With literally two or three "Please Buy Our Gold" commercials per timeout running on every financial network and radio show, and the CNBC babe broadcasting from the gold pit, the remote possibility that gold's brief correction to $680 marked the beginning of a larger scale Wave 3 is completely ruled out. And still, the gold price has hardly budged since March 2008.
Wave 3's only start from a quiet position of despondence, despair and desolation.
I posted the following chart a few days ago, it is correct:
Note that on a log scale Waves 1 and 5 are an EW guideline pleasing near-identical, and rather small, 300% price growth. Another thing to note is that gold coming off the dollar peg in 1973 is what kicked off this Wave 5 within a much larger scale Wave 5 beginning in 1934.
Next stop is a many-year devastating C Wave that bounces gold back to the starting point of Wave 4. Then, an even longer B wave, then a fall to the previous Wave 4 which is well below $100. That said, gold's certain fall is so big in scale that it will almost certainly require a decade or more, so consider not applying too much leverage.
If you look at the decline from Wave 1 to 2 (1975-1977), you have a reasonable small scale model for the price action from March 2008's peak to the final bottom of C. If you look closely, you can even see the slight overshoot that forms a slightly higher B Wave than the Wave 5 peak, in the final months of 1975.
FDR, it appears gold is just busting out of a bullish pennant flag, and also about to bust out of a very bullish inverted H&S bottom?
ReplyDeleteI mean, I am bearish on gold as well, but most people can't be short right now and absorb a run to 1200 or higher. It's kind of like when Buffett said he would hold stocks "forever." Holding anything "forever" is simply not practical for most people.
Hello FDR. I like your blog but I would like to play devil's advocate. If you would forget the charts for a moment, do you really believe the dollar will be 90% stronger in 10 years than it is today? How can you possibly justify this? I agree that gold may take a small hit when P3 starts. However, I don't think it will be much at all, and that will be the last buying opportunity for gold before backwardation. Just curious to hear your thoughts, thank you!
ReplyDelete-Bob
FDR what is your preferred means of shorting the metal? DZZ? Puts on GLD? Is there an inverse short ETF for the metal that does not utilize leverage (eg. SH for the SPX)? I don't watch or listen to commercial media but the bullishness on gold and gold stocks is certainly palpable on the internet. I am short the stocks 2X inverse and getting a little toasted.
ReplyDeleteIf you want great returns a good way is sell GLD call leaps around the 450 level. You have plenty of time, low volatility, controlled risk, some good leverage, and odds stacked in your favor.
ReplyDeleteYou could keep a closer GLD call open to insure your position, if you are really worried about your house price going to $500M from all the demand.
Or, you could short GLD and do the same to hedge.
All double shorts are monumental rip offs. SKF tanked during the greatest financial meltdown in history.
"If you would forget the charts for a moment, do you really believe the dollar will be 90% stronger in 10 years than it is today? How can you possibly justify this?"
ReplyDeleteSimple, commercial banks (the Fed is for-profit too) created our entire cash supply with as much as 40:1 leverage. With 0% and no lending, the cash supply implodes. It's easily predictable, per my prediction in early 2006.
You don't need dollar demand to create mega deflation, all you need is to shut off subprime. We need 40:1 lending just to stand still.
The Fed loves deflation because they seize assets, that's why they pulled the plug on the dollar supply. 0% interest rates prove the Fed is draining like never before, there is no doubt whatsoever.
"It's kind of like when Buffett said he would hold stocks "forever." Holding anything "forever" is simply not practical for most people."
ReplyDeleteYou are misunderstanding Warren.
He was saying never trade, only invest (he broke his own rule and lost $25B in 2008, more than any other man on earth).
Investors buy assets for cash flow in perpetuity. Traders speculate for capital gains.
The reason the stock market is crashing is because 99% of Americans are wild trader-speculators that literally do not know what investing is. It will fall until we have 99% investors. That's a long way down.
FDR wrote: "The reason the stock market is crashing is because 99% of Americans are wild trader-speculators that literally do not know what investing is. It will fall until we have 99% investors. That's a long way down."
ReplyDeleteThis is absolutely correct. Another huge difference between an investor and a trader-speculator is that a true investor doesn't demand constant quarterly profits -- he knows that the business has to navigate the cycles of the economy and the product's market. He's concerned with the long term health and profitability of the business.
I fully expect that as the number of trader-speculators dwindles, the demand for dividend-paying stocks will grow. Dividends are the only thing that really tie the performance of the company back to the price of the stock. Non-dividend stocks have no real relation to the performance of the company whatsoever -- the only relation is all in the heads of those who own the stock and the next round of suckers buying them, both of whom *believe* that the price "should be" related to the performance.
Belief and reality aren't always the same.
