Inflation/Deflation debate is BUNK! 2008-05-29.

Thursday 29th May 2008: Inflation/Deflation debate is bunk.

It just is.

Basically, whether we get inflation or deflation, what is relevant is only whether there is creation or destruction of wealth. We seem to be entering an era where there is a likelihood of massive destruction of wealth.

A period of severe inflation or deflation is at hand - and it is the result only of the destruction of wealth that is now happening. A lot of this is concerned with default on debt - the inability to pay down the debt principal or even the interest due on the debt. The cause of this is excessive debt that has built up due mainly to central bank and government policies of inflation of the money supply and the distribution of this excess money into the financial system, into the hands of banks rather than into the hands of those who produce wealth for the economy. In other words, gross malinvestment.

We have entered into a period, proven by the increasing and extreme ampltude of oscillation of the Dow Jones stock index to Gold ratio, where it is becoming impossible to value anything in terms of money, or even in terms of anything else. The entire economic system is completely broken. Many say that the Dow:Gold ratio measures values of paper assets vs real assets. I think that it is only part of the story. In fact, the Dow stocks represent real companies and real productivity and are therefore semi-tangible. Although the stock prices are based on 'faith' or confidence in those companies and are paper assets, their values are also governed by sales, profits, cash dividend payments and other 'real' assets of those companies such as real estate, plant and equipment.

The wild oscillation of the Dow:Gold ratio from 1:1 in 1980 to 43:1 in 2000 is a change by a factor of above 40! This means that, in a fiat money system, the value of one asset is not knowable in terms of another asset within a factor of 40! This is outrageous in a so-called 'stable' economy and is proof positive that the economy is not stable. I think that this huge volatility is a key factor that has been ignored.

Note from my previous blog entries (Chart hints at Financial Disintegration: 2007-12-23) that the instability began in the 1920s, shortly before the USA went off the Gold Standard, but after World War I when many industrial nations had already left the Gold Standard (such as England in 1914). Coincidence? I think not!

Contemporary with this was the Hyperinflation in Germany of 1923 and a short re-emergence of the Gold Standard in England in 1925, unsustainable because of highly inflationary policies during that period. The 1920s stock market bubble is what led to the first major off-trend high on the chart - and the major low that followed is the early 1930s 90% crash in the Dow Jones, which was followed by the seizure of private gold by Roosavelt in 1933 and the subsequent 40% US Dollar devaluation from $20.67 per ouice of gold to $35 per ounce.

The above chart is my adaptation of the Dow-Gold since 1800 sharelynx chart, with thanks to Nick at sharelynx for permission.

The bottoms of the Dow:Gold ratio in 1933 and 1980 represent major recessions/depressions, one deflationary and one inflationary. The ratio is oblivious to which. The three tops in 1929, 1966 and 2000 represent the euphoria of stock market/financial manias, regardless of the level of inflation at the time, although they probably all represent inflation (in paper aassets, though not necessarily in consumer prices).

In fact at the time of highest consumer price inflation during the 1970s, the Dow:Gold ratio was falling fast. The previous fall in the 1930s was during a deflation (with the 1933-34 inflationary policy of dollar devaluation accompanying it)! In both cases, stocks fell massively with respect to gold.

The present fall since 2000 has now gone further than this chart shows, to a ratio of 12 (12,000 Dow and $1000 Gold) and hints at serious recession/depression to come. However, it says nothing about whether it is inflationary or deflationary. It merely shows the destruction of financial assets by one form of default or another. Deflation is default through non-payment and bankruptcy; inflation is default through devaluation of the currency and consequent loss of purchasing power of the nominally repaid debt.

So all these people on the Internet 'talking their book' and wasting your time and money getting you to subscribe to their worthless commentaries about deflation vs inflation are giving you worthless arguments. It is all complete guesswork. Half of them will be wrong and you won't know which half until it is done. Probably, they all will be wrong one way or another. I have nothing to sell, therefore I am essentially unbiased. I am just writing this because I am bored!

Only two things are apparent from the chart:
1. In both cases ('30s and '70s, deflation and inflation), stocks fell massively with respect to gold.
2. The economic instability is increasing with every cycle and valuing anything correctly is becoming impossible, which hints at economic and monetary destruction, possibly at the next extreme of the cycle.
...
Now, I have noticed two more things:
3. This chart pattern is like a positive feedback loop as I described in an earier blog entry. Unlike other chart patterns with trendlines, it is impossible to break out of these expanding trendlines, unless a catastrophic event occurs on the downside or upside. The only option would be to try to stabilise the ratio within these trendlines, near to the mean. The swing is already a factor of x43, so do you think it will be possible to stabilise within these trendlines near to mean, to get the ratio to sit in the original green channel again, under this present monetary system? I don't.
4. With each oscillation, the Dow:Gold ratio is spending less time above the original, stable, slowly rising green trend channel and more time below it. This hints that financial assets in a secular sense are becoming gradually less favoured than tangible assets (gold). It hints at a shift away from trust in fiat money. It might hint subtly that industry and investment in the future might not not be able to function under fiat money.

