led to the vicious sell-off this past week. It is the Catch 22 situation with regard to the money supply and the eventual chaos that will result, which should ensure an ongoing bull market in gold and silver as safe haven investments, even if commodities as a whole tank due to a global recession/depression. Let's not forget that gold and silver are REAL MONEY, despite the comprehensive and largely successful campaign over many years by the mainstream financial press to relegate them to the status of mere commodities in the minds of investors.

The 1-year chart for gold is most interesting at this time, as it reveals that despite the ferocity of the plunge last week, gold dropped back to - but not below on a closing basis - the support of the lower intermediate uptrend channel that we had delineated some weeks back, and it also fell into a zone of strong support arising from earlier sellers around the $900 level, and closed off its lows on Friday. What this means is that gold is back in buying territory, even if we see further modest retreat in coming days/weeks that results in a trendline break. A trendline break would be unlikely to lead to further significant losses - instead a trading range would likely form for a while probably above the upper support level shown on the chart centered on and above $900. Right now the RSI indicator shown at the top of the chart has dropped to a level which indicates that gold is deeply oversold short-term and due an immediate bounce.

The turnaround in the dollar last week after a severe and prolonged downtrend was of course another factor behind the savage correction in gold and silver. We had been monitoring the critically oversold condition of the dollar for some time, which almost guaranteed the emergence of a snapback rally. Although there is scope for the dollar to rally further back to the underside of the lower resistance level shown and the vicinity of its falling 50-day moving average, it is thought unlikely that it will get that far, on account of the dire fundamentals.

There has been some speculation in recent days that the reason why gold and silver fell so heavily last week was that a part of the rapidly dismembered carcass of Bear Sterns was a large gold position that got dumped onto the market. This may be possible but it seems far-fetched. What is more believable is that Bear Sterns may have been scapegoated because it went its own way and didn't play ball with the other big players on the block and is believed to have been heavily shorting the dollar. So it was scuttled and JP Morgan, a major shareholder in a private corporation called the Federal Reserve, which just happens to have a lot of influence on the US economy, was granted first rights of salvage, the name of the game being to cherry pick the assets and farm the debts and trash off onto the taxpayer. The JP Morgan elite must feel like the islanders on that Scottish island Eriskay when a boat crammed full with crates of whisky was shipwrecked and washed onto the rocks, which story inspired a highly amusing film called Whisky Galore.


Clive Maund,

1 Comments – Post Your Own

#1) On March 25, 2008 at 10:06 AM, XMFSinchiruna (26.50) wrote:

J.P. Morgan's Dirty Little Secret
By Greg McCoach | Monday, March 24th, 2008

Events last week have prompted me to send out this communication regarding the sudden collapse of the precious metals market. Let's take a look at what caused the collapse and why junior mining companies are the one glimmer of hope amid the chaos.

Bear Stearns, J.P. Morgan, and the Precious Metals Market
The demise of Bear Stearns, which was reported to the public last Sunday evening and Monday, has in turn caused their assets to be sold off in masse this week.

On their book of liquid assets was a rather large, long gold position. It is being sold off in order to raise cash to offset their massive losses. The spot prices have been hammered because of this activity, but it will be short-term in nature. If you're looking to buy physical precious metals to diversify your portfolio at this point, you are being given an unexpected gift to do so. It won't last long.

Another item in Bear Stearns closet was a massive short-position in the ten year treasury. This of course is being unwound this week, which is making the dollar look a bit stronger than it really is. However, don't be confused by this nonsense, the dollar will soon resume its downward trend.

The fact that Bear Stearns was shorting the dollar to such a degree shows that they were not playing along with the the Federal Reserve banking crowd. And they have been severely punished by the powers that be.

What brought Bear Stearns to its knees was their own riverboat gambling mentality that not only jeopardized them, but the financial system as a whole. This story is just the beginning of what will be a long list of companies that meet a similar fate. Will the Fed and the citizens of the United States be able to bail out all the financial sewage that is about to be uncovered?

What the Fed is doing is nothing more than sleight of hand trickery to gain the assets of Bear Stearns. As I have said before, the Federal Reserve is no more "Federal" than Federal Express. It is a private organization owned and controlled by shareholders, the largest of which is J.P. Morgan Chase.
J.P. Morgan Chase, in other words, is the Federal Reserve... so don't be surprised that they end up with the assets while you and I pay for the debts from the whole mess.

When are people in the United States going to wake up to the ugly realities that are now upon us? This ongoing calamity of financial chaos is going to cause extremely serious consequences to each and every American. Your wealth, security and lifestyle are all at stake as the coming months and years unfold.

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