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XMFSinchiruna (27.47)

More Excellent Spot-on Analysis by Trader Dan Norcini

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January 23, 2009 – Comments (12)

This guy possesses the most comprehensive understanding of both the macroeconomic drivers of impending dollar weakness and strength for gold of anyone I've read in recent years. His near-daily accounts of how gold is trading from a technical perspective as an active trader himself, combined with that grasp of the bigger picture, make his analysis essential reading for anyone with exposure to gold... and especially to those trying to wrap their heads around the very complex issues of the inflation/deflation debate. Trader Dan is the man! He provides his insights free of charge as a service to the community of investors with gold exposure, and is a regular contributor over at Jim Sinclair's jsmineset.com. Between the two of them, there's nothing a Fool can't learn about the U.S. dollar, the coming scale of this crisis, and gold.

Enjoy Trader Dan:

The British Pound continues its horrid decline falling to a 23 year low against the US Dollar as events in Britain are rapidly spiraling out of control. The monetary authorities’ plan to rescue the banks there has been met with skepticism by investors while a genuine, and I might add, well-founded, fear of just who it is that is supposedly going to buy all this debt that the government is issuing which is blowing the fiscal budget deficit to kingdom come. We have a combination of a government spending itself into the drink while its stagnating economy produces fewer tax receipts. This point has not been lost on gold which once again today made yet another all time record high in terms of sterling.

One has to look at what is happening to the Pound with a great deal of sadness. Consider the once mighty British Pound, also called Sterling because it was at one time as good as silver, was the global reserve currency when Britannia ruled the seas. Its decline, which is completely due to its feckless political leaders who like ours here cannot seem to restrain spending their citizenry’s money and that of those not yet even born, is a frightening harbinger of what greets the US Dollar should we continue on our current course. From what I can see regarding the new Administration’s policies, coupled with a Congress completely taken over by those who are salivating at spending upwards of another $1 trillion, the US Dollar is doomed to follow the same course of Sterling. To say that it was inevitable is to allow those responsible to escape the blame. All of it was completely avoidable but it would have required statesmen who had the long term interests of the nation’s monetary future in mind rather than gutless politicians who lacked the courage to do what was right for the LONG TERM, even if it cost them their seats in the halls of power because of the hardship that it would inflict in the SHORT TERM.

“I will make mere lads their princes and capricious children will rule over them”. (Isaiah 3:4)

There is increasing chatter coming out of the Forex arena of intervention possibilities by both the Swiss monetary authorities and those of Japan. Both the Swissie and the Yen have been the beneficiaries of carry trade unwinding made possible because of ultra low interest rates in those respective nations. As hedge funds shed risk due to the deteriorating global economic news, these trades are being reversed or unwound with the result that players have been forced to buy Swiss Francs and Japanese Yen to repay the loans that were borrowed in terms of those currencies which were then used to purchase securities denominated in other currencies that paid a higher yield. It was a money making ATM machine while it lasted. The result has been to push both of these currencies strongly higher at the very same time that monetary authorities all around the globe are wanting to see their currencies weaken in an effort to maintain their export-related business. I am not sure how much damage the Swiss could inflict on the specs in regards to the Franc but I am under no illusions whatsoever when I say that the Bank of Japan is not to be trifled with should they decide to come from their lairs and punish the spec longs in the Yen. “Been there, done that,” is my motto and that has come from getting taken out to the woodshed by these guys once too often. So far, it is just rumors but only a fool would ignore it.

The Euro is struggling with those sovereign debt downgrades of Greece, Spain and now Portugal. That continues to feed the move to gold which is occurring in Europe as today the gold price in Euro terms hit a new all time record at the London PM Fix coming in at €663.376.

The Dollar is going to have its own issues to deal with as investors who were stuffing themselves full of US Treasuries recently are now disgorging them at an alarming rate. Today’s catalyst for the bond sell off was comments by the Obama Administration’s Treasury Secretary designee, Timothy Geithner, who accused the Chinese of manipulating their currency. Note to Geithner – you do not accuse your biggest creditor of doing the things that your own government has been doing and expect them to continue using their savings to buy your too-numerous-to-number debt issuances.

