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Technical analysis allows investors to identify trends, support, resistance, and different chart patterns to make better informed trading decisions.

While there are a lot of great investment books out there that cover stock charts, they all lack one key ingredient, interaction. Reading text and looking at images gets old after a while and can be noneffective.

To change this, I cofounded InvestingTeacher.com last year which provides completely interactive content. I am talking drawing trendlines on charts, drag an drop, built for tablets such as the iPad, interactive questions, and more.

We initially launched the site with courses and lessons, however after compiling feedback from users, we've combined all our content (156 pages worth) and created a first of its kind, 100% completely interactive eBook, appropriately titled The Interactive Guide to Technical Analysis.

The guide consists of 28 chapters, teaching everything there is to know about stock charts. From the basics of what a stock chart is to identifying Cup & Handle formations to trading engulfments, there is a lot of depth.

I am extremely excited to have wrapped up the 1st Edition and can't wait for you all to read it. The first chapter is free, with the full 156 page guide costing just $29.95 thereafter.

Read the 1st Chapter Now at InvestingTeacher.com

Original post: Learn Stock Charts with this 156 Page Interactive Guide

From the oven: home-made whole wheat bread.

Bread, "the staff of life" in much of the world, isn't for everyone. Many people find their well-being improves after removing gluten from their diet. Some see the dramatic rise of obesity in the 1980s as causally related to the widespread adoption of specific types of wheat.
If you do eat bread, home-made whole wheat loaves are a real treat:

We include a few tablespoons of ground flax seed in the dough for a nutty flavor and the extra nutrient boost of omega-3 fatty acids and phytochemicals called lignans.
The excellent bread knife shown here was a gift from longtime correspondent Kevin K.

When home-made bread isn't practical, a crusty bakery-made loaf (in this case, pain de levain) is a treat when served with some regional cheeses and a glass of wine for those who partake of the grape:

Although it's often lost in a culture that glorifies extremes, "moderation in all things" is key to healthy living and enjoyment.
I know it sounds weird to the depoliticized mainstream, but "A healthy homecooked family meal and a home garden are revolutionary acts."


My friend and mentor Jim Kunstler was kind enough to invite me to his podcast program: KunstlerCast #330: A Conversation with Charles Hugh Smith.
I mention my "Hollywood ending" for 2013: a stock market collapse that utterly discredits the Federal Reserve's policies and all those who supported them. We also discuss the insane costs of sickcare.
Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy
Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)



Thank you, Royce M. ($75), for your supremely generous contribution to this site -- I am greatly honored by your steadfast support and readership.Thank you, Frank S. ($150), for your outrageously generous contribution to this site -- I am greatly honored by your steadfast support and readership.
google_ad_client = "ca-pub-6006126731309477"; /* new300X250 */ google_ad_slot = "5310346840"; google_ad_width = 300; google_ad_height = 250; Go to my main site at www.oftwominds.com/blog.html for the full posts and archives.

Last analysis expected more choppy overlapping movement for Friday’s session which is mostly what happened. This correction is most likely incomplete. The wave count remains the same.

Last week’s analysis expected further upwards movement from the Dow which is what happened. Price has found resistance at the upper edge of a long held parallel channel on the monthly chart. The wave count is slightly changed at minor wave degree. The target is mostly the same.

A basket of major currencies in Asia including the Philippine peso suffered a blow against the US dollar after the recent comments of Federal Reserve chairman Ben Bernanke. Bernanke commented on considering cutting back stimulus programs if the US economy continues to improve. This was received positively by investors since an interest rate hike that could likely happen induced to buying the greenback.

Above is the daily chart of the USD/PHP currency pair where we can see the Philippine peso exchanging at PHP40.40-41.50 to a dollar for seven months until it surged to a high of 41.83 last May 23. As for my technical analysis, during that 7-month period, the currency pair consolidated to a cup and handle formation and broke out when it breached the 41.42 neckline after Ben Bernanke’s speech. The pair may further rise to 42.30 based on my target price which I got by gauging the size of the chart pattern and adding it to the breakout point. On the way up, however, the 42.06 resistance should be a bit of a hurdle for the US dollar’s rise. If the dollar sustains its rally against Philippine peso, heavy selling pressure could be expected at the 42.30 marker which is currently the 9-year downtrend/resistance line. Although, if this breaks, the Philippine peso could further weaken and trade around 43.50-44.00 to a US dollar.

