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By Robert Fitzwilson of The Portola Group

February 10 (King World News) - The Invisible Hand, Gold & Mainstream Media Propaganda

The commonly used words algebra and algorithm derive their provenance from the great Persian mathematician al-Khwarizmi who lived from c. 780 to c. 850.  The Latin form of his name, “Algoritmi,” is the source of the terms we know so well.  Another related technique is called heuristics.  According to Wikipedia, heuristics are utilized instead of algorithms “where the exhaustive search is impractical” and “to speed up the process of finding a satisfactory solution via mental shortcuts to ease the cognitive load of making a decision.” That must also be the source of the term “no brainer.”

Whether we saw algorithms, heuristics or no brainers at the end of the week, we saw evidence of the “invisible hand” of the Wall Street and the central planning gang at work....

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Like clockwork, the S&P 500 once again bounced smartly off of the 200-day moving average, despite a horrific jobs report and substantial internal damage to the leaders within the stock market.  On cue, the mainstream media concluded that the jobs report was really no big deal as one does not require employed people as a critical component to having economic growth.  The bad report was blamed on the weather.

The reaction to the jobs report was striking.  For a very short period of time, the stock market futures sold off precipitously, but then smartly reversed the downward slide and roared ahead in the opposite direction.  Many of the leading companies that had suffered severe declines during this correction regained a great deal of the value that was lost.  Like clockwork, we got our algorithmic/heuristic pullback, and it is now back to the races.  At least that is how it looked and felt when the closing bell rang on Friday.

Our interpretation of the action on Friday is that the market participants correctly perceived that the jobs report was horrible, but then realized that it really means that the Fed is going to have to take action once again.  The report reinforced that we are trapped in a situation where the only two solutions are more printing/debasement or economic collapse.  The central planners proactively only know how to do the former.

The TLT is an exchange-traded fund that mirrors the return on the 20-year Treasury bond.  The TLT and gold have been two of the best performers since the start of the year, outperforming the popular stock indexes by a substantial margin.  It continues to be the case, but with the rally toward the end of the week in equities, there might be a change in the wind for relative returns if the Fed is suspected to be ramping up the quantitative easing.  We have probably seen the lows for Treasury rates and the rates will trade in a narrow range with a upward bias.  To have both gold and 20-Year Treasuries showing near-identical returns suggests to us that markets have been betting on more, not less QE, and that the talk of continued tapering is just that.

The same can be said for gold and silver.  It is very obvious that the manipulation is alive and well.  What has been different, though, is there definitely seems to be a significant base that has been building for both metals.  Silver has been trapped in a very tight trading range between $19 and $20, but the trading range for gold has been migrating higher.  Not too long ago, the top looked to be $1,200.  The next top was $1,250. The most recent top has been $1,270, but it feels as if we are close to breaking through it.  Perhaps this is the “managed retreat” that has been mentioned before on KWN.

There is no question that the setup for the central bank proxies would generate huge profits if the prices of gold and silver were allowed to suddenly jump to a higher trading range.  However, the primary goal of the manipulation is to protect the dollar and the ability to create money out of thin air.  The value of that capability is immensely greater than the trading profits from allowing some semblance of market prices.  Therefore, it is unlikely that we are rapidly approaching the tectonic spike to the upside that would be justified in free market conditions.  It will happen when the central planners either lose control or it becomes in their best interest.

As for stocks, we believe that the manipulation of the markets to the upside is a key component to the overall quantitative easing.  Just as printing money to buy Treasuries injects fiat currency into the system, the same process is true for the purchases of stocks by the Fed and their proxies.  We would suggest people view it as another form of wealth transfer from those who hold cash and fixed income to those who hold quality companies.  The system is creating funny money to exchange for stocks, another form of real assets.

We know that by normal metrics and the extreme sentiment readings that stocks are high.  However, so are the other forms of real assets such as art, real estate and collectible cars.  It is a fact that stocks are inexpensive when measured against the inflated prices of other assets.  It is a gut-wrenching choice for investors as to whether or not to continue to hold cash and fixed income that is being consistently destroyed or to switch to assets that are artificially inflated by QE.

The precious metal mining companies continue to hold a lead of 16% over the Dow Jones Industrial Average, despite the rally off the bottom at the end of the week.  Investors need to maintain and build core positions in the quality mining companies.

The effect of the suppression of gold and silver prices has been to pressure the mining companies to acquire funding primarily from the banks.  The banks then apply pressure to the companies to sell their output at the artificially low prices.  If prices for gold and silver are in the early stages of a secular rise, the companies will once again be able to generate working and exploration capital from production that will enable them to escape from the iron grip of the banks.  Under those circumstances we would expect the outperformance of the sector then to be just as spectacular as was the artificially induced decline of last year.

© 2014 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.

IMPORTANT - KWN will be releasing interviews all day today.

The audio interviews with John Mauldin, Eric Sprott, Bill Fleckenstein, Egon von Greyerz, Dr. Paul Craig Roberts, MEP Nigel Farage, James Dines, Gerald Celente, Andrew Maguire, David Stockman, Art Cashin and Dr. Marc Faber are available now. Other recent KWN interviews include Jim Grant and Felix Zulauf -- to listen CLICK HERE.

Eric King

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