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Guest Post: Gold Panic Part 2
Submitted by Yves Lamoureux of Blackmont Capital (Sequel to Gold Panic Part 1)
Perhaps gold investors are suffering the blues of too much good news since breaking out to the upside, north of the magic 1,000$ an ounce. Inflation being the big macroeconomic risk that everyone is looking for, might just be the real disappointment.
For most of the last three decades we have been conditioned to drive/manage by looking in the rear view mirror. The last big black swan event of the 70’s related to the interest rate spike never replayed itself out a second time around. In the years ahead the unexpected might just be the norm and an extraordinary event could actually lead us to a hyper-deflationary black swan.
We have built one of the biggest credit bubbles in history. It would normally follow that it needs to unwind in epic proportions. The critical question for investors will be whether a normal inflationary trend can reassert itself in view of debt level, demographic, monetary aggregates and global economic shifts.
Inflation is a fundamental risk that endangers investors. However globalization and economic diversification has tended to reduce big swings in inflation shocks. The bigger need will be to calculate the next shock and I suggest that it will be hugely deflationary.
What about gold in this environment?
I have been mainly on the long side of gold for different reasons. I do believe that gold is the laggard in this cycle as everything else pretty much managed to go at bubble levels. Confidence in the financial system is eroding fast. Investors turning to gold can in fact trust this asset and do without the confusion.
We have seen behavior changes in investors. Perhaps getting kicked in the pants since 2000 does give way to pause and reflection giving preference to bonds and gold. Investment demand is the real driver just like it was with oil.
I have put up sentiment numbers in percentages on two graphs. It relates to the 2006-2007 gold price sideways action until the break out and on the other graph the recent tug of war of gold around the 1,000$ level.
One can notice that in both cases we have a good drawn out level that offers resistance. In the 2007 period, once crossed to the upside, sentiment numbers did in fact match the new high. This is not the case now as 72% bull rarely compares to a top in previous patterns. Normal behavior would have people show excitement on the break with higher readings in sentiment. It's almost as if it is too good to be true and bulls can’t find the conviction to believe it.
I also have been watching commercial positions for years. Something really strange happened from 2007 onward. In the future market 9 out of 10 times would that group be right and trounce the speculators. In 2007 more often than not, speculators started to score big against the not so smart money anymore commercial group. I did notice it in stocks, oil and gold. Why would pros lose their touch ?
We are at again one of those times where the short position from commercials is important and should act to force gold down. We did see the same behavior at the 700$ level from commercials but gold did break out and it eventually forced the big boys to cover back the short contracts. It will be quite interesting to see here who panics first…
The opinions contained in this report are those of the author and are not necessarily those of Blackmont Capital Inc.. Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor BCI makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. BCI is an independently owned subsidiary of CIFinancial. CI Financial is a Canadian owned diversified wealth management firm, publicly traded on the TSX under the symbol CIX. Blackmont Capital Inc. is a member of CIPF and IIROC.
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Appears there is still a little way to go with the gold miners:
http://stockcharts.com/h-sc/ui?s=$BPGDM&p=D&yr=2&mn=0&dy=0&id=p79492726446
I think a lot depends on whether the spec longs and the new fund entries into gold understand that the ultimate price of gold and beating the commercials and bullion banks and their masters at the gold and silver suppression scheme will only come when there is relative consensus among those funds that the amount of physical silver and gold in the futures market is quite small relative to the various paper proxies and that short positions are highly concentrated among a few players who usually get there way short term around options expiry and more importantly to turn off their black boxes, buy and hold only physical gold and silver and not futures or ETFs, do not do so on margin, and simply keep accumulating physical silver from COMEX and other resources and play the long game to WIN.
The long specs just can not control the many tricks that are used to flush the longs over and over again such as margin increases, double short ETFs and huge increases in paper short positions.
