This week’s wrap up:

By: Lynette Zang

And the volatility beat goes on with wild swings in both stocks, gold and added pressures in all of the fiat currencies. Most are reasoning that this volatility is about what is happening with Europe’s sovereign debt, and with French bank stocks dropping dramatically, they changed the rules ( like we did in the US in 2008) and now no one can sell European bank stocks short (sell bank stocks they don’t own). The markets liked this rule change, so today was an up day, though still a rather nasty week.

Volatility in the Dow is blamed on the US Debt downgrade by S&P from AAA to AA+. The Dow began the week at 12,143.24 and ended at 11,269.02, a decline of 7.2% with moves of at least 400 points four days in a row, a historical first! In the chart below you can see the trading range (between those 2 horizontal lines). This drop is very dramatic and I will say that the stock market is oversold; that does not mean undervalued, it just dropped too far, too fast. Therefore, a consolidation upward would be expected and still keep us in a negative trend.

It is the bear markets job to lull you into a false sense of security and take as much wealth down with it as possible. You might also notice that the green line is about to cross below the purple line. These are moving averages and a cross below would mean that the next most likely outcome is for the market to continue down. I also wanted to point out volume, which is in the middle of the chart. First of all, you can see that the volume trend is down as the markets have gone up: That tells me that it was more about a lack of sellers than an influx of buyers.

Second, you can see the spike in volume as the market dropped: That tells me that sellers came in strong overwhelming any buying activity. The Federal Reserve tried to calm the markets by putting a time frame around low rates, saying they would remain low until mid 2013. Good if you are borrowing, but this accommodation is likely to be highly inflationary.

Let’s move on to the dollar. Opening at 73.83 against the standard basket of fiat currencies, and closing at 74.59. But look at the chart and you will see a wedge formation from a series of higher lows and lower highs, creating a more narrow trading range. Since markets are never horizontal, at some point soon we will have a breakdown (falling below the rising bottom line) or a breakout (raising above the falling top line). I’ll keep you posted and get into this more when it happens.

There is one other way to value any currency and that is against the primary currency metal, gold. Let’s see what that looks like.

Any questions?

Now let’s look at spot gold. Starting the week at 1,629.10 and closing the week at 1,747.30 while hitting an intra day high of 1,805, for a gain of 7.3% on the week. And while this was a very fun week, gold is technically overbought, being 21% above the 200 day moving average. That does not mean over valued, it simply means that it went up too far too fast. Markets can do anything, so it could have gone above the $1,805, but this action is not welcomed by the powers that be, therefore, they raised the margin requirement (amount you must put up to borrow to buy gold) on gold by 22%. The same move the CME did with silver when it was running.

Source: http://www.advisorone.com/2011/08/12/gold-price-seen-supported-despite-margin-hike-repo . Not to worry though, look at the increase volume in gold. Once adjustments on these margin accounts are complete, it is most likely to continue its assent.

So while there is so much noise to explain what is happening, in my opinion, I believe we are in the middle of a paradigm shift, where government debt is becoming suspect. Once thought of as rock solid, now questioning the ability to repay. But large established governments cannot do an outright visible default. Therefore they must devalue their currencies to do an invisible default. It seems that the world is beginning to understand this, hence the volatility and rules changes in an attempt to control the digital markets. The physical markets are more challenging to control. Physical gold and silver in your possession protects your wealth and takes you out of the digital markers. Those of us that participate in those markets can sleep well at night knowing that our assets are protected.