All Aboard the Gold Train as Recognition Move Approaches

Since early 2009 we've written about the super-bullish long-term cup and handle pattern in Gold. It dates back to 1980 and has a logarithmic target of about $2,100. We noted that previous cup and handle patterns in Gold all reached their logarithmic target1. We expect that this move to $2,100 will be the recognition move that awakens the masses to the Gold bull market and the reality of severe inflation in the near future.

Speaking of the near future, the relative strength of Gold in the face of a strong US dollar (or weak Euro) is one big hint that this recognition move is around the corner. We've noted this before and it is important to explain to new readers. Gold priced in foreign currencies has been leading Gold in US$ terms. It is true for the entire bull market and is quite evident in just the past few years.

In the chart below we use the foreign currency ETF (UDN) to show Gold against currencies ex the US Dollar. The lower half shows Gold in US Dollars. Note how Gold/UDN is breaking away to new highs. That chart is so strong that it barely had time for even a small correction. Since Gold/UDN has been leading Gold reliably, this is an indication of what is eventually coming in the US Dollar price of Gold.

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Nowhere Close to a Bubble

As Gold pierces $1200 and makes a new high, surely we will hear a new round of calls that Gold is in a bubble or it is a crowded trade. Be sure to avoid this unsubstantiated nonsense, as it will only serve to waste your time and inevitably reduce your net worth. Let me provide you with just a few pieces of information, which refute this baseless claim.

First, did you know that as of a few months ago, Gold equities and ETF's only accounted for 0.7% of all managed assets in the world3! Can you imagine how high precious metals could rise, if everyone in the world just put 2% of their assets in this sector? What if it was 5% or 10%?

Second, Jim Rogers recently spoke at a conference with, in his words, 300 big-time money managers. Apparently 76% of them had never owned Gold!

Third, superstar fund manager John Paulson of subprime fame has had great difficulty raising money for his Gold fund4. Even one of the top fund managers can't even convince people to get aboard the Gold train.

Finally, consider public opinion on Gold, courtesy of sentimentrader.com. In the past, public opinion followed Gold higher. Yet, since the end of 2008, public opinion has stayed in a range, while Gold has climbed about $300/oz. The public hasn't budged despite the historic breakout and holding of $1000/oz level.

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Policy Makers are Shooting Blanks

Mainstream and amateur analysts will make the claims that the Fed will tighten or that the government will get serious about its troubling finances. There is almost nothing the authorities can do to stop the coming inflation and the roaring bull market in Gold and Silver.

First and most importantly, because of the overall debt level, which is massive compared to 1980, the US cannot afford to let interest rates rise. If interest rates rise, the market will only lose greater and greater confidence in the US as the interest burden will accelerate thereby hurting the economy's ability to grow and hastening the threat of bankruptcy. However, if interest rates remain low, speculation in hard assets will become rampant as these markets continue to rise, inflation ticks up and purchasing power declines.

Second, the Fed would have difficulty trying to tighten the money supply. Remember that to do this, the Fed would need to sell assets into the market. Remember, the Fed's balance sheet consists of garbage assets that the Fed overpaid for. Yes they could raise interest rates but then how would the banks survive? They wouldn't be able to borrow at 0.25% and repair their balance sheets. If the Fed would raise rates above the level of inflation, it would certainly end up threatening the financial system.

Moreover, as we've noted again and again, severe inflation results from a loss of confidence in a government's ability to meet its debts. This manifests in a falling bond market, rising interest rates and currency weakness. Debt crisis' go hand in hand with currency crises. Hence, we see Gold breaking out against numerous currencies even though "the banks aren't lending" and "velocity is falling."

The last line of defense is the Treasury market. If and when interest rates breakout to the upside, the authorities will effectively lose both control and power. At that point, the inflation genie will be out of the bottle. The action in Gold is already hinting at that outcome.

Conclusion

Even though Gold has risen nine years in a row, it is nowhere near a bubble. Just take a look at this chart courtesy of Frank Holmes. It compares Gold's current bull market with its bull market in the 1970s.

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Note that Gold rose about six-fold the first eight years into the bull market (it began in 1970). Ultimately it rose 25-fold. The Nasdaq from 1982 to 1992 advanced about four fold. Ultimately it rose 29-fold. The Nikkei advanced less than three fold from 1970 to 1978. From 1970 to 1990 it gained 19-fold. Gold is nine years into its bull market and has advanced less than five fold. See a pattern here?

If you'd like professional assistance riding the coming acceleration and eventual mania in the Gold and Silver market, then visit our website and consider a free 14-day trial to our premium newsletter.

Jordan Roy-Byrne, CMT

http://www.thedailygold.com

[email protected]

Footnotes:

1) http://thedailygold.com/chartstechnicals/gold-cup-and-handles/?p=3117/

2) http://wallstcheatsheet.com/trading-markets/gold-in-euros-is-about-to-go-parabolic/?p=6862/

3) http://thedailygold.com/chartstechnicals/gold-is-0-7-of-global-managed-assets/?p=887/

4)http://online.wsj.com/article/SB10001424052748703615904575053793439062452.html

~ S {yockade is the only real way to enforce that. And from Iran's point of view, that means war.

By the Monitor's Editorial Board / April 23, 2010

In this post-9/11 age, the idea of preemptive war against a terrorist-prone country supposedly went out of favor after the 2003 US invasion of Iraq.

Yet Congress is now pushing President Obama toward steps that could easily be interpreted as an act of war against Iran over its nuclear ambitions.