You can not beat the house at their own game. In the war to win fair market prices of gold and silver the High Ground must be taken. The high ground belongs to those who hold the physical metals. It is a longer term game and requires investors who understand the longer term paradigm and the true rarity of the physical metals.
The other important point is that silver can be a lever or a drag on gold and it seems like the the game the cartel is playing now is to use silver as a drag to slow gold's advance until they can muster enough physical gold to try to take gold back.
The same funds I refer to above can use silver to lever Gold higher by taking delivery of lets say $100 Million in Physical Silver from Comex and get a lot of leverage on Gold but they need to act fast in my opinion.
I could be completely wrong. Most of what I learned is is just from reading the essays and daily posts at GATA but those guys know something none of the other gold analysts ever seem to talk about in regard to Fed Leases and Swaps and other Central banks long term selling and how things are changing.
Take the high ground and get physical.
Straightforward and simple path: buy and hold only physical gold and silver and not futures or ETFs, do not do so on margin, and simply keep accumulating physical silver from COMEX and other resources and play the long game to WIN.
Correction. Upon further reflection, I think about $700 million in physical silver off take would probably be in the neighborhood of the right number to let silver have a substantial chance at rising to its un-supressed natural inflation adjusted high of about $150.
Gold and silver are not so much a hedge against inflation or deflation as a hedge against the growing distrust of fiat currency and the systems that create them. Its also about potential price energy after centuries of supression via one means or another and the growing transparency among the broader market as to the vast imbalance between the actual physical treasures and the huge paper proxies which claim to represent them.
Thanks for the honest thoughts. I also think that reading GATA's posts can't hurt, and it adds a lot to understanding. There may be the stray tin-foil hatter, but for the most part one gets good info.
I'm as physical as one can get: About 50% each, gold and silver. I sleep great at night!
It is tempting to go long usd as a counter trade since everybody hates it...some junior gold stocks are up 100, 200% and more this year on the TSX. How much more can they run? Gold hasn't done much in $CDN terms or $AUS this year. I haven't seen many negative comments about ABX basically writing off all accumulated shareholder equity to close out their losing hedges. Just what the fuck have they been doing for the last 20 years?
some junior gold stocks are up 100, 200% and more this year on the TSX. How much more can they run?
Ah, have you seen how much they were down last year? Those kind of returns off the lows (end of last year) are in some cases no where near their stable values at a much, much lower POG. And they have been able to secure financing aplenty along the way back up.
I haven't seen many negative comments about ABX...
Then you haven't been reading.
Also, is gold production sold in $USD - or $CDN, $AUS ?
ABX will look like shit if the gold price drops suddenly. Nothing like basically writing off all your accumulated shareholder equity to close out losing futures contracts. What the fuck this company has been doing for 20 years I don't know.
Actually, ABX will look like shit - period.
They aren't miners as much as playas - and dey playd wrong.
Although I agree that both inflation and deflation are doing the dance of death, and equally both are to be watched, inflation is simply going to win out in the end. The credit whole dug is just being filled with paper dollars allowing for even higher degrees of leveraging. If we simply look at the 100 year trend of gold and the dollar it becomes painfully obvious what is going to happen.
That being said is it possible to get a bump in the road on gold or the dollar? You betcha. But what I believe is happening are the US market bears are trying to essentially short the market by buying treasuries especially since they more than likely got hammered trying to short the market. If they swing with a big enough hammer they will cause a market panic due to most people thinking that appreciation for the USD is bearish for the stock market which would be a prime time to both gain from the flood back to saftey and a free for all to short the market.
If the bears can pull it off it will be a brilliant move.
Good, gotta get me some.
It will be quite interesting to see here who panics first…
December looms.
Oh lordy, Deliver us (our gold and silver) this day from the unrighteous Comex.
Found this gem:
"For the wages of sin is death" (Romans 6:23).
Stop diving into the hole and coming to earth. The people who create the whole demand no less than our complete controllability. They are the creators of "sin" and sin is anything and everything but obedience to know it all masters.