FDR wrote: "You don't need dollar demand to create mega deflation, all you need is to shut off subprime. We need 40:1 lending just to stand still."
ReplyDeleteOr everyone could just default, and we'd be standing still then, too. :-D
fdralloveragain wrote:
ReplyDeleteThe Fed loves deflation because they seize assets, that's why they pulled the plug on the dollar supply. 0% interest rates prove the Fed is draining like never before, there is no doubt whatsoever.
wait, don't 0% rates simply mean that the demand for new loans is really low? how are they an indicator that the fed is draining (i.e., reducing loan supply) like never before?
Is there a floor under the dollar?
ReplyDeleteInternally, which I know is wrong to base trades on, I feel we are at some sort of extreme.
"wait, don't 0% rates simply mean that the demand for new loans is really low? how are they an indicator that the fed is draining (i.e., reducing loan supply) like never before?"
ReplyDeleteYes, it indicates the Fed has completely suffocated banks. I have pointed this out repeatedly:
On the way up (interest rates rising = inflation) the Fed is accommodating, that is, they keep their bank rate well below the market rate (the 3-M Treasury is a little higher than the market rate for 30 day cash).
To pull the plug on inflation and destroy banks, the Fed keeps their rate way above the market rate. This cuts off profitable money to banks right when they need it: during mega bank runs.
During the financial fall, when the Fed was supposed to be helping prevent bank failures that they intentionally caused, they often kept rates stabilized 10,000% higher than the market rate or even more.
When market rates go negative, obviously the Fed rate is infinite with respect to bank relief.
The Fed has engineered this depression to seize our inflated-debt-hooked assets, just as I said they would back in 2006. The fact that the market rate is now 0% proves the Fed utterly destroyed our banking system: there is no more lending.
Currently, the Fed is DRAINING banks by keeping the Fed rate about 500% above the market rate for 30 day money (.25% vs .04%).
FDR and kcb wrote:
ReplyDelete"FDR wrote: "The reason the stock market is crashing is because 99% of Americans are wild trader-speculators that literally do not know what investing is. It will fall until we have 99% investors. That's a long way down."
This is absolutely correct. Another huge difference between an investor and a trader-speculator is that a true investor doesn't demand constant quarterly profits -- he knows that the business has to navigate the cycles of the economy and the product's market. He's concerned with the long term health and profitability of the business."
No doubt, except that incomes have not kept pace with fiat money creation and as an extension asset prices; therefore people dont have the cash flow to save money in order to "invest" for the long haul. Now some have inherited money, sold a business, or are just successful in their own right, but the majority of people must use the "tail to wag the dog" and use markets to produce capital gains as passive dividend income is not enough. It is analagous to people using their houses as ATM's during the boom to purchase frivolous items. The tail (house as an asset) was the driver rather than solid cash flow or savings.
"therefore people dont have the cash flow to save money in order to "invest" for the long haul."
ReplyDeleteThat's true because the 99% wild speculators in todays stock market (and also our banks gambling wildly with insured deposits) don't demand high dividends because they expect returns in cap gains.
At the bottom of the First Great Depression, stocks were yielding 20-30% dividends. Today, we see an avg of 2 or 3%.
So the lack of affordable cash flow is also a result of the age of the wild 401K and IRA speculator.
FDR,
ReplyDeleteDo you think Elliot Wave models can still be used when the markets are overly manipulated?
"Do you think Elliot Wave models can still be used when the markets are overly manipulated?"
ReplyDeleteEWs forecast and account for manipulation. Ripping off the masses is what ABC following 5 is all about.
Buy gold, the world is coming to the end.
ReplyDeleteI can't wait to spend it all afterward.
How is a rising equity market deflationary? Deflation stopped in March, no? Housing prices are going higher in Chicago or at least the ones around me are selling for more than they were this time last year. The price of stocks keeps going higher. I saw you put a picture of a suit that was for sale, but you can always find crap for sale. Investment assets are on the rise, you cannot debate this. You can debate that they will fall, but what will cause this? No one is lending, yet assets keep rising in price.
ReplyDeletei'M still seeing the cash 4 gold commercials crap, as in please sell us your gold, i know they only want to pay 40-60% of spot ( more if pushed) but they still want to buy
ReplyDeletemy friend in England says they are awash with the same "we want to buy" ..... all over TV & newsprint
http://www.bloomberg.com/apps/news?pid=20603037&sid=a0m8QhfjdEG4
ReplyDeleteFDRAOA,
ReplyDeleteI shorted gold at $1,009/oz. last Friday. Do you think I should wait longer or cut my losses? I believe gold will be cut in half, but I don't want to wait more than 6 months to find out for sure. Would you close out your positions and wait for a better entry ($1,100 or so)?
Thanks.