Text Copyright 2008. D. Bellamy.

Bullish De-Hedging news as Gold < $900. 2008-05-29

Thursday 29th May 2008: Bullish De-Hedging news as Gold moves under $900 again.

The first two articles on Kitco today, one is seemingly bearish on the surface and one is highly bullish.

Gold Drops Back Below $900 - NASDAQ, May 29 2008 9:10AM
Gold de-hedging could reach 10m oz in 2008 - Miningmx, May 29 2008 7:24AM

As gold moves under $900 again to $889.70, perhaps to test the previous support around 840-850 (coinciding with the former all time high from 1980), as oil slips below $130 to a new low, low price of $129.81 and the US$ rallies to 72.88 on the Dollar index, we hear from MiningMX the news that up to 10,000,000 ounces could be de-hedged in 2008.

those bearish on the gold market were calling for de-hedging to stop almost as soon as it started, way back in 2002, and many were calling for it to come to a halt and reverse to further hedging when ghold hit highs around $730 in 2006. Not so. They were completely wrong, as they have been all through this bull market in all tangible commodities.

In fact, with the price around $900, Anglo gold Ashanti, we hear on miningMX that » AngloGold raises R12bn to combat hedgebook! This may be accomplished by asset sales and the issue of around 70 million shares. However, this will still leave tnem with over 6 million ounces hedged! This gives some idea of the massive amount of hedging that took place during the gold bear market up until 2001.

Twelve billion Rand is not far off the $2bn US$ that Newmont spent to eliminate all its hedges not long ago, taking a large hit in the process. Since then, Newmont's profitability has seen an impressive increase.

Gold:Oil ratio to fall at Peak Oil? 2008-05-26

Monday 26th May 2008, 3:26 p.m. Gold:Oil ratio to fall at Peak Oil?

On the questions section on http://www.financialsense.com/ here: Mp3, one of the callers (Justin) made a very astute question asking if Peak Oil was the possible cause of the fall in the gold:oil ratio to 7 from its long term average of 15 and its medium term recent average of 10. Jim answered the question saying that Peak Oil is likely to be part of it and the undervaluing of gold is another major part of it. He used it as a prodictor for a big upmove in gold in the near future but gave no real fundamental or market justification for this, for instance related to supply and demand.

I think Justin hit the nail on the head. He even went to mention that the only other time in trading history that gold:oil was at 7 was 33 trading days, all in 2005. Of course, he said this to imply the connection to Peak Oil, because it seems to be established that the peak in conventional oil production occurred in May 2005. That's surely too much of a coincidence to be ignored. I have already mentioned this possibility in a previous blog entry (Oil to $1000 per barrel?) but Justin the caller asked the question in a particularly clear way. Unfortunately, Jim didn't give quite enough attention to answering this question, in my view. I think it was an important concept. However, he does such a great show with so many ideas in it and it is always worth a listen!

I see no reason why the ratio should not reset to a lower level for quite a time, for instance to 7:1. I actually mentioned that if oil reached $1000 a barrel, gold would be $5000 if the ratio was only 5:1!

Take the example of the gold:silver ratio. This has historically been 15 or 16:1 as set by Sir Isaac Newton in the 1700s and the free market over millennia. The ratio returned to this in the panic buying in 1980 with gold at $850 and silver at $50 but has spent decades since 1980 much higher, even as high as 75:1. Right now, it is 926.50/18.26 = 50.7. This ratio has been away from the historic average for more than 20 years!

Oil to $1000 per barrel? 2008-05-19+

Monday 19th May 2008, 8:34 p.m. : Oil will be $1000 per barrel before 2020.

Oil will go to $1000 per barrel.

Before 2020.

Everything points to that, including and especially government policies.

It's only my opinion. See if it's correct.

I recommend listening to the first hour of Jim Puplava's 24 May 2008 Financial Sense Newshour at http://financialsense.com/fsn/main.html. Here is the Mp3 - the relevant section on oil is the third quarter from about 40 minutes to 1 hour 3 minutes with Bill Powers and Jim Puplava.

I have started my Oil blog with this post too: Oil will be $1000 per barrel before 2020. 2008-05-19+.

Next Leg of Credit Meltdown? 2008-05-24

Saturday 24th May 2008: Next Leg of Credit Meltdown?

