The Greeks are learning the tough consequences of worshiping a false god. For years they sought the blessing of Keynesianism, only now to find it comes with a price. Keynes introduced the notion of government debt as salvation, the road to prosperity. Issue debt, and you will prosper. With those words, citizens of many nations turned their minds and ears off to reason. How could so many come to believe that borrowing money was the secret to prosperity?

Despite the decade when many nations of Latin America demonstrated clearly that debt as a road to prosperity was a delusion, the world seems forced to relearn that lesson. With Iceland, Ireland, Portugal, Spain, Italy, California, New Jersey, and Illinois now paying the price for their Keynesian debt binges, the U.S. continues down the merry road to the same financial armageddon. According to The Washington Post, the Congressional Budget Office now estimates the Obama Deficit will be more than $9.7 trillion over the next ten years, rather than $8.5 trillion. Does anyone remember when deficits were measured in billions?

One would think that after the bursting of the global mortgage bubble that debt would be a dirty word. Keynesian dogma does not allow for such heresy. The holy writings of the followers of Keynes ignore the ramifications of issuing one form of government debt, fiat money. For all our money today is someone’s, be it a government or a private entity, debt.

Since we last visited another line has been added to the above chart. Plotted in that graph are two different measures of the rate of growth for the U.S. money supply, M-2 NSA. The blue line is the one year percentage change of that money measure. The new line is the red one. It measures the six-month rate of change for the U.S. money supply at an annualized rate.

As we have talked before, the spike in those measures of money supply growth that occurred in late 2008 and early 2009 was a consequence of the massive liquidity injection by the Federal Reserve in response to the financial implosion of that period. That spike in the money supply growth rate was much feared by many as a harbinger of future inflation. We, as it happened, thought inflation would rise.

That inflation surge did not develop as so much damage had been done to the banking system that lending collapsed. Along with the collapse of bank lending came a collapse in the growth rate of the U.S. money supply. Be wary of reading much into the recent upturn in the six-month measure as seasonal forces often cause such a rise. Non seasonally adjusted data is used as the seasonal adjustment factors built with data of the last three years should be considered pure garbage.

Why did the surge in the growth rate of the U.S. money supply not lead to higher inflation? First, the surge was temporary, as can be observed in the graph. A second reason is that output, U.S. GDP, ceased collapsing. For example, if the money supply grows by 5% and output does not expand, prices should rise. If money supply growth is 5% and output increases by 6%, prices should decline. Money supply growth cannot be viewed in isolation, but also in the context of what is happening with output.

Our second graph, above, will help in understanding what was just described. In this graph we have taken the two previous measures of U.S. money supply growth and subtracted the rate of change of U.S. industrial production. The blue line is now the 12-month rate of change for the U.S. money supply minus the twelve-month rate of change for U.S. industrial production.

As is readily apparent, the surge now looks for more inflationary, and it was. However, the slowing of the U.S. money supply growth is now price depressing as industrial output has shown a recovery. That might be a dead cat bouncing, but it is what is happening at the present.

Notice now that the two adjusted money supply measures are both in negative territory. That means that U.S. output is rising at a faster rate than the U.S. money supply is expanding. Such a development is price depressing, or non inflationary. It also means that the U.S. dollar, on a relative basis, is becoming more valuable, rather than less valuable. Looking for inflation in the U.S. AT THE PRESENT TIME is a futile search.

This reality has implications for the value of the dollar on foreign exchange markets and the dollar value of Gold. The dollar has been appreciating as it should be. $Gold has been weak for now near three months, as it should have been. While the mindless trading of hedge fund managers can push the value of $Gold up in any week, such trading is swimming against the current. $Gold has been rightly weak, and should continue to be. U.S. dollar-based investors should probably defer buying until the next period of serious price weakness.

None of the above discussion should be construed as altering the longer term arguments for North American investors to own Gold. Deficit spending, nationalization of the health care system, confiscatory taxation, and business killing regulations by the Obama Regime will crush any possibility of economic growth. That reality will force the Federal Reserve into serious and overt monetization of the Obama Deficit. THAT will cause inflation to again be a problem.

The situation just described for U.S. investors is reversed for many others. English investors are experiencing rising Gold prices as the pound goes through its final liquidation as a global currency. Combination of a miserable economy being made worse by a dismal political situation is crushing investor interest in the pound. While they too should wait for price weakness to buy, they should buy with gusto when it happens.

