Posts Tagged ‘gold’

 

Gingrich Tries To Grab Some Votes

It has turned out that Ron Paul's critique of the Federal Reserve has caught on. Polls have revealed that voters (especially Republican voters) are actually partial to the idea of going back to a gold standard. This was revealed in a Rasmussen poll in early January, which characterized the gold standard debate as a 'sleeper issue' that 'could tip the scales of the race'.

 

„Phone interviews with 501 likely caucus-goers were conducted in Iowa in mid-November. The potential respondent was screened to ensure a. registration to vote in Iowa b. registration as a Republican and c. self-described as “definitely” or “probably” going to participate in the caucuses to select the Republican nominee for president. The survey has an overall margin of error of 4.4 points at the 95 percent confidence interval.

“A majority (57 percent) of those surveyed are favorable to the United States returning to a gold standard and over one-quarter is ‘very’ favorable to the idea,” reports pollster Erin Norman. “Only 17 percent are unfavorable to this idea, which equates to a better than three-to-one favorability ratio among likely Iowa Republican Caucus goers. These are remarkably high numbers given that the question contained no information about the gold standard specifically.”

Translated out of pollsterese? The gold standard drives votes both in the caucuses and primaries and in the general election.“

 

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Gold Bonds: Averting Financial Armageddon

After the near-collapse of the financial system in 2008, a growing number of people have come to realize that our monetary disease is terminal. It is that group to whom I address this paper. I sincerely hope that this group includes leaders in business, finance, and government.

I do not believe that my proposal herein is necessarily “realistic” (i.e. pragmatic). There are many interest groups that may oppose it for various reasons, based on their short-sighted desire to try to continue the status quo yet a while longer. Nevertheless, I feel that I must write and publish this paper. To say nothing in the face of the greatest financial calamity would go against everything I believe.

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Inflation: An Expansion of Counterfeit Credit

The Keynesians and Monetarists have fooled people with a clever sleight of hand. They have convinced people to look at prices (especially consumer prices) to understand what’s happening in the monetary system.

Anyone who has ever been at a magic act performance is familiar with how sleight of hand often works. With a huge flourish of the cape, often accompanied by a loud sound, the right hand attracts all eyes in the audience.  The left hand of the illusionist then quickly and subtly takes a rabbit out of a hat, or a dove out of someone’s pocket.

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The Technical Picture

Gold's recent correction has ruffled the feathers of many gold bulls and brought quite a few bears out of the woodwork. Many articles like this one ('Gold could fall below $1,400 in a hurry') have recently appeared.

But does this sudden outbreak of bearishness actually make sense? Read the rest of this entry »

 

Interventionism and Market Volatility

The enormous recent market volatility, driven mainly by 'macro-news' and well established intermarket correlations that are used as triggers for systematic trading have made life difficult for all but the nimblest traders. It is highly unfortunate that it has come to this. In the stock market, it is no longer enough appraise the investment merits of various businesses, instead more and more effort has to be expended on a form of 'Kremlinology'. What politicians and central bankers are apt to do next has become an ever more important question for investors since the beginning of the ongoing crisis period in 2007/8. Note here that we are not necessarily distinguishing between the so-called 'GFC' centered on the US mortgage credit bubble's collapse and the current sovereign debt crisis in Europe. We regard them as essentially different stages of the same financial and economic crisis.

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Gold and Economic Confidence

We are taking a brief look at gold and gold mining stocks again, updating our previous reports on the sector. We last wrote about gold itself on October 5 ('Gold, positive signals emerge') and on the sector including gold stocks on August 15 and September 12.  In the latter article we took note of the fact that the HUI index had broken out to a slight new high, but also commented on the flaws we perceived with regards to this breakout at the time – notwithstanding the fact that gold stocks represented and continue to represent good value relative to gold itself. Read the rest of this entry »


Precious Metals Sell Off

On Thursday and Friday, the decline in precious metals prices accelerated, in the process breaking a number of short term and in some cases medium term support levels.

To this we want to note that the increase in margins on gold, silver and copper futures by the CME was not the reason for the decline, but its consequence. Consider for instance that at one point on Friday, the gold contract was down by $114. At that point a buyer on Thursday's close would have had a 'paper loss' of $11,400 per contract. However, before Friday, the initial margin per gold contract was only $9,450, with the maintenance margin at $7,000. Obviously, at the low point, more than the initial margin of our putative buyer would have been wiped out. In that sense, Friday's margin increase to $11,450 initial and $8,500 maintenance margin is probably insufficient.

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Greece On A Knife's Edge

Late last week the credit markets eased off in their run on Greek government debt and CDS on same, following the reaffirmation by France and Germany of their intention to extend support to the beleaguered Greek government.

Over the weekend the brinkmanship that has frequently preceded previous aid disbursements to Greece continued, with euro area finance ministers postponing an undertaking to release the next bailout tranche and instead stressing that it may well not be paid out. This was evidently done in order to force the Greek government to make fresh commitments which in turn will make the release of the bailout tranche easier to sell to the domestic electorates of the other euro-area members.

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The Monetary Backdrop Remains Gold-friendly

The euro area debt crisis continues and with it the probability that the ECB eventually adopts a more expansive monetary policy increases. Concurrently,  'QE3' or a similar gimmick is likely to be implemented by the Federal Reserve at the September FOMC meeting, as US economic data continuing to sag, especially employment related data.