The USD/PHP rally was triggered by the mixed market sentiments that arose after Ben Bernanke’s speech as well as the profit taking in the Philippine stock market after an amazing run which broke of all-time highs. A significant chunk of these funds taking profits are from foreign investors who we can’t blame if they just want to take a break for the coming June to August summer. I may be biased but in my opinion, I’m seing this rally only for a short run. Remember, the fund inflows that the Philippine stock market will be getting after the recent credit rating upgrades hasn’t been taking into account yet. Just imagine when it does. 38.00? We’ll see… Happy weekend!

 

The DJIA had been threatened with its first 3 day losing streak of the year but a rally in the closing minutes pushed that index into the green (the only index in fact to do so) and we continue the streak at over 100 days, the longest in history.  As for other indexes they opened down sharply and despite positive economic news in the form of a durable goods report, stayed down in the morning but dip buyers showed up at almost the exact same spot as they did yesterday.  The S&P 500 fell 0.06% and the NASDAQ 0.01%.  This was the second worst week for the year, which is now saying much as most indexes only finished down in the 1 to 1.5% range.  Japan had another wild session - up over 3% and then down over 3% before finishing up under 1%.  In this world of global connection the movements there are adding to some nervousness in the United States and it seemed to affect futures early in the morning.

With the S&P 500, you can see the past two days there have been buyers at the spot where the index broke out from in early May out of a bull flag - old resistance can turn into new support so that is the case.  Now bulls want to recapture the 10 day moving average which the index has not been below almost the entire month.  Bears obviously want to see the lows of the past two sessions broken.

The McClellan Oscillator fell well below the -50 range in the morning selloff which has been a good place for short term bounces; so it makes sense there was some buying after the initial bout of selling.

Let's look at how some of the major commodities are doing.  We can see oil remains in the same condition it has been for a long while - there are a series of lower highs forming; if that changes and oil breaks out above this trendline it should bode well for a move up.  Otherwise it is range bound.

Gold and silver remain among the weakest areas of the market - no life in gold, and silver continues to stair step down in a series of bear flag formations.

One individual name that we can circle back to as we have not discussed it much is Facebook (FB).  There is a reason for that - the stock is not acting well at all and continues to work through a descending channel.  Until it can break out of this pattern it remains a place to avoid and/or short.

Markets are closed Monday for the holiday so have a good Memorial Day and we'll see you back here Tuesday where we will see if the bears can make any progress or this is just a rest stop for another move up for the bulls.

Original post: STTG Market Recap May 24, 2013

Based on the May 24th, 2013 Premium Update. Visit our archives for more gold & silver articles.

 

We would like to start with a question from one of our subscribers today, as we believe that it is a good way to show the distinction between tools that help you spot what direction the market is about to move and those that are better suited to time the exact reversal point, which is – in current circumstances – the final bottom in gold, silver and the whole precious metals sector.

 

Q: (…) One thing that I do is to look for price divergence with RSI and MACD and that is evident in the charts. Price has hit a lower low and RSI and MACD have hit a higher high/low. To me that indicates a possible good time to buy GDX, GDXJ and mining stocks. This is a volatile time so it would be difficult to hold through this period.  (…) Also $BPGDM is at zero and can’t go any lower. (…)

 

There are divergences in numerous indicators now – such as RSI and MACD – on numerous precious metals-related indices and for individual mining companies. This, however, has been the case for some time. For instance on the GDX ETF chart you can see that the early April low was accompanied by a higher low in the RSI indicator, and preceded by a move higher in MACD. The early March bottom was also accompanied by a higher low in the RSI indicator.

 

The point is that divergences are good in showing that a given move may be running out of steam, but are not that good when it comes to determining whether the bottom is in or not. With a reverse parabola in gold and a long-term cyclical turning point that we wrote about in our last essay, we are quite certain that the end of the decline is near, and that’s all that the divergences confirm. They don’t suggest whether or not the bottom is already in.

 

The Gold Miners Bullish Percent Index was indeed at the 0 level and it couldn’t go any lower (it’s a bit higher today). That’s true. But miners can. This index was at 0 in 2008 when the final bottom was formed – that’s true. However, that’s just a one-time event. It has some predictive power, but it’s not all that strong as it’s not a tendency. Statistically, we would have to see about 30 cases or more to speak of an existing relationship. But putting statistics aside, we would have to see at least a few cases with the same or similar outcome to say that this could be a tendency. Consequently, while the Gold Miners Bullish Percent Index being at 0 is a contrarian bullish factor, we think that other methods of analysis are more important right now.