The Euro price of Gold has reminded EU investors that the EU is still work in progress. The EU is not going to collapse over the financial mismanagement of individual states no more than the U.S. will crumble over the financial disasters in California, New Jersey, and Illinois. All are simply cases of Keynesian dogma coupled with inept politicians. This financial frailty is likely to reappear over the years, making the ownership of Gold a wise move. Being so close to an Iran armed with nuclear weapons might also be a good motive. However, the recent surge of Euro Gold probably should be simply watched rather than be reason to buy. EU investors should wait for price weakness to buy, and then do so with enthusiasm.

© 2010 Ned W. Schmidt
Editorial Archives

GOLD THOUGHTS are from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. For a subscription, click here.

Disclaimer: Please remember that no method is perfect nor is the one running the model. All estimated returns are for the model portfolio and do not reflect those earned on actual portfolios.

Crucial Test Approaching

The rally out of the February intermediate and yearly cycle low has now traveled far enough and long enough that it is due to take a breather.  That breather would be in the form of a short term pullback into the mid cycle low.

The initial move out of the July intermediate cycle low lasted 22 days before forming a short term top.

The current rally is now on day 21 and very short term overbought (see chart above).  Traders should now start looking for a brief pause in this market. A move back down to the 1120 support zone is probably in the cards some time soon.

I’m also starting to see divergences in breadth and signs that institutional traders are stepping aside for the moment.  More on that for subscribers in Tuesday’s market update to subscribers.

If we are on the Brink of an Asset Explosion, as I think we are, then traders should be prepared to position long in virtually any asset class as we make our way down into this temporary correction.

I expect the stock market will also exert some influence on the precious metals market when it sinks into the low. As a matter of fact, at 21 days it now appears gold has already begun the trip down into its next daily cycle low.

As this short term gold cycle is right translated (topped later than 12 or more days) the expectation is for this move to hold above the last cycle low at $1044. It would be a big plus if gold can hold above the last short term dip at $1087 and keep the pattern of higher short term highs and higher short term lows intact.

If it can, then I would be looking for gold to move above the critical $1161 level during the next short term cycle.

If gold can take out $1161 then the pattern of lower intermediate lows and lower intermediate highs will be broken. That will also force a rephrasing of the last intermediate cycle low from December to February. Again, more on that in the subscriber newsletter.

Suffice it to say that it is critical this rephrasing take place if gold is going to continue higher and not go through another multi month consolidation phase like it did from March 08 to Sept. 09.

So, short term expect some weakness in the stock market which will probably continue to rub off on the gold market, but be prepared to buy the dip as this bull rally in the stock and gold markets is not over yet.

Toby Conner

Gold Scents

http://www.goldscents.blogspot.com/

A financial blog with an emphasis on the gold bull market.

This essay is based on the Premium Update posted on March 5th, 2010

In one of our previous essays we mentioned that the situation in the USD Index appears bearish, but it has not been the main driver of the PM prices lately. It’s been the general stock market that used to drive gold and silver prices lately, which means that the situation is now less than perfectly bullish, especially in the short term.

Therefore, this week we would like to let you know what we think about the main stock indices and how it may influence the gold market.

Let’s begin with the long-term SPY ETF chart, which we often use as a proxy for the general stock market that allows us to analyze volume (charts courtesy of http://stockcharts.com)

In the latest Market Alert we wrote the following:

The general stock market appears to be topping here, or at least the risk of a temporary downturn is high. Given the high short-term correlation between the general stock market and precious metals this means that the risk of a move lower in the metals (and corresponding equities) is also high.

As you may see on the above chart, the SPY ETF (proxy for the general stock market, which allows us to analyze volume) has just moved to the strong long-term resistance level. This level is created by connecting important 2007, 2008 and 2010 tops, so it is in fact a multi-year resistance level. In order to break above such a strong resistance, stocks would need to show some kind of signals of strength. High – and rising – volume during the upswing would clearly provide a confirmation, but we have not seen that recently.

Moreover, we have seen the volume decline along with higher prices. While prices certainly may move temporarily higher, based on the historical performance of this market (and other ones as well) it is not likely that the general stock market will move much above such a strong resistance level right away.

