 Correction
in Gold Near End
Jim Willie
CB
Jim Willie CB is the editor of the "Hat Trick
Letter"
May 16, 2008
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coverage of several smallcap companies positioned to rise during
the ongoing panicky attempt to sustain an unsustainable system
burdened by numerous imbalances aggravated by global village
forces. An historically unprecedented mess has been created by
compromised central bankers and inept economic advisors, whose
interference has irreversibly altered and damaged the world financial
system, urgently pushed after the removed anchor of money to
gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds,
and inter-market dynamics with the US Economy and US Federal
Reserve monetary policy.
The springtime corrections
are really about done. They have gone on for a couple of months.
The extent of the pullbacks have been tested and retested. The
long-term trends are just about ready to asset themselves again.
Grand deceptions have resumed to attempt to fool the public and
the investment community that the worst is over for banks, housing,
and mortgage bonds. That is not even remotely true. The deeply
wounded banks, the sharply corrected home prices, and the badly
damaged mortgage bonds have much more pain ahead. Nothing has
been fixed. Many mortgage resets have yet to take place. The
New Resolution Trust Corp to facilitate secondary mortgages,
to bury dead mortgage bonds, and to renegotiate home loans is
not even agreed upon, let alone installed. Its operation will
be sometime in 2009 at the earliest. Until then, the system
burns as foreclosures mount, inventory bloats, and home prices
come down much more, guaranteeing another ugly storm of bank
losses in mortgage bonds. The ultimate determining factor
right now is home prices, which are accelerating down. Wall
Street seems unwilling even to mention home prices, preferring
to talk about bank liquidity concerns having been addressed.
Except that bank capital is still negative. Let's take a whirlwind
tour of relevant charts, to see that the progress of the corrections
is in its last stages. Sentiment is not good for gold, but it
never is when the next upleg begins, the nature of the beast.
Only the mentally tough, the well informed, and the unshakable
types are loaded with gold & silver when the uplegs begin.
The bull market in metals and bear market in US$-based paper
is ready to resume.
GOLD
The gold price has
corrected in a triple wave. Retests at the 850 level have been
completed. Longer-term moving averages remain properly aligned.
A big pullback from 1020 to 840 will next see the 180-point momentum
swing to 1200, once again capturing global attention. The remedies
all involve monetary inflation, which will be amplified as problems
and crises persist.
SILVER
The silver price has
corrected in a more volatile triple wave. Retests at the 16.30
level have been completed. Longer-term moving averages remain
properly aligned. A big pullback from 21 to 16 will next see
the 5-point momentum swing to 26, once again capturing global
attention. The gains in silver will be double those of gold on
the next uplegs.
USDOLLAR
The USDollar has bounced
in an irregular double quantum jump. It is resisted by the 100-day
moving average, which has held firm for over a full year. Longer-term
moving averages remain properly aligned. No fundamental improvement
has come to the four pillars of insolvency for the United States:
federal budget deficit, trade & current account deficit,
insolvent big banks, and rising tide of negative equity for homeowners.
All pillars are seeing worsening conditions. The epicenter for
US collapse financially is New York City, without dispute. The
epicenter for US collapse economically is either the Midwest
(Ohio) or California. My focus is squarely on California, sure
to capture the news since the rate of decline will be so magnificent
and tragic. It is also where the location of the greatest abuses
of mortgage loans. Retests of the 71 level lie ahead. The only
saving grace for the USDollar is the breakdown in the British
pound sterling, and the potential of a Euro Central Bank official
rate cut that would weaken the euro currency. The Competitive
Currency Wars have no winners, only relative losers.
LONG-TERM USTREASURY (TNX)
The 10-year USTreasury
Note competes with gold directly. The rise in its bond yield,
known as the TNX, has come with the advent and heavy deployment
of US Federal Reserve lending facilities to the big banks of
many stripes. The USFed is actually draining bank funds from
the bank system in order to rebalance its own donated portfolio
of bonds. This is covered fully in the May Hat Trick Letter reports.
Soon, the USFed will resort to outright monetization of bank
insolvency, attempt to restore bank capital, and flood the system
with printed money as it addresses its own portfolio lent in
exchange for private mortgages heavily damaged. Longer-term moving
averages remain properly aligned, although the 50-day MA threatens
to cross over. On the other hand, the 200-day MA might offer
stiff resistance. Falling long-term rates go hand in hand with
heavy USFed monetary inflation of the pure variety. Falling long-term
rates go hand in hand with gold rallies. Heavy resistance lies
right here for the TNX to head back down, favorable for gold.
EURO
The euro exchange rate
has corrected in an orderly fashion. Retests at the 154 level
have been completed. Longer-term moving averages remain properly
aligned, with the 50-day MA offering surprising support. A big
pullback from 159 to 154 will next see the 5-point momentum swing
to 164, once again capturing global attention. However, if the
Euro Central Bank does change course with an official rate cut,
then the euro will possible decline, and easily close the entire
range down to the 148.50 level. That would aid the US$ DX index.
That would also create a more powerful gold bull market in Europe,
a bigger center of wealth than the crippled Untied States lately!
The net effect might actually be positive for gold, as investors
realize that a magnificent next stage of powerful broad inflation
will be unleashed upon the entire Western world. Then there is
the British pound sterling story.