I am just listening to Frank Barbera talking with Jim Puplava (this Mp3) on the www.FinancialSense.com newshour.

He mentioned some of the American banks and monoline insurers so I went and took at look at the charts. Oh dear! This looks a bit like February 2007 and August 2007. There are some spectacular losses and some charts positioned for potential major breakdowns from multiple price bottoms. See these!

Ambac:
http://uk.finance.yahoo.com/q/ta?s=ABK&t=2y&l=on&z=m&q=c&p=m20,m50,m200&a=vm,r14&c=

Bank of America:
http://uk.finance.yahoo.com/q/ta?s=BAC&t=2y&l=on&z=m&q=c&p=m20,m50,m200&a=vm,r14&c=

Citicorp:
http://uk.finance.yahoo.com/q/ta?s=C&t=2y&l=on&z=m&q=c&p=e20,e50,e200&a=&c=

Lehman Brothers:
http://uk.finance.yahoo.com/q/ta?s=LEH&t=2y&l=on&z=m&q=c&p=e20,e50,e200&a=&c=

In the UK, Halifax Bank of Scotland (BBOS) compared to Lloyds TSB and HSBC - nice downtrend - Slide, Charlie Brown, Slide!
http://uk.finance.yahoo.com/q/ta?s=HBOS.L&t=1y&l=off&z=m&q=c&p=e50,e20,e50,e200&a=&c=hsba.l,lloy.l

It's interesting to compare these to some oil drillers:

Diamond Offshore:
http://uk.finance.yahoo.com/q/ta?s=DO&t=2y&l=on&z=m&q=c&p=e20,e50,e200&a=&c=

Chesapeake Energy:
http://uk.finance.yahoo.com/q/ta?s=CHK&t=2y&l=on&z=m&q=c&p=e20,e50,e200&a=&c=

Tullow Oil (UK) vs the OIL ETF:
http://uk.finance.yahoo.com/q/ta?t=2y&s=TLW.L&l=off&z=m&q=c&p=m20&p=m50&p=e200&c=oil
... one of the very few oil companies to be outperforming the price of oil! The 20+% gap up in the Tullow Oil share price apparently coincided with the announcement of a 600 million+ barrel doil discovery off the coast of Ghana.

It looks like Leg 2 (or is it 3?) of the credit crisis and accompanying hyperinflationary depression is underway.

Another comment from me to this posting:
Gold s Outlook back to $650-$750 area by Victor Adair
that refers to this 'interesting' gold bearish interview:
http://www.howestreet.com/index.php?pl=/fbn/index.php/mediaplayer/277

My comment was posted here:
Re: Gold's Outlook back to $650-$750 area by Victor A ...

Nadler says that Indian gold demand was down in 2007. I thought it was a record! See this article for instance:
http://www.thehindubusinessline.com/2008/01/02/stories/2008010250091300.htm

It was already 689.7 tonnes by the 3rd Quarter, then it was down in Q4 2007 because of the high price. Projection on this article was 110 tonnes in Q4 2007 giving a total of 800 tonnes for 2007. However, wasn't it still a record? Nader says it was down a lot from the previous year. I think this is rubbish, but I am not 100% sure.

OK, so Indian demand was very low in January 2008 and low in Jan-Mar 2008. It was also very low in early 2006 just the same during the spike up to $730. The next year was a record if I am correct. So they bought more in 2007 at an average of £$650 than in 2001 at an average of $270!

This Nadler guy is a perma Fed bull and a gold bear. Maybe jewellers don't like expensive gold because it erodes their premiums! That is true for semi-numismatic coins. The premiums tend to erode as the price spikes. For jewellers, falling premiums = falling profits. I think we are seeing the gold users calling for a top in gold because the high gold price erodes their profits.

Re: Gold's Outlook back to $650-$750? 2008-05-22

Wednesday 22nd May 2008: 6:01 p.m. Nothing better to do... so I posted on Yahoo!

Another comment from me to this posting:
Gold s Outlook back to $650-$750 area by Victor Adair
that refers to this 'interesting' gold bearish interview:
http://www.howestreet.com/index.php?pl=/fbn/index.php/mediaplayer/277

My comment was posted here:

Re: Gold's Outlook back to $650-$750 area by Victor Adair which hasplenty of debate about John Nadler's commentaries.