You are going to follow? The people on the inside or the idiot gold bugs that think they know everything but yet got caught up in the last two bubbles and lost an assload of money in each one?
It is very seldom that I am convicted on any belief but on those few occasions in the past when I have been I have been right 100% of the time. For whatever reason I am convinced that gold goes down before it goes up, but that after it goes down it goes up big. I don't know why. I just am 100% certain in my heart that this is going to happen and that some really smart people are going to use the opportunity to load up on physical metal if and when it happens. Maybe it's because I read Ferfal, but I think the sheeple are a lot smarter than most readers of this and similar blogs give them credit for being, and I believe that at some point there will be a wholesale, global rejection of fiat money. We'll see.
interesting discussion on Max Keiser. Russia and China Bluff, India avoids the poker game, Gordon Brown stupidity, historical ratios...
http://maxkeiser1.blogspot.com/
thanks. just a matter of time before china starts buying in big amounts. india beat them to it this time but that won't happen again.
Also like FOFOA's new piece http://www.fofoa.blogspot.com/
he makes so much sense. what am i missing?
Max is always fun!
Will 'stock' markets become redundant soon? And I use the words stock market very loosely because they seem to be irrelevant to the actual underlying stocks on a fundamental basis and they are all traded in a big basket anyway.
To watch all the indices go as if they were composed of the same constituents is becoming really ridiculous and they all seem to follow the dollar anyway.. it doesn't matter if the dollar is going down, the dax, the ftse, the russel, the nas, the dow all follow the leader and they all are a different mix of countries and number and type of companies, no matter, they all do exactly the same chart pattern now don't they!
The bullion banks...er..."commercials" are not in the PM market for nominal fiat-money gains. Their sole purpose is to keep PM's rise in check. In this endeavor, their paper losses are backstopped by the printing press.
Gekko,
I couldn't agree more. The PPT members and the hand full of bullion banks that own most of the short positions in gold and silver are not in that position because it is a good play. They are there because its official, unwritten policy of the working group and their brains (i.e. Summers and Company) to keep Gold from moving anywhere near its inflation adjusted high any time soon.
It is the mechanism of the supression that is the achilles heal. The slinglshot of the David investors in fighting the Goliath Fed backed bullion banks is when the funds and investors with deep pockets play strictly in the physical markets and do not use leverage to do so. That means they are in for the ten year play and not playing chicken month to month with commercials in the derivatives markets.
If Gensler is able to pass position limits regulations without exemptions for the top handful of Primary dealers who engage in the super concentrated short positions, this will happen naturally. If Gensler allows the exemptions, then it will be up to the deep pocketed long term investors to make a conviction play and take as much silver off the the COMEX first and then keep taking as much gold off the COMEX. That is the only way to stop the consistent capping and suppressing fire of the non-economic gold suppressing efforts of the bullion banks in my opinion.
I guess it's always nice to allow a token bear to speak in the early stages of a bull market. As for me, until my neighbor starts bragging about investing in gold coins, I'll remain bullish. What is "investor sentiment", anyway? People trot it out like its the key to understanding the universe. I'm supposed to follow a survey of people who answer survey calls? I want to know what the people who don't take calls are thinking. People like Tudor Jones, Steve Cohen, John Paulson. As I know it, they are long. I'm not so smart, but I think I want to be long too
The facts as I know them:
-The entire supply of gold would fit in my living room.
-The market cap of all Gold bullion ever mined is less than that of Google - significantly.
-there is currently a squeeze on at the COMEX - they don't have enough gold to make good delivery.
-Gold is the only investment anybody has a profit in.
-We just had an 18 month correction, we're higher now but not at an all time high in real terms - Is that how bull markets end? Really?
You must have quite the living room. I've heard it's more like the size of a cubed tennis court.
You have a living room the size of two Olympic swimming pools. Wow!
Sorry, I'm being a smart ass.
TD: when you're done with it, can I borrow your crystal ball?