The analysis of the short-term chart confirms the abovementioned point. The SPY ETF is not only right at the strong long-term resistance level – it has also just touched the short-term resistance area. The volume is relatively low also from the short-term perspective and it has been declining during the current upswing.

Therefore, betting on higher values of the main stock indices doesn’t seem to be justified from the risk/reward point of view. Whether or not to short the general stock market is a different matter. Situation is not symmetrical, meaning that the fact that the general stock market is not likely to rise doesn’t automatically mean that it plunges right away – after all, it may continue to trade sideways for weeks.

Additionally, if one is considering using options for this bet (which is often a good idea for betting on lower prices, because declines tend to be more volatile than upswings as fear is a strong emotion than greed and options’ value increases along with volatility – you may read more in one of our previous essays), it is imperative not to purchase short-term options just before a consolidation, during which prices trade sideways. Options have time value, which means that their price will decrease over time (very fast in case of short-term options) unless the underlying asset will move in the predicted way.

Therefore, before initiating a short position it might be useful to wait for additional confirmation that the move lower is to take place soon, for instance in the form of a decline on a high volume followed by an upswing on much lower volume.

Moving on to the gold market itself – given the recent high influence of the general stock market on the prices of precious metals, the abovementioned points mean that one can expect gold to move lower from here.

In the Feb 26th Premium Update, we wrote the following:

As we can observe on the GLD chart above, the values follow a consistently similar trend. After breaking above the declining short-term resistance lines (marked on the chart with blue color), gold moves lower to test the previous resistance. That was the case also this time as gold has just verified the previous resistance line as a support.

Gold has indeed moved higher during the following days, but it seems that it will need to take a breather once again. Please take a look at the RSI Indicator – it’s currently near the 60 level. Please note that this used to signal that a temporary top has been reached – we’ve marked these situations with red ellipses on the above chart.

We also wrote that gold is warming up and preparing to launch higher [from the long-term perspective]. If only gold can break free from its strong positive correlation with the general stock market, then one can assume that the gold market will most likely climb its way up.

Summing up, the situation on the general stock market remains bearish even though we have seen it move higher recently. As mentioned above, we have not seen the disconnection between gold and the general stock market, so we must remain cautious. The full version of this essay, but we will leave the short-term charts with timing details for our Subscribers.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you’ll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It’s free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski

Editor

www.SunshineProfits.com

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Here are quotes from the article (with my comments in parentheses after):

“Gold in New York fell to the lowest price in more than a week” (a few paragraphs later the horrifying fall is revealed: “Gold futures for April delivery fell $1.70, or 0.2 percent, to close at $1,122.30“).

“Gold is “unlikely” to be China’s primary investment to diversify its reserve holdings because of price risks, said Yi Gang, head of the State Administration of Foreign Exchange.” (Great – this means China is back in the market looking to buy Gold at current prices!).

“It’s all about the dollar,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “With the dollar continuing to strengthen, gold doesn’t have a chance.” (Of course, the Dollar is topping and Mr. Kaplan is as big a Gold bear as Nadler over at kitco.com – whenever a bearish Gold quote is needed, Mr. Kaplan is available).

I haven’t perfected this indicator yet, as there often seems to be a brief lag time before the ideal buy point, so we’ll see. It is also hard to use a permabear as a contrarian signal. For example, Nadler over at kitco.com is bearish every day, so he can’t be used as a timing signal. There may be too much noise to use the Bloomberg indicator as a buy signal, but the point is an important one – don’t believe a word Bloomberg has to say when it comes to Gold!

The ongoing troubles at the GSEs are no secret: it is public knowledge that Fannie had a 5.38% delinquency rate at December, while Freddie just passed the 4% threshold in January; both continue to rise rapidly each month. The fact that the mortgage-bond spread has just hit a record tight is merely an ongoing artifact of the Fed’s endless meddling in the mortgage market, with the sole purpose of keeping rates artificially low, and preventing banks from being forced to take massive writedowns on their entire loan book. This is all well known. What, however, seems to have escaped public attention is what the impact of these delinquencies is on the one largest holder of Mortgage Backed Securities, the Federal Reserve. What also seems to have escaped the public is that the Fed is now the world’s largest bank, with total assets near $2.3 trillion. We provide a weekly update of the Fed’s balance sheet and while we briefly note the liability side, our, and everyone else’s, attention, is traditionally focused on the asset side. Yet a more detailed look at the liability side reveals something very troubling, specifically that the Fed’s capital, i.e. equity buffer, which as of most recently was $53.3 billion (a comparable metric for plain vanilla banks is their equity buffer, or Tier 1 Capital, or however the FASB wants to define it on any given day when it is covering up massive capital shortfalls) is in fact negligible and could well be substantially negative, if the Fed were to account for the rapidly rising level of delinquencies in its one largest asset holdings: the $1.027 trillion in settled MBS. And while there is no possibility of a run on the Fed, the reality is that the Fed now likely runs with a negative real capital balance, meaning that the US Federal Reserve is now essentially insolvent.