OK, OK, so John Nadler had his little speech about $740 being the 'clearing' price for gold and his original forecast for this year was an average of $740 I believe, so let's see if he's right. Or maybe it was $840, who cares? So far, it hasn't got within $100 above 740 from the topside, so it looks very unlikely that he is going to be within +/-$200 with his forecast. I did though see a double H&S potential in gold that would take it back to $600 but is that likely to materialise? NO. I pointed it out here: http://1000gold.blogspot.com/2008/04/blog-post.htmland a 68% Fibonacci retracement of the entire bull run from 300 or so would point to the same, if we got a similar pullback to that of 1974-76, which was very close to a 68% Fibobnacci pullback from £198 to £103 after the original rally from £42.22 in 1971: http://1000gold.blogspot.com/2008/05/fibonacci-points-to-600-gold-re1974.html... but really, is this 1974? NOT LIKELY! http://1000gold.blogspot.com/2008/05/fundamentals-dont-point-to-gold-at-600.htmlWe do have the start of out of control inflation like in 1974 (and an oil crisis) but our economy cannot even stand interest rates over 5% or it will bust. What is the chance of slowing this inflation down with interest rates under 5%? Virtually nil, of course. Oil is at $133; everytime you look away for a minute, it has gone up again. It might blow off at $200 and come back down for a while (it's not likely ever to be under $100 again, is it?) but once Peak Oil is recognised, it will go to $1000 I think. Even with a poxy 5:1 gold:oil ratio, that would give $5000 gold. With peak oil, I think the gold: oil ratio will fall from its historical above 10 ratio for a while. If a real crisis hits in the next 10 years and oil is rationed worldwide or seized for military use as Jim Dines predicted on last weekend's http://www.financialsense.com/ interview with Eric King, then no-one will take fiat money for oil and gold and silver will be remonetised for oil purchases at that point. Only an opinion! Nadler is stuck in the Year 2000 gold bear market thinking of it as only jewellery. He is 8 years behind the curve already. True, jewellery demand is still a kind of important factor (at the moment) but getting less and less so all the time, as the monetary metal factor will increase relentlessly from here on. Why even bother to read John Nadler?

Interesting & VERY TELLING Inflation chart. 2008-05-19

Monday 19th May 2008 11;00 p.m. Interesting & VERY TELLING Inflation chart.

Gold has mounted a nice rally past $900 since late last week, with decent up moves, especially last Friday and today. Current spot market price shown on Kitco is Bid/Ask = 905.10/905.90.

Now to an article by the highly instructive and perhaps more 'mainstream' writer John Mauldin, entitled The Fed at the Crossroads. His fairly extensive articles are an interesting read because they don't contain the invective that often comes in gold bug type writings but they can sometimes paint a telling picture of the situation from someone I would view as being pretty much unbiased.

In the section 'Accounting for Inflation' he shows a graph taken from data originally published by Walter John Williams' http://www.shadowstats.com/ website and drawn by Matt Perry of the Union Tribune (according to the graph) showing annualised inflation figures from 2001-2008, according to the opre-1983, pre-1998 and present methodolgies. If you ever had the slight suspicion that governemt statistics were perhaps a little bit out of touch with the reality of wildly rising prices, take a look at that graph! Similar home truths might be found if a serious economist (one not financed by government grants to a university but a real world private economist) looked at UK inflation data.

Current inflation calculation method gives 4.0% annual inflation on the CPI, pre-1998 method gives 7.3% and pre-1983 method gives 11.6%! Of course, the pre-1983 method was the one that gave those 20% figures on a couple of occasions during the 1970-1980 period, especially around 1973-74 and 1979-81. The figure of 11.6% is well on the way to 20. And it shows inflation as being over 8% for almost all of the period 2001-2008, even while the Fed was talking of the danger of 'deflation' in 2001-2002.

I remember UK inflation being about 8% in 1978. That was about the low for the mid-'70s between the spikes to 20%+ in 1974 and 1980 or thereabouts.

It looks like we are in the 1970s all over again, without the rising wages, as I have mentioned in previous articles, such as that of Wednesday 31st October 2007: Wage-Price Spiral, without the rising wages!

Inflation - media pick new lower CPI vs RPI figure!

Last time I wrote: "Mervyn King has played 'good cop bad cop' with the Government this week: No rate cuts for two years, King hints as inflation heads towards 4 per cent. King being the bad cop of course, basically telling us that interest rates will not come down (i.e. we are playing the German game and sticking it out to fight inflation). This article mentions that inflation may go to 4% or even 5%. Shock, horror! most of our bills plus our food and petrol are rising more like 25%!"

Let's go and have a look at the Office of Natiopnal Statistics' website, where they helpfully explain these indices. That is nice and open of them, but you don't hear about it on the TV news, do you? Latest On CPI and RPI shows clearly why CPI is now quoted instead of the RPI. It's a lot lower!