This monetary backdrop should keep gold well supported. Other factors that tend to influence the price of gold are for the most part also gold-friendly at present, with the possible exception of the dollar's exchange rate. However, it should be noted that we have seen the gold price rise even while the dollar strengthened on several occasions in the past – usually when the main impetus behind dollar strength was a further deterioration in the euro area crisis.

It is of course possible that gold will correct somewhat in the near term (it would actually be a good thing for the market if it were to pause and catch its breath), but this is by no means certain.

Regardless of that, many gold stocks continue to offer very good value. We have discussed the growing strength in gold's purchasing power before, and this has without a doubt elevated mining profit margins while simultaneously raising the net present value of economically viable discoveries. This strength in gold's real price continues to be in evidence as can be seen below. Read the rest of this entry »


European Chaos

„Zeus gave Europa a necklace made by Hephaestus and three additional gifts: Talos, Laelaps and a javelin that never missed.“

 

Laelaps was a dog that never failed to catch what it was hunting, while Talos was a giant made of bronze who circled Crete to protect the island from attack. Somehow both the dog and the javelin seem to have been lost.

The volume of financial news Europe generates in a single day is almost overwhelming -  for a newspaper editor these days it must be sheer agony to decide which one of all these items should actually decorate the front page.

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Hoping For the Helicopter Pilot

Funny enough, a few hours after we noted that wounded stock bulls were likely pinning their hopes on Bernanke's upcoming Jackson Hole speech, the WSJ reported that 'stocks jump on hopes for Fed action'. 'Hope' is of course the worst possible investment strategy. Also, if true, then this is an interesting case of Pavlovian conditioning. It apparently took only a single instance of inflationary promises emanating from this otherwise rather sleep-inducing gabfest last year (a gathering of people whom the market economy would undoubtedly be far better off without) to induce an advance reaction in stock traders one year later. This year the patellar reflex, otherwise known as the 'knee-jerk', went into action even before the chief printer had a chance to add to his already ample stack of promises of free money forever and ever.

The market rally, though impressive for a single day,  once again seems to rest on weak foundations. This is not to say that the bounce can't or won't continue, we are merely++ noting that similar to previous rally attempts, it was marked by decreasing volume relative to the preceding sell-off. However, volume was better than on the immediately preceding rally attempts, and the divergences we have recently discussed  have solidified. So it certainly seems possible that the bounce will live beyond a single day.

 

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A Bounce Goes Missing

We are somewhat concerned by how quickly the stock market's recent bounce was given back again. To be sure, this potentially sets up the divergences that are often associated with short to medium term lows, but it doesn't qualify as a proper retest due to its rapidity. In fact it looks more like the fifth wave down in a 5 wave impulsive sequence.

As we have pointed out last week, there is however a small divergence between the Industrial and the Transportation Averages that was still in evidence as of Friday's close, in spite of the continued sell-off. Also worth noting is that trading volume has been declining in the most recent leg down relative to the 'kick-off' move.

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Facts and Rumors

The recent bounce in stock and commodity markets didn't go as far as we had thought it would. In fact, it was interrupted rather rudely on Thursday. There was no discernible single trigger one could pin the swoon on, but rumors regarding the state of the European banking system keep bubbling to the surface and economic data continue to weaken dramatically.

More specifically, the fact that one euro-land bank recently borrowed $500 million from the ECB at a penalty rate has raised a few eyebrows, as has the reopening of currency swap lines between the Fed and the SNB to the tune of $200 million. It appears there is ever more dollar funding trouble in the European banking system, something we have pointed out was  inevitable, as US based money market funds have pulled back from lending to euro-area banks. The funding problem continues to be confirmed by the action in euro basis swaps as well. The only thing that has to our slight surprise not happened thus far is a visible strengthening of the US dollar, but this can probably be explained by the fact that money supply growth remains ample and that the market expects even more easy money from the Fed.

Speaking of the Fed,  the US central bank has begun to scrutinize the finances of euro area bank subsidiaries in the US. Note here that these subsidiaries have US banking licenses and thus fall within the Fed's regulatory ambit (they are also allowed to borrow from the Fed's lending facilities).

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Could Gold Soon Go Ballistic?

The price of gold is at present widely expected to correct – this expectation is based on the fact that it looks rather overbought at the moment, see below:

 


 

The price of gold in dollar terms – it certainly looks short term overbought – click for higher resolution.

 


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 … but it stands on a weak foundation.

The expected rebound in stocks and commodities has continued on Monday, but there are a number of signs that this is not much more than a short covering rally that is unlikely to last. Although yields on euro area government bonds and CDS on them have continued to decline (we will update the euro area charts tomorrow), the fact remains that the economy is under pressure, so bounces in stocks have to be approached with great caution – they are more likely to represent selling opportunities than a reason to buy at this stage. Notably the recent rally has inter alia been triggered by a short selling ban in several European countries. Short selling bans have historically always been medium term bearish events – they can trigger a bounce lasting for a few days, but in the long run they are extremely counterproductive, as they lower liquidity and hinder the price discovery process. By taking away the opportunity to hedge, they ultimately create even more selling pressure than would have appeared otherwise. This latest short selling ban is thus likely destined to fail as well – one wonders why the authorities even bother.

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