Read the Full Post Here

The Gold Report: John, in Investors Digest of Canada you recently said you’re expecting gold to gain another 30% this year.

John Embry: I would say at least 30%. I said that I thought it would be the best year to date. We’ve had nine years consecutive higher year-end prices and the best year in that span for a year’s return was 31%. I think this will be the year that we exceed it in this, the 10th year of the bull market.

TGR: What’s driving this? Why is this year going to be the best year?

JE: I think we’re getting very close to the point when a greater proportion of the public realizes the degree of difficulty that sovereign debt is in. And at that point, when you can’t depend on your government paper as a safe haven, I think that fact puts gold in a much better light in more people’s eyes.

TGR: You might say the first leg down were the individuals who couldn’t pay their mortgages and that caused part of the ‘08 collapse. And now it looks like it’s the government’s.

JE: It’s very simple, actually. Private demand, as you know, was so weak that governments had to step in to maintain order in the economy and in so doing, they spent an enormous amount of money, at the same time that revenue streams fell because of the weakness in the private sector. Governments spent dramatically more money and the results are a budget deficit I never thought I’d see in my life. I’m shocked at the numbers in many places.

TGR: It’s been unbelievable. Now when you talk about gold, you’re talking about bullion. How do you see the gold stocks? Do you think we’re going to have a pullback? Ian Gordon of Longwave Analytics and Richard Russell (Dow Theory) predict the Dow will go to 1000.

JE: I don’t agree with them. As much as I love Richard Russell—he’s probably been as big an influence in my career as anyone—I don’t think that deflation is necessarily the outcome when you have a pure fiat currency system. I think the far greater risk is hyperinflation because I believe that these guys that are in control today have seen the depressionary ’30s, and they will move heaven and earth to prevent that outcome. And when you’ve got the capacity to create unlimited money, I believe you can do it. So I hear Gordon and Russell and I respect them, but I’m in the camp that thinks we’ll get hyperinflation first. We’ll eventually have to clean out the debt, but I think we go hyper before that.

TGR: So hyperinflation. Would that include stocks as well?

JE: I think stocks will do fine. They may have a violent correction first because a lot of people don’t know what the heck we’re talking about here. And when they see inflation mounting and economic conditions being less than ideal, they’ll sell their stocks. But the fact is that if you go back and look at any hyperinflationary environment anywhere, stocks did infinitely better than paper instruments. So precious metals first, stocks second.

TGR: When you’re talking about stocks, you’re not talking just about gold stocks.

JE: No, I’m talking about good businesses. I’m not talking necessarily about banks and other stuff that’s more dubious, based all on paper, but businesses like breweries, for example. People are always going to drink beer and a good brewing company will do exceptionally well in the debased currency of whatever country it’s in.

TGR: So you think that we might have a sell-off and in that sell-off all equities, including gold stocks, would go down.

JE: Gold stocks, maybe. I believe the next time everything goes down, gold isn’t going down. And if that were to be the case, I think gold stocks might surprise. They’ve been awful. Given what the gold price has done, gold stocks, by and large, have been awful.

Well, the well-promoted ones and the odd good one have done okay, but across the whole list, it’s been pretty hard slog over the last three or four years, particularly 16 to 17 months ago when it we hit bottom. I thought they were going to zero.

So many of them are trading at less than they were back in November 2003, which was the real peak of the excitement in gold stocks, if you can imagine. Six and half years ago. The gold price has done nothing but go up in that time.

TGR: In this next cycle are you seeing better returns for producers or the juniors that have pounds in the ground?