Elsewhere, the Guide to Finding CPI/HICP Data explains that the CPI is the same as the HICP, the Harmonized Index of Consumer Prices, which appears to be a standardised interntational inflation index (presumably one that understates inflation everywhere)! I am fairly sure that I remember an old free handout, the HSBC Economic Bulletin that I picked up from the bank regularly a few years ago that mentioned the HICP and gave a graph of the HICP (CPI) vs the RPI. The RPI was then at about 2.9% and the CPI was at about 1.9%. In other words the CPI was a third lower!

You can clearly see from the graph at the above link that this is still true! The CPI has always been lower than the RPI. That's why the goverrnment and the media quote it, to maintain social order. Right now, the CPI is at about 3.0% and the RPI is at 4.2%, already over 4 then, thanks Merv!

At least in the UK, you can find the old RPI data, not like the mysterious invisible M3 money supply figure that was taken off all documents released by the Federal Reserve Central Bank a couple of years ago. And has since soared,according to reconstructions by eagle-eyed economist Walter 'John' Williams at shadowstats.com !

Housing market down 10% in the next year? 2008-05-15

Thursday 15th May 2008, 11:17 p.m. : Housing market down 10% in the next year?

This week, we in the UK have been treated to a little supposed "mistake" by one of our oh-so-talented female government ministers. See here: Housing crisis: Caroline Flint gaffe reveals Government's price fears.

She was seen brandishing a set of notes and they were photographed by some press paparrazo's enormous super-fast telephoto lens, revealing virtually every word of the script, obviously meant to be seen by the public. It said among other things, that house prices in the UK "will clearly show sizeable falls in prices later this year - at best down 5-10 per cent year on year."

Surprise surprise! We could have told you that years ago! For a fuller rendering of the text, t, see here: Housing crisis: Caroline Flint's Cabinet meeting notes deciphered or view the actual photo here: http://www.telegraph.co.uk/telegraph/multimedia/archive/00670/caroline-flint-big_670610a.jpg.

Note that the neatly manicured thumb doesn't cover any key words, obviously it says "action" under there.

Also note the extremely obvious note on the front that explains exactly what is there to be read: "PAPERS FOR CABINET MEETING 13 MAY 2008" in case anybody with a long lens got their photos mixed up in their folder when they got them back from Jessops.

Notice that this sticker has had its corner peeled away to reveal the highly important word "fall" in the sentence "falls for the first time in recent years."

It's so funny. It's real comedy.

The last statement in bold, so we can definitely read it, says: "at this time of uncertainy we show that we are on people's side."

Meanwhile, Mervyn King plays good cop bad cop with the Government: No rate cuts for two years, King hints as inflation heads towards 4 per cent. King being the bad cop of course, basically telling us that interest rates will not come down (i.e. we are playing the German game and sticking it out to fight inflation) rather than the American game of debase the currency madly to cover any and all massive financial losses, prop up the stock market and debase the dollar to nothing. The article mentions that inflation may go to 4% or even 5%. Shock, horror! most of our bills plus our food and petrol are rising more like 25%!

Inflation/Deflation debate is BUNK! 2008-05-12.

Monday 12th May 2008: Inflation/Deflation debate is bunk.

It just is. More later...

May 29th entry now copied to here:

Basically, whether we get inflation or deflation, what is relevant is only whether there id creation or destruction of wealth. We seem to be entering an era where there is a likelihood of massive destruction of wealth.

A period of severe inflation or deflation is at hand - and it is the result only on the destruction of wealth that is now happening. A lot of this is concerned with default on debt - the inability to pay down the debt principal or even the interest due on the debt. The cause of this is excessive debt that has built up due mainly to central bank andgovernment policies of inflation of the money supply and the distribution of this excess money into the financial system, into the hands of banks rather than into the hands of those who produce wealth for the economy.

We have entered into a period, proven by the increasing and extreme ampltude of oscillation of the Dow Jones stock index : Gold ratio, where it is becoming impossible to value anything in terms of money, or even in terms of anything else. The entire economic system is completely broken. Many say that the Dow:Gold ratio measures values of paper assets vs real assets. That is only part of the story. In fact, the Dow stocks represent real companies and real productivity and are therefore semi-tangible. Although the stock prices are based on 'faith' or confidence in those companies, they are also governed by sales and other 'real' assets of those companies such as real estate, plant and equipment.

The wild oscilation of the Dow:gold ratio from 1:1 in 1980 to 43:1 in 2000 is a change by a factor of above 40! This means that the value of one asset is not knowable in terms of another asset within a factor of 40! This is outrageous in a so-called 'stable' economy and is proof positive that the economy is not stable.

