The Golden Hour Guest article courtesy of ChrisMartenson

Today we have the honour of hosting what we believe is a brilliant overview of the gold market written by Chris Martenson.  A priviledge indeed, as this article is currently only available to the paid enrolled members of ChrisMartenson.com, a service we highly recommend.  The article draws together a number of the news items we have highlighted recently and expands upon them. 

Chris has performed some fabulous independent investigative journalism that has been getting significant coverage across the internet.  Last month uncovering how the US Federal Reserve is managing to hide the extent to which it is purchasing US debt with money created “out of thin air”.  Also we highly recommend his “Crash Course“.  A video course available for free on his website.

The Golden Hour 

Monday, September 7, 2009

Executive Summary

  • Gold had a techncial breakout this week to the upside.
  • Fundamental support for gold is also strong at this time.
  • Swiss vaults are full.
  • Gold is accumulating to strong hands.
  • Hong Kong “recalls” gold reserves.
  • China changing the game?

Because it rose during both down days and up days for the stock market, gold has been acting in a fairly unusual way these past few weeks.  What’s going on?  I follow gold very closely, and here is what I am thinking at this time.

Before I begin, let me reiterate this:  Every portfolio, no matter how large or how small, should have a core position of physical gold in it.  Not paper gold (mining shares, ETFs, futures, etc).  I am talking about hard, physical gold that is either in your possession or in a vault.  If you have the means, you should have some in a vault outside of your resident country as well as within it.

Gold’s Technical Breakout

From a purely technical standpoint, gold broke out with conviction from a triangle this week (see chart below).  The next usual step to this process would be a back test of the breakout.

Over a slightly longer-term outlook, gold has a very interesting chart.  For starters, it has about as clean an inverted head-and-shoulders setup as one could ever hope to see, and these formations are considered to be extremely bullish.

There is also a wedge formed on this longer-term chart, which has clearly been breached to the upside, if you draw the lines like I have below.  The blue lines paint the wedge, while the purple line shows the battle line where heavy resistance is likely to be met.

If gold pops over that, then I’ll have to break out some much longer-term charts to pick some new price targets.  The green circle indicates that gold is not yet ‘overbought’ on the weekly chart like it is on the daily chart, so there is a mixed signal across the time frames.

Gold in the Media

Here is what one mainstream media outlet had to say about gold:

Uh oh. Gold’s near $1,000. 

With gold nearing last year’s highs, it’s a cause for concern. But it is probably more a sign of long-term inflation worries than fear of another financial collapse.

NEW YORK (CNNMoney.com) — Are gold investors starting to sense something wrong that others are missing?

The price of gold is nearing $1,000 an ounce. It closed at $997.70 Thursday, up $19.20 from Wednesday. This rise might be a cause for concern.

In the past two years, gold has flirted with the “box of ziti” level — a bit of slang for $1,000 from a memorable “Sopranos” episode — a couple of times. And that usually has coincided with a time of immense strain in the markets

My title for this article would have been, “Oh yay!  Gold’s going over $1000 soon.”  I happen to quite regularly disagree with the mainstream press about all things gold, and this article is no exception.

If you want a hilarious example of the mainstream press tossing around both factually incorrect and other misleading ‘information’ about gold, you can’t do much better than a recent Reuter’s article discussed at ChrisMartenson.com.

Strong Hands

Anybody who is buying gold as an imminent inflation hedge is not familiar enough with history (gold is a rather poor inflation hedge) or the recent data indicating that deflation is winning.  In fact, there is some evidence to suggest that gold performs better as a deflation hedge than an inflation hedge.  So please start tuning out the links that are drawn between gold and inflation.  They are really more of a distraction than anything.

Instead, gold is probably rising because (a) this is its seasonal period of strength (and that’s the sort of history that counts in a market), and (b) because there’s a lot of evidence that gold is disappearing into strong hands as a hedge against any number of possible “fiat failures” or additional systemic financial risk.  “Strong hands” means investors or parties who are likely to hold onto the gold for a long time and not easily disgorge their holdings based on short-term market gyrations.  They hold tight.

So those are a couple of pretty defendable reasons for gold’s recent strength.

Gold demand has been especially strong this year.  In particular, European investor demand has been especially robust.

In fact, Swiss bankers have been grumbling about running out of storage space for clients.

