Thursday, December 15, 2011

Rgold Is Golden: Sit Tight And Be Right (Or Add To Your Positions)

"This is my favorite time of the year and I'm in a great mood for receiving this year"  - Mike Greenberg, Mike and Mike in the Morning on ESPN.
I'm in a great mood right now to receive any news whatsoever that the CFTC is going to crack down on the illegal manipulation that has been going on in gold and silver futures trading on the Comex for a couple decades now.  But I know that won't happen - just ask the customers of MF Global what they think about the willingness of the CFTC to enforce the law.  And so the saga of the United States of Banana Republic continues.  I'm really excited to receive the eventual newscast that shows Jon Corzine walking away from his MF Global crime with little or no consequences.

I don't want this post to be a rant about the Government's complicity with the massive manipulation of the markets, especially gold and silver, but anyone who does not understand that this plays a big factor in the short term movements of gold and silver is unequivocally a complete idiot. The golden truth is that on a longer term basis, the manipulation doesn't work other than to scare the shit out of most people and keep them from taking advantage of the enormous wealth-building opportunities it presents.  Here's a quick comment from Ted Butler on the matter - I've included a chart below that shows the technical aspect of the market Butler describes:
What I didn’t explain in my weekend commentary on Saturday was that the next logical downside trigger point in gold for selling by the technical funds and traders was the 200 day moving average ($1610). This particular moving average had not been broken in gold for almost three years, back to when gold was under $900. The longer a moving average remains unbroken, the more significance it holds to technical traders. This level has now been broken as well, encouraging those holding gold on technical or price movement grounds to sell. This selling begets other selling as fear of further losses resonates through the market as prices plunge. The price declines step up demands for more margin, prompting further long liquidation.

Given human nature and our collective demand for easy to understand explanations for why prices are falling there will be, for sure, all manner of supply/demand explanations given to justify the price rout. But there have been scant signals from the real world of supply and demand to account for the decline in gold and silver prices. At the core, this is strictly another COMEX-commercial rig job. That it has been highly successful for the commercial crooks is unfortunate in many ways, but encouraging in other ways. The proof that it is another COMEX rig job is fairly easy to demonstrate in past and future Commitment of Traders Reports (COT), as the commercials are always big buyers on these price smashes. We have only gone down in price so that the commercial could buy. It’s not possible that the commercials can always be big buyers on such declines for any other plausible explanation. That the CFTC sits by, even though it has been armed with new anti-manipulative regulations is as shameful as it gets.
Here's a 6-year daily chart of the Comex gold futures continuous contract:

(click on chart to enlarge)

THAT, my friends, is a snapshot of one of the most perfect bull market charts that you will ever see.  You really couldn't make one up that was better.  The red line is the 200 day moving average (200 dma) to which Butler refers.  You'll note that the corrections in 2006 and 2008 on a percentage basis were much worse than what we are in right now.  That's not to say that I'm calling a definitive bottom here, but the data suggests that IF gold does break the 200 dma to the downside, it doesn't stay there very long.  I have been lucky enough to start adding to my positions every time this happens in the last 11 years and feel that it's a bit more than luck that it's worked out for me. 

Now we've all heard the Dennis Gartmans and CNBC retards and others proclaim the end of the gold bull market.  I can't tell you have many times I've heard that in the last 11 years.  I remember vividly when gold ran thru $350 in early 2003 and started to correct.  Robert Prechter of Elliot Wave fame issued a definitive warning that the gold bull market was over and gold was going to fall back to $50.  Hmmm...The common theme between Prechter and Gartman is that NEITHER of them manage a fund or commit their own money.  They make a lot of money selling newsletters with shitty advice in them to ignorant financial advisers and frightened, lemming investors.  Neither of them has any skin the game.

Here's a "technical" chart that you won't find in Gartman's letter but I will give it to you for free.  Unfortunately Eric Hommelberg does not freely publish his work anymore but he follows a metric known as Rgold.  This is the spot price of gold divided by the 200 dma of gold.  The chart I have only shows 2004-2008, but you'll note that whenever the Rgold metric goes above 1.20 it is a definitive "sell" signal AND whenever it goes below 1.00 it is a definitive "buy" signal.  Right now that measurement is .93.  .93 = BUY with both hands.  Here's the chart: 

(click on chart to enlarge)

I have several articles to cite in my argument that gold is likely close to reaching a bottom in this price correction, which actually began at the end of April.  To keep this post reasonably short, I'm going link the articles with very little commentary.  