Note from my previous blog entries (Chart hints at Financial Disintegration: 2007-12-23) that the instability began in the 1920s, shortly before the USA went off the Gold Standard but after World War I when many industrial nations had already left the Gold Standard (such as England in 1914). Coincidence? I think not!

Contemporary with this was the Hyperinflation in Germany of 1923 and a short re-emergence of the Gold Standard in England in 1925, unsustainable because of highly inflationary policies during the period. The 1920s stock market bubble is what led to the first major off-trend high on the chart - and the major low that followed would be the early 1930s 90% crash in the Dow Jones, which was followed by the seizure of private gold by Roosavelt in 1933 and the subsequent 40% US Dollar devaluation from $20.67 per ouice of gold to $35 per ounce.

The above is my adaptation of the Dow-Gold since 1800 sharelynx chart, with thanks to Nick at sharelynx for permission.

The bottoms of the Dow:Gold ratio in 1933 and 1980 represent major recessions/depressions, one deflationary and one inflationary. The ratio is oblivious to which. The three tops in 1929, 1966 and 2000 represent the euphoria of stock market/financial manias, regardless of the level of inflation at the time, although they probably all represent inflation (in paper aassets, though not necessarily in consumer prices).

In fact at the time of highest consumer price inflation during the 1970s, the ratio was falling fast. The previous fall in the 1930s was during a deflation (with the 1933-34 inflationary policy of dollar devaluation accompanying it)! In both cases, stocks fell massively with respect to gold.

The present fall since 2000 has now gone further than this chart shows (to a ratio of 12 (12,000 Dow and $1000 Gold) and hints at serious recession/depression to come. However, it says nothing about whether it is inflationary or deflationary. It merely shows the destruction of financial assets by one form of default or another. Deflation is default through non-payment and bankruptcy, inflation is default through devaluation of the currency.

So all these people on the Internet 'talking their book' and wasting your time and money getting you to subscribe to their worthless commentaries about deflation vs inflation are giving you worthless arguments. Half of them will be wrong and you won't know which half until it is done. Probably they all will be wrong one way or another. I have nothing to sell, therefore I am unbiased. I am just writing this because I am bored!

Only two things are apparent from the chart:
1. In both cases ('30s and '70s, deflation and inflation), stocks fell massively with respect to gold.
2. The economic instability is increasing with every cycle and valuing anything correctly is becoming impossible, which hints at economic and monetary destruction, possibly at the next extreme of the cycle.

Text Copyright 2008. D. Bellamy.

Fractal gold guy nailed it at $852! 2008-05-12.

Monday 12th May 2008: 5:48 p.m. : Fractal gold guy nailed it!

In my previous post on 26 March (Major gold top predicted (link). 2008-03-26), I mentioned the article by David Nichols of the Fractal Gold Report thus:

"Wednesday 26th March 2008. Back to $950.The gold price is back up at $950 today, but David Nichols has an article on Kitco called 'Gold in Free Fall' asserting that the $1000+ top was a 'major, multi-month top' and there will be further falls, after a bounce to about $966. The next few days will test his prediction!"

He also stated, "I recommend using the coming bounce up to $966 as the last chance to get out before the next free-fall. The bigger downside targets for this correction are at least $850, with a good chance that the selling will feed on itself and push gold all the way down to $730."

Interesting predictions, from a FRACTAL point of view. I thought it was worth following his ideas and seeing where they led.

In a later commentary, called Fractal Gold Report: Slingshot Levels, he mentioned a possible gold bounce to $910 as a good shorting opportunity before another leg down, with a target of $852. This forecast was on April 23rd and consistent with what he said a month earlier. Since then, although the initial bounce in gold was weaker and didn't manage to hit 910, the price headed right to his target of $852.

Don't be fooled by his prediction of this major pullback: this guy is bullish on gold, comparing it on his website http://www.fractalgoldreport.com/ to the Nasdaq in the 1990s, saying, "Gold is the most exciting speculative opportunity of the next 10 years."

A quick look at the stock charts.com Gallery Gold View page at http://stockcharts.com/charts/gallery.html?$GOLD shows that gold bottomed at an intraday low of $846.40 but a visual inspection shows the closing price low to be very close to $850. Kitco's Historical London Fixings give the minimum London price as $850.50 in the afternoon of 2nd May. Conclusion: This guy was close!

So I am certinly planning to watch what he says in the future and see if the next moves he forecasts come to pass. He is looking at $852 as the bottom for now, especially since it was originally the level that was originally the launchpad for the quick move to $1000+ earlier this year. See his latest article: Gold - Nothing Random About It from 8th May.

(For a similar view from another perspective, see The Correction's End by Roy Martens on Kitco, dated, May 8 2008 8:49 a.m.)

