Thursday, 31 July 2008

H&S Breakdown for now? 2008-07-31.

Hi All,

Dan Norcini's chart a couple of days ago showed what looked like a classic Head & Shoulders with a price target of ... $844 on an intraday basis: top-neckline = $990-$917=$73, so the measured move is $917-$73=$844. Oops!

As I said, a chart just ripe to be 'painted' lower by those who wish to imply that the economy and inflation are under control by bashing the gold price.

Anyway, on his 4-hour chart today:
the right shoulder broke down suddenly, just as if there was an engineered technical breakdown by the short sellers. The price bounced back to the neckline as resistance and not much , if any, beyond it.

As I write we are Bid/Ask $918.50 - 919.10 on the spot market Kitco, right on the neckline. Actually the intraday spot price went to $929.40. The range was Low/High $911.70 - 929.40 and over the day's trading there was a gain of only about $2: Open/Last $917.90 - 919.50. See !

The right shoulder of the H&S has also now formed and broken down on the daily spot gold chart on the stockcharts gallery view:

Looks weak, doesn't it?

Moving out to the weekly chart in the stockcharts gallery view, it looks a bit like a cup and handle formation; that's more bullish. The Point & Figure chart, the uptrend is slipping a little bit, looks mediocre. "I'm OK, you're so-so," as Bowie sang.

Don't you just love technical analysis? James Dines said he called it 'Visual analysis' - in other words, I guess he doesn't think there is anything very technical about it, especially since all the moving averages are calculated for you these days and displayed almost instantaneously on a computer chart. So it is just reading tealeaves, isn't it?

Wednesday, 30 July 2008

Beijing 2008. Think Sputnik 1 1957. 2008-07-30

Wednesday 30th July 2008 10:40 pm : China boycott continues up to Olympics Start Day.

Emanuel Balarie says here on Kitco:
China, Jim Rogers, And Commodities
"In Shanghai for instance, you can jump on the world’s first Maglev train that will take you from the airport to downtown Pudong/Shanghai in record time. Since the train travels at about 430 km/hour, the typical 45 min trip (via car) will only take you about 8 minutes."

Coincidentally, this Monday, two days ago, I was in my local "Works" bookstore and saw a £5 book about China that had a picture of the Shanghai MagLev train in it. Eric Laithwaite was a figure who appeared on British television when I was a child.

As Wikipedia says, "In the 1960s, Great Britain held the lead in maglev research;[1] Eric Laithwaite, Professor of Heavy Electrical Engineering at Imperial College, developed a functional maglev passenger vehicle. It weighed 1 ton (1 tonne) and could carry four passengers."

"Eric Roberts Laithwaite (14 June 192127 November 1997) was an English engineer, principally known for his development of the linear induction motor and Maglev rail system."

Read about them here:
Maglev (transport) - Wikipedia, the free encyclopedia
Eric Laithwaite - Wikipedia, the free encyclopedia
The Incredible Genius Of Eric Laithwaite

However, we British were never treated to a public MagLev train, not ever, and are unlikely to get one soon, if ever.

This explains the difference between the culturally, economically, morally and in every other way dying Britain and the up and coming China.

My take on it is this:

The British, American and other Western media have virtually boycotted the Chinese 2008 Beijing Olympics for the last year, with flimsy excuses containing all the usual criticisms of China from previous decades dredged up for this occasion. Eight days to go and we finally get a mention on the BBC news of their webpage for the Olympics here. BBC SPORT Olympics.

The result will be like this (if we are allowed to see any of China during it):

The Beijing Olympics, will be the equivalent of the launch of Sputnik 1 by the Soviet Union on 4th October 1957, nearly 51 years ago. It will hit home, hard, especially because we ourselves have entered the start of a deep recession, housing crisis, banking crisis, asset deflation crisis and fuel price and general (hyper)inflation crisis at home.

Tuesday, 29 July 2008

Head & Shoulders. So much for $8000+ gold! 2008-07-29

So much for $8000+ gold. We will have to wait. We are struggling to hold on to $900 right now!

Here is trader Dan Norcini's latest gold chart (short term):

It shows to me what looks like a classic Head & Shoulders with a price target of ... $844 on an intraday basis:
top-neckline = $990-$917=$73, so the measured move is $917-$73=$844.

