Gold – A Reality Check

Of course, there is an element of truth in all their arguments but the fact is that the world economy has not collapsed in a heap.

“Oh but it will, it will, trust us, it will.”

All this negative energy – to what end?

If it does collapse in a heap – and GATA turns out to be right – then what? If economic activity implodes no one will escape – not the gold holders and not the paper holders.

Surely, therefore, if one has a brain with finite capacity then it would be far more constructive to apply that capacity to working out ways to solve the problems.

It is an unarguable fact that no economy can operate effectively without focussed participation – AT ALL LEVELS – of those who add value. The Federal Reserve will achieve nothing by marginalising those at the bottom of the totem pole who previously added their particular value. Financial enslavement has its flip side: dishonesty and crime which, by definition, cannot be centrally controlled if it turns out to be the rule as opposed to the exception. By definition, anarchy is uncontrollable.

It seems to me that there has been an element of irrationality creeping into GATA’s thought processes:

In its April 7th publication entitled: What’s the central bank endgame in gold? The following observation appears:  “I think their [the Central Banks] primary concerns are about maintaining the value of their currencies, government bonds, and general equity markets while gradually inflating their unpayable debts away and keeping the mere rabble of their citizenry from figuring out what’s really going on, which would be the end of Western central banking.”

Reality check: Inflation requires a double sided entry. When you print money, you “lend” that money to the recipient you don’t “gift” it to the recipient. How can one inflate debt away if the very act of inflation creates more debt?  That’s like arguing that we can empty the hole that’s full of water by pouring more water into it. Debt cannot be “inflated away”. It has to be repaid or reneged on; or serviced in perpetuity. It is self evident – even to a 15 year old – that if the debt mountain grows to the sky, the debt will become unrepayable. It will be reneged on. Does GATA have such a low opinion of the IQ of those in the Fed that it thinks the Fed cannot understand this? Alternatively, is GATA so cynical as to believe that the Fed can understand this axiomatic logic and is deliberately moving to ensure its outcome?

If one accepts the glaringly obvious fact that it’s physically impossible to inflate the debt away by creating more debt, then one comes to the inevitable conclusion that the Fed does not have an end game on anything, including gold. It is living on a day-to-day basis. All it is attempting to do is “buy time”. The market will decide the end game and GATA represents one (minority voice) in the market. A stopped clock is 100% correct twice a day. That’s about as accurate as GATA has been. Like many people, they got the timing of the turn in the gold market correct. Like many people, they called the bull market in gold correctly; full marks to them for that.

But the world has changed. One’s thoughts need to adapt to that change. Theirs hasn’t.

I agree that gold is in a primary bull market. But it seems to me that the gold price is due for a significant pullback. Here is the reasoning:

The gold price will pull back (within the bull market) because we are approaching a point where an increasing number of investors can see that it’s time for a “reality check”. Bernanke has stopped talking about helicopters. Geithner’s more measured choice of words has been signalling that the game is changing. (He is even deferring to Congress whereas at the time of – the first leg of – the GFC he was arrogantly dictating to Congress). In turn, Congress seems to be embracing more frugal thoughts. Germany (the leader in the EU) is terrified of hyperinflation. China’s economy is slowing and China is the world’s largest producer of gold.

All this seems to indicate that the demand side of the equation might soften (for the foreseeable future) whilst the supply side keeps barrelling along; and maybe even increase as new mines come on stream. In my view, there is very likely to be a shakeout of the speculators. When that has happened, gold will resume its uptrend.  Logic dictates that such a shakeout will very likely begin to manifest before the US Presidential elections – which will be fought against a backdrop of arguments (by the incumbent) that the US economy is growing – regardless of the veracity of these arguments. By implication, if the economy is growing, gold as a safe haven will become a less compelling argument.

Yes, the statistics are being fudged and the argument is contrived.  But this has been the situation since 1999 when the gold price turned up. And then, finally, the GFC arrived. And the economy of the world is still functioning. Something has changed.

In context of a “reality check” – have a look at the monthly chart below (courtesy DecisionPoint.com):

Based on the scale of this chart, the gold price could “churn” for upwards of five years before it finally touches the second most steeply ascending trend line. That being the case, if the prevailing trend line is penetrated on the downside, (which the sell signal on the PMO indicates is probable) then the shakeout could see a pullback of at least $400 (to $1250). But the 3% X 3 box reversal P&F chart below (courtesy stockcharts.com) suggests that it might fall as low as $1109 – which implies that even the second most steeply rising trend-line in the above chart might be penetrated on the downside – depending on how long it takes for that target to be reached.

The reader should understand that none of the observations above is made with any sense of disrespect for anyone. GATA has painted itself into a corner by being inflexible in its thought process. The issue does not relate to their intellect. It relates to the egg that would be on their faces that would have to be explained away.  Intransigence under such circumstances represents normal behaviour.