 

Having briefly discussed some of the tools to time the final bottom, let’s see such tools in action. Let’s move on to today’s chart section with the analysis of the silver market. We will start with the very long-term chart (charts courtesy by http://stockcharts.com.)

In this chart, we saw particular intra-week volatility but prices overall are not much higher, increasing by just $0.25. The week was pretty much flat and very little changed with respect to price or outlook.

 

Getting a closer look at this chart shows further similarities with the declines of 2008. We saw a 3 week consolidation period after the initial plunge before prices moved lower once again. Note how silver moved lower back then after initially correcting and closed the week close to the previous local low that ended the previous sharp decline. This is about where we are right now.

Based on weekly closing prices, we already have a breakdown below the early April low which is another confirmation of the similarity between now and 2008. The self-similarity now suggests increased volatility and a big decline ahead.

 

Now, let’s turn to silver:gold ratio as it is yet another tool that – thanks to self-similarities – helps us time the upcoming bottom.

We saw no significant underperformance of silver this week. The ratio has pretty much traded sideways for several weeks now. Although there was a bit of inter-week under- performance, it is much less visible than what we would expect based on the declines seen in 2008. The implication is that the final bottom is probably not yet in.

In the short-term SLV ETF chart, once again we see that prices moved higher early in the week and this move was strongly invalidated on Wednesday with volume levels nearly as high as Monday and Tuesday combined. Prices did move higher on Thursday but volume levels were pretty much average, actually a bit weak if compared to volume levels of the past week, and less than one-fourth of what they were the previous day, so the move to the upside did little to change the overall outlook here.

 

Summing up, the situation on the silver market does not look all that bullish. The cyclical turning point suggests a bottom in a week or so but we feel a need to see this confirmed by other markets. Placing our trust in this tool alone does not seem sufficient at this time. Even though we see divergences between many indices and particular mining stocks and main technical indicators, they only support the claim that the final bottom is about to form, but give no direct clues as to when exactly it is going to be formed. Here, the self-similar patterns seem more reliable and the best idea in our opinion is to wait for more decisive signals.

 

To make sure that you are notified once the new features are implemented, and get immediate access to our free thoughts on the market, including information not available publicly, we urge you to sign up for our free gold investment newsletter. Sign up today and you’ll also get free, 7-day access to the Premium Sections on our website, including valuable tools and charts dedicated to serious Precious Metals Investors and Traders along with our 14 best gold investment practices. It’s free and you may unsubscribe at any time.

 

Thank you for reading. Have a great and profitable week!

 

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

Gold Investment & Silver Investment Website – SunshineProfits.com

* * * * *

About Sunshine Profits

 

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer

 

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Stock markets at a crossroads after sell-off - Financial Times

http://news.google.com

The Week MagazineStock markets at a crossroads after sell-offFinancial TimesIf past trends are any guide, moves by the Federal Reserve to taper or terminate its quantitative easing programme could trigger a significant stock market correction that is ...

Correction is contained on stock market - Kathimerini

http://news.google.com

KathimeriniCorrection is contained on stock marketKathimeriniA late push led by Coca-Cola HBC contained the significant losses incurred by most blue chips during Monday's session on the Athens bourse, as investors sought to cash in on last week's gai ...

A Stock Market Correction Will Yield Trading Opportunities ...

http://www.istockanalyst.com5/21/13

We have seen a big rally in U.S. stocks and that is what we are seeing still yet! With all the whining and crying and doomsday scenario gurus are selling with their newsletters, the markets have risen to new all-time highs.

Here’s a simple bounce play that I see in the USD/CHF forex pair. As you can see from the pair’s 1-hour chart, the US dollar may strengthen a bit against the Swiss franc as the pair appears to find some support at the 0.9650 level as for my technical analysis. If this marker holds then the pair could rise back to at least 0.9700. On the other hand, a break below 0.9650 may send it down towards 0.9600. Given the present set-up, I’m gonna look to buy at 0.9650 and sell at 0.9700 with a stop loss at 0.9150. Wish me luck!