JE: Oh, I think the juniors. The whole thing is a matter of confidence. They’ve got so much volatility in the gold price. You get a good thrust up and you got a violent correction and I think they’ve got so many people discouraged and going the wrong way on these gold stocks that right now the degree of confidence is very low. If I’m right and the gold price stages a dramatic breakout in the next 12 months—and I’m talking hundreds and hundreds of dollars on the upside—then I think the confidence will return and people will seek an outlet in gold stocks because so many of them have been beaten up. More importantly, the overall market cap of all the gold stocks is really small in the context of all the money around.

TGR: What’s the seasonality of this year?

JE: I think that probably we may continue to wallow around here for maybe the better part of another month. Maybe not quite that long. But, historically, mid-March to mid-May has been a really good period. When I look at the fundamentals and everything that’s going on, I see no reason why it shouldn’t be a very good period this time. And there’s one other development. I don’t know whether it will come to fruition, but on March 25th the CFTC is going to be investigating position limits in gold and silver on the COMEX. And if they ever put any teeth into those things and kept these bullion banks from what they’re doing on the short side with their large positions, I think that could have a salutary impact on gold and silver prices.

They’re finally going to have to address this because there’s been so many complaints about the bizarre price action on the COMEX in both gold and silver.

TGR: What about some individual stocks? Any that you’d like to comment on?

JE: Gold Fields (NYSE:GFI) remains very cheap. It’s been under a cloud, I think, because there’s been a lot of conversation among some of the more radical factions in South Africa about nationalizing the gold mines. I don’t believe it’s going to come to that. I talked to a chap who knows South African President Jacob Zuma fairly well and Zuma is certainly not in favor of that. There’s always going to be radical factions. If they want to destroy their gold industry, nationalize.

TGR: That’ll do it.

JE: Hopefully, cooler heads will prevail. On that basis, Gold Fields is extraordinarily cheap based on its reserve base.

TGR: What about consolidation plays? Do you think the time is right for that?

JE: I think the big problem is that the guys that head up some of these gold companies don’t have the confidence in their own product that they should have. As a result, they’re reluctant to pull the trigger on acquisitions that to me would be brilliant at this stage in time. We’ve seen some activity, as you mentioned, in Mexico. I know Goldcorp (NYSE:GG, TSX:G) has been picking up a few around its big silver play down there. And I think that’s a great move. My attitude is that these guys, without exception, all have long-term reserve issues. If there’s ever been a better time, based on my outlook for where all this is going, to pick them up, I can’t think of one. These guys should be looking for anything that’s real and using their paper right now to buy it.

Another stock I like that I sound like a broken record on is a Canadian-based company called Wesdome Mines (TSX:WD). They’ve got two operating gold mines, one in Quebec and one in Ontario. You couldn’t be operating in a better geopolitical environment. They’re both profitable. They had a dividend last year; they will pay a dividend this year. I believe the Canadian dollar, despite other people’s belief that it’s going to be very strong, isn’t. Given the budgetary problems and everything that are coming up here, Canada will move heaven and earth to make sure its currency doesn’t move up against the U.S. dollar, so I don’t see any further cost pressures because of a stronger currency in Canada. They’re having success with extending their ore bodies and they’ve got absolutely blue chip mining facilities and the stock, which probably earned something like 20 to 25 cents last year when it reports, trades at just over two bucks. I just think the thing is dirt cheap. I look at a lot of stuff that’s years from production with market caps three times as big as this one. This one’s got a total market cap of $215 million. So I think, of all the small stocks that I look at, I like small producers that are basically overlooked and this, to me, is probably the most overlooked small producer. I’m always interested in profitability and the ability to extend their reserve life related to market cap.

TGR: Any others?

JE: One that I like up here in Canada that I’ve liked for years that’s just coming into production, and they are really adding to their reserve base, is Lake Shore Gold Corp. (TSX:LSG), which trades around three bucks. I think that they’ll eventually prove up multi-three, four million ounces just outside of Timmins, which is another great place to be operating because of its long mining history. I’m a little less adventuresome these days in the sense that my greatest concern down the road for gold stocks is if my maligned view of where this is all headed occurs, one of the few sources of revenue for governments may be taxing gold mines. So I want to be in a geopolitical area where there is some respect for law and people aren’t totally rapacious like they are in some of the third world countries.