The highly respected Peter Grandich has issued a $1mm bet challenge to Dennis Gartman, Jon Nadler and Jeffrey Christian - three morons who routinely issue doom warnings about gold and yet who are always wrong in their market calls.  None of them have skin in the game but Grandich is giving them an easy opportunity.  Please read this link in its entirety - Grandich has arranged for a law firm to set up an escrow account if any of these three dopes decide to show some conviction behind their drool:  LINK

Zerohedge has posted an excerpt from a Citicorp market research report that explains why they see gold going anywhere from $3400 to $6000 over the next two years.  They cite technical as well as the usual fundamental reasons for this.  This is very significant because it is the first time in 11 years that a large, Too Big To Fail Wall Street bank has issued a bullish call like this on gold:  LINK (no, this isn't the end of a bubble because Citi has become bullish - there's still 10 other Too Big Big To Fails that are extremely bearish on gold).

This could be one of the best signals yet that gold is getting ready to form a bottom and turn around:   the sentiment index as measured by Marketwatch's Mark Hulbert is registering very high levels of negativity.  Please note that Hulbert points out this contrarian indicator is right more often than it's wrong, which means that the negativity of investors toward gold is actually very bullish:  LINK  I can confirm this measurement because there's been an usually high number of commentors lately on this blog who are thinking about dumping their holdings.  I will buy what they sell.

Whenever I need a little "conviction-check" - some "couch time" - with regard to my fear levels, I like to spend time reading what Jim Sinclair has to say.  Eric King made it easy with this interview of Sinclair.  Please note that he thinks this high volatility in gold right now indicates that gold will go higher than he expects. This quick interview is well worth reading:  LINK

Finally, please keep in mind that ALL the fundamental variables that are driving the gold bull market keep getting stronger by the day.   Congress and Obama are getting ready to pass a huge spending bill which extends the payroll tax cuts and extends jobless claims.  This means that the spending deficit for 2012 will be much larger than projected back in September and the amount of debt the U.S. Treasury has to issue will be even greater than projected when the debt ceiling was lifted.  Expect another debt limit ceiling extension fight before the November 2012 elections or just after.  This means that Fed will be forced to roll the printing presses or the Government will not be able to fund all of this new debt issuance.  Hell, we didn't even have debt ceiling limits and massive deficit spending  and high unemployment as problems when the gold bull market began.  As these problems get worse, the case for gold going several multiples higher from here gets better.

One more thing to think about:  how many of you have financial advisers calling you to tell you that it's time to sell your gold?  How many of you have advisers calling you and telling you it's time to buy or add?  I would bet my last nickel that over 90% of all advisers are calling and telling their clients to sell.  I would also bet that those are the very same advisers who advised their clients to stay away from gold for the last 11 years.  If I had an adviser like that, I would hang up the phone and find a new one.


  1. Ahh Gartmouth is LONG of the

    "His closed end fund (HAG in Canada) is down almost 19% since inception
    in 2009, and he caught a bunch of the gold move. If he was as good as
    Bubblevision thinks, he probably would have better numbers."

  2. Great post, Dave.

  3. W.W.T.D.?

    What Would Tebow Do?

    I think he would buy, lolz.

  4. Hey Dave, I read somewhere that the central banks are leasing gold to insolvent banks at negative interest rates so that they can sell it into the market to raise cash. Do you think this is happening, and if so, how long might it take for them to finish selling? Thanks, Gary

  5. Founder Of $30 Billion Hedge Fund BlueCrest Says Most Euro Banks Are Insolvent; Euro Situation Much "Worse Than 2008"

    On whether BlueCrest's relationship with banks has changed:

    "I do not take any exposure to banks at all if I can avoid it. All the money at BlueCrest Capital Management is in Two-Year U.S. government debt, Two-Year German debt, we have segregated accounts with all of our counterparties. We are absolutely concerned about the credit quality of the counterparties."

    On whether he's afraid of taking risk right now:

    "Absolutely. The main thing that's driving our decision about where to lend money or where to place our funds under management, the vast majority is dollars which we keep in two-year notes. We have a chunk of euros, which we keep in German two-year paper. We're not interested in taking any peripheral debt risk at all and we're not interested in taking any bank credit risk right now."

