Wednesday, September 06, 2006

Gold Price Break Out

Tuesday, the gold price broke out above its 4 month long triangular flag pattern. Very bullish, particularly since it gapped up and out of the pattern. It should not be surprising if gold does not come back down to close the gap. It still has not closed the gap up it made back during the last week in June despite trying 3 times at the 61.8 Fib retracement level.

South African gold production has been in decline for a decade. Australian production is now down to its lowest in 10 years. The Indian central bank just announced an increase in its gold reserves. This is the beginning of the season for increased Indian gold demand. Turkey, a major importer, just keeps increasing the amount it imports. And, the AMEX's HUI index of mostly non-hedged gold and silver companies has been leading the gold price. The gold price breakout makes sense.

"The combination of artificially low interest rates, foreign central bank intervention, an irresponsible Fed, excessive credit availability, the proliferation of low or no-down payment, adjustable-rate, interest-only and negative-amortization mortgages, a can't-lose attitude among speculators validated by ever rising 'comps,' [comparables] the complete abandonment of lending standards, widespread corruption in the appraisal industry, rampant fraud among sub-prime lenders and the moral hazards associated with loan originators reselling loans to buyers of securitized products who perceive minimal risk and an implied government guarantee, has produced the mother of all bubbles." - Peter Schiff on the current real estate scene in the US

Saturday, September 02, 2006

US Decline Good For The USD Gold Price

"Investors who learn the truth and ignore or avoid the spin make the money. Those who don’t get to the truth or who listen to and believe the spin are going to have a hard time." - Monty Guild

A US economic decline is good for the USD gold price? As nutty as it may seem to some, yes. Read on.

Despite what the financial media, let alone the mass media, in the US tell you and despite what the US government's number crunchers and statistic gathers tell you, the US economy is in decline, rolling over. This roll over should pick up speed as time goes by. Think of a compound curve heading downwards.

If the federal government's Bureau of Labor Statistics tell you that there has been 200,000 jobs created last month, about the opposite is true. About 200,000 job have been eliminated. If you find this surprising, pay attention to John William's Shadow Government Statistics

The fraction of the population participating in the labor force has been heading down since about 2001. To see this go to 'Jesse's CrossRoads Cafe'. Here is his labor force participation chart. Meanwhile the US financial mass media is saying that economic growth is steady to increasing and that the US has roughly full employment while the chart looks to be developing a massive multi-year head and shoulders topping pattern.

First of all, US interest rates are rising:

What do you expect after a 25 year decline in rates? It looks like the chart is putting in a massive 40-45 year double bottom.

This should not be surprising considering the massive amounts of US dollars the US Treasury/Fed have been creating, particularly since the early '80s. The more there is of something, the less it is worth. So, the higher the interest rate loaners want for compensation for the less valuable dollars they are to receive in the future when the loans are paid off.

Check out the St. Louis Fed's Monetary Base numbers on this chart starting just after the US Fed was created. Wait till all the overseas US dollars start flooding back to the US.

Rising interest rates means a decline in business activity and a decline in jobs.

Rising interest rates means a decline in federal and state government tax receipts from both businesses and individuals, usually at a increasing rate of decrease.

Declining federal and state tax revenue while federal and state spending is increasing means exploding budget deficits. States get a lot of their dollars from the Feds.

Add an increasing federal budget deficit to an increasing US trade deficit and you have an increasing current account deficit.

The current account deficit measures how many US dollars are leaving the US to buy goods and services over and above the goods and services foreigners are buying from the US. This number is balanced by the amount of US dollars that are coming into the US as investments in US businesses, equities (shares), US treasuries (debt), etc.

At some point the rest of the world decreases or stops, eventually, its loans to and investments in the US since it is the biggest, baddest, dead beat (it keeps borrowing knowing it does not have the wealth to repay), record breaking debtor nation in the world.

When the rest of the world says no more (and even before this), the federal and state governments have to find financing internally which means they have to ***increase*** interest rates offered on their debt. This leads to a further decrease in business activity and a further decrease in federal and state tax receipts, a further downward US economic spiral.

This leads to increasing pressure on the US Treasury and Fed to create humongus amounts of debt and US dollars (a dollar can't be created without a dollar's worth of debt being created first) further devaluing the US dollar.

The less value the US dollar has, the more of them are demanded for the same weight of gold and silver. Thus the gold price and silver price go up, even eventually rocketing up if the value of the US dollar is rocketing down.

Unfortunately there is going to be an ugly economic downside for the US when the gold price and silver price are sky high. Probably the federal government knows this, thus the hiring of Haliburton to build concentration camps within the US.

"During Greenspan's tenure, America was transformed from the world's largest creditor to its greatest debtor, from the world's mightiest industrial power to a second-rate service provider, and from a nation of responsible savers to one of reckless spenders," - Peter Schiff