Oops! It looks like a chart just ripe to be 'painted' lower by those who wish to imply that the economy and inflation are under control by bashing the gold price.

However on the daily chart, the right shoulder is not yet formed:

Maybe we need to wait a little while before making any conclusions.

Friday, 18 July 2008

$8387.96 Gold & US Balance sheet #2! 2008-07-18

Friday 18th July 2008, 9:58 pm: $8387.96 Gold & Balance sheet of USA. Part 2.

This gets more fascinating. I have found another webpage, this time on the St. Louis Fed website, giving foreign holdings of US debt. It's called:
'Federal Debt Held by Foreign & International Investors'

The data gives the total foreign owned Federal debt calculated every 3 months since 31 March 1970 and doesn't quite tie in with all the data I had on the previous blog entry.

The US Gold Reserves figures are taken from this document in the public domain:

Again, I am going to do the calculations the same way but this time assuming that the debt data is consistent because it is all from the same page linked above:

Calculations: (1 tonne = 1 million grams. Need to x1,000,000/31.104 to get troy ounces: that factor is about 32150 troy ounces per tonne.)
Total debt / US gold reserves (tonnes) / 32150 = price of gold 'needed' to balance the debt using the gold reserves as collateral, as per Jim Sinclair's idea on :-

Total foreign holdings of Federal debt = $12,400,000,000
US Treasury Gold holdings = 9839 tonnes
Gold price to balance debt = 12,400,000,000/9839/32150 = $39.20/oz.
Actual average price for 1970 was $35.94, so VERY CLOSE TO FAIR VALUE.
This was before Nixon closed the gold window and 'floated' / 'sank' the US$.

Debt ballooned!
Total foreign holdings of Federal debt = $31,800,000,000
US Treasury Gold holdings = 9070 tonnes
Gold price to balance debt = 31,800,000,000/9070/32150 = $109.05/oz.
Actual average price for 1971 was $40.80, so way undervalued (by 62%).
Debt figure is for 30 June 1971. Nixon closed the gold window soon afterwards.
No wonder! The dollar needed to fall and the gold was disappearing with 769 tonnes lost in 1971.

Total foreign holdings of Federal debt = $56,800,000,000
US Treasury Gold holdings = 8584 tonnes
Gold price to balance debt = 56,800,000,000/8584/32150 = $205.81/oz.
Actual average price for 1974 was $159.26, so slightly undervalued.

Total foreign holdings of Federal debt= $119,500,000,000
US Treasury Gold holdings = 8584 tonnesGold price to balance debt = 119,500,000,000/8597/32150 = $432.35/oz
Actual average price for 1978 was $193.19, so 55% undervalued.

Total foreign holdings of Federal debt= $118,200,000,000 (down on 1978 - thanks Mr. Volcker!)
US Treasury Gold holdings = 8221 tonnes
Gold price to balance debt = 118,200,000,000/8221/32150 = $447.20/oz
Actual average price for 1980 was $612.56, so 37% overvalued (and 98% overvalued at the 1980 futures top of $887.50 by this method).

Total foreign holdings of Federal debt= $171,600,000,000
US Treasury Gold holdings = 8174 tonnes
Gold price to balance debt = 171,600,000,000/8174/32150 = $652.97/oz
Actual average price for 1984 was $360.48, so 44.8% undervalued.
Note that the calculation is getting close to the 1980 highs.

Total foreign holdings of Federal debt= $2,193,400,000,000 (massive)
US Treasury Gold holdings = 8,133.5 tonnes
Gold price to balance debt = 2,193,400,000,000/8,133.5/32150 = $8387.96/oz
Actual price for 18 July 2008 is $948.80 after being beaten down a bit, so 11.3% of fair budget balancing value, i.e. 88.7% undervalued.

So this set of data agrees with the previous set, on a fair value of $8000+ per ounce for gold.

You can see also that at some point gold was overvalued (by a factor of 2 in January 1980), and was close to fair value in 1970, which gives this analysis some credence I think.

One might even say that gold was actually undervalued in the period around 1970, because the French were in a hurry to swap their trade surplus $ for gold at that time!

By this analysis, fair budget balancing value of $8000 is implied.

Estimate gold market @ $8355+! 2008-07-18

Friday 18th July 2008 5.37 p.m. Estimate gold market @ $8355+!