They’ll always go where the money is and in this case they may be even more desperate for money, so that’s why when people ask me how should I be exposed to the gold industry, I say, well, the first thing you’ve got to have as the core of your portfolio is bullion, because that’s forever. You don’t have the same leverage to the upside necessarily, but on the other hand you know what you’ve got. The gold stocks are ephemeral, but if you hit them right, you’re going to make a fortune. You will get a three- or four-time bigger move than you will in bullion at some point in time. But the long-term hold is bullion, in my opinion.

TGR: Would you speculate? I read that the IMF is going to be selling some gold and India stepped up earlier. What are your thoughts on that?

JE: The whole thing irritates me. The IMF has announced the sale of this gold 500 times and every time with the express purpose of knocking the price of gold down. It was interesting the last time when the Indians actually relieved them of over 200 tons because that was what basically vaulted the market from about $1,045, which the Indians paid, up to $1,225 in the space of less than a month. That has been followed by the third significant correction in the last three or four years.

I think we’ve seen the vast proportion of the correction and I think what may be one of the factors that could get this thing going again is when somebody does relieve the IMF of the gold, the 191 tons to be exact. There’s speculation that India might be prepared to go to the plate again because the Chinese have been reluctant to step up. Number one, I don’t think they want to be seen publicly doing it. They’d probably rather do it more clandestinely because they’ve got so much money to convert into hard assets. And, secondly, as somebody pointed out, the Chinese at least have a domestic supply of gold. They can buy all their domestic to augment their reserves, where the Indians really don’t have that. So I think the Indians conceivably have a bigger vested interest here in taking that IMF gold. And there’s also sort of the suggestion that the Chinese wouldn’t want to be seen to be paying more than the Indians did, so they’re reluctant to step up with the gold price $50 higher currently than the Indians paid. If it was really a free market, if they were really prepared to sell it to anybody, I think I could name any number of institutions, organizations, individuals that would be more than glad to relieve them of it. It’s not much money. It’s $6 billion. They throw it around as if it’s a big deal. Heck, given the budget deficits in some of these countries, $6 billion is literally a piss in the ocean.

GR: That’s right. What do you think when Soros came out and said that gold was a bubble?

JE: I wrote about that and I got it right. I was very pleased about that because some people got all upset. The people that were negative on gold thought this was great, brilliant George Soros doesn’t like gold. But if you read between the lines, if you read really what he said, he said gold is the ultimate bubble, but he didn’t say gold is currently the ultimate bubble. I believe that it will be the ultimate bubble. I think the gold price is going to go crazy and at that point I’d be worried about. And then it came out after the fact that Soros had been a major buyer of gold for his funds in the fourth quarter. So who knows what he was doing. The fact is, depending how you interpreted his remark, he was speaking at Davos, which is a very mainstream event, and he said something that can be interpreted any number of ways.

TGR: Right. And, again, I think the financial talking heads used it as the negative.

JE: Absolutely. The mainstream guys were all over it. The guys who have never like gold have been wrong all the way up and said, oh, my god, George Soros doesn’t like gold. But I think George Soros’ remarks were misinterpreted and if you saw what he was doing, not what he was saying, he was buying gold.

TGR: Alright. Any last comments?

JE: The only comment I’d make is I really think things are sufficiently serious here in a financial or monetary debasement sense that everybody—and I have never been a table pounder—but I think every single person with a serious portfolio has got to have a reasonably significant exposure to precious metals. This isn’t something that’s just insurance for those who’ve got cold feet. This is something I think is a mainstream thing that people must have.

TGR: When you say a significant portion, what percentages are you thinking?

JE: I used to say 5% to 10% when it was just an insurance thing and the market was pretty sanguine. I say at least 20% now. I see the other assets as being less attractive. I wouldn’t buy a bond if you gifted me with the money to do it.

TGR: John, once again, I appreciate it.

John Embry is chief investment strategist at Sprott Asset Management and Sprott Gold and Precious Minerals Fund. He also co-chairs the Central GoldTrust Board of Trustees. An industry expert in precious metals, John’s industry experience as a portfolio management specialist spans more than 45 years; he’s simultaneously researched the gold sector for 30-plus of those years. He joined Sprott in 2003, after 15 years as Vice-President Equities at RBC Global Investment.

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DISCLOSURE:
1) Gordon Holmes of The Gold Report conducted this interview. From time to time, Streetwise Inc. and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Gold Fields Ltd., Goldcorp.
3) John Embry: I personally and/or my family own the following companies mentioned in this interview: Wesdome Gold Mines, Lake Shore Gold Corp., Goldfields Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None.