Swiss banks running out of storage space for gold bullion

Friday, 17 Jul 2009

In a note entitled No more space for Gold Bars, Swiss news website 20 Minuten Online reports that Swiss banks are running out of secure storage space for gold bullion held by investors and institutions in their vaults. Fears of hyperinflation, the economic downturn and the success of gold index funds (ETFs), which are supported by physical gold, has led to a run on precious metals investment – and in gold in particular, and in the necessary secure storage space in which to hold it..

One Swiss bank, earlier this year, reported that it was having to relocate some of its stored silver bullion to another site to make room for gold. The Zurich Kantonal bank put this down to the success of its gold ETF.

The website reports another Swiss investment banker despairing “We have the need to store more gold for our clients but are finding it difficult to find secure storage facilities”. Gold storage makes high demands on security which is what is making the gold holding task more difficult. Few banks will divulge exactly where their gold is stored for security reasons.

Another banker reported that his bank still had space but that it is beginning to run out.

I consider Swiss vaulted gold to be in strong hands.

Another example of strong hands comes to us by way of the recent news report that Hong Kong, presumably acting at the behest of mainland China, is recalling its gold reserves from a London custody account back to its homeland.

Hong Kong recalls gold reserves, touts high-security vault

HONG KONG (MarketWatch) — Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city’s airport, in a move that won praise from local traders Thursday.

The facility, industry professionals said, would support Hong Kong’s emergence as a Swiss-style trading hub for bullion and would lessen London’s status as a key settlement-and-storage center.

“Having a central government-sponsored vault would create a situation where you could conceivably look at Hong Kong as being a hub, where metal could be traded for the region,” said Sunil Kashyap, managing director at Scotia Capital in Hong Kong, adding that the facility was the first with official government backing in the region.

It bears noting that this article came out the day after a surprise $20 advance in gold, which had me scratching my head.  But if I had been privy to the rumors of this story before it broke (I was shamefully out of the loop!), gold’s reaction to this game-changing news would not have been confusing at all.

Of course, we need to keep in mind that the Hong Kong monetary authority only reports $63 million in gold holdings, or approximately 2 tons at current prices, which is hardly substantial.  However, I don’t know how they value it; the US values its gold at $42 an ounce, meaning that if Hong Kong valued theirs at the same silly price, it would amount to something closer to 50 tons.  Even this is not an impressive amount by modern standards. However, I see something else potentially at work here that overshadows that tiny amount.  .

Is China Changing the Game?

If I was China and I wanted to accelerate the process of accumulating gold reserves, I would seek to create a gold-trading hub on my soil to rival those of the west.  Further, I would not trust custody holdings by another country or institution, unlike so many other central banks and institutions, who keep their gold with the NY Federal Reserve Bank or at the London Exchange.

The pattern with China lately has been pretty clear. They make a trial balloon test announcement and then take surprisingly rapid action.  They did this by trading directly in yuan with Hong Kong; a trial balloon that was floated in July and tested in August.  Another example is the issue of rare earth metals, which went from an anonymous statement by a lower-level trade functionary to a more official pronouncement in only a week.

Because of this, I am keenly observing to see whether or not this move of gold to Hong Kong reflects this pattern.  If so, it means that in a surprisingly short amount of time, this little warehouse could become a third center for gold trading and storage, challenging London’s position.

Which means that the story for gold could change very rapidly.  For the past several decades, US and UK monetary authorities have used gold as part of their private (if you will) tool set for conducting and shaping monetary policy.  Having a third large player involved could upset many decades of agreements and actions simply by introducing a new player into the game.

A lot of gold is stored by the NY Fed in Manhattan in custody accounts for many different foreign parties.  If you’re interested, the Minneapolis Fed has a nice, easy-to-read description of the vaults and the storing processes at this link.

NY Fed Gold Vault (one of more than 120)

Regardless of the outcome of this line of speculation, I consider the move by Hong Kong to be an example of “strong hands.”

Reasons for Gold’s Strength

It is my belief that gold’s strength has more to do with a desire to hedge against the possibility of continued stresses to the financial system than it does to fears of imminent inflation.  These are as compelling a set of arguments to hold gold as I have ever seen.

Personally, I hold gold as a hedge against fiscal and monetary recklessness.  I think that the chance of a funding crisis for the US is incredibly high and that a dollar crisis will result.  I summarized this recently at ChrisMartenson.com:

Let me reiterate my position:  “My conclusion from all this is that the US has a date with a funding crisis and probably an associated dollar crisis, and increasing foreign indebtedness is an absolutely vital component of that pair of risks.”