IF you have not taken a look at the long bond chart, do yourself a favor and see what happens when supply overwhelms demand. Bonds have now broken down below their 50 day moving average and appear headed down to the 100 day unless they can reverse course very quickly. The weekly chart shows a solid topping formation in place with the next level of support near 125^12. The bonds have been very tricky to call because anyone with a lick of sense knows that they were in a bubble but gauging when exactly a bubble has popped is sometimes a bit more difficult than it would seem mainly because it is easy to underestimate the effect produced by fear on a market. Markets are anything but rational – do not ever forget that.

I should also point out that the Gold/Bond ratio, a measure of investor’s preference for a safe haven choice, has been decidedly in favor of gold over the last couple of weeks. I will attempt to get an updated chart up later today for your reference. No doubt serious-minded investors are looking at the Treasury International Capital Flows data as well as the coming US government spending orgy alongside of these Euro zone debt downgrades and are saying to themselves, “the Hell with paper”.

Meanwhile, Russia appears to be burning through its share of reserves with the speed of a wildfire as they attempt to put a floor beneath the disappearing ruble. I will get a Gold in ruble terms chart up today later on – it too is amazing.

This brings me to another point – I see one way only for those nations which are cranking up the printing presses to warp speed to avoid complete and utter insolvency – they will have to devalue their currencies against gold and inflate the debt away. I am not a statistician or a mathematician, but I cannot wrap my mind around the amount of debt being created by so many nations and envision any other scenario in which any of it has a snowball’s chance in hell of ever getting repaid. Either that or the current monetary system collapses and a new Bretton Woods type accord replaces it. When we talk about a soaring gold price we are in effect talking about the devaluation of paper currencies – it is one and the same thing for all practical purposes.

All of this is serving to put a strong floor of support beneath the gold market which’s resiliency is beginning to resemble that of a cork’s. It keeps bobbing up to the surface after getting pushed down by bullion bank selling at the Comex.

The wedge formation which is revealed on the daily gold chart that begins with the July 2008 high and the mid-October 2008 low appears to be attempting to resolve itself in favor of the upside with the top of that line coming in near the $880 region. That level is taking on more and more significance as a technical barrier and should gold be able to punch through the selling that the bullion banks are throwing into its path here near the $860 level, they will be pushed back to that line as a defense. If they can be pushed off of that hill, gold will have broken out in US Dollar terms into a trending move. Expect a battle at that level therefore by the gold haters. Momentum indicators on the daily gold chart are all positive with the price above all of the major moving averages. The only bit of a fly in the ointment is that the 10 day moving average remains below the 20 day but it has turned higher which is a plus. The last reaction in gold a few trading sessions ago took it down into the confluence of the 50 day and 100 day moving average from which is sharply bounced, a very strong technical signal.

Equities are falling apart with news from Microsoft about job layoffs hitting stocks hard. After all, if the darling Tech Sector cannot even escape the carnage, what can? Quick answer – check out the mining sector which again is putting in a valiant effort to divorce itself from the broader equity market action. The HUI and the XAU are both in positive territory as I write this. Whether they can hold onto their slim gains is unclear at this point in the session but the fact that they are remaining afloat even with a lead anchor tied to their feet is at least somewhat encouraging. I might add that should the HUI be able to clear the 288 level, it has a good shot at 305-310. The XAU has short term resistance near the 120 level and if it can best that should go on to test 125-127. Momentum indicators on the daily charts of both indices look positive but if we get a move higher, I would want to see the RSI get above the 75 level.

Gold deliveries in the expiring January contract reached 161,700 ounces with today’s assignments while registered warehouse stocks have actually shown a decline below the 2.8 million ounce mark (Someone needs to the call the Comex guys and have them reign in that fellow who reported the drawdown – what was he possibly thinking?).