The Gold market is set to catch fire. Every desperate smack down in the Gold price by the bankstaz who are short more metal than they can deliver is needed only because there is so much buying pressure in the market and they know how out of hand the next bull run could get.

News of Soros and Paulson buying $175 million of NovaGold (ticker: NG) equity is very bullish. The stock popped today on the news, of course. These boys certainly aren’t afraid to put their clients’ (and their own) money where their mouth is.

News of credit default swaps on U.S. Debt PAYABLE IN GOLD from a reliable source is insane. Who owns the Gold and is also willing to risk it on such a dangerous trade? So many interesting implications of such contracts if they exist and are being traded. The fact that interest in such a trade exists among “insiders” shows how dangerous things are under the surface.

The U.S. Dollar is topping out just as we are entering a very strong seasonal period for Gold and Gold stocks (mid-March to mid-May).

Dips are for buying. I bought some Yamana Mining (ticker: AUY) and GDX calls this morning on weakness to complement my GDXJ calls. I like how beaten up Yamana looks. Here’s a 6 month daily candlestick chart of the action in AUY thru part of today with a plot of the AUY:GDX ratio below to show how weak Yamana has been relative to the senior mining GDX index:

I have really learned to love such “reversion to the mean” trades. Since Gold stocks are so volatile, such trades have a fairly good success rate. Wish me luck…

I remain as bullish as ever and I remain as biased as ever. I still believe Gold will be making new highs before the spring is over and that Gold stocks will outperform the metal during the imminent spring run.

By Neil Charnock

goldoz.com.au

I have fantastic news to report this week.  The XGD has formed a powerful buy signal indicating that the way forward is up again for the Australian gold sector. I have shown this signal in the daily XGD chart below with some resistance levels overhead which we are currently cutting through with apparent ease. Chances are that this will continue and that the awaited second leg of the gold rally that began in September 2009 at around US$954 is now back on track. Firstly let us take a look at gold.

This is the long term chart and simplified pattern of the upward price of gold.  The long consolidation patterns are easy to define.  Each successive rally is larger than the last and you can see that once the horizontal consolidation top was breached in the chart above we saw a double leg rally marked in Part A and Part B.  The good news is that Part B is just beginning for this up-leg.  The patterns are never exactly the same and the scale gets larger keeping us fractal fans on our toes.  The consolidation between legs this time around at the larger scale took longer than the first pattern possibly due to scale and the Christmas break in the middle of proceedings.

Part B was also slightly larger than Part A in the first pattern and therefore there is potential for the second leg to run to around the USD$1370 – 1400 area.  Now to the XGD index Down Under. The buy signal divergence is clear below on this chart so it is in agreement with gold.

Daily XGD chart

The XGD index is dominated by NCM which is our biggest gold miner.  This company just happens to be amongst the world leaders in terms of production, valuation metrics and global diversity of operations.

This is just another example of the global status of Australian mining.  Take BHP and RIO as further senior examples and you can quickly imagine that Australia is not really off the beaten track as many investors imagine.  Several of the top North American funds and many major banks have a stake in our gold industry which backs up my thesis nicely.

You might ask why?  Globalization and internet information flow have now reached a stage where the Australian gold and mining sector will have to be valued in terms of global valuation metrics which means the current undervalued status of the mid and lower tier miners will not last.

Given the underlying strength of the fundamentals for gold one can quickly see that this will enable considerable additional leverage on capital returns over the coming years. The investors that come to understand and exploit this sector now will reap the rewards.

Here is a longer term (weekly) view of the XGD and you can see the solid bench this index has formed in between the two horizontal lines.  In the top of that circle, if you look carefully, you can see the move today.  There are some resistance levels at 5700, just over 6,000 and up at around 6,300 to be overcome before we can move up to tackle the older 6,900 level and blue sky.

Australian Gold Index – XGD Weekly

Security of tenure and other sovereign risk issues are extremely important to miners due to the significant capital investment and time taken to bring a project to fruition. Australia rates up there with Canada ahead of the USA leading the world by this benchmark as well.  Our status has been improved throughout the financial crisis. This factor also carries a significant weighting for investors and rightly so.