BRITISH POUND STERLING
The pound sterling
is in the middle of a crash. The UK currency is looking very
weak, having gapped back down to the critical 194 support level,
as forecasted last November in the Hat Trick Letter. Housing
prices in the UK have begun to fall for the first time in a decade,
a trend very early here in its pathogenesis, sure to continue
for another two years or more. Recession in the UK economy is
assured, since they deployed the lunatic AngloSphere model of
housing bubble foundation for economic vitality. That heretical
catastrophic model was hatched across the Great Pond, the location
of the primary meltdown in the Wall Street. The long-term picture
is analyzed more fully in the May Hat Trick Letter report out
this weekend. A painful disaster this way comes for England.
The heavy duty monetization of their bank system, kept in highly
questionable secrecy, will feed the gold bull, if not from plain
vanilla monetary inflation, then from fear of the unknown.
JAPANESE YEN
The Japanese yen exchange
rate has corrected in an orderly fashion. Retests at the 95 level
have been completed. Longer-term moving averages remain properly
aligned, with the 100-day MA offering strong support. A big pullback
from 102 to 95 will next see the 7-point momentum swing to 109,
once again capturing global attention. However, if the Bank of
Japan does return to normalcy with an official rate hike, then
the yen will rise with sudden power. It will force the liquidation
of more Yen Carry Trades, and render deep damage to the Japanese
exporters. Japan has two big trade partners nowadays, both the
US and China. The irony here, not unknown to the FOREX arena,
is that the yen might rise substantially as the Japanese economy
undergoes a recession. Their stimulus to exit such a situation
will feed the gold bull across Asia. One should know that the
US$ DX index has a aberrant tiny yen component. My name for the
DX index is the 'Anti-Euro Index' since the euro is oddly weighted
by over 50% within it, but the yen is under 20% in weight. Big
moves in the yen will not move the DX index much.
OIL/GOLD RATIO
The ratio of the crude
oil price to the gold price has really shot up considerably.
The USDollar weakness has opened the door for a big rise in crude
oil, aided by speculators, probably with heavy US bank participation
(to improve damaged balance sheets). Funds must have an eye on
possible expansion to the Iran war front, even to Lebanon as
a second front. Regardless, the oil price is due for correction,
and with it, a relaxation of the ratio shown in favor of gold
again.
CDNX/GOLD RATIO
The ratio of the Canadian
exchange stock index, laden with a heavy representation of mining
stocks, versus the gold price, is another important indication
of trend. The ratio hit bottom this March and has begun to recover.
This is a very promising signal for not just gold, but leveraged
investments like gold mining stocks in a general sense. Watch
for a bullish crossover of the 50-day moving average above the
100-day MA. Later expect crossovers above the 200-day MA, during
a full blown recovery.
BANKING STOCK INDEX
The BKX is a stock
index worth watching as attempts are made to remedy the current
US bank insolvency. Tremendous losses have been incurred on their
balance sheets with asset backed bonds. Those losses are matched
by tremendous losses in their stock equity, even their bond principal.
Also, dividends have been cut. Notice that an attempt at recovery
has taken place. The real story seems to be a newly formed
bearish triangle though, one which indicates a huge decline if
a breakdown occurs below 76. Given the next round of bank
losses in commercial mortgages, prime adjustable mortgages, car
loans, credit card lines of credit, it seems a cinch for another
BKX breakdown, just like what occurred with the homebuilders.
HOMEBUILDER STOCK INDEX
Only a partial stock
chart is shown here. In previous years, a previous huge decline
occurred in a breakdown for the HGX index. The breakdown was
duplicated in 2007. My forecast is for yet another HGX breakdown
in 2008. How far down will it go? TO ZERO. The housing glut and
declines dictate and assure that a remedy to the housing and
mortgage systems comes only when almost all the homebuilders
are out of business. If the system adds to the glut of supply,
then the system is nowhere near completion of the remedy. Losses
continue to be announced of very significant size for the entire
group, on many fronts like deep discounts, land options, mortgage
portfolios, and violations of bond covenants.
QUICK CONCLUSION
Sadly, the insolvent
US$-based economic and financial system has a long way to go
before any recovery can be claimed. The four primary pillars
of the federal budget deficit, the trade and current account
deficit, the bank insolvency, and the rising tide of negative
equity homeowners, these scream of ongoing need for remedy. All
forms of remedy involve monetary inflation. The current approach
has been careful and directed. The next steps will be much more
broad and systemic in the face of desperation to avert collapse.
Beware of civil disobedience toward mortgages. Beware of civil
disturbances. Beware of open scuffles at gasoline stations. Beware
of possibly food riots in poor neighborhoods. Being the newest
Thrid World nation, the Untied States will see food riots similar
elsewhere in the world. The system inside the US is moving toward
chaos. An inflationary recession does that. Job loss and rising
prices make for a nasty cauldron for emotions. The only known
plan will be to produce enough inflation to keep the system running.
The implemented cure will plant seeds for further crisis one
year from now, and guarantee a severe change via disruption.
The only safe place to be will be commodity investments that
oppose the Great Paper Chase in dissolution, in particular precious
metals and energy. My favorite remains silver, for many reasons.
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May 15, 2008
Jim Willie CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
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Golden
Jackass
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Trick Letter
Jim Willie CB
is a statistical analyst in marketing research and retail forecasting.
He holds a PhD in Statistics. His career has stretched over 26
years. He aspires to thrive in the financial editor world, unencumbered
by the limitations of economic credentials. Visit his website
at www.GoldenJackass.com. For personal questions
about subscriptions, contact him at JimWillieCB@aol.com.
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