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Green Light Turns Yellow

March 21, 2012 by  

Green Light Turns Yellow
PHOTOS.COM
After riding high for much of February on bullish news, precious metals prices hit the skids following Ben Bernanke’s testimony on Feb. 29 in front of the House Financial Services Committee.

It was all going so swimmingly for gold investors: The European Central Bank had thrown out another €529.5 billion in easy-money accommodation for eurozone banks, and Federal Reserve Chairman Ben Bernanke had publicly indicated that his quantitative easing gun was loaded and he had an itchy trigger finger.

Then it all fell apart. It started with Bernanke’s most recent testimony before Congress, which was then firmly backstopped by last week’s policy statement from the Federal Open Market Committee. Both strongly suggested that further quantitative easing is off the table in the short term.

After riding high for much of February on bullish news, precious metals prices hit the skids following Bernanke’s testimony on Feb. 29 in front of the House Financial Services Committee.

How dramatic was the fall in gold? Consider that the metal hit its monthly high… and its monthly low… in the same day.

This was a major, bearish technical signal that simply had to be acknowledged. And in doing so, we must also admit that the rally of the previous weeks was much more fragile, and more dependent upon speculative trading funds, than anyone had imagined.

The fact that the markets nose-dived so quickly upon Bernanke’s testimony indicates that some very big money, in a limited number of hands, had been betting that Bernanke was going to outright endorse a third round of quantitative easing in a very clear and direct fashion.

In the end, the markets reacted not so much to what Bernanke said, but what he didn’t say. In short, he didn’t come right out and publicly endorse more quantitative easing. And last week’s FOMC statement did not do so either.

Other factors have played a role in gold’s correction, most notably the brightening economic picture in the United States and at least a temporary resolution to the European credit crisis. In other words, the market believes that even Bernanke can’t find sufficient cause for another round of quantitative easing.

Looking Forward

At the very least, the downdraft in gold has been accompanied by significant short-selling. And this infers a short-covering rally to follow at some point.

Regardless, the correction in gold seems to be well overdone and unjustified, given the broader monetary backdrop. There’s already far too much liquidity in the global system, along with obvious inflation in Asia and “stealth” inflation in the West, to see a collapse in gold demand.

As the Wall Street Journal editorial board put it:

In addition to the European Central Bank’s liquidity burst, China is easing its reserve requirements to stimulate more bank lending. The Bank of England has been all-in for some time, and the Bank of Japan recently joined the party. Lesser central banks have been following suit, as the world takes its cues from the grandest monetary maestro, Mr. Bernanke, who has announced that the Fed will keep interest rates at near-zero for another three years.

Does this sound like a tight-money policy? Purely on monetary momentum alone, the future looks bright for gold and tangible assets over the long term.

In addition, we can’t forget about the $1.5 trillion in excess banking reserves that is being held by the Fed right now. This money officially doesn’t exist… until the Nation’s banks start withdrawing the funds to make loans and thereby insert the money into the economy.

Sustained U.S. economic growth, in other words, won’t be the end of liquidity injections. Instead, it will mark the beginning of a new phase, as the velocity of today’s huge, overhanging money supply accelerates and inflation truly kicks in.

And finally, does anyone really believe that the Fed and the ECB are going to drain the punch bowl anytime soon? Is Bernanke going to suddenly stop printing money?

In fact, one can put forth a very credible argument that more quantitative easing will be necessary — unemployment is still at record levels in the eurozone and the economic data in the U.S. continues to be mixed. In his Senate testimony, Bernanke claimed that the record for quantitative easing was “positive,” and he maintains that his previous two monetary injections didn’t spark inflation at all.

Rest assured, Bernanke still has his finger on the QE trigger, and it’s itchy.

The technical damage that has been inflicted on the gold chart cannot be ignored, of course. The market’s swift reaction to last week’s FOMC statement, for example, sent gold below its widely watched 200-day moving average.