Casey Research's Chief Energy Investment Strategist, Marin Katusa, whose portfolio profited nicely the last time the uranium bull broke loose a decade ago, recently interviewed a group of world-renowned energy experts to discuss the prospects for the sector that some considered doomed by the Fukushima disaster. Anti-nuclear power sentiment has by no means evaporated, but Katusa sees clear signals that the bulls are ready to run, not least of which is the recent attack on the Somair uranium mine in Niger.

Do you follow your own advice? Ivan Lo, editor and founder of Equedia.com and The Equedia Weekly Letter, does. Lo doesn't just follow companies in the gold and silver space, he actually paused this...

Visit the aureport.com for more information and for a free newsletter

About the claim that central banks will never let asset bubbles pop ever again--their track record of permanently inflating asset bubbles leaves much to be desired.

The problem with trying to solve all our structural problems by injecting "free money" liquidity into financial Elites is that all the money sloshing around seeks a high-yield home, and in doing so it inflates bubbles that inevitably pop with devastating consequences.
As noted yesterday, the Grand Narrative of the U.S. economy is a global empire that has substituted financialization for sustainable economic expansion. In shorthand, those people with access to near-zero-cost central bank-issued credit can take advantage of the many asset bubbles financialization inflates.
Those people who do not have capital or access to credit become poorer. That is the harsh reality of neofeudal, neocolonial financialization. Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012).
Injecting liquidity by creating credit and central bank cash out of thin air is not a helicopter drop of money into the economy--it is a flood of money delivered to the banks and financial elites. The elites at the top of the neofeudal financialization machine already have immense wealth, and so they have no purpose for all the credit gifted to them by the central banks except to speculate with it, chasing yields, carry trades and nascent bubbles (get in early and dump near the top).
Life is good for the kleptocratic financial Aristocracy: for debt-serfs, not so good.
No wonder the art market and super-luxury auto sales have both exploded higher. Thanks to the central banks' liquidity largesse, the supremely wealthy literally have so much money and credit they don't know what to do with it all.
If you want to borrow money to attend college, the government-controlled interest rate is 9%. If you want to speculate in the yen carry trade or buy 10,000 houses, the rate is near-zero or at worst, the rate of inflation (around 2% to 3%). If you want to borrow money for anything other than a socialized mortgage to buy a single-family home, tough luck, you don't qualify. But if you want to speculate with $10 billion--here's the cash, please please please take it off our soft central-banker hands.
If your speculations end badly, then no problem, we transfer the toxic trash heap of debt and phantom assets onto the balance sheet of the central bank or onto the public (government) ledger.
Given this reality, it was inevitable that the stock, bond and housing markets would all be inflated into bubbles by this monumental flood of free money. Please consider these three charts:

Spot The Bubble: Average New Home Price Soars By Most Ever In One Month To All Time High (Zero Hedge)
Verdict: bubble.

Verdict: bubble.

Japanese Bond Market Halted At Open As Bond Selling Purge Goes Global (Zero Hedge)
Verdict: bubble popping.
It is widely accepted as self-evident that all these bubbles will not pop because the central banks won't let them pop. That's nice, but if this were the case, then why did stocks crater in 2000-2001 and 2008-2009, and why did the housing bubble implode in 2008-2011? Did they change their minds for some reason?
No; they assured us right up to the moment of implosion that everything was fine, there was no bubble, etc. The only logical conclusion is that bubbles pop even though central banks resist the popping with all their might.
In the past, central banks were pleased to inflate one bubble at a time, enabling money both smart and dumb to flee one smoking ruin and get busy inflating the next bubble-ready asset class.
But now, thanks to essentially unlimited liquidity and credit, the central banks have inflated three bubbles at the same time: stocks, bonds and housing. That raises an interesting question: what if all these bubbles pop in unison? Will the central banks be able to place a bid under all three markets simultaneously? If so, where will all that freed-up cash go next?
One possibility is gold, another is commodities such as grain and oil. The latter is especially interesting, because central banks and governments hate energy speculators with special intensity because the "Brent vigilantes" have the power to boost inflation where it matters, i.e. energy.
Once energy takes off in a speculative bubble, the rising cost of energy sucker-punches the already-anemic global recovery, and the responsibility eventually lands on the laps of the central banks who created all the bubbles. Their quantitative easing policies discredited, the central banks will have to restrain their liquidity hand-outs, and that will undermine what's left of the various speculative bubbles they've blown.
Those who argue bubbles won't be allowed to pop ever again should look at history from 1999 to the present again. 