I think I see things backwards from a few others here.  I don’t see a dollar crisis as a cause, but as an effect.

I am convinced the US has a date with a funding crisis.   Full stop.  Discuss.

Next, I cannot conceive of how a funding crisis can be resolved without an associated currency crisis.  They go hand-in-hand, like Argentina in 2001 or Mexico in 1984 or… etc., etc., etc.

Timing?  Here I really have no particular position on the short- or even intermediate-term direction of the dollar or any other currency, because they are all manipulated to an incredible degree by central banks.   This is not idle speculation; they write papers about how to do it best and post them to the BIS website.  I’ve read them.

The issue for me comes down to merely trying to assess when the strain of propping the current US fiscal nightmare grows too large for the other central banks.

My hypothesis is that such a break will happen like a pencil snapping – all at once and rather suddenly.  Right now I view the pencil as heavily strained and flexed but obviously not yet broken.  3% ten-year yields and 0.24% six-month yields tell us that the US government is not yet out of borrowing room.

But is the US insolvent?  Yes.  Is the US government borrowing at unsustainable levels?  Yes.  Will the US government willingly stop borrowing too much money on its own?  No. Does the US government therefore have a date with a funding crisis?  Yes.  Is the chance of an attendant dollar crisis high or low?  High.  Very, very high.

I would suspect that more than a few other recent purchasers of gold share these sentiments.

Other Factors

We know that JPM and HSBC together hold over $100 billion in gold derivatives and that they represent more than 90% of the entire bank gold derivative market, implying a heavy degree of concentration for these holdings (see Table 9).  This data, which comes from the OCC, is always severely behind the times, and this information is from the end of the first quarter.  Still, it has not appreciably budged from prior quarters, so I would be slightly surprised if it has changed much coming into this quarter.

I think it is entirely probable that JPM and HSBC are massively short the gold (and silver) markets, based on past information and other circumstantial evidence, such as the CFTC report showing a heavy concentration of short interest among just a few large (unnamed) banks.  I am always keeping an eye out for the inevitable day that these massive short positions will need to be “unwound.”

Conclusion

Gold has recently broken out of both short- and longer-term wedges and is on the rise.  Demand for gold is also supportive of the case for higher prices.

There are sufficient news stories around, ranging from Hong Kong moving their gold stores from London to Swiss vaults filled to the brim, to convince me that strong physical demand currently exists for gold.

I am a strong holder of gold here, but I would not be an additional accumulator at this price.  Either gold will succeed in crossing the resistance barriers, or it will fail.   If you already hold gold and are thinking of getting more, either buy the breakout or be glad you waited when it fails and falls back.

If you do not yet own gold (which should be a holding in every portfolio, no matter how small or how large), you should be prepared to buy the breakout if it happens.  This means figuring out in advance what you would buy, from whom, and how, so that you can pull the trigger if/when the time comes.


Disclaimer - I have positions in both physical gold and silver.  For the record, these holdings are stored in a variety of safe deposit and off-site vault locations.  I also consult to a very limited number of individuals on strategies and tactics for accumulating and storing physical gold and silver.  If you are a high-net-worth individual and wish to know more, please contact megan@chrismartenson.com for more information.


All the best,
Chris Martenson
ChrisMartenson.com


Copyright 2006-2009, CMAL LLC. All Rights Reserved.


Disclaimer: This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be — either implied or otherwise — investment advice. This letter/article reflects the personal views and opinions of Dr. Chris Martenson. Securities trading may not be suitable for all readers of this newsletter. You should be aware of the risks inherent in the stock and asset markets. Past performance does not guarantee future success. You cannot assume that profits or gains will be realized or that any recommendation or opinion presented in this newsletter will be profitable. Your personal due diligence is necessary for all investment and trading decisions you make. All information provided by Dr. Martenson is obtained from sources believed to be accurate and reliable. However, due to the number of sources from which information is obtained, there may be delays or inaccuracies in such information and he does not warranty the accuracy, completeness or fitness for a particular purpose of the information made available herein. Neither Dr. Chris Martenson, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Dr. Chris Martenson, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this newsletter may be reproduced without the express written (or emailed) permission of Dr. Chris Martenson. Everything contained herein is subject to international copyright protection.


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