It's funny how gold makes a new historical high and all sorts of "experts" (Prechterites being at the forefront) - who know absolutely NOTHING about the Gold market - start coming out of the woodwork proclaiming how it is an inflation hedge when we are in "deflation", how it is on the verge of topping out, how the dollar will rise and crush Gold in the process, how equities will collapse and take Gold with it, etc. etc.
It's all good GG. If there weren't so many idiots, it would be impossible to make money in any market.
Not a problem, Gordon. When the so-called "experts" are on the gold train we wil have the perfect contrary indicator! Hang on for the worst of the anti-gold experts to capitulate and it'll be time to sell.
Gordon,
Hope you get this. I'd post this for Chumba too. I am floored to announce that the Wallsteet Journal is suggesting that you run up your credit cards if you are worried about your job. Starts at the end of the story where he discussed the cases of Bill and Ted.
http://online.wsj.com/article/SB1000142405274870401300457451804084837726...
"could actually lead us to a hyper-deflationary black swan... I suggest that it will be hugely deflationary."
Can someone explain to me, how we could have severe deflation when the fed is currently giving money to anyone who wants it for free? If cash is becoming MORE valuable over time, then why wouldn't you borrow it for free, and hold it (at least) or lend it (and make interest on top of deflation)?
I really don't see this happening - until the FED raises rates.
Is the Fed giving you the money? Can you borrow it for free?
Deflation is relative to the object.
It's a confidence game my friend. The mantra of the Confidence Game: fool as many people for as long as you can.
Do you have absolute, first hand knowledge of the FED giving money to anyone or any company? "Money for nothing" that is...
Not just a CNBC report of such a transaction. Not here's $300 million for 50% equity in your bank, and we'll give you the rest later if our equity market ramp plan does not work.
Did you see it with your own eyes? No, not so much? Don't worry you are not alone.
There was rampant inflation during the last two bubbles (equity, real estate bubbles). The FED wants you to believe that there will be inflation in the future. They do not want the deflation shitstorm to hit and will do anything to prevent it.
They are even inflating gold prices, as gold inflation will have a sympathetic reaction on all other asset classes.
We are at a very critical point where the deflation spiral could take hold easily.
The real estate market has not inspired confidence, nobody is buying and holding equities, the unemployment downward spiral is nearing terminal velocity, uninvested savings rates are way up and people are opting to pay down debt.
Stimulus II is going to have a negative effect on Obama, just as health care has. But what's a Nobel Brotha to do? Start a war?
I'm betting that destruction from the deflation spiral will appear very evident to economists in Jan/Fed 2010.
I am in your camp Anon 126332 as I've been reading some very interesting stuff on how the Fed manages inflation expectations. Essentially we are dealing with a psy-op of the grandest scale as they certainly do not have sufficient physical means to promote the kind of inflation so many are foretelling. I also cannot help going back to the fundamentals whenever I hear the shrill call of the inflationary siren. The way I see it, there will be no meaningful inflation until unemployment stops rising. This could be quite some distance in the future considering a) the record numbers flat out of work presently, b) the record numbers of parttime workers who want full time employment and c) the record lows in weekly hours worked. Even the most conservative estimates (pie in the sky) suggest a return to pre 2007 employment environs could take another three years. David Rosenberg and Mish are far less optimistic and lay out a pretty compelling case for employment being dead in the water for a good decade at least.
I remain agnostic on gold however it would seem very convenient for the sell side to promote the inflationary bogeyman at this juncture. The clarification I seek is whether gold is rising primarily due to fear of systemic collapse or as an inflation hedge. Perhaps to my detriment I am one of the few who remains entirely unconvinced that inflation is the greatest threat at the moment. At the same time I intuit that this fear (irrational in my view) is the main price driver of gold. If systemic collapse were the reason then stocks should not be catching such a massive bid. My antithetical (or perhaps heretical) hypothesis awaits proof in the next stock market decline. I suggest that rather than the Dollar bears crying uncle it is more likely to take the form of one of the members of the "ruling" financial cabal going renegade so to speak, with the others (like the sheep they and we all ultimately are) inevitably succumbing to the herding instinct and dutifully following. Thus the need for Dollars to deleverage will resume as overarching "investment" theme and voila the Dollar again transits from pariah to hero in what is now becoming a fairly predictable wash, rinse, repeat cycle.