After bouncing yesterday, crude oil bounced back down today. To a certain extent, its welfare is tied to that of the equity markets where as a general rule, lower stock prices have been sucking it lower while higher prices have been encouraging bottom pickers. Anytime we see weakness in crude oil, many of the other commodity markets do tend to soften as this plays into the deflationist camp’s views which still have a wide following out there. For the sake of clarity, I do not agree with the view of those in that camp who predict gold getting pulled lower as a result of deflation. My reason is that their view fails to see gold as a currency and not a commodity. That is the reason I continue to send charts up from time to time detailing the price of gold measured in other currencies besides the US Dollar. The deflationists are narrow-minded in their view of gold considering it only in US Dollar terms. How one can say that the price of gold is going to weaken because of a deflationary environment while at the exact same time the yellow metal is soaring into new all time high in terms of the British Pound, the Ruble, the Euro, the Australian Dollar, the Canadian Dollar and so on? It seems to me many of the proponents of this view have some serious “splaining” to do. Hint – gold is a currency guys – stop looking at it like it was a commodity.

Lastly – trading volume and open interest in the February 2009 contract will be waning as April will take on most active month status.

 

12 Comments – Post Your Own

#1) On January 23, 2009 at 9:04 AM, XMFSinchiruna (27.47) wrote:

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#2) On January 23, 2009 at 9:05 AM, XMFSinchiruna (27.47) wrote:

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#3) On January 23, 2009 at 9:06 AM, XMFSinchiruna (27.47) wrote:

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#4) On January 23, 2009 at 9:07 AM, binve (< 20) wrote:

Thanks! Yeah, I am a big Trader Dan fan myself.

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#5) On January 23, 2009 at 9:07 AM, XMFSinchiruna (27.47) wrote:

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#6) On January 23, 2009 at 9:08 AM, XMFSinchiruna (27.47) wrote:

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#7) On January 23, 2009 at 9:13 AM, XMFSinchiruna (27.47) wrote:

Here's what Dan says in providing the 5 gold/currency charts above, and the gold/bond ratio chart which follows below:

Please examine the following set of charts of gold as priced in various major currencies. As you can see, it is either making new all time highs or just right off of those levels when viewed in several of these currency valuations.

Keep this in mind whenever you read some of the deflationist arguments about why the price of gold has to go lower in a deflationary spiral. Gold is a currency—something those who adhere to that particular economic view seem to have forgotten.

Also – just a side note – I mentioned in my midday commentary that gold in Euro terms had made a new all time high at the London PM Fix of today (1-22-2009). That was incorrect. The all time high is 646.590 made back in October of last year. I apologize for missing that one.

Also, please note the gold/long bond ratio chart which is also shown to give you an idea which of the two is performing better as a safe haven.

 

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#8) On January 23, 2009 at 9:44 AM, baekeland100 (63.48) wrote:

This is my first chance to read any blogs put out by TMF Sinchiruna --  How pleased I am to have run into his/hers blogs. When given the time, the other posted blogs will be read with the same enthusism. 

Your writing belongs in The Economist if you do not have an economic degree you have certainly been graced with a natural talent for economics. 

I have a PH.D in Victorian Literature and am always on the look-out for learning (regardless of the field) TMFSinchiruna you have been added to my very short reading list on the Fool.  Thank you, TMFSinchiruna for making economics a very interesting study.  It reminds me of Carroll's mix of mathematics and literature.  Again, thank you.

 

t out by TMFSinchiruna.  How happy I am 

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#9) On January 23, 2009 at 9:59 AM, Jimmy2008 (< 20) wrote:

I started to visit this website about 2 months ago. I really enjoy it. Expecially blogs from Abitare, Sinchiruna, wdot.

Another website, seekingalpha.com, is also extremely good.

Any other website, as good as fool.com, seekingalpha.com?

I don't like street.com.

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#10) On January 23, 2009 at 11:34 AM, XMFSinchiruna (27.47) wrote:

I really can't stand Glenn Beck, especially his pathetic theatrics. I post this video solely for the contribution by Congressman Ron Paul. Ron Paul, in case you are not aware, also gets it. This man understands fundamental economics better than anyone on Capitol Hill, and I think he's right that people won't heed his message en masse until a dollar collapse of some measure is already underway.

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#11) On January 23, 2009 at 12:49 PM, jesusfreakinco (28.86) wrote:

Sinchy,

Redemption is near...

http://www.kitco.com/

 

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#12) On January 23, 2009 at 1:28 PM, Bays (30.24) wrote:

 

kitco.com is a great site for metals and mining companies.

 

Sinchy,

 Thanks for the info....  My portfolio is heavily weighted in precious metals and commodities right now.  This is good stuff to hear.

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