By: Lynette Zang
Some ask if this is the end of gold’s bull market. The answer is quite clear, NO, and the reason is Central Banks coordinated efforts to devalue global fiat currencies.
From what I see, global challenges are coming from almost every direction. Here in the US the deficits are ballooning and no one can find a way to cut spending, so debts and deficits are exploding and eroding confidence in our ability to control outcomes. Of course trusting the people who got us into this mess, to get us out when there is no historic precedence for where we are is difficult.
It appears that the only tool they have left is money printing aka currency debasement aka inflation as witnessed by the recent liquidity swap which was just a helicopter drop of money into any and every European bank.
It isn’t working.
Of course the Eurozone is falling apart and the Euro Dollar seems to finally be impacted by that. China’s real estate market is in free fall amongst other world economic issues and everything points to a culminating crisis. So the question is, why is gold falling so fast? The following is my educated theory on what is happening.
First of all, the move in spot gold and the US dollar index look eerily similar to what happened back in 2008 as they were put in position to withstand the major system shock when Lehman Brothers went out of business, AIG first went on life support from our government and Merrill Lynch had to be saved by Bank of America. Let’s take a look at the chart below. You might recall between 2007 and July of 2008 when every time you went to the grocery store or gas station that prices were noticeably higher and people were started to scream with gas over $4 a gallon. That was because the dollar dropped approximately 12% in that 12 month period and hit an all time low of $71.33 while at the same time gold broke to a new all time high of $1003. When we were in jeopardy of breaking below $70 the Chinese yuan re-pegged to the dollar to give it much needed support (it had been partially de-pegged) pushing the dollar up 12% and gold down 34% in a short period of time. In my opinion this was done to get us into a position to withstand a major shock as you can see on the charts below. Now look at how quickly the dollar dropped and gold popped up during the unfolding of the 2008 banking crisis. Now ask yourself, has anything gotten better? Not at all, in fact the contagion is now global.
Let’s look at the current action of the dollar and spot gold. At the time spot gold was making a new all time high a bit above $1,900 the US dollar was testing support within only 200 basis points off the all time low near $73.50. Then the dollar rallied quickly and so far is up almost 10% from that bottom test. In 2008 spot gold fell 34% to approximately $700 to get into position for the next leg up to new highs. Today spot gold closed roughly 17% below its all time high and just above a support level of $1550. I’ll talk more about the technical action in the Friday Market Wrap Up and we’ll look at silver and the numismatics then as well.
Of course I cannot control the markets and it is certainly possible that magic can happen and I could be wrong, but as I watch the unraveling of the global market place: China’s real estate market in free fall, interest rates shooting up in Europe as government bond auctions fail, and deficit spending in the US as far as the eye can see, with the only tool left in central bankers arsenal all boiling down to massive liquidity continuously being pumped into insolvent banking and governmental systems. I cannot but suspect that the central banks are getting the inflation, risk indicators and the US dollar into position for some very nasty news the likes of 2008.
It took them 6 months to get into position in 2008, so far we are 4 months in. I hope I’m wrong, so neck on the line here, but if I’m right you may have a limited amount of time to get your physical gold and silver position built at these price levels. If I am right we could see the dollar drop and gold go up just like they did in 2008. Do not try to call a bottom, computers are faster than you or me. You cannot get out of the way, but you can take advantage of this correction.