The House and Senate are moving quickly on a bill to force US sanctions on the sale of gasoline to the Islamic Republic of Iran. In theory, the measure would only punish US and foreign companies that export refined oil products to Iran which, despite being a major exporter of petroleum, lacks sufficient oil refineries.

But there's a big problem: The only way to really enforce such a crippling sanction against the Iranian economy would be through an American-led naval blockade which, by international law, is an act of war.

In recent days, Iran's regime has made it pretty clear that it is preparing to fight such a blockade, if it comes to that. Iran's Revolutionary Guard Corps began a five-day sea, land, and air military exercise April 22 in the Persian Gulf and Gulf of Oman. The war games may even extend to the Strait of Hormuz, the watery chokepoint through which a fifth of the world's oil flows on giant tankers, and which is guarded by the US Navy.

History is instructive here: It was a US ban on the export of oil to Imperial Japan for its invasion of China that triggered the 1941 attack on Pearl Harbor. And a US naval blockade of Cuba in 1962 almost led to nuclear war with the Soviet Union.

Also on April 22, the House of Representatives voted by a huge 403-11 margin to set a deadline of May 28 for an agreement with the Senate on the gasoline sanctions. In the Senate, too, patience with President Obama's slow and often faltering approach to Iran is running thin.

"We have waited long enough for diplomacy to work," says Senate majority leader Harry Reid. "Iran is a festering sore in the world."

Here's the link to the full story.

One way or another, the West seems to have its sights set on laying Iran low, giving that nation no more credibility to its claims that it wants to use its nuclear capabilities only for civilian purposes than it did to Saddam Hussein's that he had no weapons of mass destruction.

Something has to give here, and in that it sure doesn't look like it's going to be the Iranians' determined stance on uranium enrichment, a new war involving America is a very real possibility.

* * * * * *

The next story is posted at the heraldscotland.com website.  I knew that South Africa was going down the tubes… but until this story showed up, I didn't know just how quickly it was happening.  The opening paragraph reads… "A leading black South African ­commentator has uttered the dreaded "Z" word, a sentiment that has been considered too terrible to think for ordinary people, and considered near-treasonous in the upper reaches of the ruling African National Congress."  Well, now it's been said.  The headline states "Is South Africa Turning Into Zimbabwe?" It's a bit of a read… but definitely worth your while… and the link is here.

The last two stories are about the spreading sovereign debt crisis, not only in Greece, but the other PIIGS as well.  The first story is courtesy of reader Roy Stephens and is an item that appeared in yesterday's edition of The New York Times.  Greece's credit rating was lowered to junk status yesterday… and the panic and fear in European capitals was palpable.  The headline of this story reads "Cuts to Debt Rating Stirs Anxiety in Europe"… and the link is this story is here.

Later on Tuesday evening, Ambrose Evans-Pritchard at The Telegraph in London weighed in with his own piece on the unfolding debacle.  Here the headline reads "ECB may have to turn to 'nuclear option' to prevent Southern European debt collapse".  The European Central Bank may soon have to invoke emergency powers to prevent the disintegration of southern European bond markets, with ominous signs of investor flight from Spain and Italy.  The situation is getting uglier by the hour, dear reader, and I can't see this crisis lasting much longer without something blowing up… or freezing up.  This is a must read article… and the link is here.

We have gone past the point of no return.  There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day. – Jacques Cailloux, chief Europe economist, Royal Bank of Scotland… 27 April 2010

Well, dear reader, things are circling the drain much quicker now.  There is no possible way out of this except the three options I keep mentioning… 1] a deflationary depression, 2] a hyperinflationary depression or, 3] a massive upward revaluation of the gold price in order to increase the asset side of the ledger for the European Central Bank et al.  Sooner or later, gold will be the only option left… but it's obvious that things will have to get a lot worse before that happens.  But at the rate things are going right now, that may not take long.

It should be no surprise that the gold price in Euros hit a new record high yesterday.  Here's the  one-year $Gold:$Euro chart.

This should speak volumes to you, dear reader.  It says you should buy more silver and gold… and take physical delivery asap!  You should also be buying the stocks in companies that mine this sort of money… and there's no better place to start then Casey's Gold and Resource Report… or Casey Research's flagship publication… the International Speculator.  It's my opinion that time is running out… and I'm ever so happy to be 'all in'… and have no intention of changing from that investment posture.

The CME has posted preliminary volume figures for Tuesday's trading activity in both gold and silver… and they read as follows:  Gold volume was a very high 199,470 contracts, of which about 9,000 were roll-overs.  Silver traded a chunky 61,299 contracts…of which around 30% were roll-overs.  Open interest for May fell 3,542 contracts to 16,676 contracts… but I expect that will be revised downwards rather significantly when the final figures are posted later this morning.

Far East and early London trading volume [as of 5:55 a.m. Eastern time] showed gold around 25,800 contracts for June… net of roll-overs.  Trading in silver is a heavy 7,500 contracts… but over 70% of that volume is switches from the May contract into July.  This is no surprise.

The gold price isn't do much of anything… but is trending downward at the moment… and I see that silver got creamed the instant that Hong Kong trading ended for the day… and the dollar is in a rally mode at the moment… up about 32 basis points.

Open interest numbers will be something to see when they show up on the CME's website later this morning.  I'm expecting the worst for gold… and [considering Tuesday's price action] it's impossible to even guess what happened to the o.i. in silver.

Yesterday's trading activity did not disappoint, as it was even more 'wild and wooly' than even I expected… and I'm expecting the same sort of activity until the New York markets close on Friday afternoon.  So hang onto your hats.

See you on Thursday.