View Full Version : Gold, $, and the Economy

25th November 2009, 18:44
Hourly Action In Gold From Trader Dan
Posted: Nov 25 2009 By: Dan Norcini

Dear Friends,

The surge by the Euro above major resistance centered near the 1.50 level with a corresponding break of downside support in the US Dollar and a move to a new yearly low, catapulted gold up to within easy striking distance of $1,200.00. If you recall our inflation adjusted gold price chart, a breach of that level on strong volume could take gold into an upside acceleration with a longer term target of $1,750 quite conceivable based solely on the chart pattern alone. It appears as if the $1200 level could fall early next week.

I find it more than disconcerting to see the complacency in the broad US equity markets regarding the near free fall in the Dollar. A falling dollar may generate some paper profits for US businesses, especially those in the export end of things, but it spells disaster for the US consumer, especially both the poor and the middle class, who have yet to understand what is going to happen to their purchasing power as the cost of the basic necessities of life begin an inexorable climb higher. Remember how they quietly switched that 5 pound bag of sugar to a 4 pound bag and left the price the same? Well, get ready for another repeat of that – expect to see smaller bags and boxes of cereal, etc, but with the same sticker price as the former larger quantity size. Suzie Homemaker will be confused as she comes home from the grocery store with another $200 worth of goods but with far more room left in her cupboard after she unloads the bags.

Jim has said it many times – these derivative kings have destroyed us all. While we welcome the rise in gold, we despise the reasons for its rise because it could have been avoided. Now it is too late. The Dollar is finished as the global reserve currency and with its demise, so too goes the position of US preeminence in global economic affairs. As that fades, eventually military power will fade as well. Just like Rome declined, so too America is on the path of long term decline and believe me, it pains me deeply to have to write this. Instead of letting the pond scum bankers and financial wizards who sold the public and the global investment community a bill of worthless goods (read Structured Investment Vehicles and Collateralized Debt Obligations) reap the consequences of their unbridled greed, the powers that be decided to instead debauch the currency, our birthright, and begin a process of nearly unlimited creation of worthless scraps of papers which somehow are laughably regarded as “money”. Gold’s rise is now mocking that “policy” and exposing it for the generational theft that it is.

The idiotic notion that one could print their way to prosperity seems to have completely enveloped our current crop of leaders as if all that is necessary to generate permanent well-being is a perpetually rising stock market. Do you not find it amusing if not somewhat depressing, that we have coined a new term to explain what is sheer stupidity if words mean anything – a “jobless recovery”? There can be no recovery where there are no jobs because where there are no jobs there is no demand from consumers who are clinging to life support and hoping to avoid being the next round of payroll casualties. Businesses are profiting because they have cut the major item of expense in their budgets – payrolls. Even that has a new euphemism attached to it –“increased productivity”. Let me give you the Norcini explanation of that term with a real world definition – Fire half your workers, dump the remaining work on those who are left, make them work twice as hard and keep their salaries the same. That my dear friends is how these heartless fiends who come up with this crap define a recovery.

With the official unemployment record closer to 18%, millions of Americans are now on food stamps, in danger of losing their homes, and trying to keep from losing all that they have worked for the entirety of their lives. Yet we are assured that the economy is recovering and it will just be a matter of time before new hiring kicks in and a new era of abundance is upon us. Make no mistake about it –business owners are NOT going to ramp up employment if they can keep their payrolls lean and mean. There are too many workers looking for employment to allow workers who complain about being overwhelmed by work to be taken seriously. The attitude is: “if you do not like it, someone else is standing in line behind you to take your place so shut up and get back to work”. Owners will hold out to the last moment before taking on additional payroll expenses.

Were it not for the government’s cash for clunkers program and its first time home buyers tax incentive, GDP would be disappointingly low. Just look at what happened to car sales when the cash for clunkers program ran out of money. They fell off a cliff. Expect the same in the real estate markets after the first time credit expires because there is also a glut of homes from foreclosures not to mention the many homes that are up for sale due to economic distress by hard pressed homeowners who are facing unemployment or reduced incomes.

That is why we are seeing bonds moving higher even as the stock market moves higher. Strangely enough, the equities are running in a dollar induced inflationary environment while the bonds are signaling the deflationary aspect of falling home prices and other assets. We are getting a mix of both inflation in some sectors and deflation in others. How would you like to be an automotive manufacturer watching the cost of all of your commodity inputs soaring at the same time the public has no money to buy your cars? What a perfect hell storm!

Back to gold, technically it is overbought but that is a relative term and really does not mean much when a buying frenzy commences. Expect volatility to increase as price moves higher with larger intraday price swings the norm. Margin requirements will increase sharply as well. Buyers of calls in particular can expect to pay some hefty premiums. I keep watching silver to see when it breaks through the $20 barrier. Silver demand is very strong right now especially among those who can no longer afford gold. Let’s see if that is sufficient to take it through overhead resistance at $19.00 on the charts.

The shares are still lagging behind the bullion but at least their charts look very strong.

Enjoy your Thanksgiving.

Trader Dan

Forgot to post the chart......it in the next post

25th November 2009, 18:57

The above is exactly what I was talking about last night in this post......


25th November 2009, 21:02

Below is a figure that charts goldís correlation to U.S. inflation using the iShares Barcalys TIPS Bond ETF (TIP) as an inflation proxy, the USD Index, and the credit default swaps (CDS) on euro-denominated 5-Yr UST to serve as a proxy for US creditworthiness risk, with CDS data only going back a year and a half. What is interesting when looking at the rally in gold in 2005 into 2006 is that when gold broke out it was showing no correlation to the USD and the first leg of the rally into 2006 actually witnessed the correlation to the USD show a strong positive correlation, contrary to its normal relationship. However, in the final leg up to the 2006 peak the USD broke down significantly and then became nearly perfectly negatively correlated to gold, indicating the later move up in gold in 2006 was from gold acting as a USD hedge. Also, the correlation to the TIP ETF was falling and becoming negative through most of the 05/06 rally, indicating that gold was not acting as an inflation hedge so some other factor was driving the price of gold higher in the first leg.

The 07/08 move in gold appeared to follow the normal pattern in which gold is positively correlated to inflation and negatively correlated to the USD. Interestingly, while the first leg up in the 05/06 rally saw gold being positively correlated to the USD and the second leg showing gold and the USD being negatively correlated, the opposite occurred in the 07/08 rally. The first leg into the end of 2007 saw gold and the USD negative correlated as one would expect but that negative correlation diminished significantly as gold was acting less as a USD hedge in the latter stage of the advance.

26th November 2009, 00:01
Dan Norcini's commentary is spot on.
Obviously exciting to see golds advance yet frightening to see most have no idea what is happening or what the Dollar's decline foretells.
No matter what, I love the idea of the banksters who have been involved in shorting gold and silver for so long losing control of their rigged game. Biggest problem is I'm sure they'll be bailed out with more of our own tax money.
A vicious cycle.