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy
Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)



Thank you, Arooj S. ($10/month), for your outrageously generous subscription to this site -- I am greatly honored by your support and readership.Thank you, Kendall H. ($5/month), for your superbly generous subscription to this site -- I am greatly honored by your support and readership.
google_ad_client = "ca-pub-6006126731309477"; /* new300X250 */ google_ad_slot = "5310346840"; google_ad_width = 300; google_ad_height = 250; Go to my main site at www.oftwominds.com/blog.html for the full posts and archives.

Click on the charts below to enlarge. Daily Wave Count. Hourly Wave Count. Detail is in today’s video. Thank you.

Yesterday’s analysis expected price had entered a fourth wave correction and should continue with choppy overlapping movement for another few days. Sideways movement for Thursday’s session was expected and is mostly what has happened. This correction is most likely incomplete.

Thursday could be described as "dip buyers show up again".  After the outside day yesterday on the major indexes, global markets showed a lot of weakness overnight with Japan's Nikkei down over 7%.  U.S. markets opened up down about 1%, but within the first hour or so the dip buyers showed up to the scene.  Until they are punished repeatedly by the market for doing so, they will keep repeating the pattern that has been working for them all year.   In economic news Chinese flash purchasing managers data was weak, coming in at a contractionary level, while U.S. weekly unemployment claims fell back substantially from last week.  However this is a technically inclined market as it is all about the central bankers actions right now.  The S&P 500 finished down 0.29% and the NASDAQ 0.11% - both well off their lows of the morning.  The DJIA has now fallen two days in a row - remember it has not fallen 3 days in a row in about 4 months!

The S&P 500 came back to test the bull flag it broke out of in early May near 1636 in the morning.  It bounced back to the 10 day moving average.  Certaintly is not all systems go here as each time we see a major faltering like yesterday we have to ask "was that the top?" but as mentioned, we could fall all the way down to the breakout over 1597 and still be in a primary bull move.   Notice the 50 day moving average (currently 1590) has served as support all year.  But even before that the bottom of the channel that has worked all but one time since the advent of this move in Nov 2012 serves as a key support.

Almost identical story in NASDAQ.

The McClellan Oscillator weakened today and is now down to a -35 reading; generally -40 to -50ish readings have been good short term buy signals.

With the first real selling pressure in over a month today was a good day to see which stocks traders immediately flock to, as they should provide leadership on any bounce.  A lot of the hot names of late came to the forefront - anything associated with Elon Musk...

...and the 3D printing stocks.  While 3D Systems (DDD) was only up slightly on the day it made a huge move off its morning low.

Music sharing service Pandora (P) also had a strong day ahead of earnings - after the bell it reported a strong quarter which led to another 8% upside in the after hours, up to the mid $18s.

Internet radio company Pandora Media Inc. reported higher-than-expected revenue in the latest quarter, with losses in line with analysts' forecasts, as the number of subscribers who pay for ad-free listening more than doubled to exceed 2.5 million.  Pandora predicted that it may break even in the current quarter after adjusting for one-time costs, and it predicted annual earnings and revenue that exceeded Wall Street forecasts.

Original post: STTG Market Recap May 23, 2013

Bullion Rallies Despite “Losing US Fed Prop” as Stock Markets Sink on Weak China Data

 

BOTH gold and silver rose in Asian and London trade Thursday morning, defying a sharp slide in global stock markets to gain 3.0% rally from yesterday’s sharp sell-off.

 

Commodity prices fell as major government bonds rose but weaker Eurozone debt slipped, pushing interest rates higher.

 

Tokyo’s Nikkei index – up by 85% from November – dumped more than 7% after new data showed a surprise contraction in China’s manufacturing sector.

 

Private “retail” investors have “abducted” the Japanese stock market, accounting for more than a third of recent volume, according to brokers quoted by the Financial Times.

 

“[Gold's] inability to hold the highs is bearish,” says the latest technical chart analysis from Scotia Mocatta.

 

“[Wednesday's] intra-day rally is indicative of bargain hunting in gold rather than a change in trend,” the bullion bank adds, pegging support at the April 2013 low of $1323.

 

Like Barclays Capital’s analysts, Scotia now puts short-term resistance at yesterday’s sudden spike of $1412.