"i'M still seeing the cash 4 gold commercials crap, as in please sell us your gold"
ReplyDeleteAlmost every commercial break on every financial network currently has at least one "buy gold" ad. On financial radio shows, sometimes an entire break is nothing but redundant buy gold commercials.
Aren't those commercials just taking advantage of the runup in gold and the poverty of many people by getting them to part with an asset for a hefty premium? I'm seeing more garage sales these days too.
ReplyDeleteI would think it would be a worry, for holders of gold if these outfits were trying to sell gold to the masses.
"I would think it would be a worry, for holders of gold if these outfits were trying to sell gold to the masses."
ReplyDeleteThey are all selling gold.
"I shorted gold at $1,009/oz. last Friday. Do you think I should wait longer or cut my losses?"
ReplyDeleteIf you are unable to absorb a few percent you definitely shouldn't be in the stock market. Shorting gold is around a 2-3 year trade with perhaps a 200% return with returns rolled back in.
I think of your "CASHZILLA" cartoon. It is cute but only an imitation of the real "GOlDZILLA" (oh, i mean "GODZILLA").
ReplyDeletefdralloveragain, sorry for going off-topic, but I was re-reading some of your posts, and you've said in the past that the Fed chairman & board are actually there to fight the Fed (see http://fdralloveragain.blogspot.com/2009/03/why-cash.html?showComment=1238166540000#c2198238480598843238).
ReplyDeleteSince the Fed board sets policy, what practical means do the private member banks have of stopping Bernanke from monetizing (printing basically) say 1000T of debt or assets? Let's say Bernanke decided that to prove his thesis he had to buy my laptop for $1000T. Aside from political pressure, what can they do to stop him? Do they somehow control the traders at the NY Fed who would actually have to carry out these purchases?
Great that you are playing techincals and elliot wave.
ReplyDeleteHowever, the move in gold is "event driven" The "event" is the future of the dollar.
Every investor should pay attention to all aspects of the market place. Ignoring one or many can be doom.
"Since the Fed board sets policy, what practical means do the private member banks have of stopping Bernanke from monetizing (printing basically) say 1000T of debt or assets?"
ReplyDeleteThe Fed governors are supposed to "set direction" (of course, the market does this for them, they ALWAYS chase the 3-M T-bill); the FOMC executes. Often, the actions do not match the words. But that doesn't matter, even if the actions match the words, the Fed has no power to print cash.
A lot of people are confused by this, but the reality is that commercial banks in the private sector print with leverage on top of reserves, the Fed may only print cheaper reserves, and they still need to turn a profit to do so. So if the consumer is not borrowing, the Fed can't affect a net increase in cash, there is no mechanism to do so.
That is why M3 is plummeting even with 0% Fed policy.
When times are good (defined as: people want to take risk or borrow; they bet they can outpace interest payments with growth), then, and only then, can the Fed print cash.
The Fed is, and always has been, completely powerless over the size of the cash pool. The only product they have to sell is "more debt." They can put "more debt" on sale, but all stores that go out of business first put their wares on sale.
"However, the move in gold is "event driven" The "event" is the future of the dollar. "
ReplyDeleteThe future of the dollar has never been brighter. People must understand that the failure mode of profit driven currency issue is rarity. The strength of the dollar IS the USA's problem, no one has cash to spend--prices fall.
It's hilarious to me how many people the Fed has utterly convinced that the US real estate market is booming like never before--that is the picture of a weakening dollar--rising home prices.
That is why gold prices ALWAYS follow home prices, there has never been, and never will be a significant (big picture) exception. More recently (late 20th and early 21st century), the boom in over liquidity also makes gold follow stocks, tick for tick.
If you really believe that gold is going up, you'd be foolish not to buy stocks instead. Stocks ALWAYS go up more than gold prices during inflation:
1932-2007 peak) Dow 40 to 14,100
1932-2009 peak) Gold $20 to $1050
Of course these assets are very closely related in price action, they are all forms of money.
Any comments on the power of an extended fifth wave?
ReplyDeleteFDR agreed with you that gold goes up during inflation but this time inflation may not matter as the fear factor alone can drive up gold to unimaginable levels coz of what we are facing ahead.So what makes you think that fear cannot drive gold prices to absurd levels as people devoid of anything else to turn to in turbulent times seek the gold heaven for safety? Surly in such a scenario and if the fear factor reaches a peak. so can gold.Gold at 5k$ in such a scenrio would definitely be in the range of possibility?
ReplyDeletethe Fed may only print cheaper reserves, and they still need to turn a profit to do so.
ReplyDeletecan't the Fed write a check on itself to buy my laptop for $1000T? i would then go deposit this check at my bank, and can then spend the money to buy an eichler in palo alto (i.e., even if the bank doesn't relend the $1000T, it gets out into the economy). where in the Fed charter does it say that they need to turn a profit to print money? maybe that's the unstated policy, but can't Bernanke ignore it if he so wished? My question was, what practical means to the bankers have of exerting control over Bernanke and the Fed board in such a case?