So in the short term, dollar-bullishness based on improving U.S. economic data and a consensus that the worst is over in Europe may continue to hamstring gold prices.

But over the long term, an improving U.S. economy has the potential to unleash massive amounts of price inflation, which will result in a weaker U.S. dollar and stronger gold and commodity prices.

In short, the future may be a bit choppier than we had hoped, but I’m confident that the metals are headed much higher once the current correction has run its course.

The Potential For Economic Armageddon In November

While gold should slowly but surely resume its climb soon, there’s a very real possibility that the metal could absolutely explode higher. And it’s actually getting more likely every day.

You see, the Republican primary contest has lasted longer, and been more vitriolic, than anyone had imagined. The candidates are doing the opposition research for the Democratic Party, and spending their war chests attacking each other. At this point, I think the odds of unseating President Barack Obama in November are 50/50 at best.

And that means American investors are precariously balanced on a fence. Fall on one side with a Republican victory, and we still have problems… but they’re solvable. Fall on the other side with a Democratic victory, however, and there’s big, big trouble ahead.

We’ll see our debt burden continue to grow with massive spending and no entitlement reform, rising taxes and other attacks on the productive sectors of society, and monetary inflation to a degree that will make recent dollar- and euro-printing pale in comparison.

Make no mistake: This will be economic Armageddon. And the odds of it occurring grow more likely with every day that the Republican nomination remains contested.

That’s one reason why many investors are looking at the current correction in gold and silver as a major buying opportunity. And I agree with them.

In fact, I’m going to provide some specific, bargain-priced recommendations in upcoming issues of my free e-letter, Golden Opportunities.

In the meantime, with Rick Santorum having recently won Mississippi and Alabama, the calls for Newt Gingrich to withdraw from the race are growing more strident. If he remains in the contest, it should help decide the nomination more quickly for Mitt Romney, since Gingrich will split the anti-Romney vote with Santorum.

But don’t count on Gingrich running away from the spotlight he loves so much. To be fair, Gingrich has some great ideas. I’ve discussed many of them with him over the years, as he has appeared at our annual New Orleans Investment Conference.

In fact, as you’ll see below, he presented much of his future platform at our 2010 New Orleans Investment Conference.


 

Why there? Because the New Orleans Conference is famed for bringing in the world’s top experts in geopolitics, economics and investments together with today’s most successful and opinionated individual investors.

History has shown that there’s simply no better place for investors to get actionable strategies to protect and build their wealth, and there’s no better place for the most accomplished experts to present their views.

Gingrich gave a rousing presentation at the 2010 New Orleans Conference. It’s the speech that’s widely credited with having launched his Presidential campaign, and you’ll see why.

So, enjoy Gingrich’s inspiring speech. But also be sure to protect yourself from the dangers he foresees, and which are growing more real with every day that passes.

–Brien Lundin

Brien Lundin

is the editor and publisher of Gold Newsletter, a publication that has ranked among the world's leading precious metals and resource stock advisories since 1971. To learn more about Gold Newsletter, visit www.goldnewsletter.com. Mr. Lundin is also the host of the famed New Orleans Investment Conference, the world's oldest and most respected gold investment event. To learn more, visit www.neworleansconference.com.

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  • s c

    Ben the Boob’s clock is ticking. The ability of the Fed head to speak a unique banksterese language is a skill that’s a part of the job. Volcker spoke it. Greenspannnnn spoke it. Ben the Boob speaks it. The next one will speak it, too. It doesn’t mean the Fed head or the Fed is on our side.
    It’s just a reminder that mere mortals aren’t entitled to speak the language or understand it. That’s reserved for the Fed’s high priests (and investors with VERY deep pockets).
    I’ll bet on gold and silver. Mortals, on the whole, aren’t worth much – unless they come to the table with standards
    and they also pack real character. Stay tuned, folks.