Fundamentals don't point to gold at $600 re: 1974-76

Sunday 11 May 2008: 11:24 pm: Fundamentals don't point to gold at $600 re: 1974 decline!

Is this 1974? Well, er, nope. OK, even if gold does go to $600, to me it looks like it might not be the end of the bull market, just the return of the price to the original slower moving curve in the price graph in existence from 1999 to mid-2005, before the rapid increase after the breakout above about $480 going to $730 by May 2006 - and before the second, even faster increase going to $1000+ between mid-2007 and March 2008.

In 1974, real interest rates were going positive and their was a decrease in the inflation rate. At present, in 2008, we have grossly understated inflation rates and they are increasing despite the data manipulation. Oil and prices are skyrocketing worldwide. We don't seem to be at the peak of the general commodities markets in 2008, whereasthe peak had already occurred in 1973-1974, when gold started its 48% decline.

The Fed had some ammunition in the 1970s to increase interest rates (and to decrease them), whereas in 2008 they have practially no ammunition to do either. They can drop the short term rate from 2% to 0% and we have already discovered the upper limit at just over 5% recently before real estate market started to go bust. The Fed is stuck between 0 and 5%. They havenot had the fortitude to take it even to 6%. The potential for going to 15-20% interest rates to end the present gold and commodities bull market is practially nil, unless we already have impending hyperinflation with inflation already at 15-20%. What really matters is whether the real interest rate (interest rate minus inflation rate) is negative, zero or positive. Rates went positive in 1974 (and also highly positive in 1980) and that, arrested the commodities bull markets, along with decreasing monetary inflation.

Fast forward to 2008: real interest rates are negative at 2% nominal while the understated USA 'CPI' inflation figure is about 4%; that's a real interest rate of -2% already. Account for the skewed propaganda inflation figures of the Consumer Price Index with all its dubious statistical fiddles and you are perhaps looking at 8% inflation using 1995 statistical methodology or even 11+% using 1980 methodology, which surely is the valid one to use because that was the methodolgy used at the time of the last major inflationary economic situation in 1971-1980. That would make real interest rates on short term bills of 2-11 = -9% and on long term debt of 4-11 = -7%, highly negative, which should be exceedingly bullish to the gold price and also highly geared towards more inflation finding its way into prices of real goods on the shelves. It also looks very negative for the relative value of the US dollar compared to other currencies, again potentially highly 'price inflationary' in terms of import and commodity costs.

The first head and shoulders pattern that I mentioned has already broken down and has a target of $800, so that is possible. There was indeed a similar major potential for a larger H&S pattern after the 2005-2006 bull run, but it didn't materialise. Instead, gold had a long consolidation in a converging triangle pattern, from which it broke out 18 months later, explosively, into the bull run that went to $1000 in early 2008. The current correction down from $1000 to the mid-$800s is also less severe in nominal and even less in percentage terms than the post May 2006 correction, although it is significant.

The debt, housing and derivative situations in the USA and by extension the whole world are so way above the risks that existed in the 1970s that we are almost beyond comparison with that time and therefore my fully personal opinion is that gold won't (cannot) go down as far as $600 before bargain hunting by the big US$ holders (oil exporters and China for example) would buy up all the available gold at higher prices than $600 due to the high risk and already existing oversubscription to the US$ by these countries.

Whatever happens, this will be a highly significant test of Technical versus Fundamental analysis of this market and of markets in general (notwithstanding the assertions by GATA that the gold market is heavily manipulated downwards by governments, central banks and their agents and therefore that technical analysis is effectively not much use in the gold market).

Fibonacci points to $600 gold re:1974? 2008-05-03

Saturday 3rd May 2008 7:35 pm: Fibonacci points to $600 gold re:1974?

James Turk of www.goldmoney.com has mentioned on some internet radio shows that the period at the beginning of 2008 reminded him of 1974 with the high inflation and the oil crisis, accompanied by a stock market crash.

What also happened in 1974? Well, at some point real interest rates rose and there was a stock market crash. Inflation peaked for a while and the gold price went down from a high of around $198 all the way down to $103, which is a 48% correction.

So what if we repeated 1974 now? Would gold decline 48% from its 1020 high to $530 (i.e. 0.52x1020)?

I have been thinking about this ever since James Turk made mention of parallels with 1974, even though he also forecast a gold peak potential of $1500 for 2008.

Ronald Watson has an article on www.kitco.com called The Death Of Gold Revisited where he has a couple of excellent charts, showing clearly the context and then the detail of the 1974-1976 cyclical bear market in gold, in the midst of the 1970-1980 bull market. He shows the British Times newspaper article about gold soaring andwonders if it marks an interim top (Cramer also pushed gold at this time) and the start of a possible large drop in the price similar to that in the mid-1970s.