"where in the Fed charter does it say that they need to turn a profit to print money?"
ReplyDeleteWhere does it say that in any private corporation's charter?
Want to see profit?
Consider that the Fed is "buying" distressed mortgages. Now, on the surface that looks awfully kind of them. But there is catch, they are the only buyer of MBS, and every "purchase" is a forced loan to the US gov that carries a taxpayer guaranty on both the principal and the interest. That is a short sell, not a buy.
Simply put, the Fed is shorting the U.S. real estate market like no other corporation can.
Where does it say that in any private corporation's charter?
ReplyDeletesure, there are laws about that, and if the CEO does something to hurt shareholder profit interest, they can vote to remove him, or sue, or the board can remove him. in the case of the Fed, however, who stands above Bernanke should he take a decision that hurts the private Fed's profit interest? as far as i can tell his word is law at the FOMC. (and you've said yourself that his job is meant to represent the people vs the banks, at least in theory.)
every "purchase" is a forced loan to the US gov that carries a taxpayer guaranty on both the principal and the interest.
do you mean that Fannie & Freddie debt has been guaranteed by the USG? i haven't heard that, all i know is that they've committed a $100B line to backstop it. the Fed may be making (an informed) bet that USG will backstop all of it, but at least on the face of it, the MBS is *not* full faith & credit (it even says that on the front of the prospectus)
FDR wrote: "A lot of people are confused by this, but the reality is that commercial banks in the private sector print with leverage on top of reserves, the Fed may only print cheaper reserves, and they still need to turn a profit to do so. So if the consumer is not borrowing, the Fed can't affect a net increase in cash, there is no mechanism to do so."
ReplyDeleteNo mechanism in the face of *no* willing borrowers, no.
But as I mentioned elsewhere, the U.S. government is always a willing borrower, and pays the loans back by pointing guns at the people's collective heads.
Now, you can argue that printing money that way is economically bad, and you'd be right. You could also argue that it's less inflationary than if people were to borrow the money of their own free will from private banks, and you'd be right about that too.
But compared with loaning money to NOBODY, lending money to the U.S. government *is* inflationary, and that's pretty much that.
So yes, a mechanism exists. It's not the most effective mechanism (from the point of view of creating as much inflation as possible) but it exists nonetheless.
There is no way you can use the chart as a way to compare whats happening today with what happened in the 1970s .
ReplyDeleteThen we were faced with domestic Inflation from a Period of Embargoes that isolated our exports , and today we are facing worldwide Inflation from a Developed world as a whole thats wanting more and more quality in their lives , ie; China Asia , BRIC nations in General , that now have Consolidated all Natural Resource supplies worldwide , and this has left the dollar virtually naked as the reserve currency , because of the intrinsic value of world resources being valued in dollars , thats now being challenged as to why dollar denominational value should be the standard when the Government that Represents it is devaluing their currency by monetizing its demand without true fundamental growth .
Now BRIC nations control the means in which to cause Inflation over supplies in the world , and western nations are in a new era of price discoveries on all markets that Inflation will be a part of .
www.marketwatch.com/story/rare-earths-and-chain-owns-them-all-2009-09-24?link=kiosk
2012 forecast: Food riots, ghost malls, mob rule, terror
ReplyDeleteTrends chief says people should brace for 'the greatest depression'
http://www.wnd.com/index.php?fa=PAGE.view&pageId=112452
this a paragraph from the London Independent , Demise of the Dollar ;
http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html
" Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars."
" The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years. "
Why is Wall Street Rallying , Paying Banker / Fascists Bonuses Generated from Laid Off Taxpayers ??????
http://www.independent.co.uk/opinion/leading-articles/leading-article-the-end-of-the-dollar-spells-the-rise-of-a-new-order-1798200.html
" We should not be sentimental for the dollar. It makes economic sense for world trade to be conducted in a variety of currencies. Relying on one only has the advantage of clarity, but it also creates instability if the economy that underpins it faces uncertain prospects".
" Yet we need to understand that exchange rate volatility is a symptom, rather than a cause, of what truly ails the world economy. The biggest driver of global economic instability in recent years has been the determination of China to boost its export sector at all costs. Beijing's persistently large trade surpluses and manipulation to prevent its own currency from appreciating have effectively forced Western nations into running persistently large trade deficits. It was this pressure that blew up various asset bubbles that burst with such disastrous effect last year."
" A gradual move away from the dollar makes sense. But without a commitment from world governments – both in the rich and developing world – to reduce these destabilizing global trade imbalances we will enter an uncertain new era; and one that could yet make us pine for the days of the dominant greenback. "