  • http://www.ifonlyphotos.com Alex Frazier

    The main analyst I subscribe to hit the ups and downs so precisely that the level of trust I am gaining in him is almost dangerous. In recent weeks, he called the upside in silver to within $.50 on spot, and warned of a correction back down to $32-$33 on spot based upon a repeat of a 2006 pattern. While the typical analysts were citing a head and shoulders bottom (which didn’t pan out as hoped; the right shoulder didn’t properly form), they were widely caught be surprise when silver corrected down to $32.50.

    At that time we had a buy alert, with the encouragement that silver and gold may yet have some continued limited downside, the rally expected to follow was too potentially large to miss the boat. So we were advised to get in, lest we miss it when it took off.

    Back in August, this same analyst was predicting a price correction in silver down to $27-$30, which it did in fact hit.

    His analysis is entirely based upon technical data. Bernanke may have said something that is perceived to have spooked the market. But truth be told, I am finding that technical data trumps fundamentals hands down. Everyone blamed this recent correction on Bernanke and what he did or did not say. But this analyst called the correction based on technical data before Bernanke ever said a word.

    It is my opinion that the technical data will prevail, yielding a rally in the very near future, with gold rising to between $1800 or $1900 per ounce on spot, and silver to between $40 and $44. Depending upon RSI volume levels and ETF performance, there might then be a good opportunity for a profitable short before the next rally pushes towards the $2200 per ounce target in gold and the $50 per ounce target in silver.

    These are my thoughts.

    • Sirian

      Alex F,
      Could these movements of both gold and silver have also been initiated by London? Other factors are involved, of course, but is it not possible that the highs and lows of both metals are being manipulated, intentionally. Data can be manipulated too. Has this not happened before? I often wonder if this manipulation is to banks and countries advantage to buy low, sell high in their efforts to acquire as much gold & silver as possible? In so doing, is there not more economic control – globally – within their grasp? He who holds the most gold makes the rules – may not be the correct wording but still, sound familiar? I agree, spot prices will climb back up, as they have before, but once again, is it not possible that these are being manipulated more than people realize? It seems very plausible to me.

      • http://www.ifonlyphotos.com Alex Frazier

        Anything is certainly possible. However, the method of manipulation would be high volume longs or shorts, which translates to little more than volatile market action. I seriously doubt there is hidden manipulation going on.

        Soros, as a prime example, has attempted to manipulate the market in the past. Last year he dumped a tremendous amount of gold. The hope, I’m sure, was that through his extremely large volume sell and the reliance some have on his reputation, he would spook the market and cause a sell off, whereby he could buy back in at a much lower price and profit.

        The Federal Reserve does the same thing. So do the other central banking systems. If the price gets too high, they sell in tremendous volume and buy back in when it bottoms. They all want gold because the paper dollar is on the verge of being worth jack squat. So to encourage volatility, they play, and this allows them to profit in terms of paper dollars, which helps them increase their holdings of the yellow metal.

        It’s all a game. The rules are pretty clear cut. If you play wisely, there is a lot of money to be made. If you play foolishly, you stand to lose a lot. But apart from the volume, anyone can play, if not necessarily on the same level.

      • Sirian

        History accounts for Soros being considered as one of the most profound economic terrorists that has ever lived. You’re right, the games both he and the Fed are playing – really spooky. At times, I suppose, you could say the game of “one up man ship” is going on between Soros and the Fed and who knows how many other central banks. I agree, we could all play the same game but unless you have the initial capital to step into that arena – which most don’t – then all we can do is remain the spectators and hope for the best.

      • http://none Firefly

        Remember that all this buying and selling of tons of gold is not actually tons of gold but calls and puts on the futures market. When some one buys one 100 ounce gold contract someone else has to agreed to the price and agrees to sell it to them at that price at the specified time, a couple of months or a couple of years. One contract is one contract is insignificant. When someone sells 50,000 contracts at one time that’s 5,000,000 ounces of gold and although no actual gold exchanges hands in 97% of the cases that definitely depresses the market. Only central banks and people like George Soros afford to make moves of this magnitude but they can make super fortunes doing it or lose their shirts like Gordon Brown did in 1999 when he sold a huge chunk of Englands gold for $252 and ounce. It’s an interesting game but if you make the wrong move you can lose everything.