His 58% correction is the 1974-1976 retracement fraction of the gold bull 1971-1974 upmove; the price rose from $35 to $198 and then fell back to $103. So (198-103) = 58% of (198-35) .

If one were to use the breakout from the previous high of $43.50 on his chart (or maybe $42.22, which was quoted elsewhere as the gold price after a dollar devaluation at that time), then the upmove was 198-43.50 and the downmove was 198-103. The percentage of the downmove compared to the upmove is then ((198-103)/(198-43.50))*100= 61.49% Wow, that's 61.5%, so close to a Fibonacci Golden Ratio classic retracement of 61.8%!

Let's apply this to the current gold market 1999-2008:

We need a breakout point for gold from the long term chart. See the 10-year Kitco gold chart here. Now there was a pop up in gold in late 1999 to about $325, before the Bank of England bombed gold with its annouced gold sales staring that year. Kitco's Historical London Fix page for 1999 (what an excellent website") states that the highest London Fix price that year was on October 05, 1999 at $326.25. The next time that was bettered was May 29, 2002 with the PM LondonFix at $327.05. That is the breakout and one great candidate for the start of this bull market. See Kitco's Historical London Fix page for 2002.

Their Gold fixes for 2008 page gives the 2008 peak as the 2008-03-17 AM Fix at $1023.50. Now for the arithmetic. What would a Fibonacci 61.8 retracement give us? It would give a price target of 1023.50-(1023.50-326.25)*0.618=$ 592.60. WACKO JACKO! That's my $600 target from the Head & Shoulders potential pattern in my previous posting called Ominous double head and shoulders in gold to $600?...(!)

Iraq & Mad Max are the models of the future. 2008-04-29

Tuesday 29th April 2008 7:31 pm: Mad Max & the Palace State.

So what could we expect in a post peak oil, post-industrial overpopulated tribal world of conflict and poverty that is the future? Well, exactly that, perhaps.

I think Iraq is the model of the shape of things to come in most of the world. This makes sense to me, since they took away Saddam Hussein and swung him from a platform and in doing so killed the only leader capable of holding that country together, even though by brute force to a great extent.

However, there are rich people and they are not going to want to live in that kind of world. What's the point of beng rich if you have to drive around in an old beaten up pickup with a machine gun at the back like Mad Max or a paramilitary gang in the Congo? Not much point. They will need a 'Palace State' to be created to enjoy their wealth in safety away from the ravening hordes.

So, maybe we will have a playground area where the rich and the ruling classes will all live, a polluted production area where everything is made (China perhaps), some mining areas such as Southern Africa, Siberia, South America and Canada where commodities are obtained, the oil producers in the Middle East and then a kid of chaos area in the rest of the world, where the remainder of the 7 billion, 10 billion, 25 billion or 50 billion semi-starved poor of the world will live their Mad Max existence. In this situation, survival rates will probably be low and the world population could be less than it is now, especially without any good healthcare systems available or affordable.

Where would the playground area be? Somewhere surrounded by or bordered by oceans, nice climate, sun, sea, sand and the rest. Australia, New Zealand perhaps? Oh and plentiful water supplies. How about north America near to the great Lakes? Whichever areas are chosen would be heavily fortified against any outside interference. The playground areas of late, such as Dubai are difficult to sustain, in the desert but that partiular one may survive with oil wealth, perhaps. Monaco may still be there but it is in the middle of the future war-torn ethnic mix of Europe, which could present a big problem. Still, it could be heavily guarded.

Have you noticed how the Formula One Grand Prix races are gradually moving to the Middle East and Far East (Malaysia, China, Bahrain for instance)? This is one almost perfect illustration of this trend. The massive horseracing industry in Dubai is another.

Iraq as a model for all areas where commodities are mined is the correct one, I think. There will be massive social deprivation in these areas and the mines and oil fields will be guarded by military hired by the commodity consuming area(s). Outside those areas will be pollution and anarchy. China will have all the production facilities and be massively overcroded with cheap labour workers crammed together in a smog filled polluted environment, like Northern England in the late 19th Century, only much more extreme.

The post-industrial countries (the USA, Britain, most of Europe) will also be war zones. No longer able to compete for the supply of commodities, they will become Third World areas. Existing Third World countries will become Fourth World, never to get off the ground.

To anyone who disagrees, how do you see it then? The economics and resource allocations of the present world order simply don't add up, even without Peak Oil. Human life as we know it is simply unsustainable and the wealthy will at some point have to move to one heavily protected area of the world to enjoy the fruits of their wealth in relative safety.