 

Gold prices rose Thursday morning to breach $1390 per ounce once again, recovering two-thirds of Wednesday’s plunge from that 1-week high – made as US Federal Reserve chairman Ben Bernanke was testifying to the Senate on the likely direction of Dollar interest rates and quantitative easing.

 

Having warned against “a premature tightening of monetary policy” however, Bernanke was then asked if the Fed might start reducing its $85 billion in monthly QE purchases of government debt and mortgage bonds before Labor Day on Sept. 1st.

 

“I don’t know,” Bernanke replied.

 

Minutes from the US central bank’s latest policy meeting also showed one participant wanting to reduce the level of QE “immediately”.

 

“Not having the future support of the Fed,” says Edward Meir’s note for INTL FC Stone, “will remove a major prop for gold.”

 

“It seems the market is now squarely focusing on the September 17-18 [policy] meeting for the Fed to make its move,” reckons ING bank’s analysts.

 

“Together with expectations of tightening quantitative easing,” says Mitsubishi analyst Jonathan Butler – also quoted by Reuters – “the general trend for a modest economic recovery in the developed markets is going to fuel growth in the equity markets and the Dollar.

 

“That should see gold coming under pressure.”

 

“The momentum is strongly negative,” says Edward Lashinski, global strategist at RBC Capital Markets in Chicago.

 

“The market understands that gold is no longer a safe haven.”

 

On the supply side meantime, “Being more profitable is better than being bigger,” said Jamie Sokalsky, CEO of the world’s largest gold miner, Barrick, at Bloomberg’s Canada Economic Summit in Toronto on Tuesday.

 

Also forecasting new record highs for the gold price thanks to central-bank demand and the state of the global economy, Sokalsky mooted “divesting” some smaller, higher-cost mines to focus on more efficient projects.

 

In particular, the giant Pascua-Lama project in Chile – valued at some $8.5 billion, and already eating some $5bn in costs – has been delayed by environmental concerns, says Canada’s Financial Post.

 

“Barrick is considering all its options at Pascua-Lama,” says the paper, “including outright suspension.”

 

At current gold prices around 10% of gold mines globally will be making losses, according to Thomson Reuters GFMS data.

 

“We would initially expect the oldest mines closing,” says a special report from Japanese trading house Mitsui’s metals strategist David Jollie in London, “as they are in many cases coming to the end of their operating life.”

 

Gold mining companies are likely to avoid closing newer projects “as long as possible,” Jollie says. But if the gold price stays low enough long enough, “closures will happen.”

 

Adrian Ash

BullionVault

 

Gold price chart, no delay | Buy gold online

 

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold and silver in Zurich, Switzerland for just 0.5% commission.

 

(c) BullionVault 2013

 

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

In January of this year I published a piece on the “fair gold price” in order to demonstrate that, if one was to simply treat the gold of all international central banks as the world’s true, reserve currency – as history has held it as for over hundreds, if not thousands, of years – then a logical calculation would place the value of gold at an astonishing $10,617 an ounce. Compared to gold’s price of $1,675 back then, this was a significant revaluation.

The fair gold price can be calculated by the use of James Turk’s Gold Money Index formula:

Fair Price of Gold (per ounce) = Total Central Bank Foreign Exchange Reserves / Total Central Bank Gold Reserves

As I attempted to explain in my January piece, there is nothing surprising about the formula: it compares the gold bullion reserves of the central banks with their foreign currency reserves.

I concluded by asking what would happen to the market/spot price of gold if central banks around the world started to slowly, or quickly, divert their foreign currency reserves – over $10 trillion’s worth – into gold.

Defining foreign currency reserves

Foreign currency reserves are accounts, mainly held by central banks, composed of foreign currency, foreign government securities, and other foreign currency assets. Under the Bretton Woods Agreement (1944-1971), foreign currency reserves were especially important because the entire agreement hinged on the fact that participating countries would not only commit to a fixed exchange rate for their currencies, but more importantly, that they would “lend” their currencies (or gold) to the International Monetary Fund (IMF) so that the IMF could use said currencies (or gold) to intervene in the foreign currency markets in order to artificially maintain that pre-agreed upon, fixed exchange rate.