I am not being patriotic here I am giving you the reader a heads up. Australia is positioned as part of Asia and an excellent place to do business.  We are an excellent prospect for overall strength in our currency in the long term and therefore Australian resource stocks represent an opportunity for the global investment community as a hedge.  Currency gyrations are going to get severe and I am not saying Australia will avoid severe ups and downs. Our currency market is small much like the silver market so beware we can be just as volatile at times such as in 2008.  However just look at the recovery since.

What I am saying is that the long term security of your capital investment in Australia will be superior to the USA, Europe, Japan and the UK if you choose the right sector.  Selected mining stocks including energy, gold, rare earths and specialized metals will assist you to maintain your asset values while other asset bubbles burst.  You could be looking at a currency benefit and an investment gain if you get it right – a double whammy for your investment capital.

I believe it is the emerging gold and energy stocks that will out perform however the large stocks lead the way and this process has begun.  The Australian dollar is just one of the commodity currencies so a basket of prime candidates in China, Canada, Brazil and Australia should all do well.

About a month ago I announced that the markets were “Oversold” and they have barely looked back since.  We first alerted our Gold Members to the 5100 support level on the XGD and it held twice after that.  Today the XGD broke through the first significant level at 5600 backed up by all of the leading components in the XGD.  Many Australian gold stocks have just printed powerful buy signals and will now move forward back to test the highs of 2009 in the near future.

I am preparing a brief report this week on these technicals for Gold Members.  Our recent upgrade to the Ratings Tables should give investors the ammunition to further their own research and pull the trigger on the better prospects.

The Australian gold sector has acted very intelligently as a whole by raising money while the going is good.  As the debt bubble eventually bursts capital raising will be harder to accomplish.  Having said this however I believe that the gold miners will be one of the few sectors of the economy that will attract investment capital. They will be part of an elite group that will be able to secure borrowings.  Now we come again to the cost of borrowing.

Greece heaved a sigh of relief last week on news that it had put its 10 year bond to bed at 7%. Europe joined in the cries of relief that this was overcome but hang on a minute guys are we missing something.  This is providing us a benchmark indicator of how sovereign interest rates will act on funding difficulties this year.  Bank rates are generally about 2% above sovereign rates, corporate and retail rates even higher again.

Careful of asset price devaluation ahead

The outcome is that funding is getting more expensive and this is the new trend for any country facing over extended budgets and deficit issues.  Now imagine what has to happen to asset prices in Greece on a 300+ basis points rise in interest rates overnight. In case you can’t imagine this it is not a pretty picture.

Australia just put rates up 25 basis points again to try to ease the latest government created property asset bubble (on top of the other real estate price bubble) but imagine what would happen if that interest rate rise was over 10 times this level. Most Aussies are living in “La La Land” and thinking that we did so well through the global crisis so all is well for property even in a rising interest rate environment.  I heard a comment that many Aussies now prefer Real Estate to equities.

Well they are going to be hit hard when things reverse as their precious property investments will not be liquid. That means that by the time they realize they are wrong it will be too late. Banks that are fighting for market share up at these levels are going to take a hit too but nothing to the extent these poor misguided investors will.

The smart money is still moving into gold and gold stocks around the world.  Now that the smoke and fear of the recent minor correction is over the gold stock prices are heading higher once again here in Australia.

Australia is part of Asia by default and we are well placed to benefit from this fact and from supplying growing economies.  Euro zone investors and those from the UK and the USA will gradually gravitate to this market here – after all some of the biggest name investors and funds are taking larger and more diverse positions in the ASX gold stocks.

I have recently completed a file to show some mega profits generated in the last few months including a trade that has only just begun – yet has created a significant profit even during this weak market.  It is at the head of the latest news (March 1^st) on the GoldOz update page and you can down load it for free if you are interested.

A major gas deal was announced today resulting in a 46% gain in that stock and renewed excitement in the gas sector – so both gold and energy are still the place to be.  I have also provided a link to a special report on tax changes and legal solutions available here – special file link

Good trading / investing.

Neil Charnock
goldoz.com.au

GoldOz has developed a basic Member area (news only) and a Gold Members area with substantial investment tools. GoldOz web site is a growing dynamic resource for investors interested in PGE, silver and gold companies listed in Australia, ASX share quotes, Aussie Gold Index charts, brokers, bullion dealers in addition to the company research via our paid Membership services.

Neil Charnock is not a registered investment advisor. He is an experienced private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services. The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are his current opinion only, further more conditions may cause these opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.