  • Mike Austin

    One of the dangers he WE forsee is Gingrich himself. An admitted progressive. I have watched many of his speeches and he is better than Barry. He is also better than everyone else at saying what you want to hear. We do not need this kind of liquid candidate. Keep the ideas, dump the meesenger.

  • Tazio2013

    Bernanke Fights Back Against a Gold Standard – Wednesday, March 21, 2012 – by TDB Staff Report

    We have been arguing for a long time that many of elite memes are dying or dead thanks to the Internet and central banking may be chief among them. This squeak of agony from Bernanke is further proof that the top powers feel a need to protect central banking and to challenge its detractors.

    The trouble is that central banking came in with assurances that it would modify monetary manias and ensure the system stayed solvent and steady for the benefit of the average person. As it has done none of that and has been exposed as horribly unjust and even genocidal system anyway, it is difficult to see how the elites intend to defend it going forward.

    The alternative, in fact, is some sort of PUBLIC gold standard or global monetary standard controlled by the elites who have set up the current system. Bernanke’s comments can also be seen as paving the way for a further evolution within the context of these parameters. But the LAST thing the elites want is a private gold standard or private money generally.

    Ironically, unless they can gain significant control over the Internet, private monetary standards may indeed be in their future, which would jeopardize the entire program of global governance as their funding sources would dry up.

    Conclusion: This will likely be the final battle of the Internet Reformation in our view – the struggle by the elites to move away from the failing and exposed central banking system toward another system ALSO controlled by them. Whether they can pull it off remains to be seen. The world’s economy would seem to hang in the balance.

    http://www.thedailybell.com/bellinclude.cfm?id=3718#FeedBackStart

    • http://none Firefly

      And isn’t it interesting that in the 1900 year old Book of Revelation it speaks of a very evil world leader, apparently a banker who makes everyone use his mark IN their hand or IN their forehead in order to buy or sell. No one will be exempt, not even kings. RFID chips and future microcomputers would be IN and not “a tattoo on” as one modern and inaccurate version of the Bible says. Amazing too, when you think that this was written over 1900 years ago. Some say just a lucky guess but I don’t. Of course this will not likely be until after WWIII or until the world is so messed up we will all be crying for someone, anyone to save us. Hope no one reading this is here then. It will not be a happy time.

  • ranger hall

    Alex, You are Right Big Money and Govt makes the ups and downs, and in most cases its the little guy that gets Hurt.
    Politicians and Club Members always know when to buy are sale, They Know or Create the News, First hand infoe beats luck anytime.

  • Mom Henning

    All this sounds like a big gamble to me. Don’t get into investment wagering unless you have lots of money and the ability to lose it gracefully. I learned all this in the casinos long ago when I was a card dealer. Luck favors the prepared mind. Them that knows don’t tell, and them that tells don’t know! At least, if you go to the races or a casino you don’t have to wait 6 months to learn you have lost.

  • simian pete

    I keep forgetting that a lot of “you people” who post comments are doing fairly well financially. The only “market” I “invested” in was the meat market – at the local grocery store. It took me 30 minutes evaluating what I could buy/afford with my meager food stamps….

    Have all of you noticed that “Banquet” frozen (cheap ass) TV dinners have gone up to a $1.25 ? They use to be 89 cents a year ago. I hope the TV dinner bubble bursts soon ….

  • s c

    If anyone still has doubts about gold’s real value, you might be interested to know that some people in England recently found out that some of their gold bricks were hollowed out to ‘make room’ for some lead. That is, somebody took the time to “play” with the gold before English banks got them. If you STILL don’t know what that means, it means that people will do ANYTHING to get their hands on gold.
    How many of you think people will go out of their way to tamper with dollars? Our dollars are self-destructing. Gold doesn’t self-destruct. Uncle Scam still wants you to think gold isn’t worth having.

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