  6. Re gold leasing: yes. I wrote about it yesterday. I think the selling is over. What happens is taht the Fed/BOE/ECB/BIS make a lot of physical available to lease and it forces lease rates to go negative, meaning the bullion bank gets paid a small amount to borrow the gold from the Central Bank AND its gets to use the proceeds from selling the gold for liquidity and to earn carry. It's a double-carry trade.

    You can monitor the lease rates on
    and there you can two distinct down-spikes into negative territory. That's likely where the gold was leased and then sold over that period.

    What happens is the flood physical hits the price and the sharp price spike down triggers sell-stop positions at the macro black box momentum hedge funds and it sends gold into tailspin.

    Notice how they waited to do this in between the heavy buying seasons in India. They alwasy do this when the market is least liquid on the bid side.

    Go search the archives and you'll find some definitive research articles on gold leasing.

  7. game of gold tell them to pluck off

    The "Rothschild's" Plan of 2012

    Lets bring things down, buy up the real-soverign assets hard-assets that belong to the people in various countries, and then control the super-nationalality (Empire) though financial sponsorship. The names have changed to Goldman Sachs and JP Morgan and other corporate too big to fails, the personalities are different be they Jamie Dimon, Lloyd Blanenfien, Warren Buffet, George Soros. The game plan seems to have remained the same. Get insider deals with lots of leverage with you yourself lacking the capital, manipulate markets to cause distress, buy those distressed assets, cause chaos in the streets, tell nations what to do, then control the super-nation of Empire using the financial puppeteer's strings.

  8. Gartman hasn't said this is the end of the Gold bull market. He in fact recognizes that this is a bull market in gold. He has been long gold or neutral gold for at least 3 years. That's how long i have been following him.

    He has recently been long gold and short the euro and that has been a terrific trade. He called the top at 1900 here and has been right on the money.

  9. Dave, I'd love to know whose lining up to buy all that leased physical gold sold on the spot market at these lower prices :)

  10. @anon re gartmouth...he's still long of the losses...

    PPI: Moderating But Still Way Too High

    Even more troublesome though is that crude and intermediate goods continue to show price increases substantially above that of finished goods. This is not a positive thing at all as it denotes margin pressure on the processing chain -- all the way down the line.

    There are only two places to compensate -- employee wages and profits. Productivity "helps" but when this situation exists the productivity improvement gets "harvested" by the producers to cover the shortfall between crude and finished goods sent off for final sale. The result is a generally-declining standard of living for the workers and declining corporate profits.

  11. sought but can't find...?

    Horizons Gartman ETF is an exchange traded fund established in Canada. The Fund seeks capital appreciation through exposure to the investment strategies of The Gartman Letter, L.C. The Fund will invest in a variety of portfolio securities and instruments which may include, but are not limited to, equity securities, futures contracts and exchange-traded funds.

  12. Enjoyed your post Dave. I've been watching inventory levels of physical silver at a few of the major online dealers and once silver dropped below $30, inventory levels have been hammered. I only yesterday started watching same for physical gold, but I suspect the dynamic is similar.

  13. John Hathaway - Media & Gartman Attacks on Gold are Bullish

    With mainstream media relentlessly attacking gold, Hathaway had this to say about the situation,“The gist of an article today was, ‘Is there a bear market in gold?’ I think the media is playing this up. Bloomberg is obsessing about the falling gold price. That’s generally the tone of what I see, so it is consistent with the sentiment numbers for gold and silver and to me it’s a pretty good sign.”

  14. Jim Rickards - The US Treasury Shorts the Dollar

    When asked about the US dollar, Rickards responded, “Some legislation authorized a $100 billion line of credit from the United States to the IMF. It suddenly occurred to me how this actually works. The IMF puts in the borrowing notice for the $100 billion and the Treasury sends the $100 billion to the IMF. They (the IMF) then use it to bail out Europe.

    But here’s what happens, the Treasury sends the money and the SDR gives the Treasury a note because it’s a borrowing. So that’s very significant because for the first time in history the IMF would be leveraging its balance sheet. But the note they give the Treasury is not denominated in dollars, it’s denominated in SDR’s.

    The SDR includes dollars, but it also includes other things such as Swiss francs, pounds sterling, euros, Japanese Yen and eventually the Yuan. Now when the note matures, the IMF pays you back in the dollar equivalent of the SDR at that time. In other words, they don’t give you $100 billion back. They take the SDR equivalent back and convert it into dollars at whatever the exchange rate is at the time.