The Banksterz are addicted to the carry trade now. The only way to kill the incentive is to raise rates to ~2%.
Batten down the hatches when they actually do!
The government will never confiscate our gold like FDR did in the '30's,that's way too overtly facististic... they will simply tax the hell out of it instead...
The golden rule #1= The CB's control the card game in the end..
I would argue that while the CBs control the card game for awhile... economic fundamentals control the card game in the end... the FED is not the "house"... the "house" is reality. And you can't beat the house, as the saying goes.
if the house is reality, SPX would still be in 666 territory..
You could only attach a sales tax to gold so it would still be benificial to purchase as long as you believed the inflation rate was less than the sales tax over a acceptable period of time for you.
The FED is printing money but it is all sitting on bank balance sheets, that's why. Banks are hoarding money because the system is basically insolvent and they are hoping that the rally can continue so that they don't have to mark to market. They also need a cushion for any fallout from commercial property or another inter-connected institution.
The trillions of dollars in stimulus have helped to stem the deflationary cycle which is all but evident. Except in the eyes of those who have emotionally biased positions.
Sentiment and Price on Gold both took off on 8/31 because that's when we learned of CHINA'S DERIVATIVE DEFAULT stance. This was a BLACK SWAN event and could indeed cause hyper-deflation followed by hyper-inflation (when the FED panics.) Why does no one talk about this??? It is THE REASON GOLD TOOK OFF the last couple of months. Why do you think Obama is in China right now after his stupied tire and pipe tariffs?
BTW can you smoke green shoots with China's steel pipes?
I hear you on deflation, but the weapons being deployed to correct the asset valuation downdraft by helicoptering in the cash are ZIRP interest rates (for price) and the Fed's printing press (for availability). Therefore, I regard gold as a hedge against the symptoms of currency debasement, which I guess resembles ordinary inflation as prices "rise". But it's not "too many legitimate dollars chasing too few goods" - at some point it mutates from the early stage "free, easy money" to later stage "printed excessively dilutive fiatscos" i.e., it's the same supply of goods but the fiat bux ain't perceived as worth as much as say, in the example of Zimbabwe, yesterday.
I think the range between early stage and later stage may not be all that wide - rather, I think the FED means to test the limits of the dollar as far as their instrinsic, or "mass psychologically supported" value - but once that range is exceeded, I think all bets can be off in terms of a cascading loss of confidence. We as Americans cannot imagine this outcome - it has been drummed out of heads. A dollar is sound, end of story, and we will buy the fiatscos value until it is painfully obvious that we are living in Zimabawe. As for the rest of the world, I do not know - Chinese students laughed at Geithner how many months ago, and even now the Ultimate Road Show has saddled up to sell the America Story Version 3.0 abroad to our creditors "hey this time we mean it! Double dare and cross my heart!"
In fact, this is the world's reserve currency we are talking about and I am not ready to see as inevitable the death of the dollar, but profound weakness that will reveal itself in the price of gold - yes, I can see that as worthy of a hedge for the time being.
The psychology of it, as you pointed out, seems rather similar to how people tend to defend the idea of something that they invested a lot of their life in. So many people don't want to face reality or wake up because they need their pensions to go as planned, and that they can still buy stuff with the same money they have been using their entire life to buy stuff since it is all they know how to obtain.
It will be interesting to see all this pan out to say the least.
Here's my indicator for when the Gold market drive will end.
I call it the Q indicator after me. I found it and ya betta
give me credit.
When Gold or any major market goes up 100% in one year.
