August 9 (King World News) - The Precious metals market is trend ready.  Gold, on our short and long-term trend indices, is primed for a substantial move.  This could be up or down.  We will examine both possibilities and which direction we believe has a greater probability of being realised.

Silver is likewise primed (See chart below). 

Our model is ‘Trend Ready’ when it is below 1.50 on our indices.  (Ignore the short-term horizon given here on charts, it’s just to provide some graphical representation, but it’s applicable over this bull market and others.)  The convergence of both long and short is a plus but not a prerequisite for a powerful trend.  The question remains: which way will the trend ignite?

Well, we actually don’t care as we will allocate less or more depending on when we get the buy or sell signal that affirms the beginning of the trend.  We may have a few false breaks up or down, as is evident by recent price action.


However, the evidence points to an upside break for both gold and silver, which is not dissimilar to our Silver – The Coming Bullet - August 2010 ‘Trend Ready’ state.  Although we will edge towards holding perhaps more silver as the old silver ratio looks divergent from ISM data (Purchasing Managers Business Survey), and emerging equity indices, which we believe have begun to perform well, as they respond to worldwide efforts to re-stimulate.

We want to state there has been a strong buyer in the gold market these past few months.  Also we want to reiterate the buyer in the room is Asian and has been stepping up their buy order, 1545, 1575 now 1600?.  It is reminiscent to me of the very same buyer(s) who soaked up US 10 year bonds at 4.85% in June 2004 when the Fed didn’t cut rates from 1% to 0.75% as was widely expected.  By end of 2004 rates were at 4.25% but 10 year yields had rallied back to 4.00%.


This time front-end rates in the US will not be rising (fiscal cliff aside), and with 10 year yields at 1.68% and having topped out in our opinion, we do see a cessation of Asian bond buying and a switch to gold and other currencies by our Asian counterparts.  It is the end of the vendor-financing relationship.

Although it may not seem like it, the strong hands are buying from the weak hands.  A recent FT article written with the usual alacrity at gold ownership is likely a useful signal on sentiment.  It is clear most have grown weary of gold resuming its uptrend, but gold has performed as expected.  It reacted to a mini-gold rush when sentiment was too frothy in the short term, but we have now shaken out the speculators.


Speculator positions in the paper precious-metals market are very light.  In fact, for the market to get traction to the downside we would need to see a net short position in the CFTC data.  Now this seems a low probability in light of recent and potentially future macro-fundamentals.  Also it is clear that individuals have purchased more physical and steered away from ETFs, a trend we have noted at KWN many times before in interviews.  This is good to see as it leaves the paper market less room to manoeuvre.  If you speak to GATA you will understand the dynamics better.

What do we know today? And what are the markets beginning to discount now? As our macro research partners, Variant Perception, recently pointed out, the world is currently experiencing a broad-based slowdown and coincident economic data continues to weaken, but growth should start to turn up towards the end of 2012.  From Variant Perception:

“Given the weakness in the global economy, central banks are in the midst of a coordinated easing cycle.  In our client meetings in the past six months, the consensus view is that rate cuts and unconventional policy will be ineffective.  Clients argued that even if monetary policy is extremely loose, monetary policy is useless if the transmission mechanism is broken.

While the transmission mechanism is certainly severely impaired in certain parts of the developed world it is not globally and universally broken.  Easing in emerging markets as well as unconventional easing in developed markets will still have an impact on the global economy and asset prices.

Every single central bank that can cut rates has done so, and the major central banks are expanding their balance sheets.  Emerging central banks had already begun easing going into the current slowdown, but they have now intensified their monetary policy response with China, South Korea and South Africa joining in.  In the developed world, the RBA in Australia and the ECB have also further reduced interest rates.”

Central bank easing cycles typically lead the business cycle and changes in asset prices by nine months.  We expect a strong upturn in late 2012 in economic activity and asset prices not least based on global liquidity conditions.

Source: Variant Perception

“The global monetary policy backdrop is increasingly loose as not only emerging central banks are cutting interest rates, but developed central banks that are near the zero bound are resorting to increasingly creative and less orthodox ways to stimulate the economy.”

Recent posturing by central bankers aside, one thing is for sure: monetary conditions are loose.   Either Draghi is a genius or an idiot.  One minute he stands ready to do whatever it takes to maintain the euro - which inferred no conditionality on bailouts - and then in next breath he calls for conditionality.

So again he is either as hopeless or helpless as the finance ministers of the eurozone - take your pick.  But we suspect he is playing a canny game.  He will force euro integration through conditionality and fire up the ESM, prime the ELAs, and ensure the substitute bailout of German TARGET2 balances remains viable.

Meanwhile, Japan lurches further into indebtedness, and the Japanese MoF (Ministry of Finance) and ‘rentier’ government fight to hold onto power, but time is truly running out.  When they fully monetise their bond market the game will be up there too.  Furthermore, with JGBs rolling over along with other rate markets, Japan’s funding issues are about to become very real.  In a world of failing currencies, gold will remain the ultimate protector of your purchasing power.


Additionally, the VP Business Cycle Financing Index (chart above), points to a higher ISM in the next 6 to 9 months, which as the graph below highlights will lead to a narrowing of the gold/silver ratio, with silver outperforming (the ratio is inverted to provide clarity on changes).  As the ISM rises, the gold/silver ratio will fall from near 60, where it is now, to 45 and more. 

Finally, if growth picks up moderately due to über amounts of global stimulus, as Variant Perception suggests, this will be very positive for gold and silver just as it was in the previous decade.  It will not be true (final) demand that will drive GDP in the next few years, but demand for credit, as it has been before.

In a coming interview with KWN I will discuss why mining costs are actually supportive for gold, despite recent comments by some analysts to the contrary, as well as potential developments in Asia and Europe.”

© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The interviews with MEP Nigel Farage, Peter Schiff, John Embry, Egon von Greyerz and James Turk are available now.  Also, be sure to listen to last week’s line-up of other KWN interviews which include Dr. Stephen Leeb, John Hathaway, Art Cashin ($612 billion UBS), Gerald Celente, and Don Coxe ($538 billion BMO) by CLICKING HERE.

Eric King

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© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast,

rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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