For example, whenever one country experienced a balance-of-payments deficit – a situation where it was importing more goods than exporting and, as a result, the supply of its currency was increasing and therefore depreciating in value – the central bank (or even the IMF) would intervene in the foreign exchange markets and use “stronger” currencies from its foreign reserves in order to purchase the “weaker” currency at a fixed rate (usually above market value) in order to try and stabilise the exchange rate and increase the value of its currency.

For proponents of the Bretton Woods system, this type of arrangement was ingenious. For those with more commonsense, economic literacy, and foresight – like the New York Times’ reporter, Henry Hazlitt – this policy was illogical and unsustainable:

“It is obvious that such a plan could maintain even the outward appearance of success only for a short time. It is possible, of course, to keep a valueless currency at any arbitrarily chosen     level by a commitment to pay that price for it, just as it is possible to keep a worthless stock at $100 a share by buying at that price all of the stock that is offered for sale. But when the allotted resources of the buyer run out, the currency or the stock will immediately drop to its natural level, and the buyer will find himself holding just that much worthless paper. The plan becomes particularly unrealistic when each nation can turn out unlimited amounts of its own currency on its own printing presses-with the incentive, which it does not ordinarily have, of a buyer at a fixed price. It seems probable that the plan could only lead to a huge waste of funds and to a temporary world inflation with a subsequent collapse.”

Mr Hazlitt was right: It did collapse and, in 1971, the United States reneged on Bretton Woods and ceased redeeming dollars for gold. But this was not the end of central bank intervention in the foreign currency markets. In fact, it was just the beginning.

Is there an exit strategy for central banks and their foreign currency reserves?

In an article titled, “Do Industrialized Countries Hold the Right Foreign Exchange Reserves?”, published by The Federal Reserve Bank of New York in its Current Issues in Economics and Finance newsletter, the authors focus on primarily two things: 1) the recent and unprecedented amount of foreign currency reserves that central banks have accumulated and 2) how central banks are going to handle – possibly unwind – said reserves from their accounts without disrupting monetary policy and/or economic stability.

In regard to the first point, see the chart below. It clearly shows that central banks across the world are flush with trillions in foreign currency reserves.

In regard to the second and most important point of the article, about how central banks can try and unwind their foreign currency reserves without disrupting the market, the article only has this to say:

“Central banks that acquire a large stock of reserves through foreign exchange interventions . . . face another, longer-term issue. Once reserve balances become high, the central bank may need to identify an exit strategy.”

Forgive me for spoiling the ending, but an “exit strategy” was never fully articulated in the article. But that should be of no real surprise; when it comes to the Federal Reserve’s “exit strategy” for its current $85 billion-a-month diet of mortgage-backed securities (MBS) and US Treasuries, not to mention its previous $2.7 trillion-worth of US Treasury purchases, there can be no exit strategy. And it will be the same with the foreign currency interventions: there will be no exit.

From paper reserves to gold reserves

The only real exit strategy for any central bank is to switch its foreign currency reserves – which are fiat paper dollars – into real reserves: gold. (Let us see what this would do to the price of gold).

According to recent data in/from the Currency Composition of Official Foreign Exchange Reserves (COFER), central banks across the world (excluding China) have accumulated almost $11 trillion in foreign reserves. Additionally, these same central banks – excluding China once again – have just 28,764 tonnes of gold reserves. Therefore, using the Gold Money Index’s formula (shown above), the fair gold price should be $10,783/oz.

Conclusion

Market intervention (otherwise known as manipulation) is the prerogative of central banks. Whether it be intervention that aims at intentionally weakening a currency or intervention that supports a currency above market value, “the true forces of supply and demand be damned” is the philosophy and practice of central banking. But such a philosophy cannot last. The market is stronger than any group that attempts to control it. Why? Because the market is not a single entity but a society of individual actors, working together peacefully, in order to achieve his or her ends by scarce but intentionally means.

Thus, acting individuals will at some point discern the intervention – that is, the manipulation of the supply and demand of the market – and react to protect him or herself.

If central banks are not careful, they too will lose the confidence of the market – that is, the people. And when that happens, not even all the foreign currency reserves in the world will save them. Only gold will.

That should be our exit strategy.

Tags: fiat currency, gold price, gold reserves, sound money Author: Gabriel M. Mueller Buy precious metals with us
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Published by GoldMoney
Copyright © 2013. All rights reserved.
Written by Gabriel M. Mueller – Contributing Author

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