Jim Sinclair had a prediction in 1974 for a bull market high of $900 for gold on this basis, quoting from his website article on dated 2008-07-17:

"In 1974 I concluded gold would rise to $900. That number represented the price gold would have to be at, times the amount of gold published as held for the US Treasury to balance the value, at par, of US Treasury debt held internationally. This would be balancing the international balance sheet of the USA.
The trick is analyzing what the international debt of the US is, both directly and implied. The number in 1974 was $900. I will not tell you the number today. It is absolutely scary

It is not easy to find the correct figures to reconstruct Jim Sinclair's forecast from 1974.
However, here are some useful pages concerning US debt owned by foreign countries and US gold reserves:


US Treasury: Treasury International Capital System Cross-Border Portfolio Holdings of Securities

Foreign Portfolio Holdings of U.S. Securities as of 6/30/2007 (klarge file (Use Right click Save Target As)

2008 Press Release revision of above:

Historic foreign debt & equity holdings 1974-2008

The United States Bullion Depository Fort Knox, Kentucky
Highest gold holdings 'this' (20th) century: 649.6 million ounces (December 31, 1941).
Amount of 'present' gold holdings: 147.3 million ounces. (Not sure of date. This is less than the total offical US gold reserves, see below.)
It also says, "The Depository is a classified facility. No visitors are permitted, and no exceptions are made."

Wikipedia (very useful and easy to see as usual!):-
World official gold holding (June 2008) - original source World Gold Council:
World 29,813.1 tonnes
United States 8,133.5 tonnes ... (261.49 M oz)
Venezuela 356.8
United Kingdom 310.3 (less than Venezuela, thanks to dickhead Gordon Brown)...
(Although the United States has the largest reserves of individual countries, in total the eurozone gold holdings are greater (11,065 tonnes as of December 2007).)

Central Bank Gold Reserves An historical perspective since 1845 by Timothy Green
This gives US gold reserves in USA as 8584 in 1974 and 8544 in 1975 (tonnes of gold).

World Gold Council latest information on gold holdings: (requires username and password)

Historical gold prices (see yearly charts and data):

Get your pocket calculators out!

Some of these US Treasury statistics seem to specify market value rather than 'par' value. Also, some include long and short term debt, some separate them. It doesn't really specify whether these are 'official' government holdings or if they include private institutional/investor holdings too. Some include other figures such as corporate debt and stocks and shares ('equities'), so the exact figures that Jim Sinclair would have used are not easy to find.

(1 tonne = 1 million grams. Need to x1,000,000/31.104 to get troy ounces: that factor is about 32150 ounces per tonne.)

Try for 1974:
Total foreign holdings of US Treasury debt (long+short term)= $42,427,000,000
US Treasury Gold holdings = 8584 tonnes
Gold price to balance debt = 42,427,000,000/8584/32150 = $153.73/oz
Unfortunately that is not Jim Sinclair's $900 prediction!
However, gold was quite close to this price in 1974! It topped at $195 and then declined to $103 before taking off again in the late '70s. Actually on the first trading day of 1975 (2 January), where Kitco's data begins, the London PM Fix gold price was $175.00. The Yearly average for 1974 was $159.26. how close is that? Within 5%! So it seems a very reasonable estimate. The debt had increased a lot by 1978 predicting a higher gold price as the 1970s went on. So let's continue on that basis... using data from these pages: and

Try for 1978:
Total foreign holdings of US debt (long term) = $42,427,000,000
US Treasury Gold holdings = 8584 tonnes
Gold price to balance debt = 50678000000/8597/32150 = $183.35/oz
Again, gold was quite close to this price in 1978! Actually this estimate is a bit low if anything. The 1978 range for gold was $160.90 to $242.75. Year average was $193.19/oz.

Try for 2008:
Total foreign holdings of US debt (long term)= $2,185,000,000,000
US Treasury Gold holdings = 8,133.5 tonnes
Gold price to balance debt = 2185000000000/8133.5/32150 = $8,355.84/oz.

I saw elsewhere an estimate of US short+long term Treasury debt held by foreigners as 1964928000000+229099000000=2194027000000 = S+L Treasuries = 2,194,027,000,000 2.194 trillion $, very close to the 2.185 Trillion that I used just above.

So this analysis gave a very reasonable estimate for the price of gold in 1974 and 1978 - and for 2008 gives a price necessary to balance the budget of the USA as being $8,355.84/oz!

Actually I think that this 2008 figure is not equivalent to the 1970s figures. The figures given on the Treasury website are at different levels of detail and are broken down in different ways, making it tricky to pick the right one. I need to look at the total long term debt figure in my calculation for 2008, which is actually $6.006853 Trillion.

Recalculate for 2008:
Total foreign holdings of US debt (long term)= $6,006,853,000,000
US Treasury Gold holdings = 8,133.5 tonnes
Gold price to balance debt = 6006853000000 /8133.5/32150 = $22,971.45/oz!

It seems that gold was already balancing this part of the debt of the USA by rising from $35 an ounce into the $150-200 region by 1974. I think that Jim Sinclair's calculation must be using a wider description of debt ("both direct and implied," as he says).

If you want to give yourself a fit, you could try using the total foreign holdings equity+debt, which at the present time are $9.771725 trillion as of the Treasury 2008 Press Release linked above. (Possibly that's closer in principle to what Jim Sinclair meant in 1974 to get his $900 estimate.) :
9,771,725,000,000/8133.5/32150 = $37,368.87/oz. That's an 'outrageous' price! Or maybe we should say that the today's actual $959.75/oz London PM fix is an outrageously low price?

Now, another date for which data is found: 1984. I cannot find actual Treasury debt data for 1980.
Try for 1984:
Total foreign holdings of US debt (long term)= $163,228,000,000
US Treasury Gold holdings = 8174 tonnes
Gold price to balance debt = 163,228,000,000/8174/32150=621.12/oz
Again, debt was up a long way by 1984. Average gold price was $360.48/oz, so maybe a bit undervalued. The estimate is in fact very close to the average gold price in 1980 which was $612.56/oz. Fascinating!

Let's summarise, including the adjustment factor that might be needed to bring the actual price to meet the estimate. Note how close the 1974 and 1978 estimates are, using this data!

Year, Estimate, Actual, Adjustment implied
1974, $153.73, $159.26 (annual average), x0.96
1978, $183.35, $193.19 (annual average), x0.95
1984, $621.12, $360.48 (annual average), x1.72
2008, $8355.84, $959.75 (17 July 2008), x8.71
2008, $22971.45, $959.75 (17 July 2008), x23.9

Since the 1970s figures using this model were both very close to the actual gold prices, these figures seem to imply more of a longer term 'fair value' for gold, rather than the price at a spike top such as the one in 1980.

PS. I have found another webpage that might explain Jim Sinclair's 1974 $900 peak estimate! See next entry.

Tuesday, 8 July 2008

Hyperinflation idea & key links! 2008-07-08.

Tuesday 8th July 2008 4:38 p.m. Hyperinflation idea & key links!

Here is my idea of the magnitude of inflation we might expect. Afterwards, I give some links to key articles on hyperinflation that I have read in the last few years.

After listening to John Williams speaking about hyperinflation on the 5th July edition of (2nd hour), I had an question, then an idea.

The question:
How could we calculate the magnitude of the possible upcoming hyperinflation?

The idea came the following night: look at how much money might need to be created to underpin the financial markets.

Suppose the mountain of financial derivatives was to collapse and the Federal Reserve had to print enought money to monetise it.

Money supply - Wikipedia, the free encyclopedia gives the M3 (broadest) money supply in the USA as 10.3 Trillion when it was last quoted in February 2006. At that time, the total notional value of outstanding derivatives was about 600 Trillion $ worldwide. More conservatively, perhaps we might try using total derivatives exposure of US banks first. for Fed M3 data
and for a reconstruction of M3 money supply to the present day, where it now stands at $13.5 Trillion.

OCC: Publications - Qrtrly. Derivative Fact Sheet tells me that the Total Notional Value of All Derivatives of US banks is about $180 Trillion.

To monetise these if they collapsed would take an increase in the money supply of 180/13.5 = 13.33x or 1,333%.

Initially, I used $10 Trillion for M3 and $500 Trillion to represent all derivatives outstanding worldwide at about that time in 2006 when M3 was last quoted. It gave an idea of how many dollars are out in the world versus the derivatives contracts. To monetise that lot would require an increase in the money supply M3 from $10T to $500T, an increase of 50x or 5,000%.