The bull is over and I will sell.
.
Dream On.
.
Gold was a nice hedge in case of systemic collapse in late '08, currently it is a nice hedge in case fiat currency haters rise up screaming for pegging currencies to gold, and in the future when inflation finally gets around to actually being acknowledged rather than hidden off balance sheets, it will work then.
You have life insurance right? Home owners? Auto? Medical?
Just get some Gold insurance too.....If there comes an event (shit brown swan) where you need gold and you don't have it, you'll be screwed.
...and you don't have it, you'll be screwed
So it really is true what they say - the best things in life are free ;)
Crisismode- No dreaming here in Gold@ $350 , Silver $7.50.
The ramp up is just started especially when people say
-Dream on.
gold is bullshit..I don't get this...sophisticated investors aren't in gold unless they are looking to take money from the stupid ones.
Here's the thing, if you want to look at expected inflation, look at TIPS vs treasury yields. Expected inflation on 30 year TIPS is only at 2.5% currently.
If expected inflation by bond investors was exceptionally high, tips yields would 0 and t-bills would have an incredibly high yield to be able to service debt and monetary policy.
The bond market consensus is obviously that inflation will remain very low.
you're either claiming that bond investors are stupid or gold investors are exceptionally smart. From the many gold-bugs I've seen, they've all tended to be exceptionally wrong in their predictions. I'll stick with the bond investors, personally.
Gold does well in deflation or hyper-inflation especially in a low growth environment (alternate opportunity cost asset classes have limited upside). Gold can also be a bet on a currency crisis of confidence.
All the "investments" today are nothing more than bets on what the fed will do. My bet is that they will continue to do what is in their owners best interests (banks). The parasite might kill the host in the process.
There are many that still believe in a "two party" system because of history, but the two party system of equities and bonds is giving way to a third independent party called precious metals (gold & silver). Many investors/speculators realize stocks have risen in the extreme and have moved their funds into bonds, thinking that is their only option.
This is like our political choice of having to go with the lesser of two evils. There is still huge risk on defaults but those aren't priced into bond yields right now. There is a huge risk of corporation collapse but that isn't priced into dividend yields right now. When investors then realize that equities are pumped and there is no growth, and that bond rates can only go up (prices down) because they are at the lowest historical rates, THEN THERE IS ONLY DOWNSIDE ON MOST BONDS AND MOST EQUITIES AND THERE WILL BE A HUGE FLIGHT TO SAFETY NOT INTO TREASURIES OR THE DOLLAR BUT INTO GOLD TO PRESERVE PURCHASING POWER.
Warren Buffet said to expect 4% return on your money (he represents the equity world), Bill Gross said to expect 4% return on your money (he represents the fixed income world). Question: If these two individuals state the expected return is 4% on both equities and fixed income (primarily the investing universe as we know it) while we know there is significant risk on the downside to both bonds and stocks along with the purchasing power of the dollar sliding and potential tax increases - What is the proper risk / reward position? In fact they have debased the currency at roughly 4% per year since the inception of the fed so there really is no real return looking forward after inflation and taxes.
Now look at the return of gold over the last 10 years compared to every asset class - it can protect your purchasing power (6000 years) as well as providing upside when that upside down inverted pyramid comes crashing down - into the base that is gold. The Wizard of Oz was right, follow the yellow brick road. In the original book, Dorothy had silver slippers and it was changed to ruby red for the movie. It was trying to tell us there is a man behind the curtain and that we should follow gold & silver.
I believe if deflation accelerates (we are currently in a deflationary deepression), cash and gold will be the survivors. In hyper-inflation without job & wage growth, strategic land and gold will be the survivors. Gold is currently predicting a USD currency crisis, hyperinflation, or deflation and the flight into real wealth safety from other asset classes. He who has the gold makes all the rules - do you want to help make the rules or just follow them?
Does someone pay you to write this crap?
Did someone pay you to write this crap?
Bullshit.