    What that means is that the Treasury is going short dollars. Think about the significance of that, Eric. The Treasury sponsors the dollar. You take a dollar bill out of your pocket and look at it, the Secretary of the Treasury signs every dollar bill. It’s sponsored and backed up by the Treasury and yet the Treasury is shorting its own currency by taking SDR notes from the IMF. My question is, if the Treasury is shorting the dollar, shouldn’t the rest of us be shorting the dollar too?”

    Geithner sings to Lagarde

  15. The OCC derivatives report is out...the top 5 banks increased their gold derivatives positions 117% Y/Y in Q3. Not very surprising...they were preparing for the takedown.

  16. Shawn, i just looked at the data, they increased them 17% y/y BUT 21% from Q2 2011. LOL

  17. I'm just referring to the Y/Y rate between Q2 and Q3, not from 2010 Q3.

    Q2 120,533
    Q3 146,245

    The increase in that 3-month period is 21.3% for the quarter. That rate annualized is (1.213)^4 = 2.16, hence the 116% Y/Y rate increase in the prior 3 month.

    In any event, they added $25B notional against gold...nuff said.

  18. Robert Prechter is a fool followed by shallow dupes. Prechter for years gained his fame by making predictions of the level of the Dow Jones Industrial Average.

    All of his predictions were shit because the Dow level was impossible to know beforehand. The Averages were skewed from every stock split, so unless you could predict the frequency and timing of which stocks would split, WHICH WAS IMPOSSIBLE TO KNOW BEFOREHAND, you were pissing in the wind.

    And retarded mongoloids paid him millions for his predictions. You could chart the pattern of maggots crawling through dog shit and it would have every bit as much validity as Prechter's Dow predictions.

    Of course, Prechter still eats shit, because some things never change.

  19. How many others?

    Illinois pre-paid collage fund is 30% short. Click here.

    The State of Illinois is facing another big problem. College Illinois is not taking on any more clients. More than a billion dollars is invested in the prepaid college program but a study finds the program has a 30 percent shortfall. One reason parents are upset is because they've paid in, but now the money's not there.

    Program participant, Jeanne Corrigan is concerned. "In our minds, it was a guarantee, a contract that was backed by the state of Illinois. We fulfilled our part; every month we paid. Our daughter is fulfilling her part of the bargain; she's working hard in school and preparing herself for college and a career."

    The Illinois Student Assistance Commission plans to give the governor and lawmakers comprehensive recommendations on fixing the $1.1 billion College Illinois Program. That should happen early next year.

    More than 30,000 Illinois families hold contracts in College Illinois, which lets parents lock in tuition costs at public universities years before students go to college.

  20. Rehypothecation Is An Old Story: MF Global's Story Is a Different Story of Filched Funds

    Meanwhile, the Hunts had borrowed $50 million from Mocatta to buy more silver and had deposited 10.7 million ounces with Mocatta as collateral for the loan. Jarecki rehypothecated the Hunts' silver, meaning he used it as collateral for his own borrowing. This wasn't prudent, but it was definitely legal. After the Hunts posted the silver as collateral with Mocatta, the price of silver tripled. The Hunts were nervous after hearing the rumors about the cash margin calls for Mocatta's futures hedges, and they showed up in Henry Jarecki's office in a very bad mood.

    The Hunts new the value of their collateral at then market prices far exceeded the cash value of their loan, and they wanted the loan size increased so they could buy more silver. Jarecki agreed to a bigger loan, but the increase wasn't big enough increase to satisfy the Hunts, who became suspicious that Jarecki was in financial trouble. The Hunts then said they wanted to prepay the loan and take back their silver. Jarecki responded that the loan terms didn't allow for early repayment. Now the Hunts were afraid and angry.

    If Jarecki had to buy the Hunts silver in the open market or if he had to cancel his futures trades with no offset to meet the Hunts' demands, it would have created a liquidity crisis for Mocatta. Instead, Jarecki solved everyone's problems. He arranged an exchange of futures for physicals (an EFP to cancel out his and the Hunts' futures positions in exchange for a special agreement on the silver) and sold the Hunts 23 million ounces of silver for cash at what was then the top of the silver market.

  21. Really awesome post! I love the graph over the past 6 years of daily gold prices.