Interestingly, that would represent a 98% devaluation in the US dollar, which is about the same as the entire devaluation that has occurred over the last 75-100 years , since the inception of the Federal Reserve in 1913 and/or the US leaving the Gold Standard in 1933. Gold was $20.67 an ounce then and has recently been as high as $1030 per ounce, an increase of 50x or a devaluation of the $ against gold of 98%. Similarly for the British Pound. The gold Sovereign was a £1 coin originally but is now worth £108 in gold bullion value, a devaluation of the pound against gold of 99%.

So, after already seeing a 98% devaluation in the $ in less than 100 years, maybe we could see a 98% devaluation in the next 10 years, to write off the derivatives mess over the next decade. This also assumes that the derivatives don't increase even more (they are currently increasing far faster than the standard measures of money supply: M1, M2, M3, MZM, etc). I think Jim Sinclair mentioned that the total derivatives notional value worldwide has actually passed 1,000 Trillion (a US Quadrillion), which, versus 13.5 Trillion M3 would take a 74x increas in M3 to cover it, as of 2008.

Since the path of inflation would probably be unstoppable at that point, it might be possible to see yet another 98% devaluation in the $ in a single year to keep the trend going, and we would then be into a Weimar style hyperinflation with the $ going effectively to zero (perhaps along with many or all other currencies). Jim Sinclair doesn't expect the US to have the full Weimar experience of hyperinflation, whereas John Williams of Shadowstats does see this as the final outcome.

In any case, I see this quick calculation as being the one and only way to get an idea of the true potential of inflation needed to revive the financial system in the case of a systemic collapse being imminent. The only alternative would be to let the system collapse into a massive deflation. If they have already used as collateral for generation of credit, the magnitude of deflation that might occur if the 1,000T$ in notional derivatives were to be revalued to zero is quite alarming! Essentially, perhaps this 1,000 Trillion could be viewed as a form of money supply and if it was destroyed, the money supply would go from $1,000T to $13T (with only M3 remaining) perhaps overnight, nearly a 99% reduction. Hyperdeflation!

Some best links on the Hyperinflation topic:

A superb article by Julian Philips that I read a few years ago: The Quintessential Inflation - The Great Weimar Inflation (when the gold price by my calculation reached 76.5 trillion marks per ounce in 1923). Then I would recommend reading John Williams' Hyperinflation Special report linked below, straight afterwards.

There was also Howard Ruff's Kitco article, called hyperinflationary depression and here is the link to the excellent John Williams Shadowstats Hyperinflation Special report download page . This highly detailed Special Report is also linked from the front page of the excellent Shadow Government Statistics Home Page.

Here is a link to John Williams' indispensible Shadow Government Statistics » Alternate Data Series graphs.

Also, the excellent Jim Sinclair's MineSet is a key resource for talk on the derivatives debacle.

My own posts on inflation/deflation:
Hyperinflationary depression? 2008-04-26
Inflation/Deflation debate is BUNK! 2008-05-29
Chart hints at Financial Disintegration: 2007-12-23
Mega-move from Dow:Gold megaphone! 2008-06-04
Megaphone top in Dow:Gold ratio? 2008-06-03
Earthquake + inflation is more than 3%. 2008-02-07... (totally frivolous)

Happy inflating!

Thursday, 3 July 2008

News: BoA/Countrywide and ECB. 2008-07-03

Some News at last!
Bank of America takes over Countrywide and ECB raises interest rates.
2008-07-03 23:33 GMT

Well, it's been boring with gold consolidating so nothing to say. This blog isn't a running commentary. Let John Nadler at Kitco and the big financial news agencies waste their and your time by commenting on nothing all the time and telling you nothing of any use.

Today's news is worth mentioning.

I was putting on my new Favourite places after AOL managed to erase my old ones when I upgraded to their new network. I looked for Countrywide. It wasn't there on Yahoo Finance.

"Invalid ticker," it said. I then went to the news on Google and there it was: B of A took over Countrywide, as had been expected. Very quiet and buried under other news when it actually happened.

The other news: The European Central Bank raises interest rate by 1/4 point to 4.25%. The USA Fed is at 2%. What to expect? Euro should rise? Dollar go down? Gold go up possibly?

The opposite happened. Again the news agencies will find all kinds of spurious reasons why this was so. Do you want to waste your time reading them? I don't.