Are new highs for gold and silver a bull or bear indicator?
Posted on 29 September 2010 with 5 comments from readers
The price of gold hit a fresh high of $1,312 today as these words hit the computer screen, while silver powered above the resistance level of its 2008 high to $21.88. In the trading pits the news is that a powerful wave of buying yesterday overpowered the three bullion banks trying to suppress precious metals.
But it was an odd day in financial markets. The news about US housing and consumer confidence was bearish enough to send stocks lower on a typical day but they still managed to limp higher.
QE or not QE?
Attention among investors appears more focused on a possible resumption of quantitative easing by the Federal Reserve and its likely stimulatory impact on stocks rather than the fundamentals of a deteriorating US economy. This is in turn weakening support for the US dollar and a weaker dollar almost always sends precious metal prices higher.
Are investors therefore caught in some magic Goldilocks scenario where everything goes up, even when it should be coming down? It is probably a dangerous conclusion to reach, somewhat akin to buying a house at the top of the market in the sure and certain knowledge that prices will only ever go up.
It also seems pretty clear that Wall Street insiders flicked the sell switch at the weekend. That would account for the ‘accidental’ Google flash crash last Friday (click here). You bet against this crowd at your peril.
On this reckoning the gold pit action is just a last burst of optimism from latecomers to the party. For the gold price will surely dip (if not to much more than $1,150) in a big sell-off in financial markets, and silver will also fall back below $20.
Profit downgrades
For if the street is moving against you then you need to cross over to the other side. Surely the news that is in the works must be profit downgrades for 2011. Think of it from the other way around: why on earth would profits be upgraded in a deteriorating economy?
Wall Street brokerage houses control the release of their own forecasts and can use this to manipulate the market up or down as they please, or rather make sure that they have their short positions in place for a correction that they themselves drive.
Indeed, if you look at the COT options as a recent Barrons article noted, the small guys and long and the big players are all short. Yesterday the small guys perhaps overpowered the big guys in the bullion market but don’t count on this continuing for very long. A higher gold price usually means trouble and it is coming.
5 Comments posted by readers:
Bernanke’s inflation plan may be the least bad choice the fat cats have left. If the Federal Reserve chairman can engineer inflation he might solve some problems.
Inflation will reduce the real value of the US debt. Inflation will increase tax revenues. That can give all levels of government more money to spend, instead of less, in deflation. Inflation will pump up stock values, so people might quit saving every dime that they make, if they see their wealth increasing, instead of falling. That increase in spending will boost demand, and that extra demand will increase employment. Inflation itself will encourage increased spending. It won’t take people long to realize that saved money buys less and less. It is like a termite eating your dollar bill. You had better spend it before there is nothing left to spend. Economic activity will increase, and so will employment.
Employed people are less likely to default on their mortgages. That could finally stabilize real estate prices. (Until peak oil hits in 2016.) Fewer banks would fail, and those that remain won’t continue to take more huge real estate loan losses.
The devalued dollar will make US exports cheaper. Look how the stock market goes up whenever the dollar goes down. The cheaper dollar superceds nearly any bad news, and the Dow ends the day up!
Ben’s plan might work, but it does have risk. The greatest to me is the risk of it not succeeding as much in increasing growth, while increasing the supply of money enough to cause inflation. You end up with stagflation. Then trying to stop the inflation puts the economy back into a recession. You end up worse off with rising prices and high unemployment. You think people are mad now!
As far as hyperinflation, I just don’t see it happening. But it will be interesting to see if Ben can apply just the right amount of new money to prevent it, yet still stimulate the economy. I wouldn’t want that job.
If hyperinflation does occur, you would sure want to own gold. No matter what happens, I think the gold trend for the next couple of years is probably up. A lot of paper money will be created in an effort to try to get the world out of this mess.
But don’t be surprised if gold takes a temporary price dip around the time of the November US elections.
China et al may buy on the dips
“The news about US housing and consumer confidence was bearish enough to send stocks lower on a typical day but they still managed to limp higher.”
That’s because yesterday, 28 September, was another special day for the PPT (manipulators at the US Dept. of Treasury) and the POMO (Permanent Open Market Organization, which are the manipulators at the US FED Central Bank). I wonder how many billions these organizations pumped into the stock markets yesterday to prevent them from sending stocks lower?
For inquiring minds who are interested in reading more on the PPT and POMO operations, go here:
Link: http://www.zerohedge.com/article/cazenove-strategist-discusses-ppt-and-pomo-interventions-keep-markets-ramping-higher
and here:
Link: http://www.zerohedge.com/article/graham-summers%E2%80%99-weekly-market-forecast-hs-edition
BTW, I forgot to say that this was a very interesting commentary, Peter . . . I have two additional remarks:
1. As you stated, when gold continues to power its way higher, it spells big trouble ahead in the general market.
2. There are a great many folks I know who wished they bought physical gold last summer (or last spring, or last year!). For their sakes, I hope that when the general market tanks, gold will drop to around $1150 . . . that will be a great occasion for many “would-be” gold buyers to jump in. When this happens, that window of opportunity may not remain open for very long.
Man things getting interesting now, I bought gold at 870 now look where it is. Up over 1300 the investment guy I listen to was right, he called the stockmarket crash back in 2007 and has been spot on with things.
Check out his video below. he is calling for higher prices. When the SHTF then what??. Many most the fat obese people in the US are so asleep. They aint got a chance.
http://www.youtube.com/watch